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European Chart of the Day: UK Services PMI

Position: Long Germany (EWG); Short Italy (EWI), Euro (FXE)

 

UK Services PMI for December declined to 49.7 versus 53.0 in November, and importantly fell below the 50 level that divides expansion (above 50) and contraction (below 50).

 

As we’ve noted in previous work, including yesterday’s piece titled “Europe’s New Year’s Update”, we believe inflation in the UK will continue to be a negative headwind in 2011. In the most recent Bank of England Minutes the committee concluded that over the intermediate term CPI could reach as high as 4.0%. Even at its current level of 3.3% Y/Y we’re cautioning that consumption can be chocked off.

 

While UK Manufacturing PMI showed a gain to 58.3 in December (the highest in 16 years) versus 57.5 in November, given the prospects for slower growth this year, including the economies of its main trading partners in Europe, there’s reason for caution. The UK’s austerity program over the next 4 years is a tax on the consumer and should weigh on confidence to the downside. With Services a stronger driver of overall growth than manufacturing in the UK, we believe this inflection in the Services PMI is meaningful and stagflation may not be far afield.

 

Currently we’re playing Europe’s Sovereign Debt Dichotomy with a short position in Italy (we re-shorted the etf EWI on 1/4), and are short the Euro (FXE) with a TRADE range of $1.30-$1.32 versus the USD. We remain long Germany (EWG) in our Virtual Portfolio.

 

The BoE meets next on January 13th to announce its interest rate policy, with consensus expectations of no change to the current main rate of 0.50%.

 

Matthew Hedrick

Analyst

 

European Chart of the Day: UK Services PMI - UK Services


INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD

Initial Claims Rise 21k

The headline initial claims number rose 21k week over week to 409k (18k after a 3k upward revision to last week’s data).  Rolling claims fell 3.5k to 411.25k.  We continue to remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.8%, it's 11.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.8% actual rate as opposed to the 9.8% reported rate.

 

One thing worth pointing out is that in the last two years the first several weeks of the new year have seen raw SA claims rise. We would expect to see this trend continue. If not, it would suggest a stronger underlying improvement in the jobs environment.

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - rolling claims

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - raw claims

 

There is seasonality in initial claims, which the BLS makes an effort to remove via the seasonal adjustment factor.  Below we show the non-seasonally adjusted initial claims series for purposes of comparison.  

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - claims NSA

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for the trend in industry NIM. Thus far the spread in 1Q is tracking 38 bps wider than 4Q.  The current level of 276 bps is up from 272 bps last week.

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - spread

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - spreads QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL JOBLESS CLAIMS RISE 21K - EXPECT A PAUSE IN IMPROVEMENT GOING FORWARD - subsector perf

 

 

Joshua Steiner, CFA

 

Allison Kaptur


TALES OF THE TAPE: EAT, RT, DRI, CAKE, RRGB, PFCB, COSI, SONC, CBOU, CMG, MCD, SBUX

Strong performance yesterday, particularly in QSR, after well received earnings from Sonic on Monday and Ruby Tuesday yesterday after the close

 

Notable news items and price moves yesterday:

  • A notable divergence in price action yesterday was EAT up on accelerating volume, while DRI, CAKE, RRGB and PFCB were down on accelerating volume
  • RT posted strong results after the close last night, beating expectations with strong same-store sales results showing a healthy gap emerging between RT and the Knapp-Track casual dining benchmark.
  • Cosi outperformed once again and remains one of my favorite names.  Yesterday’s 13% gain was confirmed by strong volume and Cosi is now the top performing stock over the last month and week.
  • Sonic posted strong gains following Monday’s earnings results.
  • Some upgrades/downgrades from Piper Jaffray hit the tape: CAKE was raised to “Neutral" from "Underweight", CMG was raised to "Overweight" from "Neutral" CPKI was downgraded "Neutral" from "Overweight" and BJRI was downgraded to "Neutral" from "Overweight".
  • CBOU coffee upgraded at Jeffries.
  • RT upgraded by BofA/ML.
  • CMG article in Fortune: “Chipotle Mexican Grill is the hottest restaurant stock around”.  CMG founder Steve Ells said Wednesday he is developing an Asian fast-casual concept that he expects to debut in mid-2011.
  • MCD is selling Lattes in the Atlanta market for $1 until January 17th.
  • Year-over-year food prices rose 10 percent for the most popular store-bought grocery items, especially breakfast foods, according to the American Farm Bureau Federation.
  • SBUX removed the words “Starbucks Coffee” from its logo, seeking to emulate NKE and AAPL as a brand that is ubiquitous and instantly recognizable.  The move also reflects company’s shift from being purely about coffee to selling food and other beverages.  Much of the reaction online has been negative, which could make SBUX’s move look more like GAP than NKE.

TALES OF THE TAPE: EAT, RT, DRI, CAKE, RRGB, PFCB, COSI, SONC, CBOU, CMG, MCD, SBUX - sbuxlike

 

TALES OF THE TAPE: EAT, RT, DRI, CAKE, RRGB, PFCB, COSI, SONC, CBOU, CMG, MCD, SBUX - stocks 16

 

Howard Penney

Managing Director


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THE M3: SITES 7 & 8

The Macau Metro Monitor, January 6, 2011


PARCELS 7 AND 8 IN COTAI FOR NON-GAMING: MEDIA REPORT macaubusiness.com

According to Jornal Tribuna de Macau, a source close to the situation said the Macau government do not have plans for casinos on sites 7 & 8.  The government is instead looking at “projects related to economic diversification,” the source added.  It is also reported that the government has started proceedings to get back five undeveloped land parcels granted to private developers.



Us vs. Them

“For some of them, inflation is not so bad; they even ask for a continuation of it, because they are the first to profit from it.”

-Ludwig von Mises

 

“For some of them” – that’s a critical preface, to a critical economic statement, during critical global economic times. If you’re reading this right now, consider yourself just like me . We are the fortunate ones. We can make money being long inflation.

 

If you haven’t read von Mises’ Fourth Lecture titled “Inflation”  yet (in Economic Policy, Ludwig von Mises speeches; Argentina 1959), you should. On page 45 he goes on to write that:

 

“And there are always people who favor inflation because they realize what is going on sooner than other people do. Their special profits are due to the fact that there will necessarily be unevenness in the process of inflation… But of course, the politician in power who proceeds toward inflation  does not announce: I am proceeding toward inflation.”

 

Unlike the Big Government monetization of debt experiments gone bad of Jimmy Carter (and then Bernanke-Lite Fed Head, Arthur Burns), how appropriate the lessons of history are that stand the test of time…

 

I’m long inflation.

 

In fact I got longer of inflation on the “buying opportunities” I have seen in commodities and currencies throughout the week. I have taken my asset allocation to Cash down in the Hedgeye Asset Allocation Model from 61% (at the beginning of the week) to 49% as of yesterday’s close.

 

How does one get long of inflation?

  1. Buy Commodities (we’re long oil, OIL, corn, CORN, and sugar, SGG)
  2. Buy Currencies whose countries have inflationary trends and an upward bias to interest rates (we’re long US Dollars, UUP, and Chinese Yuans, CYB)
  3. Short Bonds (we’re short short-term US Treasuries, SHY)

Of course, you can be long stocks too, which we are in both Germany and the US (admittedly too light in the shoes on the US side as we are long Healthcare and Energy, but short Tech and Consumer Discretionary).

 

That said, too light on Equities when the rest of the world wakes up to what we are really doing to world populations with trivial things like food inflation is definitely the place that the risk manager in me wants to be.

 

What are we (“some of them”) doing to most of them?

 

We’re starving them.

 

Now maybe Wall Street couldn’t give a damn about this. But I do. Here’s the data on world food prices (per the United Nations, not The Ber-nank):

  1. World Food Prices hit record ALL-TIME highs in December (on historical matters, ever is a long time).
  2. The commodities basket (55 commodities in the UN’s calculations to smooth out what’s “core”) has eclipsed the 2008 all-time high.
  3. Global grain production will have to rise at least 2% in 2011 to meet demand and avoid further depletion of stocks (UN agency).

The wizardry of the US Government’s calculation of inflation (CPI) is in the data as well. Ben Bernanke stares into the 60 Minutes cameras and does God’s work, under oath, saying that he didn’t see 2008 inflation with $150/oil or 2010 inflation with all-time record high world food prices. Charlatanism redefined.

 

When a professional politician or anyone who gets paid on inflationary terms tells you there is no inflation in the US, this is what they mean:

 

Top 6 Current US CPI Weighting:

  1. Housing: 41.96%
  2. Transportation: 16.69%
  3. Food and Beverage: 15.76%
  4. Recreation: 6.44%
  5. Medical Care: 6.51%
  6. Education and communication: 6.51%

*they’ve changed the CPI calculation 9x since 1996 (I wonder why)

 

So, obviously, the takeaway here is that Bernanke doesn’t see inflation because, like Hedgeye, he is bearish on US Housing. Unlike Hedgeye, he must think that the entire world works in NYC or Washington DC, where you don’t cook or drive to work.

 

Here’s another way to think about Global Inflation Accelerating and its impact on an interconnected global economy:

 

World Populations:

  1. China 1.341B people = 19.5%
  2. India 1.192B people = 17.3%
  3. USA 310M people = 4.5%
  4. Indonesia 237M people = 3.5%
  5. Brazil 190M people = 2.8%
  6. Pakistan 171M people = 2.5%

And across the world’s populations, here are this morning’s fresh off the Macro Grind global inflation reports for December:

  1. India food inflation reported at +18.32% year-over-year growth
  2. Russian inflation (CPI) hitting another new high at +8.7% DEC vs +8.1% NOV
  3. Kazakhstan inflation (CPI) +7.8% DEC vs +7.7% NOV
  4. Uruguay inflation (CPI) +6.93% DEC vs +6.87% NOV

I know – who cares about them people in Uruguay and Kazakhstan anyway. Nice trade Heli-Ben.

 

My immediate term support and resistance lines for the SP500 are now 1262 and 1284, respectively.

 

Trade inflation and roll the bones out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Us vs. Them - Ben


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