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Us vs. Them

This note was originally published at 8am on January 06, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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,



Keith R. McCullough
Chief Executive Officer


Us vs. Them - Ben

India's Two-Factor Squeeze

Conclusion: We remain cautious on Indian equities as growth looks to slow due to a cash shortage and additional monetary policy tightening on the horizon. Further, we see inflation as a much larger headwind in India than we feel is currently priced into its equity market.


In 2010, we’ve seen India struggle with inflation, aggressively tighten monetary policy to the tune of six rate hikes and take measures to alleviate a shortage of cash in its financial system at the end of the year. In spite of all this, the Indian economy and Indian equities barely skipped a beat on the year as a whole: 

  • Indian GDP has averaged +8.8% YoY in the three quarters through 3Q10 vs. a +6.8% YoY quarterly average throughout 2009;
  • India’s BSE SENSEX Index finished 2010 up +17.4%; and
  • Indian banks borrowed 923 billion rupees per day from the Reserve Bank of India in 4Q10 – the most since 2000 – as they struggled to meet rising demand for loans. 

India's Two-Factor Squeeze - 1


Given this sequence of events, the question, “Where to now?” seems most fitting. India is struggling with inflation running ~300bps over the government’s 4-4.5% YoY target and accelerating food inflation currently at +18.32% YoY (there are 828 million Indians that live on less than $2 per day at PPP, so food inflation IS an addressable problem in India, contrary to our conflicted and compromised views of inflation domestically).


India's Two-Factor Squeeze - 2


Despite these inflationary concerns, the RBI has been keen on adding fuel to the speculative fire in an attempt to ease a cash shortage within its financial system by supplying Indian lenders with liquidity. This is likely because the RBI expects inflation to continue to soften from here on the heels of the aforementioned interest rate hikes in 2010.


India's Two-Factor Squeeze - 3


Currently Indian Finance Minister Pranab Mukherjee expects YoY WPI (India’s broadest measure of inflation) to decelerate to +6.5% YoY by March 31 – up from the government’s initial estimate of +5% YoY in early 4Q10 and +6% YoY as recently as December 14. This subtle ratcheting up of inflation expectations suggests the Indian government sees what we see: more inflation on the horizon.


India's Two-Factor Squeeze - 4


As it currently stands, the shortage of cash within India’s financial system has driven rates on short-term paper to two year highs: India’s one-year certificate of deposit is currently at 9.45%. The rise in rates has contributed to a doubling of AUM at Indian money-market funds in 2H10, finishing the year with 569 billion rupees ($12.6 billion). Heightening inflation expectations may also be a contributing factor to the increase, as the returns from such instruments are allowed to be adjusted for inflation before being taxed.


India's Two-Factor Squeeze - 5


Liquidity continues to remain tight within the Indian financial system, as deposit growth (+15.3% YoY) is being outpaced by credit growth (+21.1% YoY) – a recipe for accelerating, NOT decelerating, inflation in an economy with demand-side pressure as robust as India’s. To counter weak deposit growth, we’re seeing Indian lenders hike deposit rates: the State bank of India has raised one-year deposit rates +225bps since July 30 to a 22-month high of 8.25%; Housing Finance Corp., India’s largest mortgage lender, increased its deposit rates +75bps to 7.95%. India’s overnight interbank borrowing rate jumped +50bps since the end of last week to 6% - another sign of tightness within India’s cash market.


If this tightness persists, we could see the Indian economy run into a scenario whereby they simply can’t meet demand consumer and corporate demand for loans enough to sustain the current cycle’s robust growth trajectory. Interest rates likely have to continue to heighten across the Indian economy in order for Indian lenders to grow deposits enough to meet such demand. Sure, India could continue to pump liquidity into the system by accelerating its government bond purchases, but it does so at the risk of exacerbating inflationary concerns.


Adding to this confluence of stresses is the increasingly likelihood of additional tightening by the RBI to combat a potential acceleration in inflation. The RBI meets on January 25 and may resume hiking the repurchase rate, which currently stands at 6.25%.


All told, India’s 4Q10 GDP (which we think may surprise consensus estimates to the upside) may be wind up being a cyclical peak when look back 6-9 months from now. Given, we don’t think getting long Indian equities right here and now would be the most prudent investment to make. If anything, we prefer to be exposed to India on the short side absent a meaningful improvement in the data.


Darius Dale


R3: SKS, UA, TSA, Men’s Apparel


January 6, 2010





  • In case you missed it, Under Armour’s annual High School All-America Football Game took place last night with the most brand exposure I think I’ve ever witnessed in one event. While only in its fourth year, UA’s game is taking notable share from the traditional U.S. Army All-American Bowl with 6 of the nation’s top 10 recruits participating this year.
  • According to a study published by popular UK rag the Daily Mail, women spend $110 on average each year buying clothes on sale that don’t fit in hopes of fitting into them someday. With New Year’s resolutions still top-of-mind, sometimes it helps to know you’re not alone.
  • It was only a matter of time, but Groupon just sold its first marriage proposal ‘deal’ last night. Call it a sign of the times, a hoax, or whatever you like, but one thing is for sure - this company knows how to stay in the headlines.



Saks Closing its Denver Store- Saks Inc. will close its Saks Fifth Avenue store in the Cherry Creek Mall in Denver on March 19, marking the luxury chain’s seventh closing since July. Additional closings are expected as Saks continues to scrutinize its stores and shift resources to the most productive units and those showing potential. Saks Inc. operates 47 Saks Fifth Avenue stores, 57 Off 5th outlets and saks.com. “Store closing decisions are never easy,” Stephen I. Sadove, chairman and chief executive officer of Saks, said Wednesday. Sources said Saks wants to close its Dallas Galleria unit. Asked if that was true, Julia Bentley, senior vice president of investor relations and communications, responded: “It is our policy not to comment on rumors or speculation.” The 87,000-square-foot Denver unit opened in 1990. The store is owned by Saks and is being sold to the landlord. From the sale and closing, Saks expects to realize a net after-tax gain of about $6 million in the fourth quarter ending Jan. 29.<WWD>

Hedgeye Retail’s Take: Given the frequency with which retailers hold onto underperforming real estate, hats off to Saks for making the tough decisions – however with razor thin margins and negative margins two years running it’s not exactly like they have too many options. To put the 7 closures into perspective, the company had a store base of only 108 at year end (including outlets).


TSA to Open Third S.A. Elite Store - Sports Authority plans to open its third S.A. Elite, its new smaller concept, this spring in Town Center Corte Madera in California. Its first two S.A. Elite locations were opened in the Denver area in August and November. According to the North Bay Business Journal, Sports Authority signed a lease for a 15,640-square-foot space at the south side of the mall and plans to open the store in May. <SportsOneSource>

Hedgeye Retail’s Take: After launching the concept back in May, we’re a bit surprised quite frankly that it’s taken TSA this long to open a 3rd store – particularly with DKS and HIBB stepping on the store growth accelerator and upping the ante for the industry in the process. In fact, at ~20% of the size of a typical footprint these concepts should be much easier for TSA to roll out in short order due to the dearth of new larger format construction.


Men's Wear exhibits Strong Performance in the Holiday Season - Behavioral experts say shopping doesn’t come naturally to most men, yet men’s wear was among the star performers this past holiday and retailers are expecting (or at least hoping) the growth will continue in 2011. They’re helped by the fact that clothes do wear out — and men feel that it’s time at last to replace their threadbare suits and holey socks and underwear. According to behavioral finance expert Meir Statman, author and business professor at Santa Clara University, the recession has stirred men’s competitive juices and they see dressing better as a competitive edge. “It’s not just a matter of impressing women anymore,” he said. “It’s also about impressing potential employers. There is a sense that the competition out there is more fierce.”<WWD>

Hedgeye Retail’s Take: The simple fact that since 2000 men’s apparel expenditures have outperformed women’s every other year offers some credibility to the wear-and-tear theory. As it turns out the last ‘men’s cycle’ occurred during late ’08/ early ’09 so it makes sense to see the resurgence of men apparel outperformance in recent months.


Anchor Blue is Shutting Down Operations - The retail landscape has its first casualty of 2011. Anchor Blue Inc., the Corona, Calif.-based teen specialty store operator owned by private equity firm Sun Capital Partners, has closed its corporate offices and is in the process of winding down operations at its 120 stores. Officials at Sun Capital declined to comment Wednesday and calls to Anchor Blue officials weren’t returned, but suppliers and store associates confirmed that operations were being shut down and details on the chain’s liquidation were expected on Friday. The troubled teen retailer survived a three-month stay in bankruptcy, beginning in June 2009, and a series of downsizing moves, but found itself at a loss to compete in an increasingly promotional youth retail market. In an effort to work down inventories and generate cash, it had been running “buy two, get two free” promotions for much of the holiday season. Anchor Blue also had been among a series of retailers operating stores with large amounts of empty space within its walls and concentrating its inventory in the remaining square footage.<WWD>

Hedgeye Retail’s Take: The first retail closing of the new year reflects persistent challenges in teen apparel. While retailer balance sheets on the whole are improved relative to 2008, Anchor Blue isn’t likely to be along on this list for long.


Online Holiday Sales Rise 12.1% - ComScore Inc. reported Wednesday that online sales for the holiday season, including all of November and December, totaled $32.59 billion, 12.1 percent higher than the $29.08 billion reported for 2009. The new data update a previous report in which online sales between Nov. 1 and Dec. 26 were reported to have risen 12.6 percent to $30.81 billion. Between Dec. 27 and Dec. 31, a period which included a vicious snowstorm along the Eastern seaboard, sales rose 10.1 percent to $1.78 billion from $1.62 billion in the comparable prior-year period.  Gian Fulgoni, chairman of ComScore, noted the final results for holiday outpaced the firm’s earlier projections of 11 percent growth. <WWD>

Hedgeye Retail’s Take:  With both athletic apparel and footwear sales up 10% last week according to our weekly data sources, concern over last week’s storm appears to be overblown indeed. Online continues to be one of the fastest growing channels for retailers.


Carhartt, Adam Kimmel to Launch Men's Line- Workwear maker Carhartt has partnered with designer Adam Kimmel to launch a co-branded line that will make its debut at retail in May. The line will be sold at Barneys New York and a small number of specialty retailers in the U.S., in addition to stores internationally.  The launch collection encompasses 29 pieces, including outerwear, jeans, plaid flannel shirts and pants in moleskin or cotton twill. Accessories in the line include a duffel and tote bag as well as cotton cashmere beanies. Retail prices will range from $70 to $600.“I’ve worn Carhartt since I was 10 years old and for me it’s a chance to expand my business in a romantic way,” said Kimmel, who founded his signature men’s wear label in 2004 in New York and sells to about 80 stores worldwide including Barneys, Maxfield, The Webster, Colette in Paris and Dover Street Market in London. “Carhartt is an American heritage brand and it’s really maintained the integrity and quality of the product and kept a focus on their core customer over the years. This is the perfect marriage.” <WWD>

Hedgeye Retail’s Take: Further evidence that a resurgence in authentic ‘Americana’ wasn’t just a 2010 phenomena.


The Future of Social Shopping  -Retailers are exploring a new frontier in social commerce as they go beyond simply offering Facebook pages and Twitter profiles for their customers to follow.Fueling this trend is web retailers’ quick adoption of social sign-on, which allows consumers to log in to their Facebook account instead of registering on an ecommerce site. Social sign-on gives retailers access to rich profile information for targeting customers. “Bringing Facebook profile data into retail sites makes sense because it influences consumers when they are close to conversion,” said Jeffrey Grau, eMarketer principal analyst and author of the new report “Social Commerce: Personalized and Collaborative Shopping Experiences.” “In contrast, many consumers on Facebook are mainly socializing with friends and further removed from making purchase decisions.” Over half of online retailers who responded to an August 2010 survey by Gigya, a provider of social sign-on applications, had either implemented the feature or planned to add it in the near future. <Emarketer>

Hedgeye Retail’s Take: Call me out of touch, but I had no idea what social sign-on was – essentially using sign on information for social service sites (i.e. Facebook, Twitter, etc.) to gain access to corporate retail websites. A great way for retailers to gain access to more detailed analytical data on consumers, but the inherent Big Brother personal profile sharing conundrum remains a key hurdle in technology adoption.


R3: SKS, UA, TSA, Men’s Apparel - R3 1 6 11




RT’s results last night were significant for both the company and, being somewhat of a first glimpse for this earnings season, for the wider casual dining space.  In terms of the company itself, as we can see in the quadrant chart below, margin expansion was sustained despite a significant step up in the difficulty of the year-over-year comparison from 1QFY10 to 2QFY10.  Same-store sales stole the show, though, with company-owned same-store sales growth coming in at +4.2%.  This is the best result on that metric since 4QFY06.


RT: STRONG QUARTER - rt quadrant


The same-store sales result also implies a significant gain in market share for the company.  The gap between RT’s sales and the Knapp-Track casual dining benchmark widened further over the most recently reported quarter on a one-year and two-year basis.   RT’s Gap-to-Knapp increased to +3.1% in 2QFY11 from the prior quarter.  On a two-year average basis, the Gap-to-Knapp increased to +3.4% from 2.6% in the prior quarter.   


In terms of the income statement, there were no significant red flags.  SG&A expense was up 130 basis points year-over-year as a result of testing the company’s new coupon strategy in national magazines and various other digital advertising expenses.  This was offset by a decline in interest expense due to a lower average debt balance and a lower effective interest rate due to a lower spread to LIBOR as a result of improved leverage ratios.  The tax rate was 13.3%, which was significantly down from 47.4% last year, but even a tax rate of 25% would only have made a difference of approximately $0.01.


In terms of outlook, management did not change their FY11 guidance.  From a comparison perspective, 2HFY11 is more difficult for RT than the first half of the year.  In 4QFY11, the company will be facing its first positive year-over-year same-store sales comparison since 4QFY07.  Notwithstanding this, given that two-year average same-store sales accelerated year-over-year by 220 basis points, management’s FY11 guidance of flat to +2% now seems conservative.  During the Q&A session of the Earnings Call, management cited the still-fragile U.S. economy and lack of predictability of business conditions as reasons for the hesitancy to raise guidance on the back of the strong 2QFY11 performance. 


Despite their cautious stance, however, management also implied current guidance may be conservative and stated that it is not a reflection of weakening trends, but rather a decision to not update guidance as opposed to offering fresh guidance.  Specifically, CEO Sandy Beall stated, “We’re in the – needless to say we feel comfortable with the guidance range we’ve given. We hope we can beat it and if that looks bad, it looks bad. But hopefully we can beat it. We don’t want to go out there over promising, the world’s not easy. It’s not easy, yet. It’s not as predictable as it used to be in the old days.”


The company is also lapping 19.5% and 19.7% restaurant level margin from 3Q10 and 4Q10, respectively, versus 15.9% and 13.7% in 1Q10 and 2Q10, respectively.  Management commentary on costs for the remainder of the year didn’t raise any concerns; food costs are expected to remain relatively stable compared to the prior year and restaurant operating margins, overall, are expected to be flat for the year which implies a slowdown in margins in 2HFY11 (given that margins were up 200 bps in 1Q11 and 140 bps in 2Q11).  This margin guidance would imply that RT would fall out of the Nirvana quadrant of our restaurant sigma chart in 2HFY11 after operating in Nirvana for three consecutive quarters.  Again, if same-store sales outperform the guidance range, margins could also come in better than management is forecasting.


Besides the fragile overall macro environment that Founder, President and CEO Sandy Beall alluded to - which is obviously the prevailing factor in RT’s ability to generate strong results for shareholders – RT seems well-poised for the remainder of FY11. 


With regard to December trends, management stated that there was a slowdown in trends from the 4% levels of 2QFY11, but that the performance was “reasonably good” despite the weather which affected everybody, “at least in the Eastern United States”.  Management highlighted Florida and New England as high-performing geographies for RT in the quarter ended November 30th.  RT’s peers are performing well today; along with RT, RRGB, CAKE, EAT, DRI and PFCB are all trading up.  Yesterday saw a divergence in price action with EAT trading up on accelerating volume with DRI, CAKE, RRGB, and PFCB trading down on accelerating volume.


Howard Penney

Managing Director

Is Swine Flu a Tail Risk You Are Contemplating?

Our Healthcare Sector Head Tom Tobin called out a global macro risk to us the other day that we had not been considering, the reemergence of swine flu (H1N1).  In the United Kingdom, almost 36 people have died of the virus this flu season.  Interestingly, almost all were under 65 years of age and, according to reports, 40 percent of the fatalities did not have the usual risk factors (weak immune systems, primarily).


Ireland, in particular, is seeing an acceleration in swine flu activity.  According the Public Health Agency in Ireland, as of the week ending January 2nd, reported swine flu cases had grown from 30 to 91 week-over-week – a +190% increase in seven days! (albeit on small numbers)


As a refresher, the H1N1 form of the swine flu is descended from the strain that caused the 1918 flu pandemic, which was estimated to have killed 50 – 100MM people globally.   The symptoms to swine flu are similar to other flues – chills, fever, sore throat, muscle pain, and general discomfort.   Fatalities occur as these symptoms accelerate, and the most common reasons for death are respiratory failure, pneumonia, dehydration, and kidney failure.  Not surprisingly, fatalities are most common in the young and elderly, which is what makes the recent strain in the U.K. interesting to note, as 40% of the fatalities did not come from this target group.


We actually did a Google analytics analysis to understand whether swine flu is a risk the investors are currently considering.  As the chart below outlines, currently search volume for the term swine flu is well below levels in 2009 and, in fact, search activity is quite low overall. 


Is Swine Flu a Tail Risk You Are Contemplating? - 1


Interestingly, we also looked at the last 30 days of search activity and noticed that swine flu search activity is beginning to break out to the upside, which suggests that the idea of swine flu as macro risk is gaining momentum.


Is Swine Flu a Tail Risk You Are Contemplating? - 2


In 2009, the World Health Organization (WHO) declared swine flu a pandemic and President Obama declared a state of emergency after more than 1,000 people had died from it.  In August 2010, the WHO officially declared the pandemic over.  While we are not trying to be alarmists in suggesting that a new pandemic is coming, we did want to highlight that there is evidence of a pickup in infections, which is not currently priced into expectations based on the low relative amount of Google search activity.


While it is tough to measure the potential economic impact from a broader breakout, it is likely fair to suggest that even a mild pickup in activity would hurt confidence and have a more severe impact on the travel and hospitality industries.  In 2009, the Brookings Institute estimates that “a mild scenario would cost the global economy about $360 billion and an ultra scenario up to $4 trillion within the year of the outbreak.”  Even if we are early and wrong, those are numbers that make this a Tail Risk worth considering. 


Daryl G. Jones

Managing Director

Government Whispering: Ahead of Tommorrow's Jobs #

Ahead of tomorrow’s US jobs print, here are some of our team’s thoughts: 

  1. Whisper of 580,000 payroll adds has been going around since yesterday
  2. Every market rally (from yesterday’s pre-market futures lows) has been followed up with people reminding me of the whisper
  3. Government Whispering is turning into the casino that Big Government Intervention built into your markets – get used to it 

Where are we at on estimates versus expectations: 

  1. The payroll number could be at least 3x consensus (it started the wk at 125,000 which is a bit of a joke)
  2. The question now is can it be 2x that (or better than the whisper of 580,000)? 

In terms of what an improving jobs picture actually means for the interconnected macro markets tomorrow: 

  1. BONDS: definitely baking this in (collapsing UST’s have been for a month and yields are bullish TRADE, TREND, and TAIL in our model)
  2. FX: definitely, maybe overly, baking this in (USD had its best day in a month yesterday and up again today)
  3. STOCKS: are trying their best to bake this in, but I think they’re going to look late 

Too late, because January looks more like November did to us (when the SPX was down) in terms of US growth, employment, and confidence trends (ABC conf hit -45 this week, down for 2 weeks in a row, and jobless claims this morn were more in line with what we see in the intermediate term TREND = Jobless Stagflation. The hype about US growth recovery is certainly getting disconnected with some very big cap consumer stocks (BBY, MCD, TGT, GPS, M, etc)…


From Josh Steiner:


I cannot speak to the NFP mousetrap that Barclays has built (my old alma mater), but I will say that our preferred method for tracking the employment situation is jobless claims. Jobless claims had their big move in December and that fueled much of the market rally over that time, so it would seem like a further rally on NFP for December would be overkill, though that’s not to say it won’t happen given how short-sighted this market is. Bigger picture, taking a step back from this one datapoint, our work suggests that claims will actually worsen over the next 4-6 weeks as they did in both 2010 and 2009, which may make tomorrow’s number a last gasp of good news on the employment front for some time, so the question becomes do you want to use that as an entry or an exit point? You also have to wonder about the importance of a single NFP print that disconnected from the claims series.


Not that anyone seems to care about the unemployment rate anymore, but there is very little likelihood that it will come down anytime soon based on the degree of contraction in the labor force participation rate, which is actually understating unemployment by around two whole percentage points.


From Howard Penney:


A few more relevant data points related to deteriorating or stagnant labor market conditions.

  1. The ISM’s purchasing managers survey (manufacturing) showed the December employment diffusion index dropping to 55.7 versus 57.5 in November.  The December reading was the lowest since March 2010. 
  2. The ISM’s purchasing managers survey (services) also showed the December employment diffusion index declining, from 52.7 in November to 50.5 in December.  The December reading was the lowest since September 2010. 

In Conclusion:


Tomorrow’s jobs # isn’t about anything other than the whisper at this point. Missing the whisper is probably as bad as smoking it (intraday rallies this week have been based on this 580k whisper, while the rest of the world’s stock markets in Asia and Europe have sold off). The short term performance spread between the VIX and SPX hasn’t been this wide since, well, ever.


That’s a very risky inverse relationship to be rolling the bones on the long side in front of a macro catalyst. At a bare minimum, that’s not what we are going to tell you to do.


Yours in risk management,


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