Today, the BLS released its monthly jobs report showing that the U.S. economy added only 103,000 jobs this December, compared with the median forecast of 150,000 according to Bloomberg Estimates. 


November payrolls showed a revised 71,000 increase (previously 39,000) with October payrolls up a phony 210,000 in revision (previously 172,000).  The October revision would have been reported as a gain of 190,000, if the BLS consistently reported its monthly recasting of seasonal factors.


While the unemployment rate released today, 9.4%, came in well below expectations, the primary reason for this is that the labor force in America has plunged (decreased by 434,000) to a fresh 25 year low.  Where is the unemployed population going?  More importantly 260,000 Americans dropped out of the labor force entirely.  This means that the Obama economy is now driving Americans out of the labor force faster than it is bringing them in. 


This is akin to governments with net emigration (Ireland, for instance) publishing unemployment rate figures that do not accurately reflect the true extent of the decline in employment opportunities for their citizens.  The chart below indicates how unemployment rate would look if the labor force participation rate were maintained at the average from January 2000 through December 2010.  Clearly the declining participation rate is having a dramatic impact on the numbers.




Cronyism is alive and well in Washington.  The remaking of the Obama administration and his investments is interesting to say the least.  How do the following three nuggets augur for the promise of “change”:

  1. Peter Orszag has gone to Citibank (Obama owned bank)  
  2. Obama named Gene Sperling as NEC Director (formally of Goldman Sachs, another institution that benefited from government handouts)
  3. Named Bill Daley as President Barack Obama’s Chief of Staff (JPM superstar and beneficiary of the government funds)


The dependence on close relationships between business people and government officials is a tight as ever, but our economy can’t generate any jobs and consumers are facing a severe squeeze on their wallets as inflation goes higher.   


Keith provides ample volume on the topic of inflation each day via The Early Look.  Today, however, we have heard Ben Bernanke on inflation and other matters as he testifies with the Senate Budget Committee in Washington.  On the subject of inflation, Bernanke once again downplayed concerns, stating plainly that, “inflation is 1% including food and fuel”.  When you decide what the weightings are to comprise a number, you can make that number whatever you want it to be.  Keith has had several thoughts on inflation during the testimony that he communicated over his @keithmccullough twitter account that I think are worth sharing:

  1. Here comes Bernanke justifying his #inflation view w/ a completely compromised and conflicted US govt calculation - rest of world be damned
  2. Do you think The Ber-nank knows what twitter is? its his Waterloo
  3. you won't hear The Ber-nank disclose that his #inflation calc has 41.96% weight on "owners’ equivalent rent"; this is embarrassing America
  4. I'm not being disrespectful about that Ber-nank pt either; no Global Macro risk manager worth his/her shirt would hire Bernanke to trade P&L
  5. Bernanke is either incompetent on global macro matters or lying
  6. there's no conspiracy theory in govt calculations, they are simply conflicted and designed to obfuscate
  7. and on growth - he uses the "blue chip" sell side estimates - nice


Rounding out the government’s TV campaign today was President Obama, commenting on the job growth trend being “clear” and to some extent he is correct given the gains in private sector jobs over the past twelve months.  However, the rate of growth is still indicating fragility in the economy and hesitancy on the part of corporations to accelerate hiring further.  Retail sales results for December and ABC consumer confidence have both lent credence to this hesitancy.  Whispers of 580k may abound, but those running P&L’s, not Bernanke or even Obama, will decide whether or not to accelerate hiring in the broader economy.


Howard Penney

Managing Director

LIZ: Nice Hole


Here’s a step back and post mortem on LIZ. Relative to the underlying fundamentals, this is overdone. But the company has not yet earned the benefit of the doubt from anyone. The irony is that the stock has changed more than the story has.


This LIZ blow-up today requires a big step back and post mortem for us. While not in the Hedgeye Virtual Portfolio, I (McGough) have definitely been a bull on LIZ with the stock as a single-digit midget despite the magnitude of challenges facing the industry in 2011. 


The crux of our case has been that after 4-years of missing numbers (and releasing more earnings miss press releases than there were quarters) the company would finally start to harvest its investments of the past 2-years and would face positive earnings revisions on dramatically reduced working capital needs while the rest of retail went the other way. 


The bottom line is that there was definitely a downturn in our expectations at Lucky, and to a lesser degree, Mexx. But the best way I can characterize this event is that it’s a ‘higher quality miss.’  “C’mon McGough, admit you’re wrong and throw in the towel on this dog.”  I’ve had 3 such conversations over the past 12 hours where I heard these words.


But let’s tear it down and see what’s changed.


Liz Wholesale/JC Penney:

  1. It was a painful 2-year build up to the decision to go exclusive with JCP and pull out of other department stores. Leading up to the decision, the company not only lost out on top line, but got beat up on margin and working capital.
  2. In the 2-years it took to implement, LIZ worked down JCP exposure to Zero. But built up JCP/QVC from Zero.
  3. The bottom line is that we’re talking a $1bn unprofitable business with high working capital needs. That spells horrible RNOA. Now, they are 1-quarter into a sub $1bn business, but with steady 4-6% margins. That might not seem like much. But msd steady margins on a business with 2-3x operating asset turns is a trade I’ll take any day. The events leading to today’s stock action has Zero bearing on this thesis. 

Liz Outlets: The company is nearly out of its 87 money losing Liz Claiborne branded outlet stores in the United States and Puerto Rico. These have been a major earnings and working capital drag. Think about it, with inventory poorly placed by multiple divorces between LIZ and Department Stores, the outlets have borne the brunt. That’s almost over. No change here in thesis.


Consumer Direct Brands:

This is where it gets dicey. I’ve got to check through 12 years of notes to confirm, but I think that this is the first time LIZ has ever called out bad weather as being the key contributing factor. In fact, it’s probably the first time in McComb’s life he’s used it.


Unfortunately, this is impossible for us to validate and/or quantify. What I’ll give ‘em is that all it takes is a simple Google search to find all the videos and news releases discussing the ‘paralyzed’ consumer in Western Europe.  I’d argue that even a paralyzed consumer will make sure that they get the best product/value regardless of weather.  But changes in consumer confidence rarely occur to a magnitude that would support a 16% negative diversion from one month to another. 


The irony here is that in looking at the underlying comp run rate for all Liz concepts, they all improved on the margin, except for Mexx, and Mexx only eroded by 200-300bps. If management is not flat-out lying about the snow factor, then this really is not that bad.


LIZ: Nice Hole - LIZ Comp Traj 1 7 11 

  1. That aside, Mexx Europe appears to be making progress early in year 2 under Thomas Grote’s direction with comp performance Oct-Nov flat after 3+ years of posting negative comps in addition to spring order book that’s up 14% both of which are positive on the margin.
  2. Leadership at both Juicy (Leann Nealz 9/10) and Lucky (Dave DeMattei 12/09) has been replaced within the last 12-months and product selling through now is likely to be legacy lines from the prior management. Spring 2011 is when we’ll likely see new product roll out.
  3. Despite the decline in December comps, Juicy’s comps on a 1yr and 2yr basis have been steadily improving and in addition to moderate store growth the top-line has reaccelerated in Q3 and Q4.
  4. Lucky continues to be a most significant drag with underperformance actually accelerating to the downside throughout the quarter with women’s product (over 50% of sales) highlighted at the key reason.

The question is whether the company deserves the benefit of the doubt between now and its 4Q call on February 17th at which time management will provide January trends to determine just how much of the shortfall in December was due to weather vs. product?


For a levered small cap stock over such a short duration, the answer is probably ‘No.”  But is there enough for us to take this thing out behind the barn an pop a cap in it? Definitely not.


In fact, after the Feb 17 call, we’ll have better disclosure on the size, profitability and return characteristics of the partner brands and exit of the outlet stores – which we think will be a positive surprise.


Keep in mind that 4 out 5 investor conversations I have on Liz include questions around liquidity. People ask about LBOs on JCP, American Eagle, Carter’s and other peaky margin companies. But they don’t breach the topic on LIZ. Are they asking me about the math as to how you get the Liz Claiborne brand for free at the current price? No. This is completely backwards.


LIZ: Nice Hole - LIZ SOP 1 7 11


LIZ: Nice Hole - LIZ Q4 PreannTable 1 7 11



Inflation is Global

Conclusion: We continue to see supportive data points that growth is slowing and inflation is accelerating on a GLOBAL basis in 1H11.


While we may have been early, our view that global inflation would lead to tighter monetary policy and slower global growth is beginning to play out in spades.  In aggregate, global inflation is being driven by the Fed’s experiment with Quantitative Guessing.  Numerous “insignificant” countries ranging from China, to Brazil, to India have explicitly pointed to monetary easing in the U.S. as a key contributor to their own inflation headwinds, as the weak U.S. dollar from July to November drove up commodity prices and accelerating inflation expectations carried them higher alongside the marginally stronger dollar of the last two months. We suggest you avoid buying the one-factor model of “accelerating US growth” as the reason global bond yields have ticked up over the last two month.


Inflation is Global - 2


Now, we’re entering a period in which many countries will actually have to accelerate tightening measures, which may put additional upward pressure on US Treasury yields, as well as put downward pressure on global growth (email us for recent reports pertaining to the topic). We’d be remiss to forget how good 4Q09 and 1Q10 were from a global growth perspective. Those be some tough comps in the face of accelerating inflation, tighter monetary policy and higher interest rates.


Seemingly every day, we get a global macro data point(s) that fit into each of the three buckets of the equation. From today’s run we wanted to highlight the following:


Accelerating Inflation: Brazil CPI accelerated to a 25-month high of +5.91% YoY in December.


Inflation is Global - 1


Monetary Policy Tightening: Indian Finance Ministry’s Chief Economic Adviser, Kaushik Basu, said India’s inflation rate is “too high” and needs to be addressed.


Slowing Growth: China’s Vice Premier Li Keqiang estimated that the Chinese economy grew about ~10% in 2010. Assuming he knows the numbers ahead of time, using his full year estimate, we can back into China’s GDP growth rate from 4Q10: +8.2% YoY. For reference, the Bloomberg consensus estimate for Chinese growth is +9% YoY in 4Q10 and +8.4% YoY in 1Q11. In a report yesterday, we explored the possibility of a hard(er) landing in China relative to consensus expectations, with the conclusion being that it is likely not priced into global equity markets (email us if you need a copy).


All told, the direction of global bond yields tells us one thing: inflation is a problem GLOBALLY. And because of that, there will be unintended consequences as struggling PIIGS and State & Municipal bond issuers come to the market to refinance throughout the year: 

  • According to some estimates, Italy and Spain (two of our favorite global macro shorts since 2Q10) need to raise €317B ($412B) this year – a sum equivalent to roughly 13.3% of their combined GDPs; and
  • House Budget Committee Chairman Paul Ryan (R. WI) yesterday ruled out bailing out any US State in budget trouble. This explicitly translates to a higher risk premium for muni bond issuers as they accelerate tax-free muni bond issuance in the face of waning federal support to patch budget gaps totaling $140B starting in FY12 (which begins on July 1 for all but four states).

Of course, none of this matters to AAPL’s earnings…


The US equity market has been cruising along for the most part, but all is not well under the hood. Have a great weekend,


Darius Dale


CNBC VIDEO: Gold Bubble Bursting?

The momentum in gold is lower, but is it just taking a break before rocketing higher? Keith McCullough, Hedgeye Risk Mgmt. CEO, and Frank Holmes, US Global Investors CEO, discuss.

The 6% Risk: SP500 Levels, Refreshed



Suffice to say, it’s been an interesting week to start off the New Year. Almost every global macro data point that I measure as a very immediate-term leading indicator has all of a sudden flashed an either amber or red flashing light. I said almost.


US small caps, which everyone and their brother was hot and heavy for after a boomer of a 2010, are now down for 2011 YTD. Barely down, but down doesn’t register as a green light in my model.


The SP500, however, isn’t flashing amber or red yet…


For that to occur, I’d need to see the SP500 breakdown and close through the 1265 level outlined in the chart below. That’s the immediate-term TRADE line of support. If it holds, God bless my longs – if it breaks, God help the perma-bulls.


If we’ve learned anything in the last 3 years about markets, it’s that they subscribe to mean reversion. Just when you think all of your short ideas are stupid, they become the only thing that works. A TRADE line breakdown through 1265 puts the intermediate-term TREND line of support down at 1190 back in play.


Now I fully realize that it’s been a while – since we had a mean reversion oriented correction that is… and that’s exactly why the probabilities are climbing of one occurring. This is actually the 1st time that the SP500 will close down on back to back days since November 29th-30th …


It’s been a while, indeed.


I’m having surgery on Monday. So I’ll be out for a few days with no SP500 levels updates. Don’t pray for me – its minor stuff. But while I’m gone, keep the 1265 line in mind. If it cracks, the buy-and-hope-bulls who re-appeared after a +89% rally from the March 2009 lows, may need the prayers.


Cheers and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


The 6% Risk: SP500 Levels, Refreshed - 1

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