Initial Claims Rocket Back to 454k

The headline initial claims number rose 51k WoW to 454k (50k after a 1k downward revision to last week’s data).  Rolling claims rose16k to 427k. On a non-seasonally-adjusted basis, reported claims fell 68k WoW.  As the third chart below shows, the NSA series is following a typical seasonal pattern. This backup in claims is being partially attributed to weather-related backlogs. We would observe, however, that the backup is entirely consistent with this time of year over the past three years - see charts below. We would expect going forward, based again on the seasonality not canceled out by the government's seasonal adjustment factors, that claims will remain high and potentially rise higher over the next 3-4 weekly datapoints.


As an aside, we continue to expect pending home sales, to be released at 10am this morning, to be a disappointment relative to consensus. For more information on that, please see our note from yesterday morning.


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 9.4%, it's 11.4%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.4% actual rate as opposed to the 9.4% reported rate.








Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 40 bps wider than 4Q.  The current level of 279 bps is flat versus last week.






Financial Subsector Performance

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






Joshua Steiner, CFA


Allison Kaptur


Conclusion:  A tremendous quarter for Starbucks, posting 1QFY11 EPS of $0.45 for the quarter versus expectations of $0.39.  Global comparable sales came in at 7% versus the Street at 5.5%.  The results are incredibly impressive and it seems this routine trumping of Street expectations is creating high standards.  Starbucks has beaten the consensus same-store sales number for the past 8 consecutive quarters.  Upside momentum may slow in the near-term, but I continue to think the company will live up to those high standards longer-term.


Starbucks registered record consolidated operating margin of 17% despite strong margin growth in the year ago quarter and rocketing coffee prices during the first quarter of fiscal 2011.  From a top line perspective, the company is maintaining healthy traffic trends with 5% of the global comparable sales result coming via transaction counts.  The company expects low-to-mid single-digit comparable store sales growth for the year.   While it would seem that comps may slow somewhat given the difficulty of the year-over-year compares, the company was facing a difficult compare in 1Q and successfully grew comps on a one-year basis.


With expectations ratcheted up by the soundness of this beat, investors may be somewhat disappointed that EPS and margin guidance for the year are quite conservative.  Despite the $0.45 in EPS for 1QFY11, the high end of the EPS guidance range of $1.43 to $1.47 was left unchanged.   Additionally, for the full year, SBUX is guiding to year-over-year growth in consolidated operating margins of 50-100 basis points (relative to the 340 bp increase in 1QFY11).  The commodity outlook does get more difficult as the year continues as management guided to a $0.17 per share negative commodity impact in the remaining three quarters versus a $0.03 per share hit in the first quarter.   SBUX has locked in essentially all of its coffee costs, however, so at least that uncertainty is taken care of for FY11. 


The international segment also posted record results with operating margins improving 720 bps YOY to 16.3%.  Management attributed this exceptional performance to its more disciplined approach around operations.  The company is sharing its best practices from the U.S. business, which is now yielding record results internationally.  Despite this strong quarterly performance, the company is still only in the early phases of its international growth potential as it still has room to refine operations and significant opportunities to expand its footprint.


The CPG segment is clearly an area where Starbucks sees a lot of white space for the business to expand, particularly in international markets such as India and Russia.   CEO Howard Schultz stressed the importance for Starbucks that they connect with customers through various channels.  In that sense, it seems logical that the company is looking to gain more control over that side of the business and ending its distribution agreement with Kraft is just one step in that process.   Although Starbuck’s investment in the CPG channel will take a toll on margins in FY11, transitioning to the direct model will give the company control over all things coffee in the grocery aisle and will be accretive beyond FY11.


I am confident that SBUX will continue to produce strong financial results, but it certainly seems implied by the reiteration of EPS guidance, and the forecast of a $0.20 cents impact on EPS from increased commodity costs, that momentum may slow somewhat in the next few quarters.  Given the level at which the company has been performing over the last few years, a slowdown from here is not catastrophic, but will perhaps bring investor expectations down slightly. 


While the stock could take a pause as the company feels the impact of higher commodity costs, we believe the next leg of significant growth for the company will play out subsequent to the consolidation of the distribution business from Kraft.  We will address Starbuck’s opportunity for continued upside in a detailed Black Book report due out in the coming weeks.  We feel the direction SBUX is headed is positive for the company and has positive implications for PEET; the clear market share loser is GMCR.


SBUX’s performance this quarter is a classic example of how well a company can execute when they focus on the core business.  Just a few years ago, management was overly focused on unit growth and the company has reaped great rewards from their focus on beverages; it is a beverage company!  Now, juxtapose SBUX’s clearly successful strategy with that of MCD, which is putting too much of an emphasis on its non-core business.  I continue to believe that issues will emerge as a result of MCD’s loss of focus on its core business over the coming quarters.



Howard Penney

Managing Director


The Macau Metro Monitor, January 27, 2011


Gordon Oldham, on behalf of Stanley Ho, announced he had filed a court claim against some of Mr Ho’s family members to recover his assets.  But  yesterday the casino mogul also claimed to have fired Mr Oldham.  “Regarding his statement on television, this was not his sentiment. He wants to continue. He is trying to get his wealth back,” Mr Oldham told Reuters in a telephone interview.


Meanwhile, Angela Ho, said she could not believe that her father would leave nothing to her mother's family. She will meet the press in Macau later today. Furthermore, Macau CEO Chui noted that the government had not received any report on SJM stock transfer.


Unemployment rate for October-December 2010 was 2.7%, down by 0.1% point over the previous period (September-November 2010), the lowest since the Handover of Macao to China.  Total labor force was 331,000 in October-December 2010 and the labor force participation rate stood at 71.4%, up by 0.2% point from the previous period.



Sands China Ltd announced that all eligible Sands China full-time employees are entitled to a salary increase of 4.5% effective on March 1, 2011.  “This follows the salary review exercise of a 3.5% increase for all 14,500 full-time employees in 3Q 2010.  The company has now completed two salary adjustments in less than nine months which accounts for an 8% increase in less than a year," said Sands.



“Rising global food prices and the Yuan appreciation would be the factors adding up price pressure from imported sources”, said the local Macau Monetary Authority.  Nevertheless, it added, in contrast to common perceptions, higher import prices tend to have a secondary impact on local inflationary pressures “while domestically generated inflationary pressures under strong aggregate demand at full employment prevail”.


The Macau Government has decided to speed up the cash handout to local residents to the beginning of 2011, rather than between July and September as usual, and is also working closely with relevant Mainland authorities to expand the sources of food imports and to safeguard a stable food supply for the SAR. 



"Headline inflation is expected to be higher over the next few months, mainly due to the recent surge in COE premiums and global food prices.  However, we expect it to moderate in the second half of 2011' the Monetary Authority of Singapore (MAS) said.



Asia Entertainment & Resources Ltd. announced that it would be adding a private room to its VIP facility at StarWorld Hotel.  The move is justified in order to handle the increasingly high demand for private rooms, the company said.  

CHART OF THE DAY: U.S. Fiscal Health --- Way Off the Line


CHART OF THE DAY: U.S. Fiscal Health --- Way Off the Line -  chart of the day

Staying On The Line

“Someone has to stay on the line and say, no, we can do this by cutting spending and reducing the size of government.” 

-Chris Christie


Last night, Larry Kudlow had an outstanding interview with New Jersey Governor Chris Christie. For those of you who still care about this country’s currency and long term fiscal health, I think this is the most positive message we can find from a professional politician in America.


I’ll go through the abominations that are the US Federal Budget Deficit and Global Food Inflation in a minute, but first I want to recap what this American patriot is doing about it at the state level. Christie isn’t hiding behind “the depression” or “the deflation.” He doesn’t waste his time fear-mongering  and storytelling like Paul Krugman and Ben Bernanke either – he’s bellying up to the battle field, Staying On The Line, and fighting Big Government Spending:

  1. Cutting Spending – he’s cut 9% of NJ government spending (that’s year-over-year in US Dollars)
  2. Cutting Corporate Taxes – unlike Illinois, which loves commodity inflation and raising taxes
  3. Doing More With Less – his spending is smarter and he’s focused on doing a better job with less

Now we can surely have a debate about how screwed up NJ was relative to the rest of America (dropping the corporate tax rate in NJ takes Christie from the 50th highest state in the Union to #48), but the point here is that we have an American leader who isn’t giving political lip-service to being the change we all want to see in this country.


Delivering on political promises isn’t easy. That goes for operating in the asset management industry too. We’ve institutionalized and bureaucratized America’s corporate and government organizations in this country to a point where Staying On The Line and fighting the Fiat Fool headwind is actually quite hard to do. The self interest associated with personal job security in this environment often trumps long term planning and risk management.


So let’s consider the Captain of this country’s possum plan to cut the deficit by $400B over the next 10 years in the context of this massive entitlement of cheap US Dollars and Big Government Spending:

  1. Analytical Incompetence: The President of the United States’ spending cut plan was based on the wrong base of spending numbers. Immediately after the State of the Union address (where Obama loosely mentioned his $400B plan), the Congressional Budget Office (CBO) raised its 3-year budget deficit forecast by over $1 TRILLION dollars. Yes, $400B in cuts were planned using the wrong denominator of spending.
  2. Deficit Context: Understanding that competent forecasters like Hedgeye Risk Management were already predicting that the CBO’s estimates were 34% too low, this upward revision by the CBO made our estimates look light! Versus the CBO’s August, 2010 estimates (no, that wasn’t too long ago), yesterday’s $3.28 TRILLION 3-year US Budget Deficit forecast was +46% higher! Now you know why Peter Orszag left.
  3. Being off by a TRILLION matters to Global Markets: Yesterday, post the CBO revision and Bernanke’s FOMC statement pandering to the political wind, we saw the currency market press the Burning Bone to fresh 5-week lows and saw one heck of an inflation trade emerge across equity, commodity, and bond markets intraday.

Now some people think this is “all good” – if you’re short bonds like I am, I agree, inflation is good. If you’re long inflation oriented commodities and equities (Energy stocks (XLE) were up +2.4% and Basic Material stocks (XLB) were up +2.1% yesterday), that’s good too.


If you are the other HALF of Americans (155M people) who don’t have positions in any of this stuff (or HALF of the world’s population that depends on rice as their #1 food staple), well – you can just suck it up. By the way, the inverse correlation between the USD and Rice is currently -0.89%.


Some facts on Global Food Inflation trends from this morning’s headlines:

  1. The United Nations “strongly advises” not delaying food supplies to Egypt (whose stock market is down -10.3% this morning), Tunisia, Algeria, Morocco, Yemen, etc…
  2. Bangladesh (that’s another 150M people = the world’s 8th largest population), is DOUBLING rice imports this morning on “panic buying.”
  3. Turkey (72M people) is seeing short-term Turkish debt get hammered this morning on inflation concerns (2-year yields at 7.97%!).

Now why, in all the parameters of American self-interest, would it serve a long-only US-centric equity or commodity portfolio manager to agree with Ben Bernanke and the BLS (Bureau of Labor Statisitics) that there is no inflation?


That answer, and why the only reading in the free world that doesn’t see inflation (Bernanke’s), are pretty obvious…


But do we think that suspending inflation disbelief by using a conflicted and compromised US government person’s inflation calculation will have the unintended consequences associated with Global Inflation Accelerating cease to exist?


Maybe in the very short run…


And in the long run, Big Government Spending Keynesians will tell you we’ll “all be dead”…


“But we should arrange our earthly affairs, for the short run in which we have to live…” (Ludwig von Mises)


Finally, this morning in Davos, ECB Chief Jean-Claude Trichet admitted he’s not going to continue to be as willfully blind to the inflation as The Ber-nank. He told Bloomberg’s Francine Laqua that “we will do what is necessary… our credibility is based on that doctrine.”


Indeed, Mr. Trichet, indeed. The credibility of a nation’s currency depends on it.


And maybe that’s why the Euro continues to strengthen relative to the Debauched Dollar this morning. God knows their sovereign risks are at least as bad as Illinois’… but God also has real-time quotes and sees that the ECB doesn’t have ZERO percent interest rates. Nor does the ECB have the entrenched broken promise of an “independent” US Federal Reserve in lagging all of Asia and Europe from here in raising interest rates to fight inflation.


Whether it’s fighting this US Budget Deficit or the charlatan storytelling that blue-collar and unemployed Americans see no inflation, I salute those American patriots like Governor Chris Christie who are Staying On The Line.


My immediate-term support and resistance lines for the SP500 are now 1288 and 1300, respectively. For the 1st day since January 18th, I tilted the Hedgeye Portfolio back to the short side yesterday. We now have 9 LONGS and 10 SHORTS.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Staying On The Line - cbo

Golden Silence

This note was originally published at 8am on January 24, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Silence may be golden, but can you think of a better way to entertain someone than to listen to him?”

-Brigham Young


We’re looking forward to the listening to the President of the United States at tomorrow night’s State of The Union address. It’s time to focus on US Jobless Stagflation. It’s time to cut the US deficit. It’s time to strengthen America’s handshake with the world via the credibility of her currency.


It’s time.


Not only is it time because America is out of time to cut spending, but it’s Game Time for the US Dollar Index’s price. The US Dollar closed down -1.1% last week and was down for the 3rd week out of the last four. It’s testing what we call its intermediate-term TREND line of support at $78.66, and if this week’s comments from both the President and the Fed don’t support it, this country could be heading toward a very dark place again.


What’s darkening? The math.


My defense partner, Daryl Jones, wrote a great summary updating the math on Friday (send an email if you’d like the full note). Currently, the Congressional Budget Office (CBO), which we consider consensus for this purpose, projects that the federal budget deficit for 2011, 2012 and 2013 will be $-1,066BN, $-665BN, and $-525BN, respectively.  This is a combined deficit of $-2.3TN.  (Yes, that is a big number.)  So, all else being equal and setting aside any maturities, the United States will have to issue $2.3TN in treasuries to fund the CBO’s projected budget deficit over the next three years.  So if we accept that there is ~$14TN in government debt outstanding (Source:, then the outstanding government debt over the next three years will grow 16%. That is, supply is going up.  Given this outlook, it does make sense that interest rates on 30-year Treasuries are moving higher.


Interestingly, we think that the CBO’s budget deficit projections are low, and perhaps meaningfully so. Currently our U.S. budget deficit projections for 2011, 2012, and 2013 are $-1.2TN, $-1.0TN, and $-0.9TN, respectively.  Combined, this is a total deficit for the ensuing three years of $3.1TN.  In aggregate, our projections are $800BN more than the CBO, or 34% higher for the three year period.  The implication being that the issuance of U.S. Treasuries may be almost 34% higher than “consensus” expects over the coming three years.  No doubt some of this is priced in, but our models have supply growing at an accelerated rate relative to what is likely priced in. And the question remains, who is going to buy these US Treasuries?


The cover of The Economist this weekend had a title that represents what we have been belaboring for the last 3 months – “The Rich and The Rest” – and, without going into every detail, we see this simply as a function of a US Government policy to print debt and inflate. Sure, inflation is great for some of us – but it’s really bad, in the end, for most of us. Global inflation is perpetuated by a policy to abuse and debauch the world’s reserve currency.


For the last 3 years, as a way to express my distaste for who I have labeled the Fiat Fools, on balance I have been short the US Dollar and long Gold. Since US Mid-term election promises were made to cut spending and address our fiscal imbalances, I have been long the US Dollar (bought it on November 4th) and short Gold (sold long position December 6th and shorted GLD on December 29th).  


Today, I am long the US Dollar and flat out frightened. Being in the hands of professional politicians who lie and backpedal on their promises is never a good place to be. It’s time, Mr. President. This Burning Buck stops with you.


Looking back at last week’s action in Global Macro prices, Dollar Down wasn’t good for much else than a low-quality European short squeeze:

  1. US Dollar Index = -1.1%
  2. Euro = +2.3%
  3. SP500 = -0.8%
  4. Nasdaq = -2.4%
  5. Russell 2000 = -4.2%
  6. Spain’s IBEX = +4.3%
  7. Italy’s MIB = +3.0%
  8. Greece’s Athex = +6.3%
  9. China’s Shanghai Composite = -2.7%
  10. Indonesia’s Jakarta Composite = -5.3%
  11. Philippines PSEi Index = -4.4%
  12. CRB Commodities Index = FLAT
  13. Oil = -2.6%
  14. Gold = -1.4%
  15. US stock market Volatility (VIX) = +19.3%
  16. US Treasury Yields = UP again, across the board

And for a US centric stock market investor, while it’s always nice to say ‘hey, look at the Dow’ and extrapolate that reading as a barometer for the rest of the world’s health, remember the simple arithmetic associated with the Dow (a sample of 30 stocks) where General Electric (GE) had a monster +7% day Friday. That’s a great day for what’s been a dog since 2008; not what’s going on in terms of Interconnected Global Macro Market Risk.


What the aforementioned weekly moves meant to me was:

  1. US Jobless Stagflation Continues – Commodity prices are sticky because the US Dollar is weak; US unemployment remains bearish.
  2. The Great December Beta TRADE – It’s a problem when stock market reflation becomes Global Inflation (Russell2000 down YTD).
  3. Volatility Is Back, Because Risk is Never “off” – VIX up +19.3%, with Bond and Emerging Markets getting smoked by inflation is self evident.

Again, if the Dow closing up +0.7% on the week is the risk “on/off” bogey that people who missed all of the Global Risk Management signals of early 2008 are still using – all I have to say about that is Godspeed. I’m keeping a big fat position in Cash as it’s the only way to protect against that dogma.


From an asset allocation perspective, I did take some weakness in market prices to invest some of my Cash position. Last Monday, I had a 67% position in Cash. This morning that position is down to 61% with the following allocations in the Hedgeye Asset Allocation Model:

  1. Cash = 61%
  2. International FX = 18%
  3. International Equities = 6%
  4. US Equities = 6%
  5. Fixed Income = 6%
  6. Commodities = 3%

And yes, if this country’s Golden Silence on the obvious breaks tonight like the price of gold itself has, I’ll be the first to get in line and get more invested. A strong US Dollar will make Global Inflation deflate. It will also strengthen America’s balance sheet and have the international investing community believe in America’s handshake again.


My immediate term support and resistance levels for the SP500 are now 1267 and 1295, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Golden Silence - aaaa

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