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CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL

Initial Claims Fall to 368K

The headline initial claims number fell 23k to 368k (20k after the 3k downward revision to last week’s data).  Rolling claims fell 13k to 388.5k. On a non-seasonally-adjusted basis, reported claims dropped 33k WoW.  In most years, this week of the year sees an uptick in non-seasonally-adjusted claims.  This year, that increase has not occurred, and the strength is showing through in the seasonally adjusted series. 

 

We are now seeing claims enter the 375-400k range where unemployment can begin to come down. Claims will need to hold this level and improve further in order to see any real movement in the unemployment rate, but this is clearly positive on the margin. It is worth noting 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%, it's 11%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11% actual rate as opposed to the 9% reported rate.

 

 CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - rolling

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - raw

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - NSA

 

One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis.

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - s p

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 42 bps wider than 4Q.  The current level of 278 bps is slightly wider than last week (274 bps).

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 2 10 spread

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - spreads QoQ

 

Financial Subsector Performance

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

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur



Virtue's Lie

“So our virtues Lie in the interpretation of the time.”

-William Shakespeare

 

This morning Global Equity markets are begging for Libyan resolve. The Chinese and Russians talking down a US no-fly zone notwithstanding, fidgety bulls are trading on a tick with the direction of the price of oil. That is “the interpretation of the time.” That price volatility is also becoming this market’s greatest risk.

 

The longer term risk management question as to the pace of Global Inflation Accelerating remains – if peace and love were to breakout across the Middle East tomorrow, will that stop the world’s reserve currency from being debauched?

 

Looking at the Global Currency market’s real-time vote on money printing, Ben Bernanke’s 2-day Semi-Annual Storytelling on US Monetary Policy was a disaster. Whether The Ber-nank chooses to be willfully blind to this or not, the US Dollar Index is now down for 8 of the last 10 weeks and collapsing to lower-lows.

 

Proving that petrodollars are indeed affected by the dollar’s price or that US Dollar priced inflation at the pump is a consumption tax on US growth is a trivial exercise. What isn’t trivial to the American public is the math. And that’s not because the math isn’t trivial. It’s because we have allowed an Almighty Central Planner to garner so much political power that he can not only obfuscate things like math – but make up his own interpretations of the times.

 

Before I get into Bernanke’s definition of what the US Dollar is (Ron Paul asked him for it yesterday), here’s the math on the inverse correlations between US Dollars and things that are inflating:

  1. Oil = -0.86
  2. Gold = -0.90
  3. CRB Commodities Index = -0.90

*Note to Fed: this correlation risk is running extremely high

 

And if you want the R-squares on these relationships they run between 0.74-0.82, so the correlation between what the US Dollar is doing and inflation is doing is crystal clear. Now some academic brainiac who is defending the Keynesian Kingdom of thought is going to quickly say something in response about “causality versus correlation” and, while there may be differences in certain scientific exercises, it’s a crock when it comes to analyzing the Fed’s mandate.

 

The Fed’s official marketing mandate is “price stability.” Whereas the Bernanke Fed’s operative has been to print money and inflate. He has only raised interest rates ONCE (2006) and he has overseen the highest levels of PRICE VOLATILITY that modern day markets have ever seen. Ever is a long time.

 

What is causality? What are the root causes of inflation? Is the global market place or The Bernank going to resolve this debate? Mr. Macro Market all but evaporated the Keynesians with The Inflation of the 1970s – are we looking to roll the bones to see if we get one of those again? (see the chart below of long-term median price inflation going back to the year 1500 from Reinhart & Rogoff’s This Time Is Different, page 181)

 

First, to attempt to briefly address some answers to these questions, let’s define what the US Dollar and Causality are:

  1. Causality (per Wikipedia) – is the relationship between an event (the cause) and a second event (the effect), where the second event is understood as a consequence of the first (agreed).
  2. The US Dollar (per Bernanke yesterday) – is the buying power of a piece of paper for things that people actually need to buy (agreed).

Now, since Bernanke says there is no inflation, he says the “price stability” and buying power of the US Dollar are just fine. And every American who doesn’t have a car service take them to work will tell you that’s the most ridiculous conclusion they’ve ever heard. In fact, most Americans think Bernanke is simply part of the government lying to them about real-world inflation – and you know what, most Americans aren’t as stupid as Bernanke must think they are – they are right.

 

Back to causality - to understand the cause of inflation, one must study the history by which The Inflation is priced – fiat currencies:

 

Pre-WWI

  1. 1913 – US Federal Reserve Act allows the US to move towards a money printing model that would eventually abandon the Gold Standard
  2. 1917 – US Treasury is given discretion to issue US Treasury Debt (to finance War, not national deficits and political careers)
  3. 1919 – Post WWI, 60% of Global Reserves are denominated in US Dollars

Post-WWII

  1. 1950’s – France ran deficit and devaluation policies (debauching the franc and France’s currency credibility)
  2. 1960’s – Britain ran deficit and devaluation policies (debauching the pound and Britain’s currency credibility)
  3. 1970’s – USA ran deficit and devaluation policies (debauching the dollar and America’s currency credibility)

Do we need to bring back a great American leader (Herb Brooks) to line The Bernank up on the blue line and repeat – “Again”… “Again”… “Again”? Or do we need a Miracle? Developed economies (including our own) have tried this over… and over… and over again with the cause (politics) and effect (inflation) being the same.

 

To make matters worse, it appears that the Big Government Spenders of longstanding European and modern American ilk haven’t learned a damn thing from all this. Bernanke seems readily prepared to blame any unintended consequences associated with this US Dollar Crisis on either Congress or someone in the Middle East. Gotta love the accountability in that. ‘Congress needs to stop spending, but I need to keep printing’ – he said it, not me.

 

My bearish view of Bernanke’s process isn’t a new one. Neither is managing the systemic risk that the Federal Reserve imposes on global market prices. Anyone who has been managing market risk for the last decade has been paid to accept and understand that the Greenspan/Bernanke interpretations of the times have not worked. As the late Murray Rothbard (distinguished Austrian School of economics professor) wrote in “The Case Against The Fed” in 1994:

 

“The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations… and this strange situation, if acknowledged at all, is invariably trumpeted as virtue.”

 

Maybe it has become the virtue of the few who hold centralized power in the palm of their hands – but this is not the virtue of the American Constitution. Neither is it the virtue of this Canadian who thought he was building an American family and firm under a President’s marketing pitch about Transparency, Accountability, and Trust. This virtue is a lie.

 

My immediate term support and resistance lines for the SP500 are now 1291 and 1319, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Virtue's Lie - f1

 

Virtue's Lie - f2


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Unbroken

This note was originally published at 8am on February 28, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“As the shark lunged for his head, Louie bared his teeth, widened his eyes, and rammed his palm into the tip of the shark’s nose.”

-Laura Hillenbrand, "Unbroken"

 

That’s a quote from an outstanding non-fiction novel that I’m reading by Laura Hillenbrand titled “Unbroken: A World War II Story of Survival, Resilience, and Redemption.” It’s a story of a selfless American Olympian by the name of Louis Zamperini who sacrificed more than this modern day man can begin to comprehend. They’ll turn this into a movie – and if they do it right, it may win an Oscar trophy someday too.

 

The story of American Sacrifice is one that we all know well. Alongside our Trashing Treasuries and Housing Headwinds Macro Themes for Q1 of 2011, it’s also something that we talk about during each and every one of our research team’s Morning Meetings here in New Haven.

 

Fundamentally, we do not believe that this country’s political leadership (Republican or Democrat) has it in itself to deliver on American Sacrifice. Since the introduction of the 112th Congress, handshakes and promises to the American people of cutting deficits and debts have already been broken. The credibility of America’s currency is broken too.

 

What remains Unbroken is the passion and faith that Americans who aren’t tied to a Washington compensation structure hold in their hearts and minds. From Wisconsin to New Jersey, that’s what you see rising to a boil. If it takes punching these political sharks in the proverbial nose, so be it…

 

We recognize what Washington and Wall Street’s Easy Money Elite want. They want us to keep doing what we’ve allowed them to do since Nixon abandoned the gold standard. He, not unlike Charles de Gaulle, moved to a deficit and devaluation strategy so that he could win the 1972 election.

 

Washington wants us to roll over and take it in The Inflation. They want to fear-monger us. They want to sell us. They want to lunge at us with the price volatility born out of the crises that they created.

 

Well, that might work for a select amount of the compromised, conflicted, and constrained few. But it doesn’t work for me and it doesn’t have to work for you or The Rest of the World either.

 

China’s Premier announced to the world last night that he’s willing to sacrifice short-term growth for price stability. In the 12th Five-Year Plan, China outlined an economic growth rate expectation of 7% annualized from 2011 to 2015. Sure, if they wanted to drop free moneys from the Eastern heavens and perpetuate The Inflation that would consume their citizenry, they could. But they aren’t. The Chinese don’t have to be re-elected.

 

After all that America has been through to fortify its individual rights and civil liberties, it’s both frightening and sad to see a State-managed economy like China’s manage The Inflation with more respect than we do. Tomorrow you’ll have our Almighty Central Planner outline to the world that he sees no inflation – or at least he sees none in his conflicted and compromised calculation.

 

Ahead of The Ber-nank’s semi-annual report on US Monetary Policy tomorrow, the US Dollar Index is hitting a fresh 4-month low. Sadly, this is more of the same in terms of intermediate and long-term trends. The US Dollar Index was down another -0.5% last week. It’s been down for 7 of the last 9 weeks. It’s a mess.

 

Surely, the US Government will blame last week’s inflation on a nut-bar in Libya. But don’t disrespect for one minute that for the last 3 years The Rest of The World has started blaming us too. Standing as the world’s fiduciary of the world’s reserve currency isn’t the next entitlement that our professional politicians can abuse – it may very well be the last.

 

On a week-over-week basis, this is The Inflation and Price Volatility that The Ber-nank will ignore:

  1. US Dollar Index = DOWN -0.5% (down 7 of 9 weeks)
  2. CRB Commodities Index = UP +2.9% (hitting fresh 2-year highs)
  3. Volatility (VIX) = UP +16.3% (up 22.5% in the last 2 weeks)

In the face of inflation and price volatility, growth signals continued to slow week-over-week:

  1. US Treasury Yields = DOWN across the curve last week
  2. Copper = DOWN -0.9% (despite Commodities being up)
  3. Yield Spread = DOWN 9 basis points to +270 bps (10s vs 2s)

But, have no fear, the US stock market remains Unbroken from an immediate-term TRADE perspective:

  1. SP500 TRADE line support = 1309
  2. NASDAQ TRADE line support = 2760
  3. Russell2000 TRADE line support = 803

So, Bernanke is doing his job, inflating the stock market -  and you have nothing to fear other than his fear-mongering itself. Right.

 

In the Hedgeye Asset Allocation Model, my teeth are barred with Cash and my eyes are wide open:

  1. Cash = 58% (up 3% week-over-week from 55%)
  2. International Currencies = 24% (Chinese Yuan and Canadian Dollar – CYB and FXC)
  3. Commodities = 6% (Oil and Grains – OIL and JJG)
  4. International Equities = 6% (Germany and Sweden – EWG and EWD)
  5. US Equities = 6% (Healthcare – XLV)
  6. Fixed Income = 0%

My immediate term TRADE lines of support and resistance for the SP500 are now 1309 and 1325, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Unbroken - bb1

 

Unbroken - bb2


RESTAURANT PERSPECTIVES

The following is a monthly look at restaurant trends, valuations, and key macroeconomic factors.  For a complete look at my overview of the restaurant space for February, please click here for a pdf, or copy and paste the link into your browser: http://docs.hedgeye.com/Hedgeye Restaurant Perspectives February 2011.pdf

 

 

FEBRUARY THEMES

  • The Consumer Discretionary sector performed well in February, outperformed only by Energy, closing up 6% on the month.  Tellingly, from the 18th through the 23rd, XLY declined sharply as oil prices jumped.  Further gains in the price of oil may put pressure on the XLY.
  • This month has seen a spate of earnings releases for the last quarter of CY10.  In the last edition of Restaurant Perspectives, I suggested that this year would likely be a turbulent year for restaurant stocks from a commodity cost perspective.  The outlook provided during earnings calls in February certainly suggests that commodity costs are the primary concern going forward.  There is a divergence between companies that have simplified their focus and operations and those that are less focused and, therefore, more exposed.
  • EAT, SBUX, COSI, and WEN (not in any particular order) are a few of the management teams that I think are focusing their energy in the right areas and best positioning their companies to navigate 2011.
  • I continue to believe that MCD faces serious challenges in 2011, as detailed in my Black Book released mid-January.  MCD has underperformed versus the S&P 500 since then.  It is interesting to note that while the Consumer Discretionary Sector has performed strongly in February, MCD has underperformed the XLY by almost 330 basis points despite being a larger component of the ETF than any other stock.
  • I still like where SBUX is going with its business model and that is good for PEET and bad for GMCR.  GMCR’s deal with Dunkin’ Donuts and the internal memo further convince me of this thesis.  See the numerous notes we published on this subject in February.

 

 

QSR VALUATION THOUGHTS

  • CMG continues to maintain its premium valuation, as it has been for some time.  While its “food with integrity” mantra resonates with consumers, concerns are emerging about the company’s commodity exposure.  Longer term it’s new focus on an Asian-style chain will likely be a negative, not positive, for the stock.
  • I expect GMCR’s multiple to contract as SBUX paves its own way through different channels of the coffee category.
  • WEN is cheap and set to improve returns with a more focused approach now that Arby’s is on the block.

 

 

CASUAL DINING VALUATION THOUGHTS

  • EAT remains one of the cheaper names in this category from a valuation perspective and the potential upside remains significant.  I expect a continued improvement in the relative fundamentals of the company on the top line as well as marked progress towards the net 400 bps of margin expansion management is targeting.
  • Like it or not, weather is an issue for the group.

 

 

CONSUMER OUTLOOK:

 

The negative:

  1. Inflation – wheat, oil, cotton.  Prices at the pump are climbing.  James Hamilton, professor of economics at UC San Diego, says that a 10-cents-per-gallon increase in gas prices takes away approximately $14 billion from consumers’ discretionary spending.      
  2. Unemployment – the jobs picture has been improving of late with rolling initial claims declining to a three handle.  The absolute level of joblessness, especially when the labor force participation rate is normalized, remains elevated.

The positive:

  1. University of Michigan Consumer Sentiment Index data came in positive for February and this offered some support to consumer stocks over the last few days of February.
  2. The Government continues to support consumer spending trends, but the impact will wane and even reverse as severe cuts are likely implemented as we move through 2011.  

Howard Penney

Managing Director


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - March 3, 2011


Equity futures are trading above fair value as news emerged overnight that a peace deal, suggested by Venezeula's Hugo Chavez, had been agreed to by Libyian President Gaddafi and the Arab League's Secretary-General Amr Mouss.   As we look at today’s set up for the S&P 500, the range is 28 points or -1.33% downside to 1291 and 0.81% upside to 1319.

 

MACRO DATA POINTS:

  • 8:30 a.m.: Initial jobless claims, Feb.26, est. 395k vs prev. 391k
  • 8:30 a.m.: Net export sales
  • 9:45 a.m.: Bloomberg Consumer Comfort, Feb. 27, est. -40.2, prev. -39.2
  • 10 a.m.: ISM Non-Manufacturing, Feb., est. 59.3 vs prev. 59.4
  • 10 a.m.: Freddie Mac 30-yr mortgage rates
  • 10:30 a.m.: EIA Natural Gas, Feb.25, est. -85 vs prev.-81
  • 11 a.m.: Fed’s Kocherlakota speaks in Minn., later Q&A
  • 12:15 p.m.: Fed’s Lockhart speaks in Tallahassee

EARNINGS/WHAT TO WATCH:

  • News Corp wins U.K. government approval for its $12.7b bid to take full control of BSkyB after agreeing to spin off the Sky News channel.
  • First exchange-traded fund for leveraged loans begins trading today, FT reports, without citing its sources. Fund is based on the Standard & Poor’s/LSTA US Leveraged Loan 100 Index
  • Ontario review of LSE/TMX deal begins second day of public hearings
  • BlackRock, Banco Santander and  10 private-equity firms are forming groups to bid for Citigroup’s U.S. consumer-lending unit
  • Legislation that would bar U.S. EPA from regulating greenhouse gases to be introduced as early as today
  • The National Football League and players’ union will reconvene this morning in a final bid to reach an agreement on a new labor accord before the existing one expires at midnight

PERFORMANCE:


We have 3 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.07%, S&P +0.16%, Nasdaq +0.39%, Russell 2000 +0.47%
  • Month-to-date: Dow (1.30%), S&P (1.41%), Nasdaq (1.23%), Russell (1.52%)
  • Quarter/Year-to-date: Dow +4.23%, S&P +4.04%, Nasdaq +3.59%, Russell +3.48%
  • Sector Performance: - Energy +0.57%, Tech +0.61%, Industrials +0.47%, Consumer Disc +0.39%, Healthcare +0.30%, Materials +0.36%, Utilities +0.17%, Consumer Spls (0.27%), Financials (0.61%)

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 803 (+2393)  
  • VOLUME: NYSE 1025.00 (-13.65%)
  • VIX:  20.70 -1.48% YTD PERFORMANCE: +16.62%
  • SPX PUT/CALL RATIO: 2.02 from 2.32 (-12.65%)

CREDIT/ECONOMIC MARKET LOOK:


Treasuries were weaker yesterday with the slightly better risk backdrop, stronger-than-expected ADP private payrolls data and somewhat more upbeat Beige Book.  

  • TED SPREAD: 19.19 +0.406 (2.161%)
  • 3-MONTH T-BILL YIELD: 0.13% -0.01%
  • 10-Year: 3.46 from 3.41
  • YIELD CURVE: 2.77 from 2.75

COMMODITY/GROWTH EXPECTATION:

  • CRB: 359.12 +1.11%; YTD: +7.91%  
  • Oil: 102.23 +2.61%; YTD: +9.62% (trading -0.56% in the AM)
  • COPPER: 449.80 -0.26%; YTD: +1.35% (trading -0.04% in the AM)  
  • GOLD: 1,437.05 +0.60%; YTD: +0.79% ( trading -0.61% in the AM)  

COMMODITY HEADLINES:

  • World Food Prices Climb to Record as UN Sounds Alarm on Further Shortages
  • Oil Declines Most in a Week on Arab League's Libya Crisis Resolution Plan
  • Cocoa Rises to 32-Year High on Ivory Coast Political Tension; Sugar Falls
  • Cotton Futures Advance by Exchange Limit Toward Record on Supply Shortage
  • Corn Rally Makes Farmers Switch to Cheapest Wheat in Decade: Chart of Day
  • U.S. Cotton Is `Sold Out,' Boosting Australian Demand, Shippers Group Says
  • Gold May Fall From Near-Record Price Following Report of Libya Peace Plan
  • Copper Fluctuates on Report of Libya Mediation, Stocks at Seven-Month High
  • Palm Oil Advances for Third Day on Outlook for Brazil, U.S. Soybean Crops
  • Khomeini, Chavez Examples Show Libya Oil Production Decline: Chart of Day
  • Wheat, Corn Fluctuate as Investors Weigh Demand Against Mideast Tension
  • Freeport-McMoran Lured in Equinox Lowball Bid for Lundin Mining: Real M&A
  • Rain Means Hydropower Is `Stealing' Share From Natural Gas: Energy Markets
  • Iran Uranium Program Unhampered by Sanctions, Stuxnet Virus: Chart of Day. 

CURRENCIES:

  • EURO: 1.3869 +0.46% (trading +0.01% in the AM)
  • DOLLAR: 76.671 -0.49% (trading +0.03% in the AM) 

EUROPEAN MARKETS:

  • FTSE 100: +0.98%; DAX: +0.97%; CAC: 0.75% (as of 06:15AM EST)
  • European markets mostly trade higher aided by a fall in the oil price on talk of a peace deal in Libya brokered by the Venezuelan President.
  • Gains in major indices remain ahead of the ECB rate decision at 7:45ET when it is expected to leave its bench market interest rate unchanged at 1%.
  • Economic data was mixed with service sector growth moderating in Feb across the region.
  • Trichet Faces Oil Shock as Inflation Above 2% Threatens to Strangle Growth
  • Rogoff Says Debt Restructuring in Greece, Ireland, Spain Is `Inescapable'
  • U.K. House Prices Fall as Supply of Properties Surges Most in Three Years
  • Poles in Germany May Force Rates Higher at Home 22 Years After Berlin Wall
  • France Q4 ILO Unemployment rate 9.6% vs prior 9.7%
  • Germany Jan preliminary Retail Sales +2.6% y/y vs consensus +1.6%

February Final Services PMI:

  • France 59.7 vs prelim 60.8
  • German 58.6 vs prelim 59.5
  • Eurozone 56.8 vs prelim 57.2
  • UK Feb services PMI 52.6 vs consensus 53.5

 

ASIAN MARKTES:

  • Nikkei +0.9%; Hang Seng +0.3%; Shanghai Composite (0.4%)
  • Most Asian markets rose today on bargain-hunting, encouraged by Wall Street’s rise.
  • South Korea rose on industrial-output data.
  • Japan rebounded from yesterday’s fall.
  • Hong Kong ended slightly higher on short-covering and strength in Chinese banks. Standard Chartered rose 4% on results.
  • Australia finished flat. ASX (ASX.AU) fell 1% when Australian regulators released guidelines indicating a second stock exchange could go live in the country by October.
  • China fell as fears about further monetary tightening outweighed any optimism and led to profit-taking in the afternoon. High oil prices sent industrial shares down, but banks rose on the perception that they are undervalued.
  • Japan Oct-Dec corporate capex +3.8% y/y vs consensus +5.9%. February diffusion index of business sentiment +1.7 pts m/m to 35.4.
  • China HSBC February PMI 51.9 vs prior 52.0.

 

Howard Penney

Managing Director

 

THE HEDGEYE DAILY OUTLOOK - setup


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