Initial Claims Rise 25k ... Give Back All YTD Improvement

The headline initial claims number rose 26k WoW to 429k (25k after a 1k upward revision to last week’s data).  Rolling claims rose 9.25k, breaking up through the 400k line to 408k. Reported claims, which are volatile, are now at the same level they were in January 2010.  Rolling claims are at the same level they were in January 2011, translating to no improvement in claims in the last four months. On a non-seasonally-adjusted basis, reported claims rose 5k WoW.


We consider rolling claims the best leading indicator for consumer-related loss frequency for lenders. A failure to realize further improvement in this series will put the brakes on ongoing credit improvement in credit card lending. Mortgage and auto lending are similarly affected. What troubles us is that claims are failing to improve in the midst of strong corporate earnings and ongoing QE2. While much of the rest of the market seems unconcerned about the end of QE2, we think it may lead to a cessation of improvement in claims based on the fact that we observed just that at the end of QE1.


Putting claims in context: we have been looking for claims in the 375-400k range as the level that can begin to bring unemployment down.  If this level is held, we expect to see unemployment improve. We consider unemployment to be ~200 bps higher than the headline rate due to decreases in the labor force participation rate. In other words, if the labor force participation rate were at the long-term average level of the last decade, unemployment rate would be 10.8% rather than 8.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 10.8% actual rate.








Two relationships that we are watching closely are the tight correlation between the S&P and claims and between Fed purchases (Treasuries & MBS) and claims.  With the end of QE2 looming, to the extent that this relationship is causal, it is quite concerning. 






Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 4 bps tighter than 1Q.  The current level of 271 bps is 2 bps tighter than last week.






Financial Subsector Performance

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






Joshua Steiner, CFA


Allison Kaptur


TODAY’S S&P 500 SET-UP - April 28, 2011

As advertised, the Bernanke did exactly what we thought he’d do yesterday: (1) Raised his inflation forecast; (1) Cut his GDP forecast and (3) Burned the Buck.  As we look at today’s set up for the S&P 500, the range is 32 points or -2.04% downside to 1328 and 0.32% upside to 1360.



The Financials remain the only sector broken on both TRADE and TREND.   




THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: 832 (-530)  
  • VOLUME: NYSE 960.95 (+5.67%)
  • VIX:  15.35 -1.73% YTD PERFORMANCE: -13.52%
  • SPX PUT/CALL RATIO: 1.21 from 1.15 (+5.28%)



  • TED SPREAD: 22.25
  • 3-MONTH T-BILL YIELD: 0.06% -0.01%
  • 10-Year: 3.39 from 3.34
  • YIELD CURVE: 2.72 from 2.74 



  • 8:30 a.m.: GDP 1Q advance, est. 2.0% (annualized), prior 3.1%
  • 8:30 a.m.: Initial jobless claims, est. 395k, prior 403k
  • 8:30 a.m.: Fed’s Duke, Williams speak at Community Affairs Conference in Virginia
  • 9:45 a.m.: Bloomberg Consumer Comfort, est. (-43.0), prior (-42.6)
  • 10 a.m.: Pending home sales, est. 1.5% M/m, prior 2.1%
  • 10 a.m.: Freddie Mac mortgage rates
  • 10:30 a.m.: EIA Natural Gas Change
  • 1 p.m.: U.S. to sell $29b 7-yr notes


  • New Zealand’s central bank kept its benchmark interest rate at a record low and called the local currency’s rise “unwelcome.”
  • Most emerging-market stocks fell on concern China will raise interest rates as early as next week.
  • U.S. ‘Disappointed’ by India Rejection of U.S. Aircraft - Bloomberg
  • Google May Overtake Apple in App Sales: All Things Digital
  • Deutsche bank profit exceeds estimates as money management reaches record
  • SAP reports 4.1% gain in first-quarter profit, missing analyst estimate


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Sugar Seen Capped by Record Thai Production, Curbing Nestle, Kraft Costs
  • Gold Climbs to Record as Bernanke Maintains Stimulus, Dollar Extends Drop
  • Copper Climbs for First Day in Three
  • Aluminum Advances to 32-Month High
  • Crude Oil Futures Retreat From 31-Month High
  • Corn Futures Advance in Chicago as U.S. Midwest May Face ‘Severe Flooding’
  • Sugar Falls as Thai Production May Cap Price Gains; Coffee, Cocoa Advance
  • Rubber Futures Advance for First Day in Four as Fed to Maintain Stimulus
  • Abu Dhabi Oil Surges to Three-Year High on Chinese Demand
  • Copper May Drop Next Week as Stocks Gain, China Demand Slows, Survey Shows




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • German unemployment declines to 19-year low as export boom drives demand
  • German unemployment -37K, est. -37k (prior -55k)  
  • German unemployment rate 7.1%, est. 7.0% (prior 7.1%) 
  • Italian business confidence , est. 103.5 (prior 103.8)
  • European stocks climb as deutsche bank beats analysts’ earnings estimates
  • AstraZeneca first-quarter profit beats analyst estimates after tax accord
  • Spain’s local elections may expose wider deficits in risk for bond markets
  • UK consumer confidence declines to lowest since depth of 2009 recession
  • France Mar consumer spending (0.7%) m/m vs consensus +0.2%








  • Japan quake takes bigger-than-estimated economic toll; BOJ lowers forecast
  • Japanese earnings push the Nikkei 225 to the highest level since the March 11 quake.
  • Asian stocks were mixed
  • Nomura profit falls 35% as investment banking fees, trading income decline
  • Panasonic plans to cut 17,000 jobs on Sanyo acquisition, television losses
  • China economic growth faces risks from property ‘shocks,’ world bank says; China declined for the 5th straight day.
  • China telecom net income climbs 8.1% on increase in mobile-phone customers
  • Grantham sees one-in-four chance of china stumbling over excess spending
  • RBA faces rate pressure as CPI outweighs record currency












Howard Penney

Managing Director


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Crystal Clear

“It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk.”

-Ben Bernanke, April 27, 2011


We’re all for transparency in what it is that we do. The problem with Ben Bernanke’s definition of transparency is that it’s not clear that he knows what he is doing. His forecasts are routinely late and/or wrong, and his decision making process depends heavily on those forecasts.


Our Q2 Macro Theme that The Bernank will remain “Indefinitely Dovish” is a forecast. So is our call that the probability of a US Currency Crash continues to heighten. Ben Bernanke did nothing but confirm those forecasts yesterday:

  1. He raised his inflation forecasts
  2. He cut his US GDP growth forecasts
  3. He Burned The Buck

While many critical factors are “not clear” to the Central Planner-in-Chief of globally interconnected markets, the prices that are marked-to-market real-time remain Crystal Clear.


Of the Big 3 that I made a call on in yesterday’s Early Look, I had 1 out of 3 wrong:

  1. Long Gold – hitting an all-time high intraday yesterday and again this morning (all-time is a long time), the price of Gold is now in line with the SP500’s YTD return of +7.8% YTD.
  2. Long Oil – rallying immediately as the US Dollar crashed to fresh YTD lows yesterday, the price of West Texas Crude Oil is now up +23.7% for 2011 YTD, outperforming both the SP500 and Gold by a factor of 3:1.
  3. Short SP500 – rallying on low-volume to a fresh YTD high of 1355, the SP500 is up 50 points (+3.8%) in a almost a straight line in the last 7 trading days into a government presser. I think The Bernank calls this “price stability.” We call it the market Gaming Policy.

While my biggest position remains long International Currencies (we have a 30% Global Macro allocation in the Hedgeye Asset Allocation Model to FX), what a lot of people want to talk to me about isn’t the raging bull market in currencies other than our own – it’s usually “what gets you to cover and buy the SP500.”


I get why that is. I think it’s fair. I am accountable to all of the current 26 positions in the Hedgeye Portfolio, particularly those that I have wrong. As Seth Klarman appropriately said earlier this year, “focusing on what you can lose versus what you can earn sets you apart.”


So, other than our “free” market’s ability to function without the heavy hand of a Central Planner holding pressers, where am I losing? Here are the updated returns in the Hedgeye Portfolio of the Big 3 aforementioned positions:

  1. Gold = +8.37%
  2. Oil = +5.37%
  3. SP500 = -2.46%

Just like that old nursery rhyme on Romper Room – one of these things is not like the others; one of these things just doesn’t belong… being short the SP500 right here and now is obviously wrong. The score doesn’t lie; people do.


Back to the Dollar…


While The Bernank’s comments addressing a Crashing US Currency were “not clear” yesterday, the world currency market’s vote was Crystal Clear:

  1. On The Day – the US Dollar lost another -0.5% (that used to be a lot for a day in the world’s reserve currency) to make a fresh YTD low.
  2. On The Week – the US Dollar is down another -1.3% (down for the 14th week out of the last 18 and down -9.8% since January).
  3. On The 28 Months – since Obama and Groupthink Geithner took their seats, the USD is down -17% (300bps away from crashing).

Now please don’t call me a Republican for putting Obama’s name beside the score. I was at least as bearish on Bush and his US Dollar Devaluation policy to inflate as I am on this administration’s grasp of Global Macro markets and how they are interconnected.




Yes, correlated – which, suspiciously, was a word that The Bernank didn’t use once in his prepared FOMC statement or presser yesterday.


How the world’s Central Planner-in-Chief can use the word “hope” multiple times and not address the most obvious risk that a US Currency Crash imposes on global markets is beyond me. The Audacity of Hope is clearly not a risk management process, so here’s the correlation math:

  1. USD to Oil = -0.92
  2. USD to Gold = -0.92
  3. USD to CRB Index = -0.87

*Note to Timmy and The Bernank: these are what we call the inverse correlations of the US Dollar to Oil, Gold, and the 19 Commodity Component CRB Index on what we call our intermediate-term TREND duration (3 months). These are at all-time highs.


The alternative risk management strategy to dismissing either causality and/or correlation risk (the global median inflation rate has been making higher-highs for the last 40 years, effectively since Nixon abandoned the Gold Standard in favor of the Fiat Fool Policy Standard), is to simply believe. Yes, we can all go there – I took my family to see Shamu’s “Believe” in Orlando last week – it was magical.


According to Big Broker yesterday (The Banker of America Merrill Lyncher North American Economics Strategist – Ethan Harris) what the Almighty Cental Planner of US Dollar Destruction was doing with this presser thing yesterday was, “teaching the American public about how monetary policy works…” (Bloomberg article by Craig Torres and Josh Zumbrun)


Thanks for the transparency. Thanks for the teachings. I may as well gloss over all of world history’s lessons on Currency Crashes now and go back to buying-the-damn-dips in US stocks alongside a stuffed dolphin at Seaworld.


My immediate-term support and resistance lines for Gold are now 1499 and 1534 (Gold is immediate-term overbought). My immediate-term support and resistance lines for Oil are now $110.59 and $114.68 (buy more). My immediate-term support and resistance lines for the SP500 are now 1328 and 1360 (I’ll stay short, for now).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Crystal Clear - Chart of the Day


Crystal Clear - Virtual Portfolio

Indefinitely Dovish

This note was originally published at 8am on April 25, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The dove descending breaks the air with flame of incandescent terror.”

-T.S. Eliot, Little Gidding (1942)


“Little Gidding” was the final of four brilliant poems in T.S. Eliot’s “Four Quartets” which helped him win the Nobel Prize for Literature in 1948. Each of the four poems considers the lessons of history within the context of one of the four elements: air, earth, water, and fire.


The element of fire in the aforementioned quote is an important metaphor to consider when watching what the US Government is doing to the US Dollar. Through a deliberately dovish monetary policy to inflate, the US Federal Reserve is Burning The Buck.


Since the unaccountable bureaucrats at the Fed and their friends who are working for Groupthink Geithner at the US Treasury will be the last to call up a chart of the US Dollar Index (career risk management), we’ll do it for you, weekly, until this Currency Crash looks less likely:

  1. Week-over-week, the US Dollar Index was down another -0.91% last week to close at $74.11 = a fresh 2-year low
  2. Closing down for 13 out of the last 17 weeks, the USD Index has lost -8.6% of its intermediate-term value in the last 4 months
  3. Since President Obama and Treasury Secretary Geithner strapped on the accountability pants in 2009, the US Dollar is down -16.8%!

So who cares?


Evidently our Almighty Central Planners don’t. They don’t even talk about it… and neither do the kowtowing “blue chip” economists who allegedly analyze their Keynesian policies.


But, The People do…


With the US stock market up +97.8% from its March 2009 low, you’d think that the policy to get us paid with some equity market performance would make this country really happy about all of this. Not.


Why not?


Alongside last week’s Crashing Currency, here’s what the price of other things that trade predominantly in US Dollars did last week:

  1. Oil = +2.1% to $112.29/barrel
  2. Gold = +1.1% to $1503/oz
  3. CRB Commodities Index (19 Commodities) = +1.4% to 367

Nice. If you are long of The Inflation, that is…


If you aren’t, well – I guess the message for you from The Bernank is too bad. Take it in the pump – and like it.


Ben Bernanke’s incompetent forecasts will be center stage on this week’s Macro Catalyst Calendar with following events:

  1. Tuesday – New Home Sales (trending at record lows despite Bernanke begging you to lever yourself up with a “cheap” mortgage)
  2. Wednesday – FOMC interest rate decision (Indefinitely Dovish); and Case/Shiller Home Prices for FEB (train wreck)
  3. Thursday – Q1 US GDP (running at least 30% below Bernanke’s initial forecast - almost all of Wall St has cut their estimates)
  4. Friday – Michigan Consumer Confidence for April (making lower-highs); and April month-end markups (US equities)

How will The Bernank spin alchemy’s free money spool into an Indefinitely Dovish message on Wednesday?


He’ll flip the switch from saying there is no inflation to worrying the world about Growth Slowing As Inflation Accelerates. At $112/barrel oil (up +180% since Obama and Geithner took office in 2009), The Inflation at the pump is almost 2x that of the US stock market. Meanwhile, gold and silver are trading at all-time highs this morning (all-time is a long time) – so he’s going to admit he sees that, I hope…


And while hope is not an investment process, watching marked-to-market expectations in both the US currency and Treasury markets is. Both the US Dollar crashing and UST yields breaking intermediate-term TREND support of 0.71% this morning are signaling Bernanke will remain dovish. He’ll blame growth slowing (Q1 GDP report Thursday) and US housing being the train wreck that he and Greenspan helped perpetuate.


In terms of asset allocation, this still leaves me long of The Inflation (Gold and Oil), and long of relatively unlevered growth where I can find it (China and US Tech). Since the week of March 28th, I’ve taken down my Cash position from 52% to 40% - the updated Hedgeye Asset Allocation Model has the following composition:

  1. Cash = 40% (down from 43% week-over-week)
  2. International Currencies = 30% (Chinese Yuan, Canadian Dollar, British Pound = CYB, FXC, and FXB)
  3. International Equities = 9% (China = CAF)
  4. Commodities = 9% (Gold and Oil = GLD and OIL)
  5. US Equities = 6% (Technology = XLK)
  6. Fixed Income = 6% (US Treasury Flattener = FLAT)

Understanding full well that the US Dollar correlation-risk to just about everything that I am long is surreal at this point, I’ll just call this positioning out for what it is – an explicit bet that the Fed remains Indefinitely Dovish until the US Government is forced to face a US Currency Crash and all of the understood consequences embedded therein.


My immediate-term support and resistance lines for oil are now $109.12 and $112.91, respectively. My immediate-term support and resistance lines for the SP500 are now 1319 and 1339, respectively.


My personal thanks to Big Alberta for riding shot-gun for the team last week, and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Indefinitely Dovish - Chart of the Day


Indefinitely Dovish - Virtual Portfolio

LIZ: Yes, It's That Simple

Maintaining guidance + comp momentum across all concepts is all McComb could ask for heading into tomorrow’s analyst day. LIZ remains one of our top long ideas.



There are going to be plenty of puts and takes to dissect coming out of tomorrow’s analyst day, but the bottom-line here is that maintaining guidance + comp momentum across all concepts is all McComb could ask for heading into the event. Here are the key takeaways from Q1 results: 

  1. Reaffirmed 2011 and 2012 EBITDA guidance. Simply confirming guidance isn’t noteworthy, but the fact that the company didn’t lower guidance for the umpteenth consecutive time is = positive. (don’t hold us to the exact number, but LIZ preannounced and/or guided down about 20 times over 20 quarters).
  2. Direct Brand comps are up across the board = positive.
  3. Focus on turning operating results at Mexx Europe appears to have shifted from product to right-sizing the store base.  Not only does this imply that product has improved, but closing stores is a more manageable task from both an operating and execution perspective = positive.
  4. Partnered Brands posted positive adjusted operating profit in the quarter in-line with expectations for the same at year-end = positive.
  5. Availability under the current credit facility contracted $100mm to $139mm. Yes, Q1 is the most challenging from a cash flow perspective, but leverage matters on this name more than most. = negative.

Net/net, in looking at Q1 results the positives outweigh the negatives = we like this one and continue to think that LIZ has one of the most positive asymmetric risk profiles in retail – still. We’ll provide additional color and thoughts following the analyst day tomorrow.


LIZ: Yes, It's That Simple - LIZ Comp Traj 4 27 11

Casey Flavin




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