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CLAIMS REMAIN CLOSE TO YTD HIGHS, WITH QE2 END IN SIGHT AUGURING FOR A FURTHER BACKUP

Initial Claims Climb 15k

The headline initial claims number rose 15k WoW to 424k (10k after a 4k upward revision to last week’s data).  Rolling claims fell 1.75k to 439k. On a non-seasonally-adjusted basis, reported claims rose 14k WoW.

 

It's No Coincidence That Claims Are at YTD Highs While XLF is at YTD Lows

We use claims as our primary frequency determinant in thinking about losses for the consumer book of balance sheet dependent financials. Thus, it is a critical signal that we remain right around the YTD high in rolling claims. The last time we saw such an inflection in the trend in jobless claims was summer 2010, a period in which the XLF lost roughly 20% of its value. Even with the XLF underperforming, we remain cautious given this continuing development on the jobs front. Specifically, it's our expectation that claims will, at best, stagnate post QE2's end and, at worst, rise. To this end, take a look at our fifth chart showing the overlay of jobless claims with S&P 500. The current divergence is among the widest we've seen in the last few years suggesting that either the market is due for a significant correction in the near-term or claims should fall precipitously in the next few weeks.

 

CLAIMS REMAIN CLOSE TO YTD HIGHS, WITH QE2 END IN SIGHT AUGURING FOR A FURTHER BACKUP - rolling

 

CLAIMS REMAIN CLOSE TO YTD HIGHS, WITH QE2 END IN SIGHT AUGURING FOR A FURTHER BACKUP - raw

 

CLAIMS REMAIN CLOSE TO YTD HIGHS, WITH QE2 END IN SIGHT AUGURING FOR A FURTHER BACKUP - nsa

 

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. 

 

CLAIMS REMAIN CLOSE TO YTD HIGHS, WITH QE2 END IN SIGHT AUGURING FOR A FURTHER BACKUP - fed an

 

CLAIMS REMAIN CLOSE TO YTD HIGHS, WITH QE2 END IN SIGHT AUGURING FOR A FURTHER BACKUP - s p

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 9 bps tighter than 1Q.  The current level of 260 bps is 3 bps tighter than last week.

 

CLAIMS REMAIN CLOSE TO YTD HIGHS, WITH QE2 END IN SIGHT AUGURING FOR A FURTHER BACKUP - 2 10

 

CLAIMS REMAIN CLOSE TO YTD HIGHS, WITH QE2 END IN SIGHT AUGURING FOR A FURTHER BACKUP - spreads QoQ

 

Financial Subsector Performance

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

 

CLAIMS REMAIN CLOSE TO YTD HIGHS, WITH QE2 END IN SIGHT AUGURING FOR A FURTHER BACKUP - perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


SUNNY APRIL FOR REGIONAL GAMING

ASCA and PNK appear to have the most near-term earnings upside.

 

 

The regional gaming revenues have been reported by all of the states and the performance was solid.  We analyze sequential revenues based on the prior 3 months, seasonally adjusted.  As the chart below shows, April sequential revenues for the riverboat market came in more than 3% higher than the projection - the 3rd straight month of sequential revenue improvement.  The consumer shook off high gas prices and bad weather (tax refunds?).

 

SUNNY APRIL FOR REGIONAL GAMING - regional1

 

Of the regionals, ASCA and PNK performed the best in April and they appear to have the most upside to near-term earnings expectations.  Comparisons for the rest of the quarter are easy and the strength appears to have carried into May.  In the last couple of weeks, sell side has been playing catch up as many analysts have raised their ratings and price targets on these two companies.  We still believe consensus is too low.  The following table shows the differential between our EBITDA projections and consensus:

 

SUNNY APRIL FOR REGIONAL GAMING - regional7


Serving The End

This note was originally published at 8am on May 23, 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 most effective way of making everybody serve the single system of ends toward which the social plan is directed is to make everyone believe in those ends.”

-F.A. Hayek

 

That’s the first sentence of Chapter 11 titled “The End Of Truth” in F.A. Hayek’s “The Road To Serfdom” (page 171). “And the most efficient technique to this end is to use old words but change their meaning.” (page 174)

 

As they did in using the old techniques of dollar devaluation and debt monetization in the 1970s, messiahs of the Keynesian Kingdom continue to shop us their central planning policies. But that doesn’t mean that the rest of us have to follow.

 

Whether it’s the center-right Popular Party crushing Zapatero’s Socialist party in Spain this weekend or watching America’s political class go after Paul Ryan for having a spine on debt/deficit reform – no matter where you go out there this morning, there they are – The People.

 

The People get the storytelling. The People know when someone is lying to them. The People will protect their capital against the bureaucrats.

 

In the last 4 weeks, I have protected my family’s hard earned capital by moving to a 61% position in Cash. Since we do in fact keep score at Hedgeye every day, you’ve seen me hold myself accountable to these asset allocation decisions in real-time. I moved to a ZERO percent allocation to US Equities last Thursday as people were bucking up to get Linked-In.

 

This is not to say that I haven’t made my fair share of mistakes in 2011. Neither is it to suggest that I won’t buy back some US Equity exposure if I see my intermediate-term TREND line of support hold (SP500 = 1321). This is simply a reminder that I have an outstanding research team here in New Haven, CT that’s had an outside of consensus view in 2011 – and we’re sticking to it:

  1. Q1 2011 – Growth Slowing As Inflation Accelerates
  2. Q2 2011 – Deflating The Inflation

These two research views did not support chasing Equity or Commodity prices into their respective 2-year highs in April. As Global Macro Risk Managers, we are tasked with getting the slope of A) Growth and B) Inflation right. If we can do that, we take out a lot of risk.

 

In terms of what that means in the Hedgeye Asset Allocation Model, here are the moves I made week-over-week:

  1. Cash = 61% (down from 52% last week and 34% at the end of April)
  2. International Currencies = 18% (Chinese Yuan – CYB)
  3. Fixed Income = 18% (Long-Term Treasuries and US Treasury Flattener – TLT and FLAT)
  4. International Equities = 3% (Germany  - EWG)
  5. US Equities = 0%
  6. Commodities = 0%

Of course, anytime I move to a ZERO percent asset allocation to anything, I get a lot of questions. Most of the questions surround how much conviction we have that The Bernank isn’t going to stop gravity.

 

With gravity being Growth Slowing

 

What’s most interesting (but least surprising) about recent week-over-week moves is that the US Dollar Index continues to drive The Correlation Risk in asset prices. Typically, DOWN DOLLAR would equate to big “REFLATION” trades in everything US Equities. Not so much last week. After “REFLATION” becomes The Inflation – don’t forget that Deflating The Inflation comes next!

 

My longest of long-term base cases about Fiat Fool policy is that:

 

A)     It shortens economic cycles

B)      It amplifies market volatility

 

Therefore, it stands to reason that once you have debased your currency (3 weeks ago, the US Dollar was down -17% since Obama/Geithner took over in 2009) the stock market pops turn into drops.

 

And from what I can tell, all this popping and dropping is making The People tired…

 

After a 2-week +3.8% pop, last week’s US Dollar Index move was only down -0.2% to $75.65. Here’s what everything else did:

  1. SP500 = DOWN -0.3%
  2. Russell 2000 = DOWN -0.7%
  3. Euro = FLAT at $1.41
  4. CRB Commodities Index = UP +0.9%
  5. WTI Crude Oil = UP +0.5%
  6. Gold = UP +1.0%
  7. Copper = UP +3.5%
  8. Volatility (VIX) = UP +2.1%
  9. 2-year UST Yield = DOWN -3.7%
  10. 30-year UST Yield = DOWN -0.2%

So what does our Chaos Theory model tell us about these moves? What’s the deep simplicity of Mr. Macro Market’s messaging?

  1. GROWTH - Growth Slowing (stocks and UST bond yields falling for 3 consecutive weeks in unison)
  2. INFLATION - Deflating The Inflation (commodities are bouncing to lower-highs on low conviction rallies)

How does this all end? Well, if it means that we’re going to sustain anything that remotely resembles The Stagflation of the 1970s, that’s really bad for the market multiple you’ll pay for peak-cycle earnings (in 1974 the SP500 traded to 7x). As to how the storytellers will be Serving The End, like Europe’s proverbial pigs, we’re not sure this decade’s version of the Keynesians will fly.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1504-1518, $95.58-$101.13, and 1321-1340, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Serving The End - Chart of the Day

 

Serving The End - Virtual Portfolio


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


Gopher Shrugged

“It’s been proven that every business depends on every other business… so everybody ought to share the burdens of everyone else.”

-Orren Boyle (Atlas Shrugged)

 

While it’s hard to pinpoint exactly who each character in today’s emerging socialist state would be in Ayn Rand’s “Atlas Shrugged”, I’m very confident that Tim Geithner could audition for more roles than one. He’s trained for this for 47% of his life.

 

In Chapter 3 of “Atlas Shrugged”, titled “The Top And The Bottom”, Rand introduces the largesse of Big Government Intervention via a political panderer by the name of Orren Boyle who “had appeared out of nowhere, five years ago, and had since made the cover of every national magazine…”

 

Ah, to be on 60 Minutes… my life would finally have purpose…

 

“Disunity,” drawled James Taggart, “seems to be the basic cause of all social problems.”

 

“You said it, Jim. Disunity that’s the trouble.”

 

That conversation (pages 44-45) between a modern day bailout socialist (James Taggart) and Geithner (Orren Boyle) pretty much sums up how this country’s central planning board of directors thinks about things – in real-time.

 

Real-time? Yes We Can. Check out these comments yesterday by The Gopher (Geithner) about this country’s fiscal affairs:

  1. “Dark forces are waging a war of attrition against efforts to strengthen regulation of the financial system…”
  2. “They’re trying to starve the agencies of funding so they can’t enforce protections…”
  3. “Right now this is all theater… I think there are some people pretending not to understand…”

No – I could not have made up these quotes if I tried. Nor do I find them funny. Political “theater” like this is a national embarrassment. Our moving more and more to the left everyday has every capitalist in America subliminally losing confidence in how this is all going to end.

 

“Who Is John Gault?”

 

This is the world’s 2nd most influential book of all-time (according to a 1991 survey by the Library of Congress) next to the Holy Bible for good reason. There are socialists and there are capitalists. And there are politicians in your life - at work, school, and play – angling … and scheming… somewhere in between the socialist-capitalist spectrum.

 

Never mind “Who Is John Gault?” – maybe a better question is who are you in today’s edition of Gopher Shrugged? It’s an important question to ask yourself as we extend and pretend on the definition of a true free-market society.

 

Back to the Global Macro Grind

 

US stocks and commodities we’re up yesterday because the US Dollar was down. If you want to fix this “disunity” thing – for short-term political resolve - that’s pretty much the only way to do it (if you think getting stocks up is the answer that is). All these fat cats have to do is blow up the hard earned credibility embedded in America’s currency.

 

The problem with this solution to the problem – the problem that they created - is that when you abuse it (and I mean burn it), the “reflation” trade turns into The Inflation (and some loony guys making Reardon Macro in New Haven said INFLATION SLOWS GROWTH).

 

That’s the problem.

 

Dollar DOWN a smidgen yesterday = commodity inflation UP big time (up +1.5% on the CRB Commodities Index – a basket of 19 commodities). So take that “theater” at the pump this Memorial Day weekend folks, and like it.

 

There’s seemingly no juice left in The Gopher’s “agencies.” Market volumes are drying up. And the “dark forces” of market gravity associated with those God blessed things called supply, demand, and price have US stocks down for 4 consecutive weeks.

 

What are we pee-ons who are starting our own companies, on our own sweat capital, to do? Easy answer. Raise Cash in our portfolios so that we can be there … once again - like we were in 2008… to hire and creatively destruct all that is wrong with central planning.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $96-89-101.57, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Gopher Shrugged - EL geithner

 

Gopher Shrugged - VP


THE M3: JACOBS RESPOND TO LVS COUNTERCLAIM

The Macau Metro Monitor, May 26, 2011

 

 

FIRED EXECUTIVE LEVELS NEW CHARGES AT LAS VEGAS SANDS, ADELSON Las Vegas Sun, macaubusiness.com

Former Sands China CEO Steven Jacobs has filed new papers against LVS and Chairman Sheldon Adelson, alleging that Adelson tried to intimidate the Reuters international news service into retracting its story about the company and its relationship with alleged triad member Cheung Chi Tai by falsely claiming it was defamatory.  Jacobs' lawyers also mention a May 2010 memo from David Law, Sands China’s collection manager, who discussed sending a US$4.8 million (MOP38.4 million) company check by courier to Las Vegas; this goes against Sands' claim that Jacobs lied about the company sending money abroad via a Macau courier.

 


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