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Initial Claims See Another Late July Distortion

Initial claims dropped 20k last week (24k post the revision to the prior week) to 398.  Breaking through the 400k line for the first time since April is a positive signal.  However, we are cautious around the timing, since late July generally sees a distortion of the seasonal adjustment related to manufacturing layoffs.  Manufacturing employees are usually furloughed for a period during the summer, and submit initial claims when furloughed.  However, the timing of these furloughs shifts by a couple of weeks, which means the Bureau of Labor Statistics' seasonal adjustment factor doesn't do a great job of capturing them.  For evidence of this, check out the typical volatility in late July (as seen in the first chart) and the similar-looking, but not identical, patterns in the NSA data in the second chart. NSA claims dropped more than 100k WoW, well outside of the average move.  


Bottom line, we would expect claims to increase back above 400-410 sometime in the next 2-3 weeks as we roll out of the seasonal distortion.  










Joshua Steiner, CFA


Allison Kaptur



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


In a market like this, where Institutional performance chasing is one of the most misunderstood long-term TAIL risks we’re observing, price levels matter – big time.  So does considering them on a multi-factor, multi-duration basis.  As we look at today’s set up for the S&P 500, the range is 18 points or -0.53% downside to 1298 and 0.85% upside to 1316.



  • The Industrials (XLI) really signaled this Tuesday; yesterday decline was a broad based confirmation that the biggest problem the US stock market faces are forward earnings expectations - not a US debt default (which didn’t move US Treasury credit risk more than a basis point all day).   From Healthcare (which we are long) to Tech yesterday, the earnings guidance was just not good - growth is slowing.  The Hedgeye models now have 5 of 9 Sectors are now Bearish TRADE and TREND (XLF, XLI, XLB, XLP, and XLV) and only 3 of 9 Sectors are bullish TRADE (XLE, XLK, XLU).





THE HEDGEYE DAILY OUTLOOK - daily sector view




  • ADVANCE/DECLINE LINE: -2561 (-1587)  
  • VOLUME: NYSE 1099.23 (+31.33%)
  • VIX:  22.98 +13.59% YTD PERFORMANCE: +29.46%
  • SPX PUT/CALL RATIO: 2.92 from 1.99 (+46.90%)



UST Yields – market morons in Washington have finally busted the 2-year yield above my TRADE line of resistance (0.41% on 2s) this morning. Will it hold?  Its anybody’s guess  - what I do know is that I trust the market price is going to lead us more than a compromised politician

  • TED SPREAD: 18.17
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 3.01 from 2.99   
  • YIELD CURVE: 2.58 from 2.61


  • 8:30 a.m.: Initial jobless claims, est. 415k, prior 418k
  • 9:45 a.m.: Bloomberg Consumer Comfort, est. (-44.9), prior (-43.3)
  • 10 a.m.: Pending home sales M/m: est. -2.0%, prior 8.2%
  • 10:30 a.m.: EIA Natural Gas
  • 12:45 p.m.: Richmond Fed’s Lacker speaks in Virginia
  • 1 p.m.: U.S. to sell $29b 7-yr notes
  • 2:30 p.m.: San Francisco Fed’s Williams speaks in Utah


  • House plans to vote today on a debt-limit increase proposal that confronts unified Democratic opposition in the Senate
  • House Speaker John Boehner to hold news conference at 1:30 p.m.
  • Health-care spending to make up 20% of U.S. GDP by end of decade, up 2+ pct pts from 2009 as subsidies expand, federal auditors said.



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Record Low Rubber Stocks-to-Use Ratio May Lift Prices, RCMA Says
  • Copper May Rise as Strike, Lower Production Fuel Supply Concern
  • Wheat Advances Third Day on Speculation U.S. Yields May Decline
  • Coffee Falls on Rising Inventories in Europe; Sugar Retreats
  • Soybeans to Gain 9.2%, Trading Central Says: Technical Analysis
  • BHP’s Chile Copper Mine Declares Force Majeure Amid Strike
  • Brazil Coffee Output to Surge After Prices Rise, Rabobank Says
  • Container-Ship Plunge Signals U.S. Slowdown: Freight Markets
  • Radiation Concern Prompts Aeon to Test Beef for Cesium Level
  • India’s BJP Asks Karnataka Chief to Resign Over Mining Scam
  • LNG Heads for Three-Year High on Japan, Libya: Energy Markets
  • China Shipping Companies Lobby to Foil Vale’s Iron Ore Fleet
  • African Farmers Challenge ADM for Bigger Share of U.S. Food Aid



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE – both Equities and Bonds are turning into proactively predictable trains wrecks. The catalysts are crystal clear (accelerating debt maturities for the majors through September), and all TREND lines have been broken/confirmed by volume/volatility studies.
  • EUROPE: Just awful. Period. With Italy crashing, Germany leads to the downside this morn and thats a very unhealthy signal; DAX = bearish TREND
  • Germany July unemployment rate +7.0% vs consensus +7.0% and prior +7.0%





  • ASIA: acts nothing like USA or Europe, because they have nothing that resembles A) Congress or B) Europig Debt - selloff was controlled










Howard Penney

Managing Director

Forecasts of Doom

This note was originally published at 8am on July 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.

“Plainly, MacArthur’s bleak assessment of the situation, his forecasts of doom, had been wrong.”

-David McCullough (“Truman”, page 834)


We’ve all experienced getting too bearish at bottoms. Historically, when this emotional capitulation comes from the political leaders of our country, we often look back at their Forecasts of Doom as the catalysts for change. Politics are a lagging indicator.


While I’m not sure I’d be accused of being bullish on Keynesian Economic policies or their impacts to the US Dollar since the 2008 US stock market crash, I’m certainly not the US Dollar bears’ huckleberry on this matter right here and now.


Not to name names, but PIMCO’s Mohammed El-Erian has been getting plenty of air-time in recent weeks (Barrons this weekend, Bloomberg article again this morning, etc.) talking up the credit risk in US Treasury Bonds.


Not to callout timing, but this has been El-Erian’s view since PIMCO effectively sold almost all of their US Treasury exposure in Q1 and Q2 of 2011. While I respect Bill Gross and all of his risk management accomplishments over the years, his partner’s Forecasts of Doom for the US Treasury Bond market have not only been wrong since March, but they are wrong, again, on this morning’s Debt Ceiling “news.”


The “news” on anything being commandeered by central planners of the 112thCongress is that the news is going to change. This weekend’s “news” of a Debt Ceiling debate failure may have been good for the Sunday talk show ratings, but it wasn’t bad for what matters to markets – the marked-to-market rating on US Treasury Yields.


If you didn’t know that market prices don’t lie (politicians do) – now you know. Or at least Mr. Macro Market in US Treasuries thinks he knows. Here’s this morning’s reaction to the “news” of doom:

  1. Short-term Treasuries (2-year yields) – didn’t move 1 basis point versus where they were priced into the end of last week (0.39%)
  2. Long-term Treasuries (10-year yields) – moved a whole 2 basis points versus Friday to 2.98%

But Mr. El-Erian has a Top 10 article on Bloomberg’s most read that delivers the headline “El-Erian Says US Vulnerable To Downgrade”… Qu’est ce qui se passe avec Le Analysis if the market isn’t reacting to PIMCO’s bleak assessment?


I’m long US Treasuries and have been writing about why since we launched our Q2 Macro Themes at Hedgeye in April. Sure, partly because I’m bearish on US Growth (Mr. El-Erian says he’s bearish on US Growth, but evidently not Bearish Enough or he’d be long the long-bond).


As most of the lagging of lagging indicators (Moody’s, S&P, etc) downgrade the likes of Greece (again!) this morning, I’m moving the Hedgeye Asset Allocation Model to its most invested position of 2011.


Yes, we still have 40% Cash – but that’s less than the 67% Cash we held at the end of February when Wall Street/Washington expectations for growth were will too high by about a double!


Ahead of this Friday’s preliminary US GDP Growth Report for Q2, Hedgeye’s estimate for US GDP Growth remains 1.7%-2.1%. Since the government, to a degree, makes up this number, we make up a range of expectations around current made-up numbers.


Here’s where the Hedgeye Asset Allocation Model stands as of this morning:

  1. Cash = 40% (down from 46% last Monday)
  2. Fixed Income = 24% (US Treasury Flattener and Long-term Treasuries – FLAT and TLT)
  3. International Equities = 12% (China and S&P International Dividend ETF – CAF and DWX)
  4. Commodities = 9% (Gold and Silver – GLD and SLV)
  5. International Currencies = 9% (US Dollar and Canadian Dollar – UUP and FXC)
  6. US Equities = 6% (Healthcare – XLV)

Obviously as Global Economic Growth Slows and Fiat Fool Policies whip around between Europe and the US like a ping pong ball (see our Q3 Macro Theme presentation, “Policy Pong”), we don’t want to be “fully invested” – not with our own money at least.


As for today, what we’d like to do on this “newsy” morning is sell some Gold high and buy some US Equity and Currency exposure low. We get the bleak assessment about Congress and a President who has a hard time making hard decisions. We also get that markets discount the obvious – and we could very well be looking at “news” of a Debt Ceiling resolution by the end of the week.


My immediate-term support and resistance ranges for Gold (long), Oil (no position), and the SP500 (no position) are now $1590-1619, $97.72-100.24, and 1322-1349, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Forecasts of Doom - Chart of the Day


Forecasts of Doom - Virtual Portfolio

CHART OF THE DAY: Institutional Constraint


CHART OF THE DAY: Institutional Constraint - Chart of the Day

Institutional Constraint

“We have many constraints as investors.”

-Seth Klarman


Baupost’s Seth Klarman is no stranger to going to cash. Neither is he shy about telling it like it is about how the game of Institutional Asset Management works. The aforementioned quote has nothing to do with the self-directed individual investor. It has everything to do with Institutional Constraints.


“Constraint”, per Wikipedia, “is an element factor or a subsystem that works as a bottleneck. It restricts an entity, project, or system from achieving its potential with reference to its goal.” Institutional Constraint isn’t what Klarman calls it, but I think he’d agree.


In Grant’s back in Q1, Klarman said “we want short-term performance, and are measured by this. There is enormous pressure from clients for short term performance. Mutual funds compete in a relative space. What’s important is absolute returns. The way people do this is forced mediocrity. To do absolute performance, you have to bet against the crowd sometimes.”


Sometimes betting against the crowd too early makes an investor wrong. Sometimes betting against your current positioning can make you less wrong. In a market like this, where Institutional performance chasing is one of the most misunderstood long-term TAIL risks we’re observing, price levels matter – big time. So does considering them on a multi-factor, multi-duration basis.


What does multi-factor mean?


First, let me tell you what it doesn’t mean:

  1. Point and click 1 factor models of simple moving averages (50 day, 200 day, etc)
  2. Being sucked into the Sentiment Vacuum of 1 topic (Debt Ceiling is the #1, #2, and #3 most read on Bloomberg this morning)
  3. Considering Global Macro risk from the vantage point of 1 country and/or 1 asset class (“what’s the Dow doing?”, c’mon)

Within the construct of Chaos/Complexity Theory (my modern day market practitioner’s answer to stale academic Keynesian Dogma), multi-factor is as multi-factor does. You need to build a risk management process that absorbs multiple price, volume, and volatility signals, across multiple asset classes, and across multiple durations.


If I had 10 Chinese Yuans for every person I’ve met in this business who says “well, the chart looks good”, I’d have a lot more money to fund Hedgeye’s growth. What, precisely, do charts mean? The answer to that is as simple as the deep simplicity Chaos Theory aspires to achieve. The chart looks as good as the math you have embedded in the picture!


If bells weren’t going off in your Global Macro Risk Management Process yesterday, I suggest you get a new one. Here are some of the alarms going off in mine that had me take my Cash position back up to 46% from 37% (where I started the day):

  1. EUROPE – both European stocks and bonds are turning into a proactively predictable train wrecks. Our research catalysts remain crystal clear (accelerating debt maturities for the majors through September) but, more importantly, now all of our TRADE and TREND lines across every major European stock and bond market (ex-Russia) have been broken and confirmed by volume and volatility studies.
  2. USA – stocks broke their intermediate-term TREND line of support (1320 in the SP500) and short-term bond yields finally busted a move above my 2-year yield TRADE line of resistance (0.41%).  Credit risk derived by market morons in Congress will be priced on the short-end of the curve (where Bernanke has tried to mark it to model for 2 years), so watch that 0.41% line like a hawk.
  3. GLOBALLY – China’s Shanghai COMP TREND line = 2831 (broken); India’s BSE Sensex TREND line = 18,578 (broken); German DAX TREND line = 7251 (broken); FTSE TREND line = 5985 (broken); SP500 TREND line = 1320 (broken); Russell2000 TREND line = 827 (broken); WTIC Oil TREND line = 103 (broken); EUR/USD TREND line = $1.43 (schizophrenic).

No one at Hedgeye has ever said 2011 Global Growth or 2H2011 Earnings Expectations were priced properly. If you close your eyes to all of my quantitative and research factoring across asset classes and just focus on those 2  - they are VERY large fundamental factors to consider having market impact above and beyond these yahoos in Congress.


Look, I’m not saying I got all of this right. What I am simply saying is that we, as a profession, can get a lot better at this if we just open our minds to re-thinking risk and re-working our asset allocations as the big factors are changing. The market doesn’t care about our respective investment styles, compensation mechanisms, or Institutional Constraints.


My immediate-term ranges for Gold, Oil, and the SP500 are now $1, $96.03-100.32, and 1, respectively. I cut my US Equity exposure to 3% (from 9%) in the Hedgeye Asset Allocation Model yesterday.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Institutional Constraint - Chart of the Day


Institutional Constraint - Virtual Portfolio

SKX: Respect The Cardinal Rule…

There are not a lot of cardinal rules in Retail investing. One of them is to never try to bottom-tick Skechers.



The tail end of fad-induced runs in retail are never pretty and SKX is no exception. While we’d like to give Skechers some credit for taking its lumps this quarter and getting more aggressive about reducing inventory, the reality is they had no choice. In addition to trying to sell through remaining product at the twilight of its relevance, SKX is starting to ship its next generation running and other ‘performance’ product for BTS. Of course "tests’have been positive", but aside from the fact that no CEO will ever state that tests aren't working, retailers are going to be understandably cautious before buying a front row ticket to toning part deux.


This one is going to take more than one quarter of pain to recover. We know full well that by the time we get any clarity, the stock will have moved on us. Furthermore, our SIGMA analysis below shows that despite the horrific (-65%) sales/inventory spread, that’s actually a sequential improvement from 1Q. The icing on the cake is that the most favorable stock price movement is associated with a move from the lower left quadrant to the upper left. And it looks like that’s where SKX wants to go.we think that some of this is already baked-into a low teens stock. And with a complete lack of clarity as to how the company unloads the remaining half of its excess toning inventory, coupled with the fact that we’re shaking out at $0.85 for next year we still don’t like this name here at $14.50.


Despite the silver lining of continued strength in the international business up 35%, domestic sales were down by the same magnitude and we expect this trend to continue driving total revs down 10% in Q3. While SKX is starting to rein in costs, gross margin variability continues to be a key issue that will have the company fighting to breakeven for the remainder of the year. Competition is getting tougher, and there’s no guarantee that this event is truly a kitchen sink event.


Again, there are not a lot of cardinal rules in Retail investing. One of them is to never try to bottom-tick Skechers.


SKX: Respect The Cardinal Rule… - 321

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