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JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY

Initial Claims Fall 5k WoW

Initial claims fell 5k WoW last week (9k net of the revision to the prior week).  This brings the level to 423k.  On a 4-week rolling basis, claims are up 1k WoW to 421k. As a reminder, in looking at the spread between the S&P and 4-wk claims, the current S&P level would equate to a rolling claims level of 460k.

 

Our general take here remains that the market and economy are reflexive, as George Soros would say. In other words, markets don't predict recessions, they cause them. The volatility over the past few months, and continuing this morning, is creating a profound loss of confidence among consumers and employers. We have been surprised to date by the resiliency of the claims figures in the face of this. We would be equally surprised if it persists. To reiterate, based on our simple mean reversion framework highlighted above, we would expect to see claims rise to ~460k mean reverting to where the market is.

 

In the fourth chart below we show the relationship between the Fed's Treasury and Agency holdings and initial claims.  The two series appear to be related.  Both series also show a relationship with the S&P.  The direction of causality isn't certain here.  Our understanding is that Fed purchases boost risk assets, particularly equities, and an increase in equity levels drives claims lower.  According to that scheme, if Operation Twist fails to boost risk assets, we would not expect a positive reaction in initial claims. 

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - rolling

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - raw

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - fed and claims

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - sp and claims

 

2-10 Spread Not Letting Up 

Acute margin pressure remains in force, looking at the 10-year yield and the 2-10 spread.  The 10-year yield is now 133 bps lower than it was at the end of 2Q. 

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - 2 10 Yield Spread by Quarter

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - 2 10 Yield Spread by Quarter QoQ Sequential Change

 

Subsector Performance

The chart below shows the performance of financial stocks by subsector.

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - Subsector Performance Chart

 

Joshua Steiner, CFA

 

Allison Kaptur

 

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THE HEDGEYE DAILY OUTLOOK

THE HEDGEYE DAILY OUTLOOK

 

TODAY’S S&P 500 SET-UP - September 22, 2011

 

Do not buy this dip. This is not a dip.

 

As we look at today’s set up for the S&P 500, the range is 40 points or -2.21% downside to 1141 and 1.22% upside to 1181.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - hrmsv

 

THE HEDGEYE DAILY OUTLOOK - bpgm1

 

THE HEDGEYE DAILY OUTLOOK - sv

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -2152 (-1338) 
  • VOLUME: NYSE 1210.29 (+20.66%)
  • VIX:  37.32 +13.57% YTD PERFORMANCE: +110.25%
  • SPX PUT/CALL RATIO: 2.66 from 1.91 (+38.96%)

 

CREDIT/ECONOMIC MARKET LOOK:

 

FIXED INCOME: by our score this is a 3.7 standard deviation move in 10yr UST bonds; Bernanke made the entire fixed income complex go haywire.  The 10 year yields making lower-lows is very bearish for both economic growth and confidence.

  • TED SPREAD: 35.80
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.88 from 1.95     
  • YIELD CURVE: 1.67 from 1.77

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Jobless claims, est. 420k, prior 428k
  • 9:45 a.m.: Bloomberg consumer comfort, prior (-49.3)
  • 10 a.m.: Leading indicators, est. 0.1%, prior 0.5%
  • 10 a.m.: House price index, M/m, est. 0.1%, prior 0.9%
  • 10 a.m.: Freddie Mac mortgage rates
  • 10:30 a.m.: EIA natural gas storage
  • 1 p.m.: U.S. to sell $11b 10-yr TIPS reopening

 

 WHAT TO WATCH:

  • United Technologies agrees to buy Goodrich for $16.5b, or $127.50-shr
  • Hewlett-Packard’s board said to meet today; said to plan to consider firing CEO Leo Apotheker
  • Hewlett-Packard deal to buy Autonomy will still go through, absent “material adverse change,” even if CEO ousted: Bernstein
  • Australian dollar drops to parity with U.S. currency
  • LivingSocial may seek more than $200m in private funding rather than seek IPO
  • Mosaic to replace National Semiconductor in S&P 500

COMMODITY/GROWTH EXPECTATION

 

COMMODITIES: crashing Copper looks like the Hang Seng this morning; down -5% in a straight line and down -21% since QE2 (Februray)

 

OIL: is in what I call a Bearish Formation - bearish on all 3 of my risk management durations (TRADE, TREND, and TAIL)

 

GOLD: this is key and why I don't own it; now Gold becomes a source of liquidity for any Global Macro hedge fund; $1821 support broke

 

THE HEDGEYE DAILY OUTLOOK - dcommv

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • Iron Ore’s Four-Year Slide Hitting Mining Earnings: Commodities
  • Gold’s Price Surge Skews Inflation Numbers Across Asia
  • Commodities Erase This Year’s Gains as Slowdown Concerns Swell
  • Oil Drops to Four-Week Low as Fed Sees Downside Risks to Economy
  • Managers Prefer Gold to Bonds on Faster Inflation: India Credit
  • Copper Slumps Into Bear Market as Fed Assessment Hurts Outlook
  • Gulf Cargo Gap Spurs Dubai-Abu Dhabi Rail Link: Freight Markets
  • Foreign Investor ‘Land Grabs’ Harm Poor Farmers, Oxfam Says
  • Copper Declines to One Year Low as China Manufacturing Contracts
  • Metal Price Drop Attracts Buying by South Korea State Agency
  • Pakistan to Boost Palm Oil Imports From Indonesia on Tax Cut
  • Copper Falls to 10-Month Low on U.S., China, Europe: LME Preview
  • Commodity-Ship Demolitions to Be Record in 2011, Bimco Says
  • Sime Darby Sees Higher Palm-Oil Production as Yields Improve
  • Rubber Tumbles to 10-Month Low as Economic Risk May Cut Deman
  • China’s 2020 Corn Imports May Be 20 Million Tons, Cofco Says
  • Brazil Sugarcane Harvest May Fall 10%, Rabobank’s Duff Says
  • Bullion Vaults Run Out of Space as Gold Rallies: Commodities

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - dcurrv

 

EUROPEAN MARKETS

 

EUROPE = train wreck - Period.  If you're a European country index down -3% this morning you are outperforming!

 

Russia is called a “Petro-Dollar” market; this stupid twist is Dollar bullish; Dollar bullish bearish for Oil, bearish for Russia

 

GERMANY: down -3.9% as the DAX fails at its immediate-term TRADE line of 5480; no support to 5019 - could re-test the lows.

 

THE HEDGEYE DAILY OUTLOOK - bpem1

 

ASIAN MARKETS

 

ASIA: put the crash helmets back on and do up your chinstraps; Indonesia was down -8.9% last night; Hong Kong down -5% moves into crash mode

 

THE HEDGEYE DAILY OUTLOOK - bpam1

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - me

 

Howard Penney

Managing Director


The Only Wall Street Strategy Note Without the Name Of A 1960s Dance In It This Morning

“We can never be gods, after all--but we can become something less than human with frightening ease.” 

-N.K. Jemisin, “The Hundred Thousand Kingdoms”

  

I think we can all be thankful for one thing this morning: we no longer have to talk or joke about “The Twist”.  The current Federal Reserve Board once again proved their incompetence as it relates to managing the monetary affairs of the nation.  Not only did the stock market not twist, or torque (as Morgan Stanley so calls it), it tanked. 

 

Yesterday actually harkens back to the heady days of 2008 when former Secretary of the Treasury, Hank “The Market Tank” Paulson, would get on T.V. to ostensibly calm the markets and inadvertently talk the Dow down a few hundred handles. 

 

We’ve said it once, and we’ll say it again, the best action that the Federal Reserve can take is to stop what they are doing.  QE 1 was ineffective, QE 2 was ineffective, and QE 2.5 Twistaroo will not work either. 

 

As The Economist wrote back in March 2011:

 

“Operation Twist has long been considered a failure. Early studies found little impact on yields, vindicating those who argued that the price of a security depends only on expectations—of inflation, for example, or monetary policy—not its relative supply.”

 

Not only did QE1 and QE2 not work, but The Twist itself was tried before in 1961 and deemed a failure.

 

In case you missed the Fed’s announcement yesterday, or have just decided to tune the Fed out, I’ll explain their intention.  The plan is for the Federal Reserve to buy $400 billion of bonds with maturities of six to 30 years, while at the same time selling an equal amount of debt maturing in three years or less.  These actions will occur between now and next June.

 

Ostensibly, the intention of such an action would be to narrow the yield curve and bring down long term interest rates.  Undoubtedly the Fed Heads are hoping this will lead to a rash of mortgage refinancing, which will free up cash for consumers to spend.  This idea is cool in the theories of macroeconomic textbooks. . . unfortunately real life is not theoretical.  This action actually has very negative implications for an already tenuous global banking sector.

 

Simply, a narrowing of the yield curve hurts financial stocks.  The cash flow of financial companies is driven by a funny little critter called net interest margin, or NIM.  Banks borrow short and lend long, and thus collect a spread on the transaction.   As the yield curve naturally narrows, or forcefully narrows by Keynesian intervention, the margins for banks compress. 

 

Our Financials Team, led by Josh Steiner, actually discussed this very topic a few weeks via a 65+ page in-depth study on the topic (ping if you’d like to trial our Financials vertical and receive access to the deck and Steiner’s team for dialogue).  In the Chart(s) of the Day today, we borrowed two charts from Steiner’s presentation.  The first chart shows that asset yields for the major banks, Bank of America, JP Morgan, Citigroup, and Wells Fargo specifically, track the 10-year yield with a very high correlation.  So, as 10-year yields decline, so too do asset yields for major banks.  In the second chart we show the potential impact on margins.  In short, as we think 2012 earnings estimates for the major banks could get cut in half.

 

The credit default swap markets for the major banks reacted as we expected yesterday and widened dramatically.  Specifically:

  • Bank of America 5-year CDS widened 11.7% to 372 basis points;
  • Wells Fargo 5-year CDS widened by 12.6% to 142 basis points;
  • Citigroup 5-year CDS widened by 12.5% to 260 basis points;
  • Morgan Stanley 5-year CDS widened by 12.0% to 355 basis points;
  • JP Morgan 5-year CDS widened by 10.6% to 146 basis points.

It’s worth mentioning that Moody’s came out and downgraded the long-term credit ratings of Bank of America and Wells Fargo, citing, “an increased likelihood that the federal government allows a large U.S. bank to collapse.” We’re not so sure how much, if at all, impact this had on the credit markets, given that: a) ratings agencies are lagging indicators and b) the results of allowing a “large U.S. bank to collapse” didn’t go so well the last time (Lehman Bros.).

 

As indicated by the moves in the CDS markets, the irony is that the Fed’s actions yesterday negatively impacted the creditworthiness of major banks and, no doubt, their willingness to more aggressively extend loans and credit. 

 

For those of you that aren’t applying for Canadian passports after the Fed’s actions yesterday, we are hosting call at 11am eastern today titled, “What’s Next for the Eurozone?”  Akin to the idea of being the tallest dwarf, the intermediate term future looks increasingly negative for Europe, which on a relative basis actually makes the U.S, in particular the U.S. dollar, look good.

 

On the call today we are going to spend time going through the history of the European Monetary Union, discuss the lead up to the beginning of the sovereign debt crises, as well as potential outcomes.  A key focus on the call will be on the exposures of the European banking sector to PIIGish sovereign debt.  In some instances, these exposures make subprime look like a speed bump.

 

We will be sending the presentation and dial in materials for the call to our clients later this morning, but if you are not a client and would like to trial our institutional service then please email our head of sales, Jen Kane, at .  Jen recently returned from maternity leave and would love to chat with you.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Only Wall Street Strategy Note Without the Name Of A 1960s Dance In It This Morning - 1

 

The Only Wall Street Strategy Note Without the Name Of A 1960s Dance In It This Morning - 2

 

The Only Wall Street Strategy Note Without the Name Of A 1960s Dance In It This Morning - Virtual Portfolio


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Unconscious Anchoring

This note was originally published at 8am on September 19, 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 anchoring-and-adjustment heuristic, as it is called, is unconscious.”

-Dan Gardner

 

I sold into the end of Friday’s 3-day rally, taking the Hedgeye Portfolio to 11 LONGS and 8 SHORTS. Last Tuesday, I held my longest net long (longs minus shorts) position of Q3 2011. Short Covering Opportunities are fun when you get them right.

 

Do not confuse a Short Covering Opportunity with a change in the intermediate-to-long-term fundamental reality that Global Growth Slowing is here to stay as long as the market keeps begging for Keynesian policy to bail us out. Remember, Big Government Intervention does two things to your markets and your lives: 1. Shortens Economic Cycles and 2. Amplifies Market Volatility.

 

Put another way (in Hedgeye speak), do not confuse a TRADE (immediate-term) with a TREND (intermediate-term) or TAIL (long-term). Since there is neither responsibility in Old Wall Street recommendations or an ability to be what we call Duration Agnostic when considering risk, you need to capitalize on the Sell-Side’s propensity to anchor on intermediate-term TRENDs, after they have occurred.

 

In “Future BabbleWhy Expert Predictions Fail and Why We Believe Them Anyway” (2010), Dan Gardner does a nice job simplifying this behavioral economics  concept of “anchoring” by citing The Wheel of Fortune Experiment by Daniel Kahneman and the late Amos Tversky. 

 

“Kahneman and Tversky showed that when people try to come up with a number, they simply do not look at the facts available and rationally calculate the number. Instead, they grab onto the nearest available number – dubbed “the anchor” – and they adjust in whichever direction seems reasonable. Thus, a high anchor skews the final estimate high; a low anchor skews it low.” (Future Babble, pg 100)

 

That’s Old Wall Street.

 

Using the #1 risk factor that we’ve been hammering on for all of 2011 (Growth Slowing), here’s how this looks from a Wall Street/Washington Strategist or “Economist” perspective: 

  1. Nearest Available Numbers: Q1 2010 US GDP = 3.94% and Q2 2010 US GDP = 3.79%
  2. Old Wall Street’s Adjusted 2011 US GDP Estimates (in Q1 of 2011) = up +3-4% GDP Growth for 2011-2012
  3. Actual Q1 and Q2 2011 US GDP numbers (subject to 30-81% downside revisions) = 0.36% and 0.98%, respectively 

And, kaboom.

 

But, but, but… this year’s -18% peak-to-trough drawdown in US Equities from the April 2011 peak was all about a tsunami in Japan and Europigs not getting their fiscal houses in order, right?

 

Right. Right.

 

So now Old Wall Street is cutting both their Global and US GDP Growth forecasts to the NEAREST AVAILABLE NUMBERS and we’re, as our friends in the media like to say, “off the lows”, with a nice +5.4% Short Covering Opportunity in the SP500 last week.

 

Nice. Really nice.

 

What else happened week-over-week that caught my craws attention: 

  1. US Dollar TRADE and TREND breakout holds support (this is new)
  2. CRB Commodity Inflation continues to break down (at the beginning of Q2 we called this Deflating The Inflation)
  3. As US Treasury Yields finally make higher-lows, Gold continues to make lower-highs (they are inversely correlated) 

So what did I do with that? 

  1. I made the US Dollar Index a 6% position in the Hedgeye Asset Allocation Model (UUP)
  2. I sold my long Silver position and remain very cautious on all commodity long positions other than Corn (CORN)
  3. I traded a proactively predictable range in the SP500 as its bullish on one duration (TRADE) and bearish on the other (TREND) 

If I have said this 10x in the last week in meetings and on the phones with clients, I have said it a 1000x in the last 3 years. The best path forward for American prosperity is via a strong US Dollar.

 

Strong Dollar Deflates The Inflation. Period. That’s why the US Consumer stocks act a lot better than the Financials and Industrial stocks. Some stocks might, but this country is not going to recover on “cheap exports.” The 71% of the economy that matters = US Consumption. Strengthen the US Dollar and rates of “risk-free” returns on savings accounts and we solidify American income and consumption.

 

If you’re holed up in some Old Wall Street Sell-Side office on Park Avenue and don’t get that trade, take a walk outside and ask an American retiree how he or she feels about The Mucker Plan – a strong US Dollar in the hand is better than a snaky Geithner and a Keynesian Europig in the bush. Anchor on that.

 

My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $$1781-1819, $86.26-90.11, 4891-5652, and 1183-1224, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Unconscious Anchoring - Chart of the Day

 

Unconscious Anchoring - Virtual Portfolio




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