The Ghost of Lehman

The ghost of Lehman Brothers continues to provide a data tailwind on this series, but that tailwind should turn headwind within a couple of weeks. For reference, after Lehman collapsed in September, 2008, the parabolic increase in jobless claims rippled through the government's seasonal adjustment factors, which mistook fundamentals for seasonality. Consequently, future years (2010 and 2011) have seen the ghost of the Brothers Lehman manifest in all sorts of government data reported on a seasonally adjusted basis. You can observe this plainly by eyeballing the late 2008 and early 2009 data in the chart below and then looking at the same time periods over the next two years. 


We think it's no coincidence that the market's behavior has rolled from positive to negative in the March/April timeframe in each of the last two years. While we think there's still considerable room to run on our bullish thesis, we're cognizant that this tailwind will turn headwind in the intermediate term.


The Data

The headline initial claims number fell 10k WoW to 348k (down 13k after a 3k upward revision to last week’s data).  Rolling claims fell 1.75k to 365k. On a non-seasonally-adjusted basis, reported claims fell 39k WoW to 362k. We continue to think that claims below 375-400k have the ability to lower the unemployment rate, which promotes a virtuous cycle as confidence and sentiment respond. 












2-10 Spread

The 2-10 spread tightened 7 bps versus last week to 165 bps as of yesterday.  The ten-year bond yield decreased 6 bps to 193 bps.






Financial Subsector Performance

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




Joshua Steiner, CFA


Allison Kaptur


Robert Belsky


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For the week ended 2/11, initial jobless claims came in at 348k versus expectations of 365k and 361k the week prior (revised from 358k).


THE HBM: PEET, PFCB, BOBE, EAT - initial claims



Comments from CEO Keith McCullough


Consensus still focused on Greece and Rating Agency noise as Global Growth Slows – amazing:

  1. CHINA – after seeing its 1st y/y decline in Export growth in 2yrs (JAN -0.5%), this morning the Chinese reported a y/y decline in Foreign Direct Investment of -0.3% y/y. Chinese govt guys called it “grim” (see Bloomberg article) – volumes on the NYSE aren’t the only thing in the world that have slowed to a halt
  2. SPAIN – the Spaniards are selling as much pig paper as they can (34% of their YTD needs) before someone figures out that Growth Slowing is what is going to crush their citizenry next. This morning’s debt auction finally came in at a higher yield (2015 bonds at 3.33% vs 2.86% last) and the IBEX is the 1st major European mkt to snap my immediate-term TRADE line of 8653 (down -2.1% leading decliners in Europe).
  3. COPPER – breaking my mo mo line of 3.88/lb support was one of the many Growth Slowing signals that had me short SPY at 1355 yesterday. This morning, copper = down -1.1% and 10yr UST yields are straight down to 1.91% as well.

Japanese Yen down hard too. We’ll likely buy/cover on red today, but not because Global Growth isn’t slowing as inflation expectations accelerate.







THE HBM: PEET, PFCB, BOBE, EAT - subsector







PEET: Peet’s Coffee traded down on accelerating volume on disappointing earnings yesterday. 





PFCB: P.F. Chang’s 4Q11 earnings hit the tape this morning. EPS came in at $0.30 ex-items versus $0.45 consensus. Comps at the Bistro came in at -2.4% versus -2.8% consensus.  Pei Wei comps came in at -1.9% versus -2.7% consensus.  The stock traded down on the print but is now up 4% in premarket trading.  On the call, management is providing some positive commentary on the company’s outlook.  We will have a more detailed post up later today.


THE HBM: PEET, PFCB, BOBE, EAT - bistro pod1


THE HBM: PEET, PFCB, BOBE, EAT - peiwei pod1


THE HBM: PEET, PFCB, BOBE, EAT - pfcb pod2



BOBE: Bob Evans reported strong EPS of $0.69 versus $0.60 expectations on Tuesday and followed it up with a positive conference call yesterday, sending the stock higher.  The company improved food and labor costs at both Bob Evans and Mimi’s Café. 




BOBE: Bob Evans Farms’ stock increased by 6.2% on accelerating volume.


EAT: Brinker management was in NYC yesterday and must have had some positive things to say.


PFCB: P.F. Chang’s eked out a small gain yesterday ahead of the print this morning.  As we wrote above, initial reaction to the print was negative but the bid is above $36 as we approach the opening bell.





Howard Penney

Managing Director


Rory Green



Feeling Certain

This note was originally published at 8am on February 02, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“You know far less about yourself than you feel you do.”

-Daniel Kahneman (Thinking, Fast and Slow)


Since last Thursday, when I made the call to go to 91% Cash (selling my US Dollar and US Equity positions down to 0%), I’ve re-invested 12% of that Cash (on red) in the Hedgeye Asset Allocation Model, dropping my Cash position back down to 79%.


After I write something like that, you should feel something. ‘Who is this guy? That’s not what I do? I love this guy. He can’t do that. I think he played hockey, etc.’


I don’t know what you are feeling right now. All I know is that the more I think I know about risk management, the less I know. As a result, the best path forward is to Embrace Uncertainty, keep moving, and banging out the early morning reps.


Back to the Global Macro Grind


People on Old Wall Street are funny. Yesterday, at Bloomberg’s China Conference, our rising star Asia analyst, Darius Dale, commented “this is really weird – I just spent the whole day listening to American investors tell me everything that they know about China.”


Where were the people from China?


I don’t know. What I do know is that there are highly intelligent people in this business that tend to think they know a lot more about what they don’t know than they actually do.


This, of course, isn’t new. In Chapter 4 of “Thinking, Fast and Slow”, The Associative Machine, Kahneman takes a step back to remind us that David Hume boiled this down to 3 principles of associative thinking in 1748: “resemblance, contiguity in time and place, and causality.” (page 52)


In other words, since most Perma-Bulls have been blown up by bubbles in the last 4 years, China must be a bubble. It resembles a bubble, right? We’re all here at the China Conference telling one another it’s a bubble, right? And notwithstanding any correlation math, we can all agree that credit bubbles cause bubbles, right?


Right, right.


So, after Gary Shilling’s consensus headline coming out of the Bloomberg Conference was “China Headed for Hard Landing”, Chinese stocks closed up another +2% last night (we’re up +16% on our CAF position since buying it on December 29th, 2011) and the Hang Seng moved to +12.5% YTD!


I’m Feeling Certain now that something hard landed somewhere last night, on a Chinese short sellers head.


Does that mean we run out and buy more China this morning? Of course not. It’s just a simple reminder that if some US centric investors don’t know what they don’t know about their own Macro market moves, how on God’s good earth do investors trust that they can pin the tail on the donkey on a 12 hour plane ride from Newark?


Back to our positioning in the Hedgeye Asset Allocation Model – here it is as of last night’s US market close:

  1. Cash = 79%
  2. International Equities = 9% (China – CAF)
  3. Fixed Income = 6% (Long-term Treasuries – TLT)
  4. US Equities = 6% (Energy – XLE)
  5. Commodities = 0%
  6. International FX = 0%

Feeling Certain about any of these asset allocations or Hedgeye Porfolio  LONG/SHORT positions we take is very hard to do. Feeling Certain that you can flip a switch from expecting Global Growth Acceleration to Deceleration in February is even harder to do.


With hindsight being crystal clear, the only thing I am certain about is how my model has worked over the last 4 years:

  1. When Inflation Expectations start to rise, people confuse commodity and stock market inflations with real-growth
  2. As real Growth Expectations start to fall, Gold, Treasuries, and Volatility start to rise
  3. As inflation expectations rise and growth expectations fall, confusion in markets starts to breed contempt

Confusion is as confusion does. The US stock market went down for 4 straight days after we made the move to 91% Cash last Thursday. After 1 up day in the last 5, the Perma-Bulls are back. But are they? How can you be perma bullish or bearish about anything after the last decade of getting paid to feel certain about everything?


My immediate-term support and resistance ranges for Gold, Oil (Brent), Copper, EUR/USD, Shanghai Composite, and the SP500 are now $1709-1771, $110.68-111.89, $3.75-3.83, $1.30-1.32, 2278-2334, and 1317-1326, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Feeling Certain - Chart of the Day


Feeling Certain - Virtual Portfolio

Early Look

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This quarter wasn’t expected to be a huge catalyst but after the HST disappointment, MAR looks relatively good.



As many of you know, MAR has been our favorite stock for the last few months and we see nothing in last night’s release to change our positive view.  The quarter was messy and confusing – as we expected – and not necessarily comparable to estimates.  However, guidance was solid which may move the stock in a positive direction today.  Following the HST disappointment, expectations were ratcheted down.  Going forward, we expect solid RevPAR growth for the industry and MAR.  While we are not totally sold on this recovery from a Macro perspective, MAR’s almost pure fee business provides a level of protection from economic volatility.  While the valuation has improved, we don’t believe the multiple yet reflects the strength of MAR’s cash rich, fee-based business model.


The conference call starts at 10am EST but here are some takeaways in the meantime:

  • Managed and franchised room growth was a little better than we expected
    • Managed rooms were 1,185 higher than we estimated (0.4%)
    • Franchised rooms were 839 (0.3%) higher than we estimated
  • Absolute RevPAR was about 1% higher than we estimated but the numbers aren’t exactly comparable
  • Reported WW System wide RevPAR was at the midpoint of company guidance (5-7%)
  • Fee revenue of $416MM missed – mostly on the incentive fee line
    • Guidance: $420-$430MM
    • Consensus: $426MM
    • HE estimate: $429MM
    • $9MM of the shortfall in fee revenue (vs. HE & Street) was from incentive fees
    • The street wasn’t adjusting for the shift in timeshare fee accounting from Management to Franchise fees so their numbers aren’t really comparable.  Versus our numbers, the rest of the shortfall came from lower base management fees ($4MM)
  • Results from owned, leased, corporate housing and other were better than expected due to a combination of stronger owned/leased results and higher branding fees
    • MAR reported $56MM of segment results vs.
      • Guidance: $50MM
      • Consensus: $59MM
      • HE estimate: $52MM
    • They did not provide a breakout of branding fees so it’s hard to comment on margins on the own/leased portfolio
  • Not much to say on Timeshare other than:
    • Street numbers aren’t comparable since MAR reported a partial quarter and didn’t provide the typical historical disclosure
    • The partial revenues that they did report were lower than our numbers as were the partial segment results.  $17MM of the miss vs. our EBITDA estimate for the quarter was attributed to timeshare segment results
  • SG&A was $25MM higher than we estimated.  We thought that the SG&A attributed to timeshare was $25MM (based on prior disclosure) and that the clean 4Q10 number, including timeshare, was $240MM (excluding charges).  We assumed only a partial removal of SG&A for the quarter.  The clean number of $219MM looks lower than what we would have projected.  This obviously accounted for a large part of the discrepancy in numbers for us and probably consensus too.
  • Guidance thoughts
    • 1Q12 and full year RevPAR outlook looks fine – in-line
    • Fee guidance is in the range of consensus ($1,438MM) and in-line with our $1,428MM estimate
    • Owned, leased, corporate housing and other guidance is below consensus of $158MM and below our estimate of $154MM
    • EPS guidance is better than our estimate of $1.49 and in-line with street estimates of $1.59

Trailer Homes

“We don’t want a society where when you lose your job you live in a trailer home, like in the U.S.”

-Nicholas Sarkozy


Over the course of my 13 years in this business, I’ve seen bubbles in Tech, Housing, and Keynesian Economics. Now the bubble in dumb politicians has gone global.


I know some people don’t like being called names. That’s why I call those ones in particular names. Sometimes, if you want to creatively destruct dogmas, you just have to pick a fight. That’s pretty easy to do with the left leaning leader of France.


Ironically enough, American politicians are now competing with the Japanese and Europeans on who can lean the most left in market interventions. When I left Canada in 1994, I never would have thunk I would see the day. It’s sad to watch.


Back to the Global Macro Grind


I didn’t short the SP500 yesterday at 11:58AM (1355) because I wanted to pick a fight – it’s because my process had it immediate-term TRADE overbought. The process obviously isn’t perfect, but it is repeatable – and when I get something right, I know why.


Yesterday I wrote about being wrong and how I deal with my own issues. If you couldn’t tell, I have a lot of issues. My goal in life is to improve upon them. In addition to President Sarkozy, politicians who understand Keynesian Policies To Inflate are having some issues of their own this morning:

  1. JAPAN – the Yen continues to go down in a straight line this week, down another -0.54% this morning to $78.80 vs USD
  2. SPAIN – the Spaniards are having a tough time selling pig paper at lower yields (2.3B EUR in 2015 bonds priced at higher yields)
  3. VENEZUELA –the Latin American FX debaucherer, Hugo Chavez, has fallen behind his Presidential challenger, big time



Yeah, I know you probably wanted someone to write to you about Greece or whatever a 12-month late Ratings Agency is thinking about what they should have warned you about 12 months ago…


Instead, consider the following about the Hugo Trailer Homes model (see chart):

  1. Collapse the currency
  2. Inflate the stock market
  3. Lose the Election

Last year, when almost 90% of country stock markets closed down for the YTD (sorry to remind everyone), Venezuela was up +79.1%. That was the best performing stock market in the world by a Madoff mile.


Instead of made for TV “rallies” on no volume (or inflows from The People), what does a Policy To Inflate get you in Venezuela, Wisconsin, or Milan?


Angry (and hungry) people.


We’ve never seen a $100 handle on the price of oil (pick your vintage – Brent, WTI, etc.) not Slow Global Growth. Now maybe the Sell-Side Strategists who told you to buy everything Global Equities on green last February are telling you it’s “Different This Time”, but I’m on the other side of that trade.


I can see exactly where perma-bulls are coming from – their risk management models have not changed. And that’s actually sad too. One of the many globally interconnected reasons I shorted SPY at 1355 instead of chasing it yesterday was that US Industrial Production Growth for January was reported at 0.00%.


Nice round number – and while The Bernank might like the ring of the zero percent thing, stock and commodity markets did not:

  1. US Industrials (XLI) were the worst performing S&P Sector of the day at -1.3%
  2. Dr Copper snapped its immediate-term TRADE line of $3.88/lb and is down another -1.1% this morning
  3. SP500 closed down for the 3rdday in the last 4

These are simply the facts. And I get paid to report them to you in the order that they are received.


Last week, I wrote a note telling you what I thought you should focus on instead of Greece:

  1. Japan’s Sovereign Debt Maturity Spike in March
  2. China’s Growth Slowing Sequentially (China’s Foreign Direct Investment reported overnight was down y/y!)
  3. The almost hyper global inflation/deflation relationship driven by policies driving the US Dollar

The bad news is that most of this is becoming new news to consensus. The Good news is where this all started is beginning to end – the US Dollar stabilizing in the last 48 hours is the most bullish fundamental factor I have in my notebook this morning.


While that may not be good for the guy who bought the Basic Materials ETF (XLB) or Freeport McMoran (FCX) at last week’s top, Deflating The Inflation is great for all my friends who grew up in Trailer Homes.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Spain’s IBEX, Shanghai Composite, and the SP500 are now $1, $116.79-119.79, $1.30-1.31, $79.01-79.73, 8, 2, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Trailer Homes - Chart of the Day


Trailer Homes - 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.