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INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH

Initial Claims Flat for the Third Week

The headline initial claims number came in flat, falling 2k after the upward revision to the prior week's data. Rolling claims fell 5.5k to 354k. On a non-seasonally adjusted basis, claims fell 15k to 332k.

 

In our note last week, we walked through a quantification of the distortion in seasonal adjustment factors arising from the Lehman shock in 2008.  Because the Labor Department uses a five-year lookback to create its seaosnal adjustment, the 2008 shock is still percolating through the data.  

 

The seasonal distortion plays out as follows.  Claims are understated in the last weeks of February by the largest amount.  From now through May, the understatement disappears.  Absent an underlying trend in the series, this effect would drive claims higher by about 20k over the course of the next three months.  By July, the distortion reappears, this time as an overstatement, pushing claims slightly higher still. From July through year-end, the distortion disappears, and the underlying trend will be reflected in the weekly data. 

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - Rolling2

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - Raw2

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - NSA

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - s p

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - Fed and Claims

 

2-10 Spread

The 2-10 spread tightened 3 bps versus last week to 167 bps as of yesterday.  The ten-year bond yield decreased 3 bps to 197 bps.

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - 2 10

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - 2 10 QoQ

 

Financial Subsector Performance

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

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - Subsector performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 


LIZ: Noise = Buying Opportunity

There was a lot of noise embedded in LIZ’s Q4 results as expected, but the take away from the quarter is unequivocally net positive. We see weakness in the stock following these Q4 results as a buying opportunity for those who remained on the sidelines looking to get into the stock below $10. Here’s your chance.

 

Here are our thoughts on the quarter and LIZ story:

  • For starters, headline Q4 revenues came in down -3%, but on an adjusted bases accounting for businesses sold or exited, revenues came in up +12%. Kate and Lucky came in in-line to above our expectations while the Partnered Brand business (now Adelington Design) and Juicy accounted for the $25mm difference equally.
  • As expected, the additional brand disclosure provided improved clarity revealing among other things how profitable and meaningful Kate Spade is to the LIZ story. We expect the profitability of Kate to continue to ramp up to 16-17% operating margins over the next two years. Also revealed was that Lucky did indeed breakeven for the year. We expect margins to expand meaningfully to MSD this year as top-line strength continues.
  • Additionally, we see the comp outlook by each brand to be conservative. The outlook for Juicy is in-line with our own. As we noted in Monday’s “LIZ Q4 Preview” note, we expect this turn at Juicy to be a gradual one, which is reflected in MSD comp growth for 2012. Lucky, on the other hand is starting off the year better than we expected as the women’s business continues to drive growth. We are taking our numbers up to a +11% comp from our prior +8% estimate.
  • As for Kate, we think management is flat out sandbagging expectations – that’s fine actually. It does no good to set unrealistic expectations for the brand. Compared to management’s outlook for mid-teen comps and 30%+ revenues, we are modeling +20% comps and 40% revenue growth, which could in fact prove conservative.
  • One of the few callouts from the call that differed from our expectations was the announcement that 35-40 stores will be added at Kate and Jack Spade alone ahead of the 20 stores we were modeling. This will adding an incremental $25mm to F13 revenues driving sustainable 35%-40% revenue growth over the next 3-years.

 

With gross margins expanding largely from brand mix and SG&A cost reductions coming in as planned we are shaking out $0.26 in EPS for F12 and $0.65 in F13 reflecting $145mm and $205mm in F12 and F13 EBITDA respectively. As we move through 2012, we think investors will start looking out to $1 in earnings power in three years (F14). That is NOT reflected in the stock at $10. Below is our updated sum-of-the-parts by brand. LIZ remains our top long and we think it doubles again this year.

 

LIZ: Noise = Buying Opportunity - LIZ SOP


Trailer Homes

This note was originally published at 8am on February 16, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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

Venezuela?

 

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 $1714-1754, $116.79-119.79, $1.30-1.31, $79.01-79.73, 8444-8653, 2340-2389, and 1339-1354, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Trailer Homes - Chart of the Day

 

Trailer Homes - Virtual Portfolio


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Don't Hate The Debate

“You have to choose not to spiral into hate.”

-Izzeldin Abuelaish

 

On red yesterday I took up my positions in US Equities and Commodities to 12%, respectively, buying Utilities and Gold in the Hedgeye Asset Allocation Model. I also sold my entire US Dollar position (9%) on green. Don’t hate me for moving fast. Sometimes that’s just what I do.

 

‘Trading, Fast and Slow’ might be a good title for a new book (or maybe just a high-frequency tweet). It uses 3 words that some people in our business love to hate. Trading? Oh no, “I’m not a trader, I am an investor.” Ok. Do you invest fast or slow? Do you manage risk? Yes, we know – you actually have to trade to answer both of those questions.

 

While plenty of people from The Old Wall are just punching the over-compensation clock at this point, I think we have entered the thralls of creative destruction. These are the most exciting times of my 13-year career. There is so much to Re-think, Re-work, and Re-build.

 

We have an entire industry that needs to be debated. Every process. Every premise. Every minute of every day offers you an opportunity to not only get in the game, but be the change we all want to see in this profession.

 

If that sounds a little speechy, it’s because it is. As Ray Dalio at Bridgewater likes to say, this business is all about figuring out the truth. In the final pages of Izzeldin Abuelaish’s ‘I Shall Not Hate’, he comments on the same principles of risk management in the Middle East:

 

“I’m not talking about the light of religious faith here, but light as a symbol of truth. The light that allows you to see, clear away from the fog – to find wisdom. To find the light of the truth you have to talk to, listen to, and respect each other.” (page 196)

 

The partisan politics, economics, and investing styles that have failed us over the last 5yrs are broken. Don’t Hate The Debate. Embrace change and progress. We can always do better. We always have.

 

Back to the Global Macro Grind

 

One of the most heated debates I have with clients remains centered on the interconnectedness of the world’s reserve currency to market prices that are primarily denominated in that currency (US Dollars).

 

Since most of Western academia has not taught us to re-think markets this way, their dogma is now our dilemma. That’s why we need to slap on the accountability pants and hash this one out, fast. It’s time for the professors to be held accountable to the debate.

 

If you don’t think Fed Policy drives the US Dollar and Inflation/Deflation Expectations of assets priced in Dollars, try that theory at home with your own money. If the Fed were to even whisper about a rate hike, Oil and Gold would get hammered.

 

That’s why managing risk around big up/down moves in the USD is critical to getting Big Beta right. With the US Dollar Index up +0.8% on the day yesterday (one of its biggest up days of 2012), here’s what happened underneath the Globally Interconnected Market hood:

  1. Silver = down -6.9%
  2. Gold = down -5.5%
  3. Basic Materials (XLB) = down -1.9%

It’s a good thing the Dollar isn’t correlated to Apple.

 

Notwithstanding that the Chairman of the Federal Reserve didn’t mention the words (and hasn’t since 2006) CORRELATION RISK in his entire semi-annual testimony yesterday, we’re still not in the business of taking his word for it on what is or is not happening out there.

 

I know this is a touchy subject – particularly to the legions of Nobel Prize winners who get paid to be willfully blind to it. But this is America, not Russia. We, The People, have a fiduciary responsibility to hold central planners accountable.

 

Transparency, Accountability, and Trust?

  1. Transparency: Bernanke to Ron Paul yesterday on defining inflation - “I’ll talk to you about that offline”
  2. Accountability: Bernanke’s prepared remarks on his mandate for PRICE STABILITY -“as we expected, inflation was transitory”
  3. Trust: Bernanke on his forecasts – “my projections are considerably lower than last year”

Alrighty then.

  1. So there is no inflation because Bernanke chooses to define it with what’s just universally considered not true
  2. And as long as commodity markets oscillate between bubble and crash mode, price inflation/deflation is “transitory” and stable?
  3. And if you’re willing to take his word for it on forecasts that he’s had dead wrong, we can soft land this puppy perfectly

I really don’t hate the man. I Don’t Hate The Debate either. As an immigrant to what I genuinely felt was the last bastion of free-market of capitalism in the world, I just find being held hostage to an un-elected central planner who is obfuscating the truth un-American.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), Utilities (XLU), US Dollar Index, and the SP500 are now $1, $122.21-126.02, $34.74-35.68, $78.09-79.06, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Don't Hate The Debate - Chart of the Day

 

Don't Hate The Debate - Virtual Portfolio


THE M3: EUROPA VEGAS; FEB GGR

The Macau Metro Monitor, March 1, 2012

 

 

EUROPA VEGAS DRAWS MADRID AND BARCELONA INTO BATTLE OVER MEGACASINO The Guardian

"We believe we have the necessary package of agreements with the government which we need to provide assurance of success. We're just finalizing the last components of [Europa Vegas, the €17bn (£14.3bn) project ]," said LVS CEO Adelson.   Last week Adelson was in Spain again, looking at a vast beachfront stretch of land close to Barcelona's airport that has been offered to him despite environmental protection orders.

 

Both Madrid and Barcelona hope Europa Vegas will have the same success that Adelson has had in Singapore and Macau.  But opposition politicians in both cities are worried. "We don't agree with this sort of economic model, which would create a tax haven that comes close to being a form of slavery," said a socialist Madrid regional deputy José Quintana.  Local bishops in Madrid are rebelling against the project. "As a recent parliamentary session pointed out, gambling addiction brings with it an increase in illegal acts, suicides and bankruptcies," the bishopric of Alcalá said in a note to parishioners.

 

MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DSEC

Februrary GGR came in at MOP 24.286BN (HK23.58 BN, USD3.04 BN), up 22.3% YoY.

 

 


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