“For they have sown the wind, and they shall reap the whirlwind.”

-Hosea 8:7


It’s windy out there this morning. But, then again, if you look back at where Global Stock and Commodity markets all peaked in 2012, it’s been windy since March. Today is not a day to freak-out. It’s just another day to price in what’s been happening.


The tail ends of this morning’s Global Macro meltdown will have a lot more to do with Global Growth Slowing and hedge funds caught off-sides long oil than it does France. Friday’s US Employment report was a mess.


The aforementioned quote came from Seth Klarman’s year-end 2011 letter ($22B hedge fund, The Baupost Group). We were obviously not alone in realizing that crossing the Rubicon of sovereign deficit and debt ratios would structurally impair Global Growth. Klarman, Einhorn, Dalio – these are the new leaders of Wall Street 2.0 – they all nailed Growth Slowing too.


Back to the Global Macro Grind


If you weren’t long US stocks or commodities last week, you probably had a very good week. Everything is relative while you are watching the whirlwind, I suppose. Our allocation to Commodities in the Hedgeye Asset Allocation Model remains 0%.


As Growth Slows and hopes for an iQe4 upgrade abate, we think the US Dollar stops going down and that, in turn, will provide a much needed break for American and Global Consumers of food and energy alike. We call it Deflating The Inflation.


Now, to be clear, this was only the 2ndweek of the last 8 where the US Dollar didn’t drop. And, as long as we have Ben Bernanke promising Qe as the elixir of a centrally planned life, America’s currency will continue to have headwinds. That all said, bullish is as bullish does, and the US Dollar has been up for 4 consecutive days. That’s a good thing.


Dollar up (in the immediate-term) means most things stocks and commodities go down. We call it the Correlation Risk. It’s what most perma-bulls got addicted to at the Q1 tops of 2008, 2010, 2011, and now, evidently, 2012. When the Dollar Debauchery stops, beta chasing anything inflation stops. Inflation and Growth are not the same thing.


Lets score that statement in real-time. With the US Dollar Index up +1.0% last week, here’s what everything else did:

  1. US STOCKS: SP500 -2.4%, Nasdaq -3.7%, Russell2000 -4.1%
  2. COMMODITIES: CRB Index -2.6, WTIC Oil -6.1%, Copper -2.6%
  3. BONDS: both German Bunds and US Treasuries hit YTD highs last week (UST 10yr = 1.83% today)

Another way to look at how perverse Old Wall Street has become when begging for Bernanke’s Policies To Inflate is that the US Dollar Index has developed an immediate-term positive correlation to US Equity Volatility of +0.93.


Think about that.


A credible currency costs this market a lot more than central planners think. With the USD up +1% last week, US Equity Volatility (VIX) spiked +17.8% week-over-week. That’s not “price stability”, Mr. Bernanke. That’s not good.


Volatility kills returns. Ask anyone who has successfully not lost money versus their 2007 high-water marks how hard it’s been to generate absolute returns and you’ll get the point.


One of the best strategies to not lose money has been not getting picked off ahead of any of these major stock and commodity market draw-downs (Q1 to Q3 SP500 draw-downs of -15-30% in 2008, 2010, 2011).


That’s why we’re so focused on the slope of growth as opposed to the level. As growth slows, “cheap” stocks get cheaper.


Valuation is not a catalyst until growth either slows at a slower rate or you have some sort of “event” whereby a cheap asset gets something like a management change or a takeout bid.


The best news I can give you this morning is that Deflating The Inflation at the pump has the highest probability of giving the US Consumer in particular a much needed tax break for Memorial Day Weekend.


I’m not suggesting our Growth Slowing call stops right here, right now. I’m just reminding you how our globally interconnected economic growth and inflation model works. Unlike most models that have failed you, ours goes both ways.


Long and short. All great teams play this game both ways (even when it’s windy).


Immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, French Stocks (CAC40), and the SP500 are now $1, $112.45-118.18, $79.34-79.81, 3107-3279, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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Analyzing the Jobs Report Through the Lens of the General Election: April 2012 Edition

Conclusion: When analyzed with rigor, as well as in the context of presidential cycles, this employment report doesn’t bode well for the incumbent’s odds of winning reelection. Additionally, we continue to view the general election debate as supportive of USD strength from a rhetorical perspective.


As it relates to our intermediate-term outlook for US growth, there isn’t much analysis we can add to this morning’s Jobs Report beyond what has been signaled via the red on your screens today. In short, we continue to anticipate slowing economic growth domestically over the intermediate term.


It’s an election year, so we’d be lying if we said that we didn’t think the various government data collection agencies were incentivized to make the headline numbers appear shiner than they perhaps otherwise would. That said, however, we’re not in the business of making bold claims; rather, we prefer to apply analytical rigor to our hypotheses and draw educated conclusions from there.


Looking at the MoM payroll gains, the headline Non-Farm Payrolls number came in at +115k MoM on a seasonally-adjusted basis. This, does, however account for increasingly scrutinized seasonal adjustment factors, as well as the infamous NSA Birth/Death Adjustment, which generated +206k “jobs” – the highest number since MAY ’11 (interestingly, this sets MAY ’12 up for a potential acceleration, given that the headline APR # is likely to be revised down).


In order to net out these two effects, we subtracted the NSA B/D Adjustment from the NSA MoM NFP number and then took the YoY delta from that. This process resulted in a YoY decline of -317k jobs in APR – the slowest month since MAY ’11 and third-consecutive month of sequential slowing. Interestingly, employment gains on this metric peaked in JAN – right alongside the peak in our bullish Strong Dollar = Strong America thesis.


Analyzing the Jobs Report Through the Lens of the General Election: April 2012 Edition - 1


Looking at the Unemployment Rate SA, the headline number came in at 8.1%. By our math, which accounts for dramatic shifts in the size of the Labor Force by using a 10yr average Labor Force Participation Rate (which just ticked down to a 30yr low of 63.6%), the APR Unemployment Rate came in at 11.3%. At -322bps, this is the widest delta between our number and the government’s headline number in nearly 30yrs.


Analyzing the Jobs Report Through the Lens of the General Election: April 2012 Edition - 2


Analyzing the Jobs Report Through the Lens of the General Election: April 2012 Edition - 3


While an 8.1% headline Unemployment Rate is great ammo for the incumbent president to hit the campaign trail with this MAY, we hardly think the average American voter is stupid enough to believe this number at face value. Rather, we think masking the dismal state of the US labor market might actually upset those among us who are either educated enough to see through any “cosmetic enhancements” or unfortunate enough to bear the brunt of what is being enhanced. Still, it always helps to back such claims up with numbers, so we present the following six charts as evidence of what we feel the real state of the US labor market is – Quantifying the Zeitgeist, so to speak.


Each chart below features two recent Strong Dollar administrations and two Weak Dollar administrations – one from each party in both samples. The labels highlight where each figure was in OCT ahead of the general election (latest figure for Obama) and at the end of each president’s second term.


On a headline basis, Obama is trending quite nicely on the Unemployment Rate scorecard:


Analyzing the Jobs Report Through the Lens of the General Election: April 2012 Edition - 4


On an adjusted basis, however, Obama continues to trend sideways as the underlying state of the US labor market remains stuck in the mud:


Analyzing the Jobs Report Through the Lens of the General Election: April 2012 Edition - 5


Looking at unemployment through another lens (unemployed persons/working-age population), Obama continues to trend sideways here as well:


Analyzing the Jobs Report Through the Lens of the General Election: April 2012 Edition - 6


One plot that isn’t moving sideways is the percentage of working-age Americans who have left the Labor Force – now at new highs for the Obama presidency:


Analyzing the Jobs Report Through the Lens of the General Election: April 2012 Edition - 7


Turning to the US Dollar, the market price of America’s currency remains the #1 factor in our dynamic, 27-factor Global Macro model as it relates to predicting the slope of both growth and inflation expectations on an intermediate-term TREND basis. It’s no secret we favor Strong Dollar policies, given the historical correlation between expectations of USD strength backed by sound fiscal and monetary policy and the state of the US labor market. On this metric, Obama remains well shy of both Bush and Clinton heading into the NOV general election.


Analyzing the Jobs Report Through the Lens of the General Election: April 2012 Edition - 8


Given the Weak Dollar policy perpetuated by the Obama administration and his appointed central planners, it’s no surprise to see that the cumulative number of net job gains since the start of his presidency is a mere +152k. This trails Reagan (+16M), Clinton (+22.5M) and even Bush (+1M) – Obama’s Weak Dollar presidential counterpart.


Analyzing the Jobs Report Through the Lens of the General Election: April 2012 Edition - 9


All told, we continue to view the general election debate as supportive of USD strength from a rhetorical perspective. Using the grandest of all stages to expose the last two administrations’ critical failures in fiscal and monetary policy – specifically as it relates to the US labor market – is a strategy we expect the Republican opposition candidate (i.e. Mitt Romney) to develop and pursue over time. If implemented, this strategy would likely force both Obama (limited scope to make fiscally expansionary campaign promises) and Bernanke (gas prices?) into an increasingly smaller box over the intermediate term.


Have a great weekend with your respective families,


Darius Dale

Senior Analyst

Early Look

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The Economic Data calendar for the week of the 7th of May through the 11th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



Weekly European Monitor: Europe’s Muddled Face

European Positions Update: Long German Bunds (BUNL); Short France (EWQ)


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -2.4% week-over-week vs up +1.7% last week. Bottom performers: Russia (RTSI) -6.0%; Italy -4.1%; Cyprus -3.9%; Netherlands -3.1%; Germany -2.6%; Ireland -2.5%; Finland -2.4%; Spain -2.2%.  Top performers:  Denmark +1.9%; Poland +1.2%; Portugal +1.0%; Romania +40bps.  
  • FX:  The EUR/USD is down -1.23% week-over-week vs +1.03% last week.  W/W Divergences: CZK/EUR -1.36%, PLN/EUR -0.58%, RUB/EUR -0.34%, SEK/EUR -0.24%, NOK/EUR -0.00%, CHF/EUR 0.00%; GBP/EUR +0.56%
  • Fixed Income:  Greece’s 10YR government bond yield saw the biggest decline of -39bps to 20.57% week-over-week. Italy and Spain closely followed, declining -29bps for Italian yields to 5.42% and -25bps to 5.70% for the Spanish 10YR yield. Portugal was one country to see an inflection, gaining +23bps to 10.83%.

Weekly European Monitor: Europe’s Muddled Face - 11. yields



In Review:

Elections across Europe this weekend present the opportunity for new faces, but with them key challenges to Europe’s forward looking policy path on sovereign debt and banking risks. This weekend sees presidential elections in France and Greece, local and municipal elections in Italy, and a state election in Germany.


Of particular attention is the French presidential election on Sunday. While still a relatively tight race, it looks to result in a victory for the Socialist candidate Francois Hollande, especially as the incumbent Nicolas Sarkozy has failed to receive the vote of endorsement from minority parties in recent days. [Holland leads Sarkozy 53.5% to 46.5% according to TNS Sofres poll, and by a margin of 52.5% to 47.5%, according to BVA and Ipsos polling companies].


For France, we think Hollande’s socialist agenda presents a tax on the French state, already suffering with high debt levels, and a financial transaction tax (supported by both Mssrs. Hollande and Sarkozy) would put it on an uncompetitive island versus its neighbors. [For more details on Hollande’s agenda see our recent work including, “Stinky Cheese”; and Weekly European Monitors titled “Socializing Growth as Governments Crumble” and “Sarkophobia”].


Directly below we show a chart of the DAX (Germany), CAC (France), IBEX (Spain), and RTSI (Russia) on a year-to-date basis. Interestingly all markets topped on March 16th, but we think the underperformance of the CAC (down -11.5% since 3/16) versus the German market also corresponds with polls from February onward showing a more decisive spread in Hollande’s favor, as the market prices in Hollande’s agenda holding growth below already subdued levels.


Weekly European Monitor: Europe’s Muddled Face - 11. indices


For Europe we think a Hollande victory will spell the end of a strong working relationship between Sarkozy and Germany’s Chancellor Angela Merkel, or Merkozy.  Hollande’s socialist agenda cuts against the German voice that Europe needs to stay the course on fiscal consolidation. He is also against the Fiscal Compact, which Germany continues to support.  Broadly, we could well see a much divided voice on Europe’s go-forward strategy to assess its sovereign and banking issues from two main economic and political heavyweights. This bodes very poorly for policy when already Europe is competing across 17 to 27 parliaments for any given agreement.   


Greek elections are also critical. Despite the diminutive size of the economy, the last two years have proven out that even a small fry economy like Greece can inflect global markets. What’s unclear is if the two main parties, Pasok and New Democracy, out of ten parties running, will be able to secure a majority. [Note: opinion polls have not been published since April 20 because of local electoral laws.]  The two need 300 seats between them in order to renew their coalition government. If they lack a majority, there’s a high probability new elections will need to be called by the Fall, all of which puts the existing bailout packages, including terms for payments between the Greek government and troika, the European Commission, and the IMF, at risk. Another question that remains unanswered is the popular support of Greeks to stay in the Eurozone. It’s worth noting that New Democracy and Pasok could still hold a decent majority even if their combined share fell below 45% since the party that places first in the election automatically gets an extra 50 seats.


A German state election in Schleswig-Holstein may get less press behind France and Greece this Sunday, but will be critical for Chancellor Merkel, whose CDU party is vying to hold on to a share of power in the northern state (bordering Denmark) and to re-enter the government of North Rhine-Westphalia, the largest state, a week later. Opinion polls for Schleswig-Holstein show the CDU and opposition Social Democrats (SPD) in a dead heat at 31%, as Merkel begins to rethink her current and fledgling alliance with the Free Democrats (FDP) in favor of the SPD, in what is known as a the “grand coalition”.


Meanwhile Italy is holding local and municipal elections on May 6-7 in more than 1,000 cities. The outcome will be an important gauge of the mood since Mario Monti took office from Silvio Berlusconi and the massive austerity that Monti has carried through.


Switching gears, this week EU finance ministers failed to reach an agreement to toughen bank capital rules, namely to fix banks’ core capital requirements at 7% of their risk-weighted assets, due to stiff opposition from Britain in particular.   The ministers now aim for a deal at their next meeting on May 15. According to Bloomberg, agreement among finance ministers will serve as a basis for negotiations with the European Parliament, which could begin later this month. The EU faces a Jan. 1, 2013, deadline for adopting rules agreed on by the Basel Committee on Banking Supervision.


Finally, the broader data released in Europe this week (below under the section “Data Dump”), continues to show weakness in month-over-month readings in concurrent-to-forward-looking data. Final PMIs (Services and Manufacturing) for the Eurozone remain comfortably below the 50 line that marks contraction, as the Eurozone Unemployment Rate jumped 10bps to 10.9% and Eurozone Retail Sales were weak for the month of March.



Call Outs:

German banks reduce exposure to Spain: Bundesbank data showed that German banks have been reducing their exposure to Spain, which peaked at €200B at the start of 2008, and down 17% to €113B last year, marking the largest pullback in percentage terms by German banks from any of the peripheral Eurozone countries.


Spanish and Italian banks load up on sovereign bonds: According to ECB data (that captures the second LTRO) Italian and Spanish banks loaded up on government debt in March. Italian banks increased their holdings of Eurozone government bonds by a record €23.7B in April, bringing their total to €323.9B. Spanish banks increased their holdings by €20.1B, bringing their total to a record €263.3B.


Greece: ECB data showed that businesses and consumers stopped pulling money out of Greek banks in March. Private sector deposits in Greek banks increased 0.5% in March after a nearly -2.7% decline in February. However, they are still 30% below their December 2009 peak. The article also noted that private sector deposits in Portugal fell by 1.8% to their lowest level since May of last year, though Spain, Ireland, and Italy all posted small increases.


Italy plans spending cuts to avoid VAT increase: Prime Minister Mario Monti's technical government plans to cut public spending by €4.2B this year to keep Italy on track to meet its deficit targets (1.7% of GDP in 2012), rather than resort to a planned 2% increase in the VAT that could potentially deepen the recession.


Global investors resume retreat from Eurozone debt: Reuters noted that surveys of 55 leading investment firms in the US, continental Europe, Britain, and Japan revealed that global investors resumed their exit from the Eurozone bond market in April, cutting their holdings to the lowest level in a year. Holdings of Eurozone bonds in balanced portfolios fell to 24.5% last month from 26% in March and the 26.9% recorded at the height of the crisis in November. It added that European funds were the most bearish, as a monthly survey of 16 asset managers based in continental Europe showed a typical balanced portfolio held 55.1% of bonds in the Eurozone, down from 58.7% in the prior month.


CDS Risk Monitor:


Week-over-week CDS was down, but marginally compared to recent weeks, across the main countries we track.  Italy saw the largest declines in CDS w/w, -15bps to 437bps, followed by Ireland -14bps to 565bps; Portugal inflected to the upside gaining +14bp to 1009bps.


Weekly European Monitor: Europe’s Muddled Face - 11. cds   a


Weekly European Monitor: Europe’s Muddled Face - 11. cds   b


Data Dump:

Weekly European Monitor: Europe’s Muddled Face - 11. neu


Eurozone Unemployment Rate 10.9% MAR vs 10.8% FEB

Eurozone Retail Sales -0.2% MAR Y/Y (exp. -1.1%) vs -2.1% FEB   [0.3% MAR M/M (exp. 0.0%) vs -0.2% FEB]

Eurozone CPI Estimate 2.6% APR Y/Y vs 2.7% MAR

Eurozone M3 3.2% MAR Y/Y vs 2.8% FEB

Eurozone PPI 3.3% MAR Y/Y (exp. 3.4%) vs 3.6% FEB


Germany Unemployment Rate 6.8% APR vs 6.7% MAR revised to 6.8%

Germany Retail Sales 2.3% MAR Y/Y (exp. 0.5%) vs 2.1% FEB

Germany VDIK Apr new passenger car registrations +3.0 y/y


UK PMI Manufacturing 50.5 APR (exp. 51.5) vs 51.9 MAR (export orders off most since ‘09)

UK Nationwide House Prices -0.9% APR Y/Y vs -0.9% MAR  [-0.2% APR M/M vs -1.0% MAR]

UK New Car Registrations 3.3% APR Y/Y vs 1.8% MAR

UK Halifax House Prices -0.5% APR Y/Y (exp. 0.4%) vs -0.6% MAR

UK PMI Construction 55.8 APR vs 56.7 MAR

UK Money Supply -5% MAR Y/Y vs -4.1% FEB


Spain Total Housing Permits -36.2% FEB Y/Y vs -22.9% JAN

Spain Q1 Prelim. GDP -0.3% Q/Q (exp. -0.4%) vs -0.3% in Q4    [-0.4% Y/Y (exp. -0.6%) vs 0.3% in Q4]


Italy Unemployment Rate 9.8% MAR Prelim vs 9.6% FEB

Italy CPI Prelim. 3.8% APR Y/Y vs 3.8% MAR

Italy PPI 2.7% MAR Y/Y vs 3.2% FEB


Switzerland Retail Sales 4.2% MAR Y/Y (exp. 1.1%) vs 0.8% FEB


Ireland Industrial Production -5.7% MAR Y/Y vs -3.0% FEB

Ireland Unemployment Rate 14.3% APR vs 14.3% MAR


Sweden Household Lending 5% Y/Y MAR vs 5% FEB

Denmark PMI Survey 61.8 APR vs 53.0 MAR

Denmark Retail Sales 1.2% MAR Y/Y vs -0.2% FEB


Portugal Industrial Production -5.8% MAR Y/Y vs -7.2%

Portugal Retail Sales -8.9% MAR Y/Y vs -8.3% FEB

Greece Retail Sales -11.1% FEB Y/Y vs -8.8% JAN


Turkey CPI 11.14% APR Y/Y vs 10.43% MAR

Turkey Producer Prices 7.65% APR Y/Y vs 8.22% MAR


Interest Rate Decisions:

(5/3) ECB Interest Rate UNCH at 1.00%

(5/3) Czech Repo Rate Announcement UNCH at 0.75%



The European Week Ahead:

Sunday: French Election Run-off; Greece Parliamentary Election; Regional German Election in State of Schleswig-Holstein; Italian local and municipal elections


Monday: May Eurozone Sentix Investor Confidence; Apr. Germany Wholesale Price Index (May 7-12); Mar. Germany Factory Orders: Apr. UK BRC Shop Index, Lloyds Employment Confidence, RICS House Price Balance; Mar. Spain Industrial Output


Tuesday: Mar. Germany Industrial Production; Apr. UK BRC Sales Like-For-Like


Wednesday: Mar. Germany Exports, Imports, Current Account, Trade Balance; Apr. France BoF Business Sentiment; Mar. France Trade Balance; Apr. Greece Consumer Price Index


Thursday: May ECB Publishes Monthly Report; BoE Announces Rates; BoE Asset Purchase Target; Apr. UK NIESR GDP Estimate; Mar. UK Industrial Production, Manufacturing Production; Mar. France Industrial Production, Central Government Balance, Manufacturing Production; Mar. Spain House Transactions; Mar. Italy Industrial Production; Mar. Greece Industrial Production; Feb. Greece Unemployment Rate


Friday: EC Releases Economic Growth Forecasts; Apr. Germany Consumer Price Index – Final; Apr. UK PPI Input and Output; France Survey of Industrial Investments; Apr. Spain Consumer Price Index - Final



Matthew Hedrick

Senior Analyst


Employment data released this morning by the Bureau of Labor Statistics were relatively bullish for QSR versus Casual Dining.  However, hiring trends within the greater Leisure & Hospitality industry, show that restaurant hiring may slow more meaningfully in April.


Employment by Age


As the chart below shows, all of the age cohorts we track on a monthly basis, with the exception of the 45-54YOA cohort, continued to gain jobs in April.  Sequential slowdowns in the 45-54 and 55-64 YOA cohorts are not positive for casual dining.  The continuing strength in youth employment trends is encouraging for QSR.  Construction employment has not picked up and will not until there is a recovery in housing.  Career Builder CEO Matthew Ferguson spoke on Bloomberg this morning on the jobs data and said that his company’s surveys are showing that 53% of companies say they’re going to higher more entry-level college graduates this year versus last year.  That number was 40% a couple of years ago, according to Ferguson.




Hiring Trends Within the Restaurants Industry

Hiring trends within the restaurant industry remain strong as of the month of March (the full-service- and casual dining-specific data lags the broader data by one month).  As the chart below illustrates, however, is that employment growth in the broader Leisure & Hospitality space has been rolling over as of the month of April.  The Leisure and Hospitality data is released in line with the general employment data and gives us somewhat of an insight, at least directionally, into how hiring trends in the restaurant industry may look for April.




Consumer Confidence

The unemployment rate is obviously a statistic that has limited meaning for investors or analysts but consumer confidence is certainly impacted by headlines.  As the chart below highlights, the declining Labor Force Participation Rate is helping to keep the headline Unemployment Rate print lower than it otherwise would be.  Should the LFPR begin to rise, that would likely bring the headline Unemployment Rate higher absent a concurrent and substantial uptick in hiring.





Howard Penney

Managing Director


Rory Green


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