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ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION

CONCLUSION: As we advance through the presidential debate and nearer to the NOV general election, the dismal state of the US labor market will likely become an increasingly positive catalyst for the USD as a result of it being a negative catalyst for the incumbent and his Weak Dollar political agenda. Incremental easing out of the Fed remains a risk to our Strong Dollar thesis, though not one we see materializing in the immediate term.

 

As we wrote in the APR edition of this series:

 

“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.”

 

To echo Keith’s comments on our Daily Morning Macro Call (email if you don’t yet have access) a +69k MoM gain in US Nonfarm Payrolls (SA) is an “absolute disaster”. Perhaps the greater disaster was the consensus expectation of a +150k gain. Global growth data and various market-based indicators have been slowing/sounding the alarm bells for literally three full months. The US is not decoupling. Refer to our APR 13 2Q12 Key Macro Themes presentation for a refresher on our thoughts here.

 

To access the replay podcast and the presentation materials, please copy/paste the following two links into the URL of your browser:

As an aside, we find it critically important in an election year to dig into the employment statistics in order to handicap the presidential election odds – particularly given the potential for a political sea change and its impact on the USD, which remains paramount as a leading indicator in our model for helping our clients stay ahead of major asset price inflations/deflations globally.

 

The USD currently is in a Bullish Formation. To us, that is signaling some combination of a few key factors: 

  1. No iQE4 upgrade in the immediate term;
  2. Romney taking polling share from Obama, a proponent of monetary policy that augers heavily on US currency debasement; and
  3. Europe imploding. 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 1

 

As it relates to point #1, it is our view that the Bernank is handcuffed in the immediate term due to the political risk associated with pursuing an asset price inflation just ahead of or during the general election debate. A necessary ingredient of further monetary easing is likely fear mongering. Will Obama support such dire messaging on the campaign trail? That’s an important question to debate at the current juncture, but in reality Obama probably needs to spin the economy as positively as possible.

 

In addition to this political headwind, the Fed’s own measure of inflation expectations remain fairly elevated relative to the last occurrences of QE; suggesting to us that there is more downside to come in asset prices before they can justify acting. Even still, as Keith pointed out on our morning call this AM, the Federal Reserve defying reasonable expectations and jumping the gun with more “stimulus” is not an improbable scenario. Key upcoming catalysts on this front include: JUN 5 – Chuck Evans speaks to money marketeers in NYC; JUN 7 – Bernanke testifies to Congress on the US economic outlook; and JUN 20 – FOMC Rate Decision.

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 2

 

To point #2, we’re already seeing this show up in the data. On our own proprietary index, Obama’s odds of securing a reelection victory in NOV have fallen -720bps from their MAR 26 peak to 54.8%. This is coincident with Romney’s presidential odds on Intrade making higher-lows. Slides 38-42 of the aforementioned slide deck walk through the implications of this phenomenon in greater detail.


ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 3

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 4

 

To point #3, not much else needs to be added beyond Keith and Matt Hedrick’s consistent coverage of the ongoing crisis within the European Monetary Union. Rumors be what they may, but our research is are hard pressed to see the GOP signing off on providing the IMF with both consent and sufficient funding to bail out Spain – or any other country or financial institution for that matter. As recently as last month, Speaker Boehner (R-OH) was on CNBC firmly staking the Republican opposition to further bailouts, bazookas, etc. Furthermore, if Spain were going to be “saved” in the immediate term, you’d likely see it show up in various market based leading indicators, which, as of now, is not the case.

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 5

 

As we advance through the presidential debate and nearer to the NOV general election, the dismal state of the US labor market will likely become an increasingly positive catalyst for the USD as a result of it being a negative catalyst for the incumbent and his Weak Dollar political agenda. Incremental easing out of the Fed remains a risk to our Strong Dollar thesis, though not one we see materializing in the immediate term.

 

Jumping back to the MAY Jobs Report, in order to net out the effect of the now-infamous NSA Birth/Death Adjustment, we subtract the NSA B/D Adjustment from the NSA MoM NFP number and then take the YoY delta from that. On this metric, MAY registered a sequential acceleration from APR’s awful print:

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 6

 

Looking at the Unemployment Rate SA, the headline number ticked up to 8.2%. By our math, which accounts for dramatic shifts in the size of the Labor Force by using a 10yr average Labor Force Participation Rate (just above a 30yr low of 63.8% in MAY), the MAY Hedgeye-Adjusted Unemployment Rate came in at 11.0%, which ticked down sequentially from last month’s 11.3% reading:

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 7

 

The following four charts compare two Strong Dollar presidents vs. two Weak Dollar presidents in the context of reelection cycles. With the exception of the BLS headline number, President Obama’s employment scorecard improved, very marginally, MoM. That being said, the broader trend in each of our three metrics – which we feel is the “true” state of the US labor market – continues to track painfully in the wrong direction for the incumbent.

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 8

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 9

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 10

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 11

 

Lastly, the following table highlights the nominal and percentage amount of job creation that has occurred in the US economy under each president’s watch through an equivalent point in their respective terms. Through his 40thfull month in office, Obama has grown US employment by +0.1%. This is only lagged by Bush’s -0.9% growth through his 40th month in office.

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: MAY 2012 EDITION - 12

 

Have a great weekend, 

 

Darius Dale

Senior Analyst


Short Covering Opportunity: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)

 

I think it’s safe to say that consensus now agrees with Hedgeye on Growth Slowing. Now we have to deal with cleaning up their mess. Alongside immediate-term capitulation, we’re finally seeing a Short Covering Opportunity.

 

Across our core risk management durations, here are the lines that matter to me most: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE resistance = 1315
  3. Long-term TAIL support = 1283 

In other words, we’re right there – right on the TAIL line. And I am making my call to start covering your shorts. Our gross long exposure to this market remains very low.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Short Covering Opportunity: SP500 Levels, Refreshed - SPX


EMPLOYMENT DATA MIXED FOR RESTAURANT INDUSTRY

Employment data released this morning by the Bureau of Labor Statistics was mixed for the restaurant industry. Employment by age indicated that employment growth data continue to bode favorably for the quick service sector.  Food service industry hiring growth, however, is showing signs of rolling over.  A second sequential monthly decline in Leisure & Hospitality jobs in May is an important takeaway.

 

Employment by Age

 

As the chart below shows, all of the age cohorts we track showed positive growth in employment during the month of May.  Additionally, with the exception of the 25-34 YOA cohort, all of the data points registered sequential acceleration in the rate of employment growth from April to May.  Continuing strength in employment growth for the 20-24 YOA cohort is a positive for QSR.  We have favored quick service over casual dining for some time and, while that view is becoming more consensus, we still have more confidence in our favorite QSR names like JACK and SBUX than we do in our favorite casual dining names with the negative economic headwinds more likely to impact the more discretionary side of the restaurant industry.

 

EMPLOYMENT DATA MIXED FOR RESTAURANT INDUSTRY - Employment by Age

 

 

Industry Hiring

 

As implied by the Leisure & Hospitality employment data, which leads the specific food service data by one month, April saw year-over-year employment growth in the limited and full-service restaurant sectors slow sequentially.  The Leisure & Hospitality data for May implies flat-to-slightly up on a sequential basis for employment growth in the food service sector. However, May also saw the Leisure & Hospitality industry lose 9k jobs versus April.  This second successive month of job losses in the industry is a departure from the 20-40k job additions we saw from September through March.  In fact, this is the first time we have seen two consecutive months of job losses in Leisure & Hospitality since January 2010.

 

EMPLOYMENT DATA MIXED FOR RESTAURANT INDUSTRY - restaurant employment

 

EMPLOYMENT DATA MIXED FOR RESTAURANT INDUSTRY - leisure   hospitality

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


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This note was originally published at 8am on May 18, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I never see what has been done; I only see what remains to be done.”

-Buddha

 

I’ll have to differ with Buddha on the first part of that thought this morning. I can definitely see what has been done out there. After a -8.1% swan dive in the SP500 (-10.9% in the Russell) and a +71% rip in the VIX since the perma-bull March top, It’s Done.

 

Done. As in way oversold in the immediate-term done.

 

Back to the Global Macro Grind

 

We understand, fundamentally, why Asian, European, and US stocks have been going down since February-March. We understand, mathematically, why Commodity prices (and the Equities that track them) have been annihilated.

  1. #GrowthSlowing
  2. #DeflatingTheInflation
  3. #BernankeBubbles

Instead of banging your head against the wall trying to trade Facebook this morning, call up those hash tags on Twitter, and you’ll see that we’ve been leading on these topics for at least 3 months.

 

Way too many people confused Ben Bernanke’s January 25thPolicy To Inflate (commodities and stocks) as growth. Short-term pops in asset price inflation is not growth. It’s precisely that food and energy price inflation that perpetuated Growth Slowing.

 

If you get the Slope of Growth right, you’ll get a lot of other things right. If you get the slope (sequential direction) of both Growth and the US Dollar right, at the same time, you’re done.

 

Done as in, done selling high – going to Cash, done.

 

You can have the best bottom-up “ideas” in the world, but when The Correlation Risk goes to 1.0, that’s when almost everything you are long is done too. Done, as in the bad kind of done.

 

As of last night’s closing prices, here’s the immediate-term TRADE correlation between the big stuff and the US Dollar Index:

  1. SP500 = -0.98
  2. Euro Stoxx600 Index = -0.99
  3. CRB Commodities Index = -0.94

There is no “de-coupling.” There is no risk management in the broken sources who have led you over these cliffs in Q1 2008, 2010, 2011 … and now, again in 2012, either. “Again!” (Herb Brooks)

 

How many times do we have to allow our profession’s consensus brain-trust miss plainly obvious forecasts of rain while the macro data was soaking wet?

 

The short answer is that they are done too. The People don’t trust the Old Wall anymore. And they shouldn’t. It’s going to take a long time before we, as a profession, earn The People’s trust (and inflows into Equities) back.

 

On a cheerier note, this morning I’ll open with our lowest Cash (64%) and highest Equity (36%) positions in the Hedgeye Asset Allocation Model since January (over the course of the Growth Slowing cycle, we’ve moved from 0% US Equities to 24%, and maintained a 0% allocation to Commodities).

 

To be crystal clear on duration, I’m playing this for the bounce. When markets are viciously oversold like this on our immediate-term TRADE duration, that’s just what we do. It’s no different than when I was shorting the SP500 in March-April at immediate-term TRADE overbought signals. We aren’t perma anything. Risk works both ways. The risk now is to the upside.

 

Looking at immediate-term ranges in the LONG positions in the Hedgeye Portfolio, here’s where I stand in terms of immediate-term upside/downside in all 14 of our current positions:

  1. SP500 (SPY) = 1303-1344
  2. Consumer Discretionary (XLY) = $42.29-43.74
  3. US Healthcare (XLV) = $36.32-37.07
  4. Apple (AAPL) = $528-560
  5. China (CAF) = $19.41-20.44
  6. Brazil (EWZ) = 50.77-55.34
  7. Melco (MPEL) = 11.84-13.33
  8. Nike (NKE) = $104.14-107.79
  9. Lifepoint (LPNT) = $34.93-36.66
  10. Hologic (HOLX) = 16.81-17.71
  11. HCA Holdgings (HCA) = $25.21-26.19
  12. Urban Outfitters (URBN) = $25.46-27.26
  13. Liz Claiborne (FNP) = 11.78-13.11
  14. Starbucks (SBUX) = 51.63-56.14

It’s Done. I bought a handful of these positions in the last 2-days. #TimeStamped like any position you have taken. I don’t run from them at the lows. I buy them on red. All the while I’m trying to understand each and every factor of each position with my Research Team so that we can handicap the probability of where prices move within our ranges, across durations.

 

These ranges are immediate-term TRADE durations. From an intermediate-term (TREND) to long-term (TAIL) perspective, our models generate wider ranges of risk.

 

Generating good “ideas” is what every good research team in this business should be doing – both long and short. But having great performance on those ideas is highly dependent on getting the timing right. You’ll need a repeatable risk management process for that.

 

Our Research Team, led by our Director of Research, Daryl Jones, has just published their work on Facebook. If you’d like a copy, please email sales@Hedgeye.com. We won’t have a risk managed view of the stock until it opens and starts giving us price, volume, and volatility data.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1521-1628, $106.78-111.52, $80.49-81.84, $1.26-1.28, and 1303-1344, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

It's Done - Chart of the Day

 

It's Done - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

 

TODAY’S S&P 500 SET-UP – June 1, 2012


As we look at today’s set up for the S&P 500, the range is 21 points or -1.25% downside to 1294 and 0.36% upside to 1315. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 5/31 NYSE -124
    • Up from the prior day’s trading of -2264
  • VOLUME: on 5/31 NYSE 1327.72
    • Increase versus prior day’s trading of 72.73%
  • VIX:  as of 5/31 was at 24.06
    • Decrease versus most recent day’s trading of -0.33%%
    • Year-to-date increase of 2.82%
  • SPX PUT/CALL RATIO: as of 05/31 closed at 1.74
    • Down from the day prior at 2.35 

CREDIT/ECONOMIC MARKET LOOK:


#GrowthSlowing – pick your high-frequency data pt this week from the bomb of Pending US Home Sales (-5.5% Apr) to yesterday’s US PMI of 52 (down -7.4% vs last month) to South Korean exports being negative in May (3rd consecutive month of y/y declines) to UK PMI of 45.9 in May (vs 50.5 in April); the concept of “de-coupling” is as dead as Keynes in 2012. 

  • TED SPREAD: as of this morning 40
  • 3-MONTH T-BILL YIELD: as of this morning 0.06%
  • 10-Year: as of this morning 1.53
    • Decrease from prior day’s trading at 1.56
  • YIELD CURVE: as of this morning 1.28
    • Down from prior day’s trading at 1.30 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Nonfarm Payrolls, May, est. 150k (prior 115k)
  • 8:30am: Unemployment Rate, May, est. 8.1% (prior 8.1%)
  • 8:30am: Avg Hourly Earning (M/m), May, est. 0.2% (prior 0.0%)
  • 8:30am: Avg Weekly Hours, May, est. 34.5 (prior 34.5)
  • 8:30am: Personal Income, Apr., est. 0.3% (prior 0.4%)
  • 8:30am: Personal Spending, Apr., est. 0.3% (prior 0.3%)
  • 8:30am: PCE Core (M/m), Apr., est. 0.2% (prior 0.2%)
  • 8:58am: Markit US PMI (final), May, (prior 53.9)
  • 10am: ISM Manufacturing, May, est. 53.8 (prior 54.8)
  • 10am: ISM Prices Paid, May, est. 57 (prior 61)
  • 10am: Construction Spending (M/m), Apr., est. 0.4% (prior 0.1%)
  • 1pm: Baker Hughes rig count 

GOVERNMENT:

    • Senate not in session, House meets at 9am
    • Former Fla. Gov. Jeb Bush testifies at House Budget hearing
    • House Financial Svcs. panel holds hearing on cyber threats to capital markets, corporate accounts, 9:30am

WHAT TO WATCH:

  • Payrolls in U.S. probably picked up from smallest gain in 6m
  • Toyota, Honda may post biggest rises in monthly auto sales
  • Euro-area unemployment reaches record 11% led by Spain, Italy
  • China manufacturing expands at weakest pace since Dec.
  • Disney names ex-Warner executive as film operation chairman
  • Wal-Mart holds its annual meeting today
  • ASCO conference this weekend; watch for data on J&J’s Zytiga
  • Goldman CEO Blankfein to be witness at Gupta’s trial, U.S. says
  • BP to pursue sale of $20b stake in Russian producer TNK-BP
  • Thomas H. Lee Partners said to be in lead to buy Party City
  • Acer, Toshiba said to unveil Windows 8 tablets to challenge IPad
  • German note yield drops below zero for first time
  • Liberty tells regulators it wants control of Sirius XM radio
  • Google loses court case to dismiss claims over digital books
  • Bernanke, China Inflation, Diamond Jubilee: Week Ahead June 2-9 

EARNINGS:

    • No major earnings reports scheduled for today 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

Bernanke’s Bubbles – this remains our short Commodities (long Dollar) call for Q2; oil is capitulating to immediate-term TRADE oversold this morning ($84.68 WTIC), but oil is also crashing (down -23% from the Feb high). There are plenty of large exposures to Oil, Gold, etc in the asset management community to be very aware of here. 

  • Mittal’s Price Squeezed in $960 Billion Steelmaking: Commodities
  • Brent Oil Falls Below $100 a Barrel for First Time Since October
  • Gold Falls in London as Stronger Dollar Curbs Investor Demand
  • Copper Falls Amid Signs European Crisis Is Hurting Economies
  • Commodities Drop to Lowest Level Since October on China, Europe
  • Copper Bears Rise to Eight-Month High as Hedge Funds Bet on Drop
  • Commodity Revenues at Top Banks Decline as Volatility Drops
  • BP to Pursue Sale of TNK-BP Shares as Billionaire Partners Bid
  • China’s Lead-Battery Exports May Fall as Output Capacity Cut
  • Palm Oil Slumps to Five-Month Low as Chinese Demand Set to Fall
  • LME Said to Get Assurance From Bidders on Keeping U.K. Base
  • Barry Callebaut Says Cocoa Bean Processing May Decline in Europe
  • Corn Futures to Extend Slump to 20-Month Low: Technical Analysis
  • Commodities Extend Fall on China Slowdown
  • China May Resume Nuclear Plant Approvals as Cabinet Passes Plan
  • Rubber Falls to Six-Month Low as China’s Output Decelerates
  • Thailand, Indonesia Agree Steps Needed to Halt Rubber Decline 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – we sold our China long position last month because our research was signaling an immediate-term acceleration in China’s growth slowing pattern; this morning’s PMI of 50.4 (vs 53.3 in April) confirms that – all of Asia was weak (has been since Feb/Mar), and consensus is now forced to agree.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team



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.

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