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

CONCLUSION: The US labor market remains in support of our view that economic growth is slowing domestically. Furthermore, the underlying trends in the data do suggest that President Obama’s odds of securing reelection are potentially lower than meets the eye.

 

Our call for US growth to slow – both directionally and relative to expectations – has been consistent since mid-MAR and this morning’s Payrolls miss is in support of our view. While the headline number of +80k MoM is indeed a sequential acceleration from an upwardly-revised +77k last in MAY, it does register as 20% miss relative to consensus expectations of a +100k gain.

 

While we remain unsure as to why the sell-side continues to attempt to forecast a made-up government number, we are sure that a +84k MoM gain in Private Payrolls (down from an upwardly-revised +105k in MAY) is an apples-to-apples signal that growth in the private sector is tepid at best. As an aside, it remains our longest of long-term views that US growth won’t meaningfully rebound without arousing the animal spirits of the private sector – something that cannot be accomplished amid incessant bouts of central planning. This is counter to the consensus view that our sovereign debt-laden central government is an integral part of the US economy that must not be reigned in – or else…

 

For more on this key topic of domestic fiscal reform, including our updated thoughts on the Debt Ceiling, Fiscal Cliff and the general election, please tune into our 3Q12 Macro Themes Call next Wednesday at 11:00am. Email for more details.

 

Jumping back to the JUN jobs report, the key takeaway from our analysis is that the US labor market remains firmly stuck in the mud, failing to improve or outright deteriorating on a number of key metrics: 

  • Non-Farm Payrolls, Net of Birth-Death Adjustment YoY: -43k from +138k
  • Headline Unemployment Rate SA: flat at 8.2%
  • Hedgeye-Adjusted Unemployment Rate SA (10YR Average Labor Force Participation Rate): flat at 11%
  • Unemployed-to-Working-Age-Population Ratio SA: flat at 41.4%
  • Labor Force Non-Participation Rate SA: flat at 36.2% 

Not that anyone was expecting a major step forward, but it’s clear that the data firmly implies the US labor market remains far worse off than the headline Unemployment Rate (SA) of 8.2% would suggest. You know conditions are not good when an 8.2% Unemployment Rate is being touted as an indicator of “strength” on the incumbent’s campaign trail. Perhaps the populace buys it, perhaps they don’t; we’ll see come NOV 6th. For now, a rigorous analysis of the data (as opposed to overreacting to the headline print) would suggest that Obama’s odds of reelection may be less than indicated by various polls, as well as the latest reading from our Hedgeye Election Indicator.

 

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

 

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

 

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

 

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

 

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

 

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

 

All told, the US labor market remains in support of our view that economic growth is slowing domestically. Furthermore, the underlying trends in the data do suggest that President Obama’s odds of securing reelection are potentially lower than meets the eye.

 

Darius Dale

Senior Analyst


EMPLOYMENT DATA: NEAR-TERM POSITIVE FOR RESTAURANT STOCKS

Employment data released by the Bureau of Labor Statistics is a positive for the restaurant industry.  The third consecutive month of disappointing employment growth in Leisure & Hospitality merits caution over the longer term, however.

 

Employment by Age


Employment growth among the 20-24 YOA age cohort, which is important for the QSR industry, was robust in May.  Employment growth among the other age cohorts was also strong, which is broadly encouraging for the industry.  The 20-24 YOA group was the only one shown in the chart below that saw a (marginal) sequential deceleration in employment growth.

 

EMPLOYMENT DATA: NEAR-TERM POSITIVE FOR RESTAURANT STOCKS - Employment by Age

 

Industry Hiring

 

As implied by the Leisure & Hospitality employment data, which leads the narrower food service data by one month, employment growth in the limited- and full-service food industries continued to decelerate in May.  On a sequential basis, the Leisure & Hospitality employment data registered a month-over-month gain of 13k, following two months of sequential job losses in the sector.  Looking at the second chart, below, it is clear that hiring in the Leisure & Hospitality industry has slowed over the last three months.  A continuation of this trend will be a negative sign for intermediate- and long-term demand.

 

EMPLOYMENT DATA: NEAR-TERM POSITIVE FOR RESTAURANT STOCKS - restaurant employment

 

EMPLOYMENT DATA: NEAR-TERM POSITIVE FOR RESTAURANT STOCKS - leisure   hospitality

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


CAKE: Not Worth Eating

Love it or hate it, The Cheesecake Factory (CAKE) faces a tough economic climate heading into the second half of 2012. The company reports earnings on July 20 and according to our estimates, CAKE will miss same store sales by the 2% consensus on the Street which currently stands at +1.95%.

 

Interestingly, investors seem to have taken a liking to CAKE as of late. Over the past week, the stock has outperformed the S&P 500 by 3.9% and the Casual Dining Index by 2.25%. A key data point to examine is the ICSC Chain Store Sales Index, which is a compilation of publicly-available sales for retail chain stores.

 

 

CAKE: Not Worth Eating - CAKE SSSjuly20

 

 

Looking at the above chart, you can see the recent decline in the ICSC index comparable to CAKE same store sales. That gap is indicative of the miss we expect of CAKE as most Cheesecake Factory stores are located in malls. The decline in retail could be construed in a way that less people are visiting malls and thus, are visiting Cheesecake Factory less. Nothing is certain until July 20, but we are not optimistic about CAKE’s report


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20 Proprietary Risk Ranges

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REBAR: Big Trouble In Little China

Since as far back as 2009, everyone from politicians to fund managers have been shouting from proverbial rooftops that growth is slowing in China. It’s no secret that we think growth is slowing across the globe as well – growth implies a sustainable economic model. And with the Chinese rate cut this week, it’s just yet another data point that backs up our case.

 

Chinese construction is what everyone keeps their eye on. When construction slows, commodities like copper and rebar will see their price drop significantly, regardless of what Federal Reserve Chairman Ben Bernanke has up his sleeve. It has to do with supply and demand, no matter how outrageous that might sound these days.

 

 

REBAR: Big Trouble In Little China - CHINA RebarPrices

 

 

The above chart tells us a bit about what’s going on China. Essentially, this is the story:

 

• Real rebar prices continue to decline, suggesting weak Chinese construction activity

• This is negative for construction equipment producers, many of which have become increasing dependent on sales to China (e.g. Komatsu)

• Chinese metal demand has been heavily driven by construction activity.  Weakening could reduce global mine capital investment, impacting equipment suppliers like CAT and Sandvik.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 6, 2012

 

As we look at today’s set up for the S&P 500, the range is 17 points or -0.63% downside to 1359 and 0.62% upside to 1376.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels

 

THE HEDGEYE DAILY OUTLOOK - sector table

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 7/5 NYSE: -371
    • Versus prior  trading day +1773
  • VOLUME: on 7/5 NYSE 684.1
    • Versus prior trading day 466.46
  • VIX:  on 7/5 closed at 17.50
    • Change versus most recent trading day of +5%
    • Year-to-date change of -25.21%
  • SPX PUT/CALL RATIO: as of 7/5 closed at 1.50
    • Versus prior trading day 1.40                     

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning: 38.35
  • 3-MONTH T-BILL YIELD: as of this morning 0.07%
  • 10-Year yield: as of this morning 1.58%
    • Versus prior trading day 1.60%
  • YIELD CURVE: as of this morning 1.30
    • Versus prior trading day 1.31

 

MACRO DATA POINTS

  • 8:30am: Change in Nonfarm Payrolls, June, est. 100k (prior 69k)
  • 8:30am: Chg in Private Payrolls, June, est. 106k (prev 82k)
  • 8:30am: Unemployment Rate, June, est. 8.2% (prior 8.2%)
  • 8:30am: Avg Hrly Earn M/m All Emp, June, est. 0.2% (prior 0.1%)
  • 8:30am: Avg Weekly Hours All Emps, June, est. 34.4 (prior 34.4)
  • 8:30am: Underemployment Rate (U6), June (prior 14.8%)
  • 10:30am: EIA storage data
  • 11am: Fed to sell $7b-$8b notes in 1/15/2013 to 6/30/2013 range
  • 1pm: Baker Hughes rig count

 

GOVERNMENT

  • President Obama signs transportation, student loan bill
  • House, Senate not in session
  • CFTC holds closed meeting on enforcement matters, 10am

 

WHAT TO WATCH

  • Lagarde: IMF to Cut Growth Outlook as global economy weakens
  • June U.S. jobs gain probably capped worst quarter since 2010
  • Amazon said to plan smartphone to vie with Apple’s iPhone
  • Seagate says 4Q prelim. sales, gross margin missed forecasts
  • Samsung shrs decline after quarterly sales miss ests.
  • Yahoo said to consider Hulu’s Kilar for CEO
  • U.K. producer prices fall most since 2008 as oil costs drop
  • Italian cabinet approves $32b in spending cuts through 2014
  • Buffett, Zuckerberg, Gates to attend Sun Valley conference
  • China GDP, JPMorgan, Air Show, Wimbledon: Wk Ahead July 7-14

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Sugar Bulls Strongest in Six Months on Brazil Rain: Commodities
  • Copper Declines for a Second Day Before U.S. Employment Report
  • Oil Drops Before Payrolls on Concern Economy Failing to Recover
  • Corn Declines as Rally to Nine-Month High Seen Curbing Purchases
  • Gold Declines for a Second Day as Dollar Strength Curbs Demand
  • Sugar Heads for Second Weekly Gain in New York on Brazil Rains
  • Soybean Meal Has Biggest Commodity Advance on Demand From China
  • Indonesia’s Tin Exports to Decline as Low Prices Curb Output
  • Copper-Scrap Discount May Widen as Prices Encourage More Supply
  • BP’s LNG Expansion in Tangguh to Target Japanese, Korean Buyers
  • Japan Atomic Disaster Called ‘Man-Made’ by Investigators: Energy
  • Coffee Crop in India Seen at Record Poised to Boost Exports
  • Gold ETP Assets Advance $2.2 Billion in June, BlackRock Says
  • Copper May Advance 6.7% Near Moving Average: Technical Analysis
  • Fuel Oil Returning to Profit on Iran Supply Cut: Energy Markets
  • Oil May Rise on Signs of Recovery, Inventories, Survey Shows

 

THE HEDGEYE DAILY OUTLOOK - commodity

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - currency

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST (HEADLINES FROM BLOOMBERG)

  • Corporate Sukuk Yield Premium Falls on Earnings: Islamic Finance
  • Oil Extends Decline After U.S. Payrolls Count Misses Estimates
  • Axius CEO Kaufmann Indicted in Alleged Scheme to Bribe Brokers
  • Fuel Oil Returning to Profit on Iran Supply Cut: Energy Markets
  • Sugar Bulls Strongest in Six Months on Brazil Rain: Commodities
  • Amazon Said to Plan Smartphone That Would Vie With Apple IPhone
  • Draghi’s Move to Zero Rates Fuels Talk of QE Entering ECB Armory
  • Turkey Agrees With Iraq on Oil Pipeline From Basra, Yildiz Says
  • Made-in-London Scandals Risk City’s Reputation as Finance Center
  • Carry Trade Means 10% Lira Bond Returns Persist: Turkey Credit
  • Middle West Oil Menaces Middle East Dominance: Cutting Research

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

The Hedgeye Macro Team


No Advantage

This note was originally published at 8am on June 22, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It is the greatest of all advantages to enjoy no advantage at all.”

-Henry David Thoreau

 

Thoreau had a lot more time to think and write than many of us.  He actually went completely off the grid and lived in a little self built hut on Walden Pond for two years to focus his thoughts.  Unfortunately, going into the woods for a couple of years is not really practical for those of us who manage global macro risk daily, but as a result of Thoreau’s sojourn we have some very insightful writings from him.

 

A couple of days ago we made the somewhat controversial call to go to 100% cash.  In fact, Keith actually titled the Early Look just that, “100% Cash”.   To the Thoreau quote above, being in cash is not really a relative advantage as cash inherently generates no return. We get that.  In economic and market environments like the one we are in, though, sometimes the best advantage is, in fact, to have no advantage at all.

 

Now, obviously, most investors by mandate can’t go to all cash.  The point was that regardless of your mandate, our view was that it was time to get out of the way and take the chips off the table.

 

Simply, and much like what Baupost’s Seth Klarman articulated in his recently quarterly letter, we are happy to be on the sidelines when investing becomes based on speculating what the next round of government intervention will be.  Will QE3 be introduced? Will Operation Twist be extended? Will Operation Twist end?  It’s all speculation, it’s all a loser’s game and none of us have an advantage.

 

The original Money Honey Maria Bartiromo was kind enough to have me on for the Closing Bell to discuss our call two days ago.  As I highlighted in the interview, this is an environment that requires tactical investing.  The gentleman I appeared with, after trying to give me a hard time about us going to cash, also eventually agreed (five minutes after he disagreed) that this environment requires tactical investing versus a long term buy and hope strategy.

 

As many of our long term subscribers know, we have two key products that provide a clear indication of where we stand in terms of asset classes and specific stock and macro investments, these are: the Virtual Portfolio and the Hedgeye Asset Allocation model.  Over the last couple of days as prices have corrected, we’ve adjusted our stance slightly and have added the following positions:

 

1)      Bought a yield curve flattener via the etf FLAT – The thesis here is pretty simple.  The Federal Reserve is extending “Operation Twist”, which inherently drives down the long end of the curve.  In general we do not mind fighting the Fed, but in this instance we recommend investing with the Fed as its just math that the yield curve should revert to the mean with the Fed’s aggressive buying.  This reversion to the mean potential is highlighted below in the Chart of the Day. 

 

2)      Bought Target Corporation (TGT) – With oil down dramatically over the past three months, this benefits retailers such as Wal-Mart and Target, who will gain share of wallet from consumers via their reduced spend on energy.  Also with the ongoing disaster at J.C. Penney (we are hosting a lunch in New York today to discuss this short idea so email sales@hedgeye.com if you’d like to attend), TGT should and will take share.

 

3)      Bought Under Armour (UA) - Growth is hard to come by in this environment and our retail team thinks that UA will print $3 billion in revenue by 2014.  This would be a doubling of revenue from 2011.  Meanwhile, in the short term UA will be comparing against a high inventory build a year ago in the upcoming quarter, so margins should look relatively good.

 

In global macro news this morning, the key event over night was the much anticipated downgrade of 15 global banks.  Our Financials Sector Head Josh Steiner wrote the following on this last night:

 

“While there's a small aftermarket "buy the news" rally taking place, we'd caution against getting too excited. First, consider what ratings downgrades mean. At their heart, they're saying that default probabilities of 15 of the largest banks around the world are higher now. In other words, the world has become a riskier place. While this is something the market's known for a while and the ratings agencies, as usual, are just catching up, recall one of the themes from our calls with Peter Atwater regarding Hardwired Ratings Linkages Lead to Hardwired Financial Contagion. At its core is the concept that sovereign and bank ratings are increasingly interwoven with growing mutual dependency/causality while Aaa rated entities are becoming fewer and less willing to do "whatever it takes". Considering how many of these firms' long term issuer ratings are still on negative outlook, and the growing uncertainty facing the sovereign debt of countries like Italy and Spain, we wouldn't uncork the champagne just yet.”

 

In the short term, as in today, to Josh’s point we may see a relief rally, but over the longer term the implications of ratings downgrade do remain ominous.

 

In Europe today, Hollande, Merkel, Rajoy and Monti are meeting in Rome ahead of the EU Summit next week. The proposal to allow the EFSF/ESM to buy peripheral sovereign debt will remain in focus with the key question being whether Merkel will continue to resist pressure. 

 

The EU Summit next week will be the focus of market action and speculation around government intervention next week.  A major investment bank is out this morning saying that it has heard from participants at the recently ended G-20 meetings in Mexico that there could be a “bazooka” of sorts in the works.

 

We have no advantage on the next round of government intervention, but we would refer you to Einstein’s definition of insanity:

 

“Insanity : doing the same thing over and over again and expecting different results.”

 

Indeed.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1570-1591, $89.92-95.58, $82.08-82.82, $1.24-1.27, and 1318-1333, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

No Advantage - Chart

 

No Advantage - vp 6 22


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