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# JOBLESS CLAIMS: HOW MANY JOBS CAN THE FED CREATE?

Takeaway: QE3 implications: Fed asset purchases are highly correlated with jobless claims, and jobless claims are highly correlated with the market.

How Does the Fed Measure Up as a Job Creator?

According to the Federal Reserve's website, one of its statutory objectives established by Congress is "maximum employment". The other two are stable prices and moderate long-term interest rates.

The chart below suggests a strong relationship exists between Federal Reserve securities holdings (QE) and employment. On the x-axis we're plotting Fed holdings of treasury, agency and agency MBS securities while on the y-axis we're showing rolling initial jobless claims. This is weekly data going back 42 months, which corresponds to the beginning of QE1. The R-squared is relatively high at 0.928, suggesting that if there's a causal relationship, then changes in the level of Fed holdings of government and quasi-government debt explain about 93% of the change in the level of jobless claims.

This means that it's possible to ask the question, assuming a causal relationship, how much does it cost the Fed to create a job? An important note here is that we're treating an averted layoff (i.e. a reduction of jobless claims by one) as the equivalent of a new job.

The equation reads y = -0.1397x + 751,424. This means that for every \$1 million dollars (x-axis is denominated in millions), the Fed can apparently reduce weekly jobless claims by 0.1397 people. The inverse of this (\$1mn / 0.1397) is \$7.16mn. In other words, it costs the Fed \$7.16 million dollars to reduce jobless claims by one person a week. Now, let's factor in that there are 52 weeks in a year, and that suggests that it costs the Fed \$137,692 to avert one annual layoff (create one new job). That sounds like a lot of money considering that median per capita annual income for employed people was \$41,663 in 2011. It costs the Fed 3.3x the average private sector annual income to prevent one private sector job loss.

It's widely held that the Federal government is inefficient, but just how inefficient is it? The Federal government spent an average of \$64,781 per person in payroll on civilian employees in 2010, according to the US Census Bureau. In other words, it costs the Federal Government about 1.5x as much to employ someone as the private sector, and it costs the Fed about 2.1x as much to avert a private sector layoff as it does for the Federal government to hire someone.

QE3 expectations are running high, and the below chart should provide a framework for thinking about its potential impact on jobless claims, when and if the size of the program is unveiled. For reference, a \$500 billion program could be expected to reduce weekly initial claims by 69,832. That would take claims down to around 300k from their current 370k. This would be good news for lenders on the credit front; though, curiously, we showed last week that in the last two years the correlation between the price level of the XLF and jobless claims has been effectively zero.

In the second chart below, we show the relationship between the S&P 500 and jobless claims - another tight fit. We showed last week that weekly initial claims and the S&P 500 have an R-squared of 0.8866 from 2007 through present. The equation there is y = -0.0021x + 2128.2. Assuming an initial claims level of 300k, the equation of the line would suggest an S&P 500 level of 1,498.2. Obviously, many things could cause these relationships to breakdown or decouple.

The Details on This Week's Print

Initial claims rose 6k to 372k last week from 366k, but only 4k after incorporating the 2k upward revision to the prior week's data. Meanwhile, rolling claims rose by 3.75k to 368k.

A bright spot in this past week's print is that for the second week in a row rolling NSA claims widened their YoY improvement, this week moving to -8.3%, vs -7.8% the week prior. This is a healthy sign.

Joshua Steiner, CFA

Robert Belsky

CLIENT TALKING POINTS

FIXING GREECE

Everyone wants to chat with Angela Merkel these days. Today, it is French President Francois Hollande, who is discussing potential outcomes for Greece and the possibility for a default as the country prepares to release a report next month detailing its finances. Greek Prime Minister Antonis Samaras will be meeting with Merkel on Friday. While no earth shattering headlines have come out of Europe in the past week, the fact of the matter is that the situation with the Eurozone continues to worsen as Germany’s ability to prop up the rest of the region dwindles. The only way out of this mess is to formulate a plan that will get countries like Greece and Spain back on a long-term, sustainable path to growth and fiscal sustainability.

Ahead of the Federal Reserve’s infamous Jackson Hole meeting next week, we went short gold and long the US dollar in the Hedgeye Virtual Portfolio yesterday. We believe that any action that the Fed may or may not take is already priced into the market for the most part and thus, the timing is right for us to initiate positions ahead of the meeting. While we’re of the opinion that the Fed will not introduce another round of QE, there’s not much to do at this point but watch and wait for the Fed to make its next move.

FAUSTIAN INVESTING

Goethe would be pleased with this term we’ve coined this morning. Like the book, Dr. Faust makes a deal with the devil and in exchange for his soul, experiences the pleasures of the world and unlimited knowledge. We think that buying equities with the VIX at 15 combined with no volume rallies is similar to making a deal with the devil or in this case, central bankers.

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ASSET ALLOCATION

Cash:                  UP

U.S. Equities:   Flat

Int'l Equities:   Flat

Commodities: Flat

Fixed Income:  DOWN

Int'l Currencies: UP

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TOP LONG IDEAS

NIKE INC (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

• TREND:  LONG
• TAIL:      LONG

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

• TREND:  LONG
• TAIL:      LONG

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

• TREND:  NEUTRAL
• TAIL:      NEUTRAL

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TWEET OF THE DAY

“"My mom used to tell us, Carl, put on your shoes. Oscar [Pistorius], put on your legs, so I grew up thinking I had different shoes." Fav #Olympic quote.-@LewisPugh

QUOTE OF THE DAY

“It is easier to forgive an enemy than to forgive a friend.”–William Blake

STAT OF THE DAY

\$1665/ounce. The price of gold, which is hitting 16 week highs amid hopes that the Federal Reserve will provide additional stimulus.

# Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

• LONG SIGNALS 80.33%
• SHORT SIGNALS 78.51%

# Faustian Investing

“In the end, you are exactly—what you are. Put on wig with a million curls,

Out the highest heeled boots on your feet, Yet in the end you remain just what you are.”

-Mephistopheles

Today is August 23rd.  To many of you stock market operators, it is just another day of finding compelling investments and tweaking those market exposures.  But for those of you who didn’t know, it is also National Compliance Officer Day.  So take a few minutes and go see that guy or gal who runs your compliance department, who you typically like to avoid, and give them a big thank you.

One of the first hires at Hedgeye was our compliance officer, Rabbi Moshe Silver.  Not only would I put his knowledge of the compliance up against anyone’s, but he is also kind of funny.  By kind of I mean he tells jokes, even if they aren’t all funny.  In all seriousness, Moshe, on behalf of all of us, thank you for your fine work as our compliance officer and teammate.

Now that I officially have my compliance officer off my back for a few months, let’s get back to the global macro grind.  A topic I want to start with today is China.  Maybe you’ve heard of it? It’s the country that has taken a massive amount of economic market share over the last two decades.  I just wanted to flag a few interesting nuggets from China over the last couple of days.  They are as follows:

• Chinese iron ore prices are at their lowest levels since 2009 and mills are beginning to default on supply contracts;
• Zhang Honxia, chairman of China’s largest cotton-textile maker, said: “The Chinese economy is only at the beginning of a harsh winter.  We are in worse shape now then compared with 2008-2009.”;
• Iron ore output in China is down 8.1% in July;
• The Shanghai Composite hit a three-year low yesterday;
• Japanese exports to China in July were -11% year-over-year; and
• The IMF has estimated that China’s capacity utilization has fallen to just 60% versus 80% in the pre-crisis era.

To be clear, I didn’t hand pick those data points to paint some bearish mosaic.  They are actually just what I wrote down in my notebook and, candidly, they are a little depressing as it relates to Chinese growth.

Last night’s PMI readings were of similar nature, if not worse, for China.  In aggregate, the PMI for August fell to 43.0 from 45.1 in July.  The specifics were even more dreary, new orders fell to 46.6 from 48.7, new export orders slumped to 44.7 (the lowest reading since the financial crisis), and inventories rose to 53.6.  Inventory up and orders down are a toxic mix for any company, let alone the world’s second largest economy.

Despite this plethora of negative data points, the equity markets keeps grinding higher.  Perversely, bad news is good news because bad news means more central bank easing.  The only term I can really think of for this type of investing (and no offense to those of you that are profiting from it) is Faustian Investing.

As many of you know, Faust is a protagonist in a classic German legend.  He is a very successful scholar, but like many successful people, he wants more.  As a result, Faust makes a deal with the devil and exchanges his soul for unlimited knowledge and worldly pleasures.  To me, buying equities at a VIX of 15.1 on hopes of further easing from central bankers feels like a deal with the devil.  Incidentally, there is a gentleman named Jon W. Faust who is a special advisor to the FOMC Board of Governors.  And I couldn’t make that up even if I wanted to …

Speaking of easing, many have asked our view of whether some incremental news on the monetary policy front could come out of Jackson Hole next week.  I will touch on that in a second, but let me just start with this, it is likely priced in.  The SP500 is up 11% in almost a straight line from the lows of the summer into Jackson Hole.  And from interacting with our many subscribers and even more followers on social media, this is the “catalyst” people are talking about.

Now, as to whether the Fed will actually do anything next week is a different question.  The key economic takeaway yesterday from the release of the FOMC’s minutes was that, “economic activity increased at a slower pace in the second quarter than earlier in the year and that labor market conditions had improved little in recent months.”  So as a result:

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

There you have it: the Fed is poised to ease!  I’m just not sure it will be at Jackson Hole next week.  The last time Bernanke announced action at Jackson Hole was QE2 in 2010.  At that point, equity markets had undergone a serious two month sell off, the government had just lowered its reading Q2 2010 GDP growth to 1.6%, and broad economic indicators were more anemic than they are now (we will have a detailed post on this later today).

So in summary, we think any potential action at Jackson Hole is both unlikely and also priced into equities.  To express this from a non-Faustian investing perspective, yesterday in the virtual portfolio we bought the U.S. dollar and shorted gold.

The greater question, though, is whether incremental easing will have any impact on economic activity. In the Chart of the Day below, we show both major recent Fed policy announcements in Q3 2007 and Q3 2010 and subsequent global economic activity.  In both instances, growth slowed and inflation accelerated.  Be careful what you wish for from those devilish central bankers.

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are 1, 113.71-116.12, 81.41-82.11, 1.23-1.25 (TREND resistance = 1.26), 1.66-1.75% and 1, respectively.

Daryl G. Jones

Director of Research

# Grass Money

This note was originally published at 8am on August 09, 2012 for Hedgeye subscribers.

“But you go through and scare the game and your cattle eat the grass so the buffalo leaves and the Indian starves.”

-Quanah Parker

That’s one of the most important quotes from one of the most important leaders of 19th century Western American history. I’d bet that a large percentage of Americans don’t know who the Principle Chief of the Comanches was (or why what he did for the US cattle business between 1870-1884 was so critical).

That’s why I read so much history. It helps me contextualize longer-term investing themes within the boundaries of how humans are forced to make short-term decisions. Ultimately, the Comanches traded their long-term liberties for short-term “Grass Money.” If you know anyone begging for bailouts, for the love of the country, please ask them to think about that.

As S.C. Gwynne reminds us at the end of Empire of The Summer Moon, the same kind of question should be on your mind this morning about devaluing your hard earned currency for the sake of short-term asset price inflations - “whether or not the Indians should do what everyone else in America did: lease.” (page 297)

Back to the Global Macro grind…

If Grass Money killed the buffalo, Fiat Fool Money is going to kill whatever is left of your “free” markets. On the heels of China and India reporting another round of #GrowthSlowing data overnight, “futures rally on hopes for Chinese stimulus.”

Alrighty then. I guess we’ll suspend economic gravity for another day.

Here’s the China data, in context:

1. Industrial Production growth = +9.2% y/y vs +9.5% in June of last year
2. Retail Sales growth = +13.1% y/y vs +13.7% in June of last year
3. Fixed Asset Investment growth = flat y/y at 20.4%

So,

A)     On the margin (where risk managing macro matters most) growth continues to slow

B)      These are hardly the “freak-out” recession or stagflation type levels of growth requiring a Geithner-like bailout

C)      Chinese stocks were up a whopping +0.6% on the “news” (still down -12% from where they were in May)

In May, not only Chinese growth, but global growth really started to accelerate on the downside. That’s why almost every major stock market in the world stopped going up in March-April. Markets discount future events.

But what are they discounting now?

A)     The long-term (TAIL) of lower-highs on lower volume (bearish)

B)      The immediate-term (TRADE) short squeeze (bullish)

C)      The ongoing hope that bailouts will earn everyone a year-end bonus sticker

Hope, of course, is not a risk management process. Timing matters. If you bought beta (the Russell2000) in March-April, you’ve lost money. If you bought the wrong stocks (MCD, PCLN, CAT, etc.) in March-April, you’ve lost a lot of money.

This morning you either buy or sell. And I think that if you buy beta today (SPY or IWM – pick your major US index), come September-October, you’ll lose a lot more money too.

Rule #1, don’t lose money.

Rule #2, don’t forget Rule #1.

Rule #3, don’t smoke Grass Money when central planners are trying to have you forget Rules #1 and #2.

My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and the SP500 are now \$1603-1624, \$108.03-113.18, \$81.72-82.64, \$1.22-1.24, 788-803, and 1386-1408, respectively.

Bes of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

# THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 23, 2012

As we look at today’s set up for the S&P 500, the range is 9 points or -0.25% downside to 1410 and 0.39% upside to 1419.

SECTOR AND GLOBAL PERFORMANCE

EQUITY SENTIMENT:

• ADVANCE/DECLINE LINE: on 08/22 NYSE -648
• Decrease versus the prior day’s trading of -344
• VOLUME: on 08/22 NYSE 600.77
• Decrease versus prior day’s trading of -6.27%%
• VIX:  as of 08/22 was at 15.11
• Increase versus most recent day’s trading of 0.60%
• Year-to-date decrease of -35.43%
• SPX PUT/CALL RATIO: as of 08/22 closed at 2.41
• Up from the day prior at 1.10

CREDIT/ECONOMIC MARKET LOOK:

• TED SPREAD: as of this morning 33
• 3-MONTH T-BILL YIELD: as of this morning 0.10%
• 10-Year: as of this morning 1.68%
• Decrease from prior day’s trading of 1.69%
• YIELD CURVE: as of this morning 1.43
• Unchanged from prior day’s trading

MACRO DATA POINTS (Bloomberg Estimates)

• 8:30am: Initial Jobless Claims, Aug. 18 wk., est. 365k (prior 366k)
• 9am: Markit US PMI Preliminary, Aug., est. 51.5 (prior 51.8)
• 9:45am: Bloomberg Consumer Comfort, Aug. 19 (prior -44.4)
• 10am: New Home Sales, July, est. 365k (prior 350k)
• 10am: New Home Sales, M/m, July, est. 4.3% (prior -8.4%)
• 10am: Freddie Mac mortgage rates
• 10:30am: EIA natural-gas change
• 11am: Fed to purchase \$1.5b-2b notes 11/15/2022-2/15/2031
• 1pm: U.S. Treasury to sell \$14b 5-yr TIPS (reopening)

GOVERNMENT:

• House, Senate not in session
• Quinnipiac U,, CBS News, NY Times discuss swing-state poll on Obama/Romney matchup conducted in Fla, Ohio, Wisc., 10am
• Federal Election Commission holds audit hearing on McCain- Palin 2008, McCain-Palin Compliance Fund, 10am
• FERC meets on natural gas, electricity market coordination in U.S. Southeast, 9am
• Oxfam America holds a conference call briefing on final rules for oil, mining transparency provision of Dodd-Frank Act Consumer Protection Act after SEC vote, 10am
• SEC holds closed meeting on enforcement matters, 2pm

WHAT TO WATCH:

• Best Buy said to resume talks with founder Richard Schulze about agreement to allow him to conduct due diligence
• Sales of new homes in U.S. probably climbed 4.3% in July
• Euro-area services, manufacturing contract for seventh mo.
• Pfizer lawyers to ask federal judge today to throw out claims the fen-phen diet pills caused fatal disease
• Hertz said to start soliciting Dollar Thrifty shareholders to gauge their selling price
• EU regulators resumed review of UPS’s bid for TNT Express; set new deadline of Dec. 20 to rule on deal
• David’s Bridal agreed to be acquired by Clayton, Dubilier for \$900m: N.Y. Post
• U.S. to expand missile defense system in Asia: WSJ
• Chesapeake Energy accused of letting CEO McClendon profit from Texas oil, gas wells while denying same chance to leaseholders on properties
• Qantas cancels order for 35 Dreamliners after annual loss
• Pilots at American Airlines, US Airways said to be considering terms of transitional labor pact if carriers merge
• Sirius holders lost bid to stop Liberty Media from seeking to acquire controlling stake
• SEC Chairman Mary Schapiro canceled vote on proposal to tighten money-market fund rules amid opposition
• Ancestry said to seek higher buyout bids from Permira, TPG
• Facebook won FTC approval for acquisition of Instagram
• Citigroup urges SEC to block Nasdaq’s Facebook plan to pay \$62m in compensation
• China manufacturing may contract at faster pace in August
• First Solar plans to develop solar farms in India
• Broadview Networks filed for bankruptcy protection yesterday
• Lawyers for Kazuo Okada return to Nevada court today to argue for access to Wynn Resorts’s book\ Brazil may need to import U.S. ethanol if fuel mix raised this year, CEO for Bunge in Brazil told Bloomberg News

EARNINGS:

• Big Lots (BIG) 6am, \$0.41
• Hormel Foods (HRL) 6:30am, \$0.41
• Patterson (PDCO) 7am, \$0.49
• Lancaster Colony (LANC) 7:16am, \$0.79
• Signet Jewelers Ltd (SIG) 7:30am, \$0.83
• Toro (TTC) 8:30am, \$0.63
• Micros Systems (MCRS) 4:02pm, \$0.60
• Aruba Networks (ARUN) 4:03pm, \$0.17
• Salesforce.com (CRM) 4:05pm, \$0.39
• Solera Holdings (SLH) 4:05pm, \$0.62
• Mentor Graphics (MENT) 4:15pm, \$0.17

CURRENCIES

EUROPEAN MARKET

ASIAN MARKETS

MIDDLE EAST

The Hedgeye Macro Team