Treasuries And Jobless Claims

If we take a look at the yield of the 10-year Treasury and put it up against non-seasonally adjust (NSA) jobless claims, you can see that there's a correlation. Yields on Treasuries tend to increase after a decrease in jobless claims and vice versa. When things are bad and jobless claims rise, so does the yield on the 10-year. Does this mean that investors are looking for allocate capital to a safe haven like Treasuries when things begin to go to hell in a handbasket? Could be.


Treasuries And Jobless Claims - image001

The Consumption Game

Client Talking Points

Strong Dollar

Our non-consensus bull case for US growth is something we've been talking about for awhile now and we think that it sells itself. It all revolves around consumption growth which in turn boosts US consumption stocks. The three pillars of our case are:


1.       #StrongDollar continues to make a series of higher-lows and higher-highs (vs its 40yr low in 2011)

2.       #CommodityDeflation continues to make a series of lower-highs and lower-lows (vs their 40yr high in 2011)

3.       US Consumption Growth occurs when the real purchasing power of the US currency rises




Changing Our Mind

What would get us to move away from our consumption plan outlined above? Easy: a change in monetary policy. If Bernanke starts printing money again, then we're in for a rough ride. Commodity prices would like jump as the US dollar was debauched. As US food and gas prices increase, consumption in the US decreases. It's as simple as that. We'll have to wait and see what the Fed is up to. Who knows if QE will ever truly end at this rate?

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.



With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


"Failed HLF distributor files first lawsuit post-Ackman @nypost Salesman’s suit says $HLF a ‘scheme’," -@hedgeygrl


"Laughing at our mistakes can lengthen our own life. Laughing at someone else's can shorten it." -Cullen Hightower


U.S. weekly jobless claims drop 42,000 to 346,000


One of the concerns we have expressed about MCD for roughly a year now is that self-inflicted wounds are taking a toll on operations and, as a result, speed of service. This has been a  factor behind the decline in the core business.


An article in today’s WSJ titled, “McDonald's Tackles Repair of 'Broken' Service” effectively confirms our thesis.


Our bearish bias in 2013 has been wrong with MCD up 15.1% year-to-date versus the S&P 500 up 11.4%.  We don’t see any need to change our thesis at this time. Today’s article in the WSJ, coupled with the company’s recent admission that they have a millennial problem, suggests that a snap back in sales is unlikely. 


As we have discussed in prior notes, the Street is anticipating an inflection point in McDonald’s sales trends in 2013.  In late 2003, the aggressive push for positive comparable sales growth via the dollar menu did not fix the underlying problems with the business.  The 2013 rehash of this strategy is also unlikely to work.  Sustainable top line growth will be achieved through driving efficiency in the stores, and clearly MCD still has issues to address.  Changes in service standards require training and investment and don’t happen overnight. As a result, addressing the current operational issues will have a negative impact McOpCo store-level margins and franchisee cash flow.



Howard Penney

Managing Director


Rory Green

Senior Analyst

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Feel The Heat

“Energy itself can neither be created nor destroyed, though its many forms can change.”

-Eric Chaisson


That’s pretty much the first law of thermodynamics. The second law is that there is a price that gets paid when forms of energy change – it’s called entropy.


Entropy is also a measure of the disorder (or randomness) of a system… some of these basic thermodynamic ideas date back to 1824, when a young French army officer, Sadi Carnot, sought to understand the rudimentary elements of an ordinary steam engine… engines work because of a temperature difference…” (Cosmic Evolution, pg 17)


In market speak, you might insert words for entropy like “rip” or “meltdown” – but, to me at least, it’s all about the same thing – rates of change. And for those of us who aren’t on the Federal Reserve’s inside information leak-list, I guess that’s the best we can do. Think for ourselves and do our own work in a transparent and accountable way.


Back to the Global Macro Grind


“Literally, thermodynamics means movement of heat” (Chaisson). That’s why I call my rants on Twitter #TweetHeat. And oh were the #PTCs (Professional Top Callers) feeling it yesterday.


No matter what your market views have been for 2013, here we are – at all-time closing highs for the SP500 (+11.3% YTD at 1587). Consumption stocks continue to lead the charge (Healthcare (XLV) +18.82%, Consumer Discretionary (XLY) +13.13%) and Commodities continue to get hammered.


To review our non-consensus bull case for US Growth (and US Consumption Equities):

  1. #StrongDollar continues to make a series of higher-lows and higher-highs (vs its 40yr low in 2011)
  2. #CommodityDeflation continues to make a series of lower-highs and lower-lows (vs their 40yr high in 2011)
  3. US Consumption Growth occurs when the real purchasing power of the US currency rises

Pretty simple really. Wouldn’t it be nice if the President of the United States (either Bush or Obama) A) understood these basic concepts and/or B) had financial advisors who made these fundamentals crystal clear to them instead of focusing on leaking whispers about their spurious economic policy conclusions to the #OldWall?


Sadly, Margaret Thatcher passed away this week. She taught Ronald Reagan a lot about the real purchasing power of a currency and the real impact a political leader can have with her people (trust) by calling out all the conflicted and compromised bureaucrats. She was a patriot. God rest her soul.


We made some sales yesterday (I don’t like buying on green), but what would really get me to change my economic and market views?

  1. If Bernanke debauched the Dollar again

What would happen if Obama let that happen?

  1. Dollar Down = Commodities Up
  2. Commodities Up = Food and Gas Prices Up
  3. Food and Gas Prices Up = US Consumption Growth Down

Again, it’s not that complicated. Really.


What is complicated is comprehending A) Bernanke’s “transparency” model (leaking information selectively? #embarrassing) and B) how he has the “best inflation track record of any central banker since World War II” (that’s what he whined to Senator Bob Corker, under oath, earlier this year after Corker called him the biggest dove in modern history).


Bernanke has been wrong on this growth forecasts at least 70-80% of the time since he took over at the Fed in 2006. Remember, he got the job with his thesis of the “Great Moderation” (he was talking about volatility, after it hit generational lows). Not that he wants to talk about that anymore (his Fed has overseen the Greatest Volatility in US market history).


Maybe we should call his legacy The Great Transparency? Nah. Maybe Obama should put Bernanke on trial. Give the man his fair share already. Please have him explain (with someone who isn’t a market moron asking the questions):


A)     How leaking information selectively = #transparency

B)      How the all-time lows in the US Dollar (2011) = #trust

C)      How the all-time highs in Commodities (2011) = #accountability


To be balanced, the all-time highs for Food Prices (globally) didn’t happen until 2012 (Gold and the CRB index topped in 2011). So there’s still a fighting chance that Bernanke’s final rip to all-time bubble highs comes in either his reputation amongst people who get paid to believe him or in the US Bond market.


Q: (in this order) Housing, Commodities, Gold, Food, Treasuries, and now US Stocks (again). He Who Saw No Inflation at the all-time highs in all of those prices – what does he really see? Or like any un-elected and un-accountable central planner with a confirmation bias, does he see what he wants to see?


What he’s hiding from you is what you really don’t trust. And you shouldn’t. Fortunately, the other side of his storytelling doesn’t cease to exist. The popping of his Commodity Bubble is becoming self evident. That’s a real-time Tax Cut. That’s good. So will be the inevitable leak that you are no longer getting 0% on your hard earned savings account.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, USD/EUR, UST10yr Yield, VIX and the SP500 are now $1, $102.39-107.38, $3.29-3.45, $82.24-83.34, 97.62-101.63, $1.27-1.31, 1.71-1.88%, 12.04-14.41, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Feel The Heat - Chart of the Day


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Fear's Furnace

This note was originally published at 8am on March 28, 2013 for Hedgeye subscribers.

“Paris is now become a furnace of politics.”

-Thomas Jefferson


In the beginning, Thomas Jefferson fell in love with France. Eventually, he started falling out of love with some of her socialized parts. The aforementioned quote came from a letter he wrote to a friend in 1788 and went on to add that “all the world is run politically mad. Men, women, children talk of nothing else.” (Thomas Jefferson: The Art of Power, page 215)


Only 225 years later, free-market capitalists living in Paris probably still feel the same. Jefferson’s timing was, as usual, prescient. On July 14, 1789, The People stormed the Bastille Saint Aintone and the French Revolution went full throttle. All the while, George Washington was officially named the 1st President of the United States.


Imagine Americans were paralyzed by France’s politics then inasmuch as our global crisis-seeking media is now? That’s no way to live. There’s always a crisis somewhere in this world. There’s a crisis developing for those calling for a US crisis too.


Back to the Global Macro Grind


Put another way, there is a crisis in the crisis. And, no, I am not saying that you shouldn’t be shorting countries whose economies have been socialized and compromised by modern Marxist regimes. If you are bearish on Italy, just short Italy.


Quantitatively speaking, Fear’s Furnace appears to be alive and well in Europe. Consider the following signals:

  1. The Euro remains in a Bearish Formation (Bearish across all 3 of our core durations: TRADE, TREND, and TAIL)
  2. Germany’s DAX just broke its immediate-term TRADE line of 7865 support (this week); TREND support = 7695
  3. Italy’s MIB Index (-6% YTD) has been bearish TRADE and TREND for over a month now (Italian CDS now > 300 too)

So that’s bad – for them. But is everything that’s bad for them bad for you? Hopefully you aren’t reading this letter from Milan. But if you are, A) I hope it’s from vacation and B) that great cup of coffee you are drinking is going to get more expensive before you finish it.


In Euros, that is.


When your currency starts to get torched by politicians, you probably should start freaking out. If people really start freaking-out about Europe, what they are going to do with their fiat moneys next is more of what they are already doing – buying American:

  1. European investors will buy US Dollars
  2. European investors will buy US Stocks
  3. European investors will buy US Treasuries

And while the last part of that is something I probably need to risk manage more aggressively now (the fund flow bid to US Treasuries), the first two parts of that (#StrongDollar, Strong US Equities) is more of what we continue to like anyway.


The reason why this is confusing consensus is that for the last 3 years, this is not the way that the Global Macro market worked. To review: 2010-2012 was the US Dollar Debauchery period of The Ben Bernank (i.e. the period where the entire capital market world learned to just front-run the poor guy’s Policies to Inflate).


Today, the marginal debaucherer of currency is Japan – and the to-be Bernanked (cutting rates to zero) zone is Europe. That, in turn, puts further downward pressure on Euros and Yens relative to Dollars – and puts purchasing power in the back pockets of Americans.




Or non, mes amis? Not so cool for those using the old correlation playbook of 2010-2012 either:

  1. Dollar Up = Stocks and Commodities Down, globally
  2. Dollar Down = Stocks and Commodities Up, globally

That’s when the game was less hard. Remember, “get the Dollar right and you’ll get a lot of other things right”? That’s still right, but in a completely different way:

  1. Dollar Up = US and Asian Stocks Up
  2. Dollar Up = Brazilian, Russian, and Emerging Market Stocks Down
  3. Dollar Down = Commodities and Basic Materials Stocks Up

I know. Up, Down – all around. This is enough to make a man mad. Just be thankful you aren’t trying to trade S&P futures on what some French dude down on the Eastern edge of Paris was whispering to the Old Media’s twitterati , circa 1789.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST10yr Yield, VIX, and the SP500 are now $1591-1617, $106.75-110.48, $82.79-83.66, $1.27-1.29, 1.84-1.96%, 11.31-14.29, and 1554-1568, respectively.


Happy Easter Weekend to you and your families,



Keith R. McCullough
Chief Executive Officer


Fear's Furnace - Chart of the Day


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