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INITIAL CLAIMS: NO IMPACT YET ON THE LABOR MARKET FROM RISING RATES

Takeaway: The labor market improved at an accelerating rate again this week on an NSA basis. Meanwhile, the yield curve has hit 217 bps.

A Steadily Widening Divergence

No real change this week vs. the trend we've been seeing over the last several weeks in claims. NSA data continues to improve at an accelerating YoY rate, on both a 1-week and 4-week rolling-average basis. NSA claims were 9.6% better than at this time last year, and, by coincidence, the 4-week moving average was also better by 9.6%. These represent sequential improvements vs. 7.7% and 9.1% YoY changes, respectively. The bottom line is that the accelerating improvement we've been seeing for the last few months continued last week. We continue to hypothesize that one contributing factor is Obamacare, which is causing high-employment, relatively low-wage industries like restaurants and hospitality to replace 3 full-time employees with 4 part-time employees to stay underneath the 30-hour ACA cutoff. We've been seeing and hearing a fair amount of anecdotal evidence in support of this idea.

 

On the seasonally-adjusted side, the data wasn't bad, but it wasn't great either. Essentially rolling SA claims went sideways again this week - a growing divergence vs. the trend in the NSA data - consistent with prior years. This trend should continue for two more months, when it peaks in August. Thereafter, we'll begin to see the reversal - SA claims data will begin to appear stronger than NSA data and the sector should be very strong in response.

 

The Data

Prior to revision, initial jobless claims fell 8k to 346k from 354k WoW, as the prior week's number was revised up by 1k to 355k.

 

The headline (unrevised) number shows claims were lower by 9k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.75k WoW to 346.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -9.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -9.1%

 

INITIAL CLAIMS: NO IMPACT YET ON THE LABOR MARKET FROM RISING RATES - 1

 

INITIAL CLAIMS: NO IMPACT YET ON THE LABOR MARKET FROM RISING RATES - 2

 

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Yield Spreads

The 2-10 spread rose 11.8 basis points WoW to 217 bps. 2Q13TD, the 2-10 spread is averaging 169 bps, which is higher by 2 bps relative to 1Q13.

 

INITIAL CLAIMS: NO IMPACT YET ON THE LABOR MARKET FROM RISING RATES - 15

 

INITIAL CLAIMS: NO IMPACT YET ON THE LABOR MARKET FROM RISING RATES - 16

 

Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT


Volatility (Still) Breeds Contempt

Client Talking Points

ASIA

Equities are still all over the place here. Volatility should continue to breed contempt. China was down small (-0.1%) overnight while Hong Kong was up for Day Two of a bounce (+0.5%). Since every major index in Asia is bearish TREND right now, tonight’s move in the Hang Seng will be a very important tell. Failing here? That would be a very bad thing.

EUROPE

We are already seeing European Equities fail after their 2-day no volume bounce. Say it ain't so, but the train wreck that is Greece is actually crashing again. Greece down -2.7% this morning and -29% since May 17th. #Nasty. Spain is another loser down -1% after failing at 7887 resistance (IBEX). Meanwhile, in Germany TREND resistance for the DAX remains intact at 8019.

UST 10YR

It is still all about the speed of the move (higher) on the long end of the curve. Today’s US jobless claims print is the most important (current) US economic data point of the week. Since US consensus still seems afraid of being long growth, it will be interesting to see what another positive surprise in claims would do to stocks (yields up). Of course, if claims miss, stocks could go down on that too.

Asset Allocation

CASH 65% US EQUITIES 10%
INTL EQUITIES 5% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

Bill Gross is officially talking up what's best for his own book, not his country #sad @PIMCO

@KeithMcCullough (commenting on Gross' statement earlier this morning that the 10-year Treasury may be as much as 35 basis points too cheap.)

QUOTE OF THE DAY

Every strike brings me closer to the next home run.

– Babe Ruth

STAT OF THE DAY

Worldwide arms exports are surging, up nearly 30% since 2008, according to a new report from defense analyst IHS Jane's. Weapons exports totaled $73B in 2012, up from $57B four years earlier. Total worldwide defense spending in 2012 was $1.6 trillion. 



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Hogtown

“There is thy gold, worse poison to men’s souls,

Doing more murder in this loathsome world,

Than these poor compounds that thou mayst not sell.”

-William Shakespeare

 

My colleagues and I ventured up to Toronto (nicknamed Hogtown due to the vast pork processing plants that used to call Toronto home) yesterday to meet with some old clients and some new prospects.  The first prospect’s office we strode into had a massive solid gold coin and paintings from French Impressionists on the walls.  Clearly, the commodity, and in particular gold, boom, has been good to Canadian investment managers.

 

As we made our rounds yesterday, it became increasingly obvious that Canadian money managers were also doing their utmost to diversify from this commodity heritage and in the short run that means diversifying more into U.S. equities.  In part, this was actually due to a perception of potential strength in the U.S. dollar, a theme which is very near and dear to our hearts, of course.

 

One manager actually made a very interesting point on gold companies, which was that as the majors were being increasingly forced to hedge out gold prices, they put their company at even greater risk in the future if, and when, gold prices and operating costs increased.  His view is that intrinsic value of many major Canadian gold companies is substantially lower than where Mr. Market is currently valuing them.

 

Given how much fun we’ve had analyzing the hedging strategies of LINN Energy, the Canadian gold sector may be an interesting short research project to work on next.  But as always, while you can marry your longs, it’s highly recommended to only date your shorts.

 

Back to the global macro grind . . .

 

Despite a little bit of a market freak out last week, global markets are seemingly stabilizing.  An important tell for us on this front is sovereign debt markets in Europe where, logically, risk capital seems to flee first.  After peaking over 5% on Monday, Spanish 10-year bonds are back down well below 5% and on their way back to 4.5%.

 

Admittedly, though, even as some of the risk has decreased over the past couple of days, the low volume price recovery in many key markets has been uninspiring.  In Asia, the bounce has been very uninspired with China down small over night and Hong Kong only up 0.5% for the second day of its bounce.  In Europe, Greece is back in crash mode as is down -2.7% this morning.

 

Speaking of yields, the future direction of yields on U.S. Treasuries is one of the topics our international clients are increasingly focused on, which is no surprise given the blood bath that has occurred in the U.S. government debt market over the last thirty days.  But, where will yields go from here?

 

Many bond experts had been adamant that the Federal Reserve would defend the 2% line on the 10-year.  Clearly, that was about as defendable as a Canadian Football League offense against a NFL defense.  In the Chart of the Day, we look at the yield on the 10-year going back ten years.   On a basic level, if the market truly begins to price in the end of quantitative easing, the blood bath in the bond market is likely in early days. 

 

Conversely, as interest rates go up in the U.S., this should bode well for the U.S. dollar especially given the positive relative position versus the Yen and the Euro.  In Japan, to generate anywhere close to 2% inflation will require substantially more quantitative easing.  Meanwhile in Europe, the continued economic bifurcation between countries makes it unlikely the ECB will tighten anytime soon.  On the last point, the best example of this is like the gap in unemployment rate of Germany at 6.8% and the rest of the Euro zone at 12.2%.

 

Another key theme that will continue to play out if rates in the U.S. increase and the U.S. dollar naturally strengthens is Emerging Markets outflows.  In fact, in the strong dollar era from 1995 to 2001, the SP500 CAGR was 15.8% and the CAGR of the MSCI EM Index was -5.3%.  Conversely, in the weak dollar period of 2001 to 2011, the SP500 CAGR was 1.4% and the MSCI EM Index returned 14.5%.  Now clearly, there were and are other factors at play, but the U.S. dollar will continue to be one of the most influential.

 

As it relates to interest rates, today’s jobless claims print will be the most important data we will get through the end of the week.  If claims are better than expected, then interest rates are likely to continue their ascent.  So far, equities have not acted well with interest rates breaking out to the upside, though that could change if a stabilizing economy becomes increasingly evident.

 

The global markets are having a difficult time finding their identity.  As Shakespeare wrote:

 

“All the world’s a stage, and all the men and women merely players: they have their exits and their entrances; and one man in his time plays many parts, his acts being seven ages.”

 

Indeed, we are all stock market players.  The key is to make sure, whether it is gold, U.S. treasuries, or LINN Energy, that we are not the last players to exit.

 

Our immediate-term TRADE Risk Ranges are now (TREND bullish or bearish in brackets):

 

UST 10yr 2.39%-2.74% (bullish)

SPX 1 (neutral)

DAX 7 (bearish)

Nikkei 12,9 (bearish)

 

VIX 15.17-20.97 (bullish)

USD 82.27-83.67 (bullish)

Euro 1.29-1.31 (bearish)

Yen 96.41-99.53 (bearish)

 

Oil 98.98-103.36 (bearish)

NatGas 3.64-3.89 (bearish)

Gold 1 (bearish)

Copper 2.98-3.12 (bearish)

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Hogtown - Chart of the Day

 

Hogtown - Virtual Portfolio


June 27, 2013

June 27, 2013 - DTR

 

BULLISH TRENDS

June 27, 2013 - 10yr

June 27, 2013 - VIX

June 27, 2013 - dxy

 

BEARISH TRENDS

June 27, 2013 - dax

June 27, 2013 - nik

June 27, 2013 - euro

June 27, 2013 - yen

June 27, 2013 - oil

June 27, 2013 - natgas

June 27, 2013 - gold

June 27, 2013 - copper


Paying The Price

This note was originally published at 8am on June 13, 2013 for Hedgeye subscribers.

“Somebody had to pay.”

-Lloyd George

 

That’s what Britain’s Prime Minister had to say about German reparations at the Paris Peace Conference of 1919. He added, “If Germany could not pay, it meant the British taxpayer had to pay. Those who ought to pay were those who caused the loss.” (Paris 1919,pg 181)

 

What George forgot to mention was his founding of the British welfare state; part of the British bill had to cover government spending. The Germans didn’t like that. They didn’t like the pomp of John Maynard Keynes floating around Paris smoking the peace pipe either.

 

Oh yes, my friends, there are roots to this central planning Gong Show. They run far deeper than through Krugman’s craw. Japan is going to learn that the hard way now. Indeed, someone needs to pay the price. For the last decade American, European, and Japanese politicians have tried imposing that tax on their people via currency devaluation. Now the timing is ripe for politicians to pay the piper.

 

Back to the Global Macro Grind

 

To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears. Never mind a country that starts doing it with a quadrillion in debt, there has never been a country in the history of humanity that has devalued their way to long-term economic prosperity. Championing Japan’s economics today is the equivalent of cheering on the Weimar Republic circa 1924.”

 

The title of that Early Look was “Weimar Nikkei.” The date was May 30th, 2012. Today, the Japanese stock market is crashing.

 

To crash or not to crash, remains the question. Darius Dale and I get into this debate with clients all of the time – “so, when do you guys think this all hits the fan?”, “can’t the Japanese keep this going for a little while longer?”

 

It’s a very intellectual debate because all of Wall Street is trying to figure out how long a failed team of politicians (we call Abe and Aso the Keynesian Duo) is going to be able to suspend economic gravity.

 

And maybe that’s why even a hockey and football player (Darius was a 325lb offensive lineman at Yale) can remind you that there’s nothing intellectual about Krugman and/or Abe’s Policy To Inflate at all. It might sound clever, but as a practical matter it’s just dumb.

 

So what’s the risk to the Japanese completely screwing this up?

  1. The currency market stops believing this will end well (i.e. in sustained Japanese economic growth)
  2. The Yen rips and the US Dollar falls
  3. The Correlation Risk (USD vs SPX = +0.84 on our TREND duration) goes squirrel

I’d say those are some pretty big risks.

 

But don’t blame the politicians. Don’t ask them to pay the price. This isn’t the time to be talking about pounds of flesh or anything at all like that. Instead, let’s just watch the country where this whole money-printing experiment started (Japan) implode on the world stage.

 

The context of central planning history is critical:

  1. Post 1913 Federal Reserve Act gave birth to Bloomsbury flower power act of John Maynard Keynes
  2. Paris Peace Conference 1919 gave a platform for government spending gurus to lay the railway tracks of political plunder
  3. Post 1971 Nixon abandoning the Gold Standard, 1997 was a no brainer for Krugman to tell Japan to “PRINT LOTS OF MONEY”

To be fair, going back to the 13th century, free-market folks like Genghis Kahn have been fighting the aristocracy of kingdoms and political plunderers. So the idea that Charles de Gaulle devaluing his people’s currency was going to fail inasmuch as the Weimar Republic’s did and/or the 2013 Japanese version of the same will may be consensus amongst people who have studied history.

 

But who cares about causality (central planners), let’s talk correlation – this is where this market’s risk is at!

  1. As soon as the Japanese Yen snapped our 95.85 TREND line, the Weimar Nikkei went squirrel last night
  2. Closing down -6.4%, that puts the #WeimarNikkei in crash mode (-20.4% since May 22nd!)
  3. When the big stuff starts snapping and crashing like that, we get out of the way

Actually, we got out of the way before it happened – think Hedgeye-style “Waterfall”  - and how we proactively risk manage the oncoming entropy of a burst of interconnected H20 crashing over the damn. #oncoming!

 

With time this Correlation Risk (driven by political causality) will burn off – but not today; water doesn’t burn:

  1. USD/YEN snaps 95.85 TREND line as US Dollar Index snaps 81.21 TREND line
  2. Weimar Nikkei’s TREND line of 13,848 #snapped
  3. China, Hong Kong, Germany – all of their Equity markets are over the waterfall now too (bearish TREND)

Most of this isn’t new. It’s just all happening faster now. That’s how risk works – it happens fast. This is big water, moving real fast, and I can assure you that most of the macro “tourists” out there who didn’t respect either the Yen or Nikkei signal are now very wet.

 

What does this mean for our asset allocation?

  1. We already have a 0% asset allocation to Fixed Income (Bond Yields aren’t going down on this fyi)
  2. We already have a 0% asset allocation to Commodities (Gold is down on this, fyi)
  3. We’d already cut our US Equities allocation in half versus its max (on Monday)

Since we are bearish on #EmergingOutflows (Emerging Markets), we don’t have to deal with that this morning either. What we need to make a decision on is whether to get out of US Equities altogether.

 

Here’s how I think about US Equity Market risk:

  1. It all starts and ends with the Dollar; the TREND is broken (but can be recovered with time; long-term TAIL support = 79.11)
  2. SP500 TRADE line of 1624 is broken, but TREND support of 1583 remains intact
  3. US Equity Volatility TREND resistance of 18.98 is going to be under siege this morning

Volatility, entropy, convexity – this is the stuff that makes people go squirrel. Yes, I’ve used the squirrely metaphor 3x this morning because that’s what my inbox looks like. We are getting a lot of questions on this. Which means institutional clients are in the water.

 

My first move this morning will be to do nothing. We’re not wet, so we can watch this political gonger play out a little before we let the market tell us which of these interconnected TREND risks confirms.

 

As for who ultimately pays the price for all these unintended consequences, I formally nominate Bernanke, Kuroda, and Aso. Especially for that Aso guy, ripping their countrymen a new one via currency devaluation is something they should all be ashamed of.

 

Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1370-1418, $100.36-103.94, $80.46-81.21, 93.69-95.85, 2.06-2.27%, 14.61-18.98, and 1601-1624, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Paying The Price - Chart of the Day

 

Paying The Price - Virtual Portfolio


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