Forecasting Folly:  If you’ve followed us for any period of time, the fact that we don’t pretend to have an edge on the monthly NFP figure is not a surprise. 


The BLS and ADP figures are certainly co-integrated on a multi-month basis and the trend in the initial claims and other higher frequency employment data can offer some probability weighted, directional insight and some fertile fodder for the tea leafers, but predictive value on a month to month basis is notoriously poor. 


It’s not the number itself, but the markets reaction to it that drives our subsequent allocations.


Summary Take:  In short, +74K was a disappointment vs. prevailing expectations and an outlier verses the balance of higher frequency labor market data. We wouldn't dismiss today's data outright, but we wouldn't materially shift our positioning on a single, outlier print.


With 273K people out of work due to bad weather (vs. an average of 166K over the prior 5 December’s) weather is being held out as the biggest distortive factor. With our retail and restaurant analysts (who rarely cite weather as a discrete swing factor) citing weather as a drag on traffic also, we'll assume the unusually inclement weather likely did, indeed, have some impact on construction and transports/trade employment and drag on hours worked.   


Strategy:  The unsurprising price response to today’s data is down dollar/down bonds as “no-taper” expectations get priced in at the margin.  We outlined how to play a breakdown in the dollar in our 1Q14 macro themes call yesterday (REPLAY) – While we'll monitor the dollar weakness closely, in regards to the more immediate term and today’s employment data specifically, we’ll take the other side of overbought/oversold moves in today’s price action.   


In the context of the broader labor market data, where the preponderance of evidence remains positive with ADP, initial claims, ISM mfg and ISM services all reflecting moderate, ongoing improvement,  the BLS data sits as a single negative outlier. 


Unless we see confirming fundamental evidence alongside a shift in risk management signals (across SPX, VIX, DXY, 10Y Treasury), we’re unlikely to pivot on our generally positive view of the domestic labor market because of today’s data in isolation – particularly given the positive revision, the weather caveat and the ongoing, significant seasonal distortion.   


Keith shorted BOND (etf) and long-term treasuries (TLT) in real-time alerts on this morning’s weakness in yields.




DECEMBER EMPLOYMENT REVIEW:   Below we review, in detail, this morning’s employment data from the BLS, highlight some potential issues impacting the January release and take a summary look at trends in the distribution of employment. 

  • Household Survey Employment (CPS):  Employment as measured by the Household Survey increased +143K on the back of last month’s reported +958K increase.  The household survey is notabably volatile but, similar to the ADP data, is consistent with the NFP figures on a multi-month moving average basis.
  • Unemployment rate:  Declined to 6.7% from 7.0%  as total unemployed dropped -490K and total employed increased +143K
  • Labor Force Participation:  Dropped another 19bps sequentially to 62.79 from 62.98 as the total labor force dropped -347K MoM (the net of -490K unemployed plus +143K increase in employment) and civilian population increased +178K
  • Weekly Hours:  Down small to 34.4 vs. 34.5 prior (likely impacted by weather)
  • Employment by Age:  each age cohort across the 20-44 Year old demographics accelerated sequentially while employment growth for 45-64 year olds decelerated in December.
  • Government Employment: State & local gov’t employment growth holding positive for a six consecutive month while Federal payroll growth held flat at -2.8% YoY to close the year. 
  • Ave Hourly Earnings:  Earnings slowed 20bps sequentially to 1.8% YoY.   Not a growth number particularly supportive of accelerating consumption
  • Revision:  the establishment report showed a net positive two month revision of +38K with the October estimate unchanged and November revised to 241K from 203K last month, Household Survey revised to +958K from +818K last month
  • Part-time Employment:  Part-time employment dropped 89K MoM, down -1.0% YoY.  The Trend in part-time employment remains one of decline.  
  • Industry Level Notables:  Construction employment (weather impacted) was the worst, dropping 16K MoM and ending a 6mo streak of positive gains. Notably, healthcare shed jobs for only the 2nd month in the last 10 years in December














Below is a quick comparative study of the distribution of employment by industry in the peri-recession period.   As can be seen, at the broader Industry level, the shifts have not been particularly outsized. 


The prevailing bearish narrative that the post-recession economic edifice is structurally weaker and the employment recovery has been largely illusory because we’ve only added low wage and part-time jobs seems to be overstated.   


Part-time employment is in retreat, Temp employment is increasing, construction and manufacturing jobs are currently seeing some positive momentum, and mining and energy employment (which generally pay comparatively higher wages) continue to gain in share, to name some positive dynamics. 


Yes, participation is declining (in excess of that implied by demographics) and long-term and structural unemployment will remain TREND issues, but the great, job-quality-deterioration-narrative appears somewhat fallacious.  








Unemployment Insurance:  The loss of EU unemployment benefits for some 1.3M individuals at the close of the year has been well advertised.  If jobless benefits aren’t renewed by congress and the bulk of those individuals move from unemployed to out of the labor force the LFPR will decline and the Unemployment Rate will benefit.  The largest impacts, should this occur, are likely to be observed over the first couple months. 


Annual Benchmark Revision:  the Census Bureau applies an annual population control adjustment to the Civilian Non-institutional Population alongside the January release every year.  Historically, the magnitude of the January adjustment has ranged from tens to hundreds of thousands or even millions of individuals.  An outsized revision to the January 2014 data could shift the unemployment variable dynamics from their current trend




Christian B. Drake



[video] Keith's Macro Notebook 1/10: EUROPE CHINA UST 2YR

Got Growth Divergence?

Client Talking Points


Swiss and German stocks rising +1% and leading the follow-through charge this morning (in spite of continued weakness across major Asian Equity indices ... see the KOSPI down another -0.4% overnight). Take some time today or over the weekend to review our Q1 Global Macro Themes Deck from yesterday on the why that could continue.


Whack! The Shanghai Composite fell down another -0.7% last night to -4.9% year-to-date (compare that to Austria which is up +5% year-to-date). We have no interest in being long China’s major equity index here on the red start to the year. Incidentally, New Zealand up +2.7% year-to-date looks good!


What a start for the short-end of the yield curve with fresh 3-month highs of 0.43% for the 2-year. We will see if the reaction to the jobs report is enough to blast through the September highs again for the 10-year yield today. There's no resistance to 3.05%, then 3.09% after that on the 10s.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.


We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.


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


CNBC's coverage of the jobs report has devolved into a lotto contest for anyone dumb enough to guess @KeithMcCullough


"Talent wins games. But teamwork and intelligence win championships."

-Michael Jordan


The data breach at Target was significantly broader than originally reported: The company said Friday that 70 million customers had information such as their name, addresses, phone numbers and e-mail addresses hacked in the breach. The company had previously said 40 million shoppers had their credit and debit card information stolen in the weeks following Thanksgiving.

The Rivalry

“One friend in a lifetime is much; two are many; three are hardly possible.  Friendship needs a certain parallelism of life, a community of thought, a rivalry.”

-Brooks Adams


As many of you may have noticed already, my colleagues and I have a bit of a fascination with the sport of hockey.  In particular, Ivy League hockey, since many of us played at Yale (and our firebrand energy analyst Kevin Kaiser played at Princeton).  So, if you will, please tolerate my enthusiasm for just a minute here as this weekend is effectively our Super Bowl.


Specifically, this Saturday at 8pm Yale will be playing Harvard at Madison Square Garden.  In as much as I would like to wish my friends at Harvard good luck this weekend, I would, honestly, not really mean it.  But I sincerely do hope the Crimson don’t totally embarrass themselves, or next year we will have to invite Cornell to play us on the world’s biggest hockey stage. 


Now admittedly Harvard did once win a NCAA championship, albeit it was more than three decades ago.  On the other hand, Yale is the defending NCAA champion and over the last five years has amassed a record of 111 – 53 – 12.  Over the same period, Harvard hockey is 53 – 87 – 24.  As if having Larry Summers on their team wasn’t bad enough... ;)


In Malcolm Gladwell’s new book, “David and Goliath”, he digs into the idea that underdogs do disproportionately well in competition.  He cites a study from political scientists Ivan Arreguin-Toft that looked at all wars between small countries and much larger countries over the past two hundred years.  He found that the much larger country only win 71.5% of the time.  Further as Gladwell writes:


“What happens in wars between the strong and the weak when the weak side does as David did and refuses to fight the way the bigger side wants to fight, and instead uses unconventional or guerilla tactics.  The answer: in those cases the weaker party’s winning percentage climbs from 28.5% to 63.6%.  To put that in perspective, the United States population is ten times the size of Canada’s.  If the two countries went to war and Canada chose to fight unconventionally, history would suggest you ought to put your money on Canada.”


So, who knows, if Harvard hockey were to do something totally unconventional, like say put their football team on skates, maybe they will have a chance this weekend!


Back to the Global Macro Grind...


Yesterday, Keith presented our top three global macro themes for Q1 2014.  Like clockwork, we’ve been doing these themes for the last five years.  Those three themes are as follows:

  • #InflationAccelerating – CPI comparisons globally are easy and commodities are basing, as a result we are expecting a re-acceleration in reported inflation.  From a sector perspective, the three sectors we like in this scenario are technology, healthcare and energy;
  • #GrowthDivergences – This could be the year in which global growth divergences increasingly matter for stocks, especially as rates begin to normalize, and Europe looks set up to see accelerating economic growth.  Conversely, we are starting to question whether Japan’s recovery is losing steam; and
  • #FlowShow – In a world in which 75% of the global financing stock outstanding is in debt, there is a lot money that can flow out of bonds and into equities.  In the Chart of the Day below, we again emphasize that the ratio of debt-to-equity was 50/50% in 1999.

One key supporting point for the idea that Europe could well be the global growth leader, at least on a percentage change basis, is the fact the European sovereign debt markets have all but recovered.   Remember that sovereign debt crisis from a few years ago? Well, the European credit markets barely do.


This morning the Spanish 10-year yield is trading at 3.70%.  This is a mere 74 basis points wider than the U.S. 10-year yield.   In fact, last night Spain kicked off its funding program and raised $7.2 billion in five year debt, overshooting its target.  Further, this debt was sold at 2.411%, which was the lowest funding rated of the Euro era for Spain.


Now in the long run, the Spanish economy still has excesses built up from the parabolic housing bubble it experienced.  Nonetheless, in the short run as the likes of Spain, Italy, France and Portugal are able to sell debt at reasonable rates, this is both a real positive for their governments and their governments’ ability to spend, but more importantly for banks.  As broad borrowing rates go down, this will eventually filter back to corporations who can then borrow at low rates to more aggressively fund capital expenditures and expand. 


Since we are on the topic of housing, I should flag that the U.S. housing market is at the top of our list for worries as it relates to the U.S. economy.   In fact, mortgage applications are down 22% from their 2014 peak reading.


Even if it’s not clear yet that housing headwinds will derail the U.S. economy, it is setting up for some interesting short ideas.  In particular, our Financials team just added Nationstar Mortgage (NSM) to our Best Ideas list this week.  Previously, this had been a top long idea for us, which played out well as our earnings estimates were higher than the consensus.


Conversely, our view is now that the consensus earnings estimate of north of $5 for 2014 could come in as low as $1. 


Now, how’s that for a downside surprise? 


We are doing a deep dive on the name and will outline the thesis this Monday at 11am EST. (Email to subscribe for access.)  NSM trades more than $30 million in volume per day, so there’s lots of stock out there to short, especially if you believe our Financials team that the best case scenario is that the stock will get cut in half.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Rivalry - Chart of the Day


The Rivalry - Virtual Portfolio



In light of yesterday’s downgrade, we’d like to reiterate our LONG call on YUM.


It is our belief that the vast underperformance of its China Division in 2013 was largely driven by circumstantial issues (food supplier incident and Avian Flu) rather than structural issues.  In fact, we believe YUM continues to have a material opportunity to capitalize on a growing consumer class in China that is expected to double from 300mm+ in 2012 to 600mm+ by 2020.  While China same-store sales could remain volatile in 2014, we believe they will accelerate meaningfully over the prior year. 


The trend in both sales and margins in China suggest that the company has made significant progress restructuring the business, setting the stage for improved profitability in 2014.  We believe there is enough pessimism around a potential recovery in China (as evidenced by yesterday’s downgrade) that there is upside to estimates in 2014.



YUM is currently our favorite LONG in the big cap QSR landscape fueled by a substantial long-term growth opportunity, including a strong and growing presence in China as the country transitions from a producer to a consumer economy.  We believe China same-store sales will not only benefit from easy comparisons, but will also be driven by incremental sales from menu innovation and daypart expansion in the region.  In addition to China, YUM has positioned itself well for the future through considerable penetration in other developing markets. 


YUM has been strong in the U.S. for the past couple of years, led primarily by an innovative Taco Bell business.  We believe the company has the correct drivers in place to capture additional market share and drive incremental sales at this concept.  The breakfast daypart is a huge opportunity for Taco Bell and, if successful, could drive incremental gains.



YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 4 38 00 PM


YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 16 26 AM




Easy same-store sales comparisons in China, improving margins across the major divisions, and a potential acceleration in domestic consumer spending could all lead to multiple expansion in 2014.  Investors punished the stock on bad news for the majority of 2013 and, as such, we expect them to reward the stock on good news throughout 2014.  As it stands, we see approximately 16-30% upside in the stock (depending on the trajectory of profitability in China), implying a stock price between $87 to $100 per share.



YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 4 54 38 PM



In the series of annotated charts below, we run through our bull case from a fundamental perspective.  It quickly becomes clear that operating margins are set to accelerate and that a turnaround in China would have a considerable impact on the profitability and earnings of the company.



YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 43 08 AM

YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 43 45 AM

YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 44 17 AM

YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 44 54 AM

YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 45 27 AM

YUM: CHINA WILL BE KEY IN 2014 - yum cost of sales

YUM: CHINA WILL BE KEY IN 2014 - laborrrr china

YUM: CHINA WILL BE KEY IN 2014 - other expppppeppepe

YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 3 18 46 PM

YUM: CHINA WILL BE KEY IN 2014 - us rlmnsjpg

YUM: CHINA WILL BE KEY IN 2014 - intl rlmns

YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 3 17 06 PM

YUM: CHINA WILL BE KEY IN 2014 - gagagaga

YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 3 14 52 PM

YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 3 21 37 PM

YUM: CHINA WILL BE KEY IN 2014 - yum intl op margins

YUM: CHINA WILL BE KEY IN 2014 - chinappp



Feel free to call with questions.



Howard Penney

Managing Director


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.