SUMMARY:  I’ve been dealing with and strategically parenting around my 18-month olds discovery of and increasing proclivity for the word “No” over the last month, so we’ll go with that as the theme for May Employment as it sufficiently characterizes this mornings release:    


No change in Unemployment rate, No change in the U6-U3 spread, No change in the Labor Force Participation Rate, No acceleration in the pace of job growth, No acceleration in earnings growth, No good news for housing, No #EscapeVelocity in the labor market…and probably no change in the present policy course out of the fed. 


No change in our intermediate-term outlook for growth either as we continue to think slow-growth exposure outperforms alongside rising inflation, a constrained consumer, and consensus expectations that require 4%+ GDP growth over the balance of 2014 to hit full year growth estimates.  Reported Growth will obviously accelerate sequentially in 2Q14 but the TREND, at least through 3Q14, is one of deceleration.  


A summary highlight of the numbers/data below:    


A NEW HIGH:  We eclipsed the January 2008 peak in Private employment last month and finally eclipsed the prior, Jan 2008, peak in total NFP employment by +98K with the net gain of +217K in May.   The private sector’s share of total employment has increased 40bps to 84.2% compared to 83.8% prior to the recession. 


State & Local Government Employment increased for a 9th consecutive month in May while the rate of job loss at the Federal level improved 60bps sequentially to -2.3% YoY.  Aggregate government salary and wage growth has finally begun to contribute positively to aggregate disposable income growth.  






Labor Force Participation:  The participation rate was static at 62.8% MoM in May.  The shift in participation by age since the start of the recession is not new, nor particularly surprising, but notably, the divergence from pre-recession levels has continued to increase moderately, not mean revert. 






#HousingSlowing:  Employment growth in the 25-34 year old buck decelerated for a third straight month in May.  With 1st-time home buyers representing ~30% of the market and a key first rung in housing’s ladder, weak wage growth and decelerating employment trends in this key age demographic do not augur strength for forward housing demand/HPI




Earnings Growth:  Average hourly earnings in the Private sector grew 2.1% YoY, up from +2.0% in April but a continuation of the stagnant 2.0% +/- 20bps that has prevailed over the last two years.  Average hourly earnings for Production and Nonsupervisory employees was better, growing +2.4% YoY with the slope on the trend line still positive.  (See our prior note for  Labor's Bad Bank for a more detailed discussion of labor dynamics). 


With earnings growth static and the spread between spending and earnings growth having re-expanded the last couple quarters, we continue to think the upside to consumption growth remains very much constrained in the immediate/intermediate term (see #Gravity: April Consumer Spending for further detail).


MORE MUDDLE:  MAY EMPLOYMENT - Spending vs Earnings 060614


 MORE MUDDLE:  MAY EMPLOYMENT - Nominal Earnings Prod   NonSupervisory



THE TICKING CLOCK:  At 60 months as of May, the current expansion has now surpassed the mean duration of expansions (59 months) over the last century.  We continue to think this reality weighs into the feds policy calculus  – they need to get out of QE if only to give themselves the opportunity to (credibly) get back in if need be.   


MORE MUDDLE:  MAY EMPLOYMENT - Eco cycle Profile 060614


Unemployment Rate The unemployment rate held at 6.3% in May while the U-6 rate (Unemployed + Marginally Attached + Part-time for Economic Reasons) dropped -10bps to 12.2%.   Policy makers look at the spread between the two as a broad measure of labor market slack. 


While the percent of LT unemployed and U-6 rate continue their steady, albeit painfully slow, march lower, the U6-U3 spread remained at 5.9% in May - well above longer-term averages which sit closer to ~3.5%


MORE MUDDLE:  MAY EMPLOYMENT - Unemployment rate




MORE MUDDLE:  MAY EMPLOYMENT - Employment Table 060614



80o and Sunny on tap for the Northeast.  Enjoy the weekend.


Christian B. Drake





Sell: Russell 2000 Levels, Refreshed

Takeaway: Stay with what’s worked in 2014.



Having sent out the cover signal on the Russell lower (we have 9 consecutive wins on the short/cover signal in the Russell 2000), I was just waiting and watching for the re-short signal – and here it is.


If today’s jobs report was anything other than what it is (a lagging economic indicator), maybe I’d care about it. What I really care about is that as inflation (cost of living) continues to accelerate in the US, both the consumer and housing continue to slow.


Today you want to be doing precisely what you should have been doing 5 months ago, focusing your sales, under-weights, etc. on US domestic consumer/growth. Being long slow-growth #YieldChasing (Bonds and any stock that looks like a bond!) continues to be where the real outperformance is at.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1163
  2. Intermediate-term TREND resistance = 1169
  3. Long-term TAIL risk support = 1091


In other words, the Russell 2000 continues to signal a series of lower-highs from its all-time bubble high (March 2014) and the fundamentals for US growth today are worse than they were on January 1st, 2014. Stay with what’s worked.




Keith R. McCullough
Chief Executive Officer


Sell: Russell 2000 Levels, Refreshed - R2K

VIDEO | Keith's Macro Notebook 6/6: EURO UST10YR RUSSELL 2000

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Retail Callouts (6/6): COH, WMT, AMZN, TGT, GPS, BKS

Takeaway: COH ready to sacrifice margin? WMT price compare app beats AMZN at face value. TGT pricing facts.



COH - Coach to Discount Products at Stores in Break With Tradition



  • "Coach Inc...will begin discounting purses at its North American full-price stores, breaking from tradition to combat sluggish sales and mounting competition."
  • "Coach will offer goods on sale twice a year -- in June and January -- said Andrea Resnick, a company spokeswoman. New York-based Coach had been one of the few fashion and luxury industry companies that refused to discount goods in its domestic stores."
  • “'As part of our brand transformation, we are evolving our North American promotional model to be more in keeping with other fashion, lifestyle and luxury brands,' Resnick said. The move is consistent with what Coach already does overseas."


Takeaway: COH finally showing that it may sacrifice margin for top line growth. The company needs to do something in order to drive traffic to its full-price stores. A discount strategy is probably the best alternative, even if that means margin dilution.  Gross margins in the 70's is unsustainable for COH especially with KORS & RL in low 60's and high 50's.


WMT - @WalmartLabs’ Price Comparison Tech Will Soon Automatically Credit Walmart Shoppers For Competitor Discounts



  • "Price comparison technology from retail giant Walmart’s R&D center, @WalmartLabs, will begin rolling out this summer on web and mobile, to show consumers competitors’ pricing and offer them eGift cards for the difference, if they could have saved more by shopping elsewhere."
  • "In any event, a service called Savings Catcher which was previously available only in seven test markets during a pilot trial, is now expanding nationwide this summer, the retailer says. Savings Catcher will initially be available via the web, but will make its way to Walmart’s mobile application later this summer."
  • "To use Savings Catcher, consumers will enter a number provided at the bottom of their receipt into the website, or soon the mobile app, along with the date of their shopping trip. The system then examines the items purchased and compares prices across major local retailers, including Aldi, Harris-Teeter, Target, Walgreens and HEB. If a lower price is spotted, Walmart customers receive an eGift Card for the difference."


Retail Callouts (6/6): COH, WMT, AMZN, TGT, GPS, BKS - chart3 6 6


Takeaway: The beauty of this price comparison technology is that it encourages shoppers to buy from WMT while assuring them that they are getting the best price. Whether or not it actually works remains to be seen, but it trumps AMZN's price compare app by a country mile because it takes choice out of the equation.


TGT - 16 Secrets For Shopping At Target That Will Blow Your Mind



  • "The price tag will tell you what percentage the markdown is. The lower left shows the original price and the upper right hand corner shows the percentage off for the markdown."

Retail Callouts (6/6): COH, WMT, AMZN, TGT, GPS, BKS - chart2 6 6

  • "If the price tag ends in $0.06 or $0.08, the item will be priced down again. As long as there is inventory in the store. It will probably remain on clearance for around two weeks."
  • "If a price tag ends in $0.04, it is final clearance and won’t be marked down again."


Takeaway: We never thought we'd cite BuzzFeed as a source, but we found the points on pricing very interesting.




GPS - Gap Inc. Reports May Sales Results



  • "Gap Inc. today reported that May net sales increased 4 percent compared with last year. Net sales for the four-week period ended May 31, 2014 were $1.27 billion compared with net sales of $1.22 billion for the four-week period ended June 1, 2013."
  • "Gap Inc.’s comparable sales for May 2014 were up 1 percent versus a 7 percent increase last year. Comparable sales by global brand for May 2014 were as follows:
    • Gap Global: negative 3 percent versus positive 8 percent last year
    • Banana Republic Global: positive 3 percent versus flat last year
    • Old Navy Global: positive 2 percent versus positive 9 percent last year"


VRA - Vera Bradley Products to be Sold at Macy's



  • "Vera Bradley, Inc. today announced that its products will be sold at select Macy's locations. By mid-July, Macy's will offer a selection of Vera Bradley handbags, totes, and accessories in approximately 70 locations across the country."
  • "'We are excited about our new relationship with Macy's,' noted Robert Wallstrom, Chief Executive Officer of Vera Bradley. 'Department stores are the number one destination for handbag purchasing, and Macy's will be a great place to showcase our products, especially as we launch our leather and faux leather collections. This important relationship will allow us to introduce Vera Bradley to new customers and broaden our geographic reach.'" 


BKS - Barnes & Noble to Team With Samsung on Next Nook Tablet



  • "The new devices will combine the Nook software with Samsung’s Galaxy Tab 4 hardware, creating full-service tablets that can access Barnes & Noble’s collection of more than 3 million books, magazines and newspapers, according to a statement today. The 7-inch model will debut in early August, followed by a 10-inch Galaxy Tab 4 model about two months later."


SHLD - Exclusive: Sears' Lampert met Ford's Mulally for restructuring advice



  • "Sears Holdings Corp's controlling shareholder Eddie Lampert met with Ford Motor Co (F.N) CEO Alan Mulally earlier this year to seek advice on how to turn around the ailing retailer, two sources familiar with the matter said."
  • "In the meeting, Lampert asked Mulally about how he had turned around Ford and built an effective management structure at the No. 2 U.S. automaker, the sources said.  Sears spokesman Howard Riefs declined to comment. Ford spokeswoman Susan Krusel said Mulally, 68, has not decided what to do after leaving Ford.".
  • "It would be a surprise if Mulally, who is seen as one of the most successful manufacturing executives in recent American history, considered joining Sears."


More Economic Cowbell

Client Talking Points


An (allegedly) big macro move yesterday (that didn’t actually occur) on the “big” ECB move. People thought the euro would go down, instead it went up. People thought bonds would go down, instead they went up. People thought gold would go down, instead it went up. If the euro holds our long-term tail line of support of $1.35 versus the dollar, you want to buy it. Long euros here, short the Dollar ahead of what we think is next downside catalyst for USD which is upcoming Fed meeting.


Simply put, this morning’s U.S. jobs report does not provide nearly enough economic cowbell. The jobs picture is not improving at an accelerating rate. Sorry. Bond yields have the story right. Yes – we reiterate being  bullish on bonds following this morning’s lackluster report. There’s no support really to 2.41%.


We didn’t put out the signal yesterday to re-short the Russell 2000—yet. As you know, we have not been short the S&P 500 from a signal perspective, but if the RUT is up today, in light of the jobs report, we will likely be sending out a sell signal. On an overbought signal, coupled with the jobs number, it’s a relatively easy spot to sell it. No support for the Russell to 1108; after that, no support to 1098.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


Probability of the US unemployment rate going 2% higher instead of lower (from here) = high @KeithMcCullough


"Change your thinking, change your life." - Ernest Holmes


The U.S. added 217,000 jobs in May, while the unemployment rate remains at 6.3%. (New York Times)

LEISURE LETTER (06/06/2014)

Tickers:  HT, IHG.LN, HTZ


  • Mon June 9: HTZ earnings
  • Tues June 10: HLT lock-up expiration
  • Tues June 10: Thurs June 12: Bally Systems User Conference
    Mohegan Sun
  • Thurs June 12: Blackstone Investor Day 8:00 am


SJM - (Macau Business) SJM CEO Ambrose So forecasts Macau GGR will grow 10% YoY in 2014 to MOP400 billion (US$50.09 billion).  So added that May's GGR growth of only 9.3% 'wasnt bad.'

Takeaway:  SJM historically have been conservative in their yearly revenue forecasts.  Maybe not this year.


ZNGA - CEO Don Mattrick said Zynga's audience has stabilized after many quarters of steep DAU/MAU losses.  The company is open to using part of Zynga's $1.1 billion cash on new acquisitions/partnerships.

Takeaway:  Social gaming have been the only bright spot recently for the slot suppliers.  While there are many growth opportunities, It remains a volatile, competitive environment.


HT – acquired the newly constructed Hilton Hotel in Manhattan for $85.2 million from lodging developer Sam Chang's McSam Hotel Group.

Takeaway: Another Manhattan asset for this Greater New York City focused lodging REIT.


IHG.LN – EU Commission clears Katara Hospitality's acquisition of joint control over 5 European hotels located in Amsterdam, Rome, Frankfurt, Cannes, and Madrid from InterContinental Hotels Group.  Katara Hospitality is owned Qatari sovereign wealth fund and owns, manages and develops hotels globally

Takeaway: As expected. 


HTZ – provided an update on the Company's accounting review and delayed Q1  Form 10-Q filing and disclosed new material weakness conditions over internal controls and financial reporting as of December 31, 2013.  Additionally, a thorough review of the company’s internal financial records is being conducted for fiscal years 2011, 2012 and 2013, and their impact, if any, on 2014.

Takeaway: We ponder the following - when were these issues discovered...during the prior CFO's tenure (Elyse Douglas who stepped down on Sept 23, 2013, during the interim period and prior to the appointment of Thomas Kennedy on Dec 9, 2013, or subsequent to Kennedy's arrival.  Recall, Kennedy was CFO at Hilton Worldwide until Aug 2013.


NCLH - (S-8 filing)  proposing to issue up to $2 million ordinary NCLH shares to be offered pursuant to the company's employee stock purchase plan.  The proposed maximum offering price per share would be $33.44, based on the average high and low prices of NCLH shares on May 30.


Insider Transactions:


HOT - EVP Jeffrey M. Cava sold 13,518 shares on Tuesday, June 3rd at an average price of $80.30 and he now owns 34,509 shares.


HST - VP Elizabeth A. Abdoo sold 50,000 shares on Wednesday, June 4th at and average price of $22.17 and she now owns 95,147 shares.


Japanese Gaming (Reuters) Tokyo Governor Yoichi Masuzoe today indicated that developing a casino in the capital was not a priority and that there had not been enough debate on money laundering and other potential problems that could arise should casinos be legalized in Japan. 

Takeaway: Tokyo has never really been a leading candidate.  


Macau Suspicious Financial Transactions - The Financial Intelligence Office received 1,595 reports of suspicious transactions for 2013 -- 245 cases fewer than 2012, or 13.3 percent less, despite the city experiencing continuous growth in gaming revenues.  Similar to previous reports, about 70% of suspect transactions (1,138 cases) were reported by the gaming sector.

Takeaway: A positive trend despite pressures from the US Department of State to increase levels of scrutiny. 


Chinese World Cup Betting – China is expected to issue its first online sports betting licenses in time for the World Cup. The first licenses are likely to go to those already operating with the Finance Ministry’s approval under a pilot scheme -- recently the share price of NYSE traded rose on the news. By comparison, China’s two state sanctioned lotteries, the Welfare Lottery and the Sports Lottery, have seen rapid growth, with a combined wager of RMB309 billion ($49 billion) last year. However, the penetration rate remains low by international standards and estimates put the illegal market at some 10-20 times that of the legal business, suggesting huge growth potential.

Takeaway: Regardless the size, we expect World Cup Soccer which runs from Thursday June 12 through Sunday July 13 to modestly impact Macau GGR.


World Cup Betting (Hong Kong Standard) Police from Macau, Hong Kong and mainland China are stepping up enforcement action against illegal football betting as the World Cup nears. Police from both Special Administrative Regions and from Guangdong province have launched a month-long crackdown on illegal football gambling.  The 2014 FIFA World Cup in Brazil kicks off on June 12 with the final set for July 13. In June 2010, Macau’s casino revenue declined 20 percent from the previous month, a drop that was attributed by some financial analysts to the World Cup keeping some gamblers away from gaming tables and slot machines

Takeaway: During 2010's World Cup more than 5,000 people were arrested across China, Malaysia, Singapore and Thailand while a Chinese gang was busted for running an illegal online better network related to the World Cup that was alleged to have accumulated more than CY100 billion (US$14.8bn). 


World Cup Impact on Macau (Macau Business Daily) Grant Bowie, Chief Executive Officer (CEO) of MGM China, conceded that the World Cup might affect the industry but stressed that it was not possible to assess the impact it will have on gaming business. “The impact caused by the World Cup, if there is one, is that customers may be allocating more time to watching the World Cup rather than travelling to Macau,” he said.

Takeaway:  According to statistics we found, in 2006 Chinese soccer fans bet more than 500 billion Yuan on online gambling during during the 2006 World Cup finals in Germany. 


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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