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The best way to appreciate your job is to imagine yourself without one.

-Oscar Wilde


It’s the first Friday in September and it’s all about jobs.  I have been reading over the past week how bad September is for stocks, thinking that Fridays were the worst.  Between 1999 and 2008 only 41% of Fridays were down market days – I was expecting at least 60% were down days.  In fact, for the entire month, 5 out of the last 9 years, September was a down month, but remember one  year includes 9/11 and then there was last year.  I know this is a small sample size relative to history, but I believe recent history is more relevant.  So what is all the fuss?  September is just another month! 

Who knows what this Friday in September will bring, but Research Edge’s Chief Strategist, Keith McCullough, has been recently making the call that he has shifted to expect a worse than expected unemployment report.  Ironically, this could end up being US Dollar bearish, but bullish for stocks!  For the core Research Edge client base that relationship has been part of our vocabulary since the beginning of the year.

Where I sit as a sector analyst the trends in the labor market hold the key to the future of my group.  If consensus is right and payrolls decline by another 230,000 jobs, that would bring total jobs lost since the recession began in December 2007 to 6.9 million - the biggest decline in any post-World War II economic slump. 

I’m keenly aware that a decline of 230,000 is far better than the 700,000 pace we saw in January, but many people are still losing their jobs and many others are concerned that they may be next.  This has me sitting on the sidelines.  The consumer is not dead, and therefore, it has not been easy to be short the consumer.  Yesterday was testament to that point as the Consumer Discretionary index (XLY) outperformed the S&P 500 on better than expected retail sales. 

Despite yesterday’s sequential improvement in sales trends, I contend that a prolonged weakness in the job market is bad for business and could be one factor that suggests the S&P 500’s 55% move since the March low is a head fake.  This can best be seen in a story in the WSJ today where the rising joblessness is now taking increasing toll credit-worthy borrowers.

While as a fundamental analyst I’m concerned about the consumer, the epicenter of any real weakness in the market is going to come from Washington, D.C. 

This brings me to another important THEME from the Research Edge MACRO team - INFATION ROTATION.  While this theme has generated some great banter between the Research Edge Macro team and its client base, we seem to be winning the war of important data points.  I guess it is just a coincidence that GOLD has gained 4.6% so far this month and seen the biggest three-day rally since March.  The media speculates that “a weak dollar will boost demand for precious metals as an alternative investment.”  Yesterday, the Dollar index was flat on the day and gold hit a high of $999.50.

As inflation expectations continue to climb, interest rates have to go up.  As rates head higher, the dollar will stop “burning.”  When the dollar stops burning, stocks stop going up!

If you have made it this far in reading today’s Early Look you realize that Keith is taking a well deserved day off to play golf with his father.  While getting up at 4am to write the Early Look is a challenge for sure, I’m thankful to have a job!

Function in disaster; finish in style

Howard Penney


VXX – iPath VIXWe bought volatility on its lows on 9/3 ahead of the employment report today.  


XLU – SPDR UtilitiesWe bought some low beta dividend yield on its lows on 9/2. Utilities traded down 1% and they should act ok during stagflation fears. 


XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.


EWH – iShares Hong KongThe current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.   


CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.





DIA  – Diamonds TrustWe shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

LQD – iShares Corporate Bonds Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.