• run with the bulls

    get your first month

    of hedgeye free


Initial Jobless Claims | Convergence Towards Zero

Takeaway: Within a few months the RoC in Y/Y improvement in claims will be at or near zero; another reminder that conditions are late cycle.

As we foreshadowed last week, the post-auto furlough labor environment proved more even-keeled as claims retraced their prior week bounce and have settled back into their now 16-month trend at sub-330k. 


Rate of change in Y/Y improvement is beginning to converge towards zero, a not unexpected dynamic as we approach the lapping of the frictional lower bound in claims. RoC in Y/Y claims slowed to -9.2% from -11% in the prior week and will likely be at or near zero within a few months. This, in and of itself, is not a sign of deterioration in the labor market, just as the worsening rate of change in going from 3 mice to 0 mice to 0 mice in the house is not a sign of things worsening. That said, it is yet another reminder that we're late cycle. Once things bottom out from a RoC standpoint it becomes a "how long" until the end proposition. 


On the energy side of things, there was a lagged distortion in the numbers making their usefulness not especially high. While the chart below appears to show marked improvement in the labor conditions of energy states relative to the US as a whole, this is misleading because the auto furloughs occur in non-energy states like Michigan and Ohio. Taking into account the one-week lag on the state specific data, it's clear that we're seeing an artificially positive convergence created by auto plant re-tooling and not a rebound in the energy labor market. Next week should show a more realistic representation of what's happening on the energy front. 



Initial Jobless Claims | Convergence Towards Zero - Claims18



The Data

Prior to revision, initial jobless claims fell 16k to 281k from 297k WoW, as the prior week's number was revised down by -1k to 296k.


The headline (unrevised) number shows claims were lower by 15k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3.25k WoW to 282.5k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -11.0%


Initial Jobless Claims | Convergence Towards Zero - Claims2 


Initial Jobless Claims | Convergence Towards Zero - Claims3


Initial Jobless Claims | Convergence Towards Zero - Claims4


Initial Jobless Claims | Convergence Towards Zero - Claims5


Initial Jobless Claims | Convergence Towards Zero - Claims6


Initial Jobless Claims | Convergence Towards Zero - Claims7


Initial Jobless Claims | Convergence Towards Zero - Claims8


Initial Jobless Claims | Convergence Towards Zero - Claims9


Initial Jobless Claims | Convergence Towards Zero - Claims10


Initial Jobless Claims | Convergence Towards Zero - Claims11


Initial Jobless Claims | Convergence Towards Zero - Claims19


Yield Spreads

The 2-10 spread rose 7 basis points WoW to 172 bps. 3Q15TD, the 2-10 spread is averaging 173 bps, which is higher by 14 bps relative to 2Q15.


Initial Jobless Claims | Convergence Towards Zero - Claims15


Initial Jobless Claims | Convergence Towards Zero - Claims16


Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Up Dollar, Down Rates

Client Talking Points


Driven higher on Down Euro – Mario Draghi taking his turn from now until Jackson Hole and there is only 1 move, and that’s to devalue; while EUR/USD -0.6% this morning to $1.08 is immediate-term oversold, you want to be shorting all-bounces in the $1.10-1.11 range. 


The other clean cut side of this risk management setup is to stay net short commodities – the CRB Index was -1.3% yesterday vs. SPX -0.07% and that’s where the alpha is on the bear side; CRB Index, Oil, Gold, Copper, etc. all bearish on all 3 of our risk management durations.


Another way to play this #StrongDollar Deflation (Down Yen) is long Japanese Stocks – Nikkei +0.7% overnight and +1.7% month-over-month remains our fav stock market (Euro our fav FX short).


**The Macro Show - CLICK HERE to watch a replay of today's edition.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

General Mills remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. GIS has a lot of things going for it and they are going to show it in the top and bottom line this year. Over the last couple of months, the company has announced the removal of artificial colors and flavors from their cereals. More recently, they have committed to using only cage-free eggs.  Many of these small actions that management is taking are going to have a snowball effect as they go throughout FY16. Below is a list of some of the biggest things that we are looking forward to this year:

  1. Yoplait in China
  2. Gluten-Free Cheerios
  3. No artificial colors or flavors in the cereal
  4. Granola innovation / Muesli
  5. Greek Plenti / Whips
  6. Original yogurt sugar reduction
  7. Renovation on Grain Snacks
  8. Strong push on Natural & Organic products
  9. Delivering Value to consumer on brands like Totino’s and Hamburger Helper
  10. Bringing U.S. innovation International



Gaming, Lodging and Leisure Sector Head Todd Jordan reiterates his team's bullish high-conviction thesis on Penn National Gaming. The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming. Jordan further notes that with more states releasing their June gaming revenues this past week, we feel more confident in our higher than consensus Revenue, EBITDA, and EPS estimates.


Long-term Treasury rates remain the best proxy for forward-looking growth expectations. We outline three components of secular stagnation below to explain the SAVINGS/INVESTMENT GLUT that is at the heart of the academic argument for current policy measures:

  1. Negative demographic trends globally (decline in population growth and aging population)
  2. Reduced capital intensity in leading industries (think of the capital and labor required to start Facebook over U.S. Steel)
  3. Falling relative prices of capital goods       

Three for the Road


EUROPE: we aren't short anything in Europe right now other than the Euro, but I'm getting very interested on this bounce



Men acquire a particular quality by constantly acting in a particular way.



The Clinton campaign has brought in $46,725,329.13 so far, according to its first FEC filing.

CHART OF THE DAY: Beware of Anemic Growth North of the Border

Editor's Note: The excerpt and chart below are from today's morning strategy note written by Hedgeye Director of Research Daryl Jones. Click here for more info on how you can subscribe.


...As we’ve been writing about recently, the next major global economic concern may well be Canada.  As the Chart of the Day shows, Canada has been undergoing, at best, anemic growth this year.   The Bank of Canada yesterday cut interest rates to 0.5%, its second rate cut of the year.  In the accompanying statement, the Bank said:


“Canada’s economy is undergoing a significant and complex adjustment.”


We agree with that assessment in spades.


CHART OF THE DAY: Beware of Anemic Growth North of the Border - z CHART OF DAY Blame Canada

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Blame Canada

“That’s right, Mr. Garrison. Christopher Columbus discovered America and was the Indians’ best friend. He helped the Indians win their war against Frederick Douglass and freed the Hebrews from Napoleon and discovered France.” 

— Mr. Garrison’s hand puppet "Mr. Hat" from South Park


It seems like there's always a country to blame for their world’s economic or geopolitical woes.   On the economic front, the current mantra is to Blame Greece.  On some level, there is justification for this as Greece is rightfully causing investors to question the future of the economic union in Europe. The Euro has been mercy crushed as a result.


More so than the economic questions on the future of Europe are the emerging regional tensions that the current negotiation with Greece are bringing to the forefront.  Clearly, the economic supremacy of Germany is taking the pole position in the negotiations with Greece.  While every nation and finance minister had a vote, the recent decision imposed on Greece was ultimately negotiated unilaterally by Germany.  In other words, the will of Germany is the will of the Eurozone.


The Greeks realize this and will Blame Germany.  As our good friend George Friedman at Stratfor (a veritable private CIA) wrote this week:


“In World War II, the Germans occupied Greece. As in much of the rest of Europe, the memory of that occupation is now in the country's DNA. This will be seen as the return of German occupation, and opponents of the deal will certainly use that argument. The manner in which the deal was made and extended by the Germans to provide outside control will resurrect historical memories of German occupation. It has already started. The aggressive inflexibility of the Germans can be understood as an attitude motivated by German fears, but then Germany has always been a frightened country responding with bravado and self-confidence.”


The larger reality then is that the centuries old conflict between nations and regions in Europe is re-emerging.  Greek newspapers have been replete with references to World War II and the explicit accusation that Germany is trying to humiliate Greece.   As highlighted in the picture below, some accusations have been even stronger. Case in point: a poster recently placed on the Eurobank branch in Athens accusing Germany's finance minister of being a neo-Nazi war criminal.


Blame Canada - z DJ pic for early look


For their part, the Greeks are probably not doing much to ease the increased flaming of regional and national tensions with their “increased” flirting with the Russians. As an example, in June, Moscow announced a preliminary deal to build a pipeline through Greece.  Over the past few days, there has also been speculation that Greece and Russia are close to an accord in which Russia supplies some of Greece’s energy needs (Greece currently imports 99% of its energy).  


Is Russia the ultimate lifeline for Greece? Her trump card in negotiating with Europe? Probably not. But, frankly, even if none of this comes to fruition, it’s always easy for Europe to Blame Russia!

Back to the Global Macro Grind...


The Blame <insert country> reference ultimately comes from the TV show South Park, the (adult) cartoon that has been running for some 17 seasons.   In a movie version of the weekly show, parents in South Park blame their kids' misbehavior on watching a Canadian made movie, hence Blame Canada.

As we’ve been writing about recently, the next major global economic concern may well be Canada.  As the Chart of the Day shows, Canada has been undergoing, at best, anemic growth this year.   The Bank of Canada yesterday cut interest rates to 0.5%, its second rate cut of the year.  In the accompanying statement, the Bank said:


“Canada’s economy is undergoing a significant and complex adjustment.”


We agree with that assessment in spades.


A few weeks ago, our Financials team presented more than 100+ pages on why they believe Canadian banks and banking system are great short ideas.  Aside from the obvious exposure to energy, the other major economic risk in Canada is an overheating real estate market.  The rate cuts by the Bank of Canada are only likely to continue to propel the home price gains, but the Canadian housing market will not be impervious to economic gravity in perpetuity.


One of the companies that we discussed in our report was Home Capital Group (ticker is HCG on the Toronto Stock Exchange).  Fortuitously for our call, the company actually pre-announced negatively earlier this week and traded off some 14% as a result.  Not a bad trade if you were short! 


Conversely, there was actually some decent Canadian home price data reported this week.  For June, Canadian home prices were 5.1% from a year ago, which was an acceleration from May.  The two “hottest” markets Toronto and Vancouver (which account for more than 50% of the index) were up even more y-o-y at 8.5% and 7.8% respectively.


So, was Home Capital Group's pre-announcement just a blip, or a crack in the foundation of the housing market?  We believe it's the latter and primarily this is based on affordability as the Canadian Home Price-to-Income ratio is 2.3 standard deviations above its long run average.


Want another proxy for valuation? The Canadian home price to rent ratio is currently at 19.4x. That's almost double its pre-bubble long run average of 11.7x.


The reason housing is such a risk for the Canadian economy is potential credit risk. The Canadian banking system is both concentrated and levered.  The largest Canadian bank RBC has about 0.5x assets to Canadian GDP, which compares to JPM in the U.S. at a ratio of 0.15%.  Further, Canadian bank assets in aggregate are at 2.1x GDP versus 0.5x for the U.S.  You wanna banking leverage? The Canadian have it!


So if the next unraveling of the global economy comes from north of the border, you are probably safe to Blame Canada, but don’t Blame Hedgeye because we warned you.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.20-2.46%

SPX 2040-2120 
RUT 1 
Nikkei 20138-20768 
VIX 12.51-20.01 
Oil (WTI) 50.07-52.98 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Blame Canada - z CHART OF DAY Blame Canada

BABA: Tactical Cover

Takeaway: We didn’t want to stay short this print, and beta has given us a decent exit point. Long-term bearish thesis remains the same.


  1. F1Q16 = LOW HURDLE: We’re specifically referring to the China Retail segment, where consensus is looking for 31% y/y growth vs. 39% in F4Q15.  We wouldn’t call this undue sell-side conservatism, but rather just stale estimates following the F3Q15 blow-up when consensus slashed estimates for the subsequent two quarters.  That said, BABA doesn’t need much to beat F1Q16 estimates, and with all the noise around the sell-off in Chinese stocks, we could see a relief rally on a good print.
  2. SETUP GETS WORSE THEREAFTER:  Consensus is assuming China Retail revenue growth accelerates on a y/y basis through the end of F2016, and those estimates may climb following the F1Q16 release.  GMV growth is naturally slowing, and being exacerbated by the influx of a weaker consumer, while sputtering Tmall Mix shift is pressuring commission growth.  That said, to produce accelerating revenue growth in China Retail, BABA will need accelerating y/y growth in Marketing take-rates, which will a major challenge.
  3. THE MOBILE DEBATE:  The bull case is that mobile take-rates will ascend to desktop levels.  Our bear case is that one grows at the expense of the other, and the two will most likely converge rather than meet up top.  Reason being is that we attribute the rise in mobile take-rates to rise in mobile user mix since the bulk of China Retail revenue comes from Marketing, and most of that is CPC.  That said, Mobile traffic is already breaching 80% of total traffic, so that mix shift effect is ultimately capped moving forward.  For more detail, see the note below.


BABA: The Mobile Debate

03/04/15 10:34 AM EST

[click here]


Let us know If you have any questions or would like to discuss in more detail.


Hesham Shaaban, CFA


July 16, 2015

July 16, 2015 - Screen Shot 2015 07 16 at 8.17.33 AM

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.