Initial Claims | Pushing the Limit

Takeaway: Claims have held steady recently, but there is a time limit on the labor cycle.

Initial Claims | Pushing the Limit - deflation cartoon 03.07.2016


The labor market continues to hang in there. Last week, seasonally adjusted initial claims came in at 259k, a 19k week-over-week decrease, prior to revision. This brings the 4-wk moving average to 267.5k (a 2.5k w/w decline), which is low by any objective measure. While labor conditions in Energy states have shown notable deterioration, the country as a whole has offset those pockets of discreet weakness.


While we may sound a bit like a broken record on this point, we still think it bears worth repeating that the cycle is late stage. The chart below shows that there has historically been a time limit on how long the labor market can run this hot. The chart shows that in the last three cycles, claims have run below 330k for 24, 45, and 31 months before recession set in. The current sub-330k run just entered month 25. That puts us one month past the minimum, 8 months from the 33-month average, and 20 months from the 1990s record-setting expansion.


Initial Claims | Pushing the Limit - Claims17 2


The following three charts show that the labor market in energy states has been deteriorating versus the rest of the country due to protracted weakness in energy prices.


Initial Claims | Pushing the Limit - Claims12


Initial Claims | Pushing the Limit - Claims13


Initial Claims | Pushing the Limit - Claims14

The Data

Prior to revision, initial jobless claims fell 19k to 259k from 278k WoW, as the prior week's number was revised down by -1k to 277k.


The headline (unrevised) number shows claims were lower by 18k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.5k WoW to 267.5k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -11.4% lower YoY, which is a sequential improvement versus the previous week's YoY change of -11.2%


Initial Claims | Pushing the Limit - Claims2


Initial Claims | Pushing the Limit - Claims3


Initial Claims | Pushing the Limit - Claims4


Initial Claims | Pushing the Limit - Claims5


Initial Claims | Pushing the Limit - Claims6


Initial Claims | Pushing the Limit - Claims7


Initial Claims | Pushing the Limit - Claims8


Initial Claims | Pushing the Limit - Claims9


Initial Claims | Pushing the Limit - Claims10


Initial Claims | Pushing the Limit - Claims11


Initial Claims | Pushing the Limit - Claims19

Yield Spreads

The 2-10 spread rose 1 basis points WoW to 99 bps. 1Q16TD, the 2-10 spread is averaging 109 bps, which is lower by -27 bps relative to 4Q15.


Initial Claims | Pushing the Limit - Claims15


Initial Claims | Pushing the Limit - Claims16



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT



Takeaway: Lazard (LAZ) still has extremely bullish sentiment according to our quantitative screen of Financials.

This morning we're flagging Lazard (LAZ - 91) as a short on sentiment. It is the highest ranked stock in the broker/asset manager category. Additionally, we hosted a best ideas black book call on January 12 on why the M&A environment and LAZ's AUM exposure to emerging markets makes the stock an interesting short. Please refer to our LAZ call replay and presentation materials for more information.


We are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.


The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  


We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.


Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.


The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 








The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”


Let us know if you would like to receive a copy of our black book, which explains this system and its applications.


BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   


SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

RH | What We Don't See That Matters

Takeaway: Last 'Brand Destructive' promo email sent 2/16 @ RH. Changing m.o. to set up next leg of growth from $2bn to $4bn.

There’s a lot happening this morning in the markets, but what interests us is what’s NOT happening.  Specifically, we’re witnessing (often without seeing) the change in RH’s promotional cadence play out.


The company noted with its 2/24 preannouncement that it would be moving away from promotions towards a membership model – which we think will be formally rolled out  within two weeks. But what happened just prior to the 2/24 announcement was the elimination of any and all promotional emails.


In fact, the last one was sent out on 2/16, and was arguably just as ‘Brand Destructive’ as the ones that came before it. In 3-years covering RH (the RH as it exists today) we’ve grown used to investors routinely talk about the latest promotional email from the company, and question why they exist for a brand that is supposedly so much higher-end.  Those emails were sent not only every day, but multiple times each day to tens of millions of consumers – most of whom will likely never spend a dime at RH.


RH | What We Don't See That Matters - 3 10 2016  RH promo email chg2


Three things have changed, however.

1) The first is size. Having an aggressive strategy where you need to blanket new consumers with spam on a) new products, and b) old products that need to be sold – might be appropriate when a company is maybe $500mm in sales (as RH once was). But it’s certainly not appropriate for a company that is $2bn in revenue looking to double in size through a higher end consumer base.


2) The second thing that changed is that selling online in this space stopped being as big of a competitive advantage about two years ago – at least how we look at it. Think about it…even Pier 1 went from 4% of sales online to about 20% in that time. Even aside from Home Furnishings competitors, most consumers’ in-boxes are absolutely riddled with product and promotional emails from every retailer/site they had the misfortune of registering with online…as well as the obscure retailers who paid-up for those (and your) email. The punchline is that the average consumer received about 10 emails per day three years ago from companies marketing products and services, but they receive 30 today.


3) Mobile has become a deterrent. About 90% of marketers now say that email is their primary channel for ‘lead generation’. But five years ago, mobile accounted for only 8% of marketing email opens. Today that number is 55%. Think about it…there’s a better than 50% chance that you’re reading this on a mobile device. I may be typing this on a mac with a 30” monitor, but it almost certainly looks less appealing when being consumed. Furniture takes this a step further. Why do you think that RH started presenting its quarterly earnings in a video format? Because it is an extremely visual part of retail, and they can appropriately show the vision on a big screen.  That might look good on a large desktop or a smart TV. But it looks ‘above average’ on a regular laptop, and downright horrible on a 4” mobile device.


The punchline is that RH is changing the way it markets its product not just because business is weak and it had a problem delivering on Modern. But because it’s what the company needs to do in order to double the size of the company. The m.o. of the past economic cycle will certainly not take it through the next one. In fairness, RH was ready to roll this new strategy out roughly 18 months ago, but our sense is that it had such great momentum that it did not want to risk disrupting. Now, the time is right. It might be painful. In fact, it will almost certainly be painful. But do you think that just maybe a $38 stock and 25% downward earnings revision already knows this?


We can’t stand the uncertainty around another gap downwardward if numbers come down again with the guide later this month. But we maintain that our recession-case EPS estimate is $2.50, which we think puts the stock near $30. On the upside, we definitely, positively, absolutely think $10 in earnings is in play. Pick any multiple you want – the stock is many times where it is today.

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CHART OF THE DAY: The Leading Indicator For Bank Stocks Is Falling

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... Oh, and by the way, “Financials” earnings got slammed BEFORE A) the recent crash in rates and B) the commensurate compression in one of the core leading indicators for “Bank Earnings” – The Yield Spread.


The spread between the 10yr US Treasury Yield and the 2yr is testing new cycle lows at 98 basis points wide. It’s a leading indicator for bank stocks because it’s a proxy for what they call Net Interest Margin (NIM)."


CHART OF THE DAY: The Leading Indicator For Bank Stocks Is Falling - Yield Spread CoD

Complex Games

“Thanks to their ability to invent fiction, sapiens create more and more complex games.”



That’s a big bridge between biology and human history. It’s both #behavioral and a summary point at the end of a chapter in Sapiens (by Yuval Noah Harari) titled The Tree of Knowledge. Good thinkers book. I’m enjoying it.


I’ve also enjoyed spending the week in the great state of Texas (my crystal ball had me book dates in Austin, Dallas, and Houston for the epic short squeeze in US listed Oil & Gas stocks).


West Texas Crude Oil is not only +10% in the last week, it’s +37% in the last month! No, I didn’t nail that. But, thankfully, I didn’t get nailed by it either. There is going to be a fantastic short-selling opportunity in levered Oil names again, hopefully a little higher.


Complex Games - fossil fuel cartoon 01.27.2016


Back to the Global Macro Grind


Fortuitously we took both Oil and Oil related indexes (XOP, XLE) off our Best Ideas in the Macro Themes deck on January 5th and replaced them with Utilities (XLU) on the long side and Financials (XLF) on the short side.


While plenty of our best SELL ideas (bottom up stock picks from my analysts) have been squeezed here in the 1st week of March, our best Macro Equity Sector Ideas have acted just fine:


  1. Utilities (XLU) were up another +0.5% yesterday to +11.0% YTD
  2. Financials (XLF) were down another -0.1% (in an up tape) to -7.9% YTD


That said, in Real-Time Alerts (shorter term signaling product) yesterday, I signaled that I wanted to cover some Financials and Housing related short ideas with me really having no idea what the market could do on today’s central-market-planning (ECB) event.


This morning I don’t want to get into the complexity of the Game of Slowing and how central planners (ECB this morning – BOJ and Fed next week) fundamentally believe that they can bend and/or smooth economic and profit cycles. I’d rather just wait and watch.


By the time this Early Look hits your inbox I may very well have an entirely different “market call” as we’ll have “new news” (or not) that the #BeliefSystem is or isn’t breaking down. How much longer will players in this complex game believe fiction?


Embrace uncertainty.


Even though many publicly traded US companies do not report earnings on a GAAP (Generally Accepted Accounting Principles) basis anymore, one thing I can tell you with certainty this morning is that Draghi and Yellen cannot Ctrl+PRINT Sales & Earnings growth.


With 494 out of 500 companies in the S&P 500 having reported their recent quarter (many non-GAAP):


  1. Aggregate SALES growth slowed to -4.0% year-over-year
  2. Aggregate EARNINGS growth slowed to -7.5% year-over-year
  3. With Consumer Staples squeaking out a +0.8% y/y EPS gain, only 4 of 10 Sectors have positive EPS growth
  4. Yes, Energy and Materials have y/y EPS declines of -73% and -18%, respectively
  5. But our favorite Sector on the short side (Financials) had a -9.4% year-over-year decline


Sure, you can dial-a-sell-side-strategist who’s been “backing out Energy” for the last 6-9 months, but how many of these characters proactively predicted that during a “rate hike” that Financials would be the biggest rate of change loser in their narrative?


Reminder: there are 90 companies in the S&P 500 that are categorized as “Financials”, whereas there are only 40 companies that are currently classified as “Energy.”


Oh, and by the way, “Financials” earnings got slammed BEFORE A) the recent crash in rates and B) the commensurate compression in one of the core leading indicators for “Bank Earnings” – The Yield Spread.


The spread between the 10yr US Treasury Yield and the 2yr is testing new cycle lows at 98 basis points wide. It’s a leading indicator for bank stocks because it’s a proxy for what they call Net Interest Margin (NIM).


The wider the Yield Spread, the wider bank profit margins. The narrower the spread, the faster bank earnings slow.


This brings us all the way back to the #BeliefSystem. What can the ECB’s Mario Draghi or the Fed’s Janet Yellen do other than “cut rates” and, in doing so, impose further pressure on long-term rates and bank earnings?


We’ll have to see, won’t we…


But it appears that this complex game of storytelling is reaching the beginning of the end more so than the end of the beginning.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.69-1.95%



VIX 15.88-22.66
EUR/USD 1.08-1.11
Oil (WTI) 30.89-38.99


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Complex Games - Yield Spread CoD

Oil, Euro and the DAX

Client Talking Points


There is nothing quiet about this short-squeeze in oil (up another +4.6% yesterday and +37% in the last month alone for WTI; still -24% year-over-year). The immediate-term risk range for WTI has widened out to $30.89-38.99 with @Hedgeye TAIL risk resistance = $46.11.


Down small to $1.09 EUR/USD ahead of ECB President Mario Draghi’s attempt to walk on water. The immediate-term risk range is $1.08-1.11; hedge fund bets are all over the place on what happens here today – we say embrace the uncertainty and read & react.


The DAX is doing nothing into the event, but don’t forget that it’s still in crash mode (-22% from last year’s high) so any Japanese style break-down in the belief system that central planning can ramp asset prices higher is a real risk.


*Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

If you were long energy over utilities last week, nice trade! We'd remind you that Utilities (XLU) are outperforming the S&P 500 by +10% year-to-date. And that’s with the bounce. By contrast, Energy (XLE) was up 6.5% on the week but is up only 1% year-to-date.


General Mills (GIS) faces some headwinds across their portfolio, and although the 1H of FY16 was a challenge, the company has robust merchandising and consumer plans in the 2H that should improve results.


GIS has embarked on a mission to drive their top 450 SKUs, which represent 75-85% of their volume. Calling it their ‘Power 450’, surprisingly these 450 SKUs aren’t even in all retail locations and formats, broadening the distribution footprint of these top SKUs is priority number one for GIS’s sales team. The organization is also looking at the bottom 450, representing 1-2% of volume and making critical decisions on what products can be discontinued.


We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization.


We can’t emphasize enough the bigger picture from both a data and top-down market signaling perspective. To contextualize the relief rallies and short squeezes in asset classes and instruments that are counter to our more longer-term view. Here’s what how we think the macro environment plays out from here:

  1. The market is positioned for more rate hikes into 2016
  2. The data continues to deteriorate, and market volatility ensues
  3. The expectation that “all is good” comes off the table and the market increasingly pivots to the view that, throughout 2016, the Fed is going to hike rates in methodical fashion straight into an economic slowdown
  4. The market takes in the growth slowing pivot in real-time (Treasury rates and the dollar both move lower, and inflation-leveraged assets like gold catch a bid)


Once the policy catalysts are out of the way in the next few weeks, our expectation is a return to outperformance in growth slowing asset classes (TLT and XLU). If you’re in for the TAIL and the TREND call, focus on the data, not the desperate attempts of central planners to arrest economic gravity. A brief reminder: ECB chief Mario Draghi will attempt to walk on water today.

Three for the Road


NEW VIDEO | The Very Real Possibility Of A Contested #GOP Convention… @KeithMcCullough



When you win, nothing hurts.

Joe Namath


The cost of companies losing valuable people can be as high as $188 billion per year.  

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