US STRATEGY – The RECOVERY trade is in

While a worse-than-expected 85,000 decline in December nonfarm payrolls weighed briefly on recovery expectations, the S&P finished higher by 0.29% on Friday, closing up 2.68% for the week.  Volume declined 16% day over day, so the move on Friday was less convincing; breadth was also week on the day. 


ON the MACRO front, nonfarm payrolls fell 85,000 in December vs. consensus expectations for an unchanged reading.  However, November payrolls were revised to reflect a 4K gain vs. an originally reported decline of 11K. As expected, the unemployment rate held steady at 10% (largely due to a drop in the participation rate), while the 0.2% gain in average hourly earnings was also in line with the consensus. In general there were not many good things payroll to report.


On Friday the Financials (XLF) were the worst performing sector after rallying sharply for the balance of the week.  The banking group (BKX) fell for the first time on Friday, declining (0.2%).  The weaker-than-expected December employment report may have spurred some profit-taking in the XLF. 


Despite some weakness in the dollar the CRB was basically unchanged on the day.  The cold weather helped Orange Juice move up 7%, followed by Copper up 2.1%, Silver up 1.6% and Gold up 1.6%. 


The best performing sector was the Industrial (XLI), rising 1.6% on the day.  The RECOVERY trade got a lift from upwardly revised Q4 guidance from UPS +4.8%, and continued strength in recovery-leveraged pockets of the market such as steel, aluminum, copper, machinery and multi-industry/conglomerate stocks - GE was up 9.7% last week. 


The dampened risk aversion trade was evidenced by last week’s move in the VIX.  The VIX declined 4.7% on Friday and declined every day last week (the S&P 500 was up every day last week); and a bullish steepening move in Treasuries reflecting a pushback in tightening expectations.


The Technology (XLF) sector snapped a three-day losing streak on Friday, although the move was without much fanfare.  The semis were among the best performers with the SOX +1.5%.  Additionally, the memory names resumed their upside trajectory with SNDK up 2.5% and MU up 2.4%. 


The range for the S&P 500 is 17 points or 0.4% (1,149) upside and 1.0% (1,132) downside.  At the time of writing the major market futures are trading slightly higher.    


In early trading today Copper climbed for the first time in two days as a surge in Chinese imports boosted optimism that a global economic revival is under way.   The Research Edge Quant models have the following levels for COPPER – buy Trade (3.38) and Sell Trade (3.50).


In early trading today Gold is up for the second day in a row on the back of a weak dollar.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,115) and Sell Trade (1,156).


In early trading Crude oil is trading up 1% to $83.56 a barrel.  Last week oil rose 4.2% and has been up for 4 weeks in a row.  The Research Edge Quant models have the following levels for OIL – buy Trade (80.91) and Sell Trade (84.34).


Howard Penney

Managing Director


US STRATEGY – The RECOVERY trade is in - sp1


US STRATEGY – The RECOVERY trade is in - usdx2


US STRATEGY – The RECOVERY trade is in - vix3


US STRATEGY – The RECOVERY trade is in - oil4


US STRATEGY – The RECOVERY trade is in - gold5


US STRATEGY – The RECOVERY trade is in - copper6



Wynn Macau's market share gain and overall growth in December was impressive. New junkets and higher direct play contributed to the upside.



Wynn Macau generated approximately $5.2 billion in VIP junket rolling chip volume in December of 2010, up 71% over December 2009.  This is a staggering number for one property and is the second highest month ever recorded by Wynn slightly behind only May of 2008.  And that's not all of it.  Wynn's house junket contributed another estimated $600 million in turnover.


Hold percentage was somewhat higher than last year, but not by much.  We also estimate that Wynn's direct play generated significant growth over last year.  Total VIP revenue (including the house junket) increased 85%.  Total VIP market share climbed a whopping 570 bps from November to 18.7%, while Wynn's overall market share (including Mass) grew to 16.5% from 12%.




So in addition to higher direct play, what drove the increase?  During December, Wynn Macau had 10 junket rooms at the property, operated by 9 different junkets (including Wynn's house junket).  Apparently, two of the newer operators moved quite a bit of business over from Starworld and some smaller Macau casinos.  Indeed, Starworld's VIP rolling chip market share declined 170 bps, Galaxy in total fell 140 bps, and SJM in total fell 170 bps.  Meanwhile, Wynn's two largest junkets maintained the current book of business at around $1.3 billion each.


Is the move sustainable?  Maybe, November also showed a marked sequential increase in VIP chips share, up 260 bps.  November stopped a fairly consistent share degredation following the 2009 peak in May. 

Early Look

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The Week Ahead

The Economic Data calendar for the week of the 11th of January through the 15th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - wkk1ab

The Week Ahead - wk1b


The Rear View Peak

In classic partisan style, political pundits are now debating whether or not the unemployment rate is a lagging indicator. Many politicians don’t do math. That’s why this is only a political debate. The peak unemployment rate is now in the rear view.


October’s 10.2% unemployment rate will be looked back on as just that, the peak for this part of the cycle. While this morning’s 10% rate was in line with November’s reported unemployment rate, the probability in our macro model continues to climb that we will be seeing a 9% rate in the coming months.


As our new Financials Sector Head, Josh Steiner, wrote in a note earlier this week titled, “Census Hiring An Added Credit Tailwind for 2010”:


The US Census bureau has begun hiring for the upcoming decennial census. Hiring in earnest will begin in March/April once it is known how many people will be needed to conduct the census. For those unfamiliar, the census survey is mailed out to every household in America, and census workers are needed to canvas those homes in which the census is not mailed back. So, from a hiring standpoint, it would be best if no one completed the mail-in version of the census. Census worker pay is $15-18 an hour if any readers are interested in moonlighting.


In the last census in 2000, the mail-in response rate was 67% and the census department is hoping for a comparable result this time around. This 67% response rate led to the hiring of 530k workers - or close to half Wal-Mart’s US workforce. The response rate in 1990 was 65%, roughly the same, and there were 335k workers hired for the job. This time around the expectation is that 1.2 million people will need to be hired to conduct the census, according to the head of census recruiting. With a number that large, expect census hiring to begin to generate a perceptible hiring tailwind this Spring and run through the summer.


If you are on the side of the bet that the unemployment rate is setting up to make higher-highs from here, that’s what makes a market. Both the bond market and stock market are telling you that the Depressionista bet remains the wrong bet.


Tops are processes, not points. However lagging this economic reality may be, it is far easier for me to see the peak point for America’s unemployment rate in the rear-view today than it was yesterday.



Keith R. McCullough
Chief Executive Officer


The Rear View Peak - unemplo

UK Inflation Pushing Higher

Today’s UK Producer Price Index report further reminds us why we want to steer clear of this economy in our portfolio. In particular, the Input Price Index jumped 6.9% in December from a year earlier, one indicator to us that further upward consumer inflation (CPI) should be expected over the next months as producers pass along inflated costs to consumers.  With annual CPI at 1.9% and UK GDP still struggling to show growth—quarter-over-quarter it was down 20bps in Q3 ‘09 and annually it fell 5.1%--broader fundamentals continue to look challenged in the UK.


Taking a step back it comes as no great surprise to see the UK report such inflationary figures. Not only has the country imported inflation through the depreciation of the Pound versus the USD and Euro, which bottomed just about one year ago, but the benefit of lower energy prices that we were seeing in July, August and September on an annual compare are now in the rear-view mirror. Input prices for materials and fuels began their rise in October at +0.4%, followed by 4.0% in November.


With the recent UK news flow including calls of no-confidence on PM Brown’s leadership to conflicting discussions on bank bonuses and compensation packages for its all-important but struggling financial industry, we remain vigilant of the fundamental and structural issues ailing the UK.  In Europe, we’re currently invested in Germany on the long side via the etf EWG in our model portfolio.


Matthew Hedrick



UK Inflation Pushing Higher - UKPPI

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.