As we highlight each week, initial unemployment insurance claims have for the last six weeks been moving higher. They've broken out of the three standard deviation channel we consider an important barometer. Given that claims are starting to go in the wrong direction, we've screened the Financials universe looking for the stocks with the highest R-Squared values to initial claims. The following chart shows the 45 stocks most correlated with initial claims. For reference, our screen looked at 170 Financial companies.




A quick caveat. Are all of these stocks actually being driven by claims to the extent suggested above? The answer is clearly no. Some of these high R-Squared values seem spurious. For instance, Aflac (AFL) appears to have 85% of the movement in its stock price explained by changes in claims, yet Aflac's principal business is disability insurance in Japan. So in this case, we think the correlation is more coincidental than causal. On the other hand, Capital One (COF), which shows a R-Squared value of 0.74, has a tight connection between earnings and general levels of employment, so in this case the high R-Squared value seems appropriate.


So what do we expect out of claims going forward? Our view is that claims are likely to resume their downward trend in the coming months for two reasons. First, there were numerous reports that the snowstorms throughout January/February adversely impacted the data. This wouldn't be the first time. For instance, in January 1996 a blizzard not unlike what we experienced this past month left most of the East Coast of the United States at a standstill. In the following weeks, initial claims rose 82k to 415k from 333k, only to then drop back down in the following weeks. Second, we think the census hiring will provide a tailwind for claims on the margin, as that hiring ramps up in earnest in March, April and May. The following chart shows census staffing levels by month over the last two censuses. This census is expected to require approximately two times the number of people needed in the last census.




If we're right about claims moving lower over the next few months, we would recommend long exposure to the high R-Squared names that have also seen their stock prices drop in the last six weeks - the duration over which claims have been on the rise. The following chart shows graphically which companies may be best positioned to benefit from a recovery in claims. On the x-axis is the R-Squared to claims. On the y-axis is the percentage change in stock price since January 15, 2010 - the date of the first of six negative prints on claims.




For those uncomfortable taking a view on claims, the following are some of the names with low, or no correlation to claims.




Finally, we republish our claims chart below for reference.




Joshua Steiner, CFA






Yesterday was a very strong day for the S&P 500.  The breadth of the market was very positive as every sector was up, as the S&P 500 rose 1.02% of the day.  On the bearish side volume easy down 22% day-over-day from a very snowy Friday in February. 


On the MARO front there were some positive catalysts (1) reports of a new rescue package for Greece benefited the RISK trade, (2) strategic M&A activity continued (3) a strong earnings season and (4) better-than-expected January spending data.  All of this was good for the dollar index, which was up 0.37% on the day.  Today’s set up of the Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.26) and sell Trade (80.97).


On the negative side a below-consensus 56.5 reading on the February ISM, along with declines in the forward-looking new orders and production components, seemed to be set aside by an improvement in the employment component to 56.1 from 53.3.


In return for support from other member nations, Greece is expected to announce on Wednesday that it has agreed to implement new austerity measures. The news helped underpin global equities and a number of pockets of the risk trade.  The unwinding of the RISK trade can be seen in the VIX, which is broken on all three durations – TRADE, TREND, and TAIL.  The VIX declining 1.23% yesterday and today’s setup of the Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (18.79) and sell Trade (22.01). 


All year long strategic M&A has continued to offer a tailwind for stocks.  Yesterday, MIL agreed to be acquired by MRK for roughly $6B in cash, while AIG +4.1% rallied after announcing the sale of its Asian life insurance business to PRU $35.5B. In addition, MXB (4.6%) said that it had agreed to acquire RISK in a deal valued at $1.5B.


Yesterday, the best performing sector was Consumer Discretionary.  Continuing it three week outperformance on the back of better-than-expected Q4 earnings and 2010 outlook, retail was the biggest contributor to the outperformance; the S&P Retail Index was up  1.6% on the day.  The positive trend in consumer spending got off to a strong start in 2010, rising 0.5% in January, with real spending up 0.3% and running at a 3.3% annualized rate thus far in 2010.


We are currently bullish on Technology and long the XLK.  Yesterday, the Semis lead tech higher with the SOX +3.1%. The bulk of the move was attributed to SNDK which was up 11.9%, which boosted its Q1 guidance at last Friday's analyst day, while also noting that it expects F10 revenue to come in at the upper end of its forecasted range.  An additional tailwind for the semis came from January global semiconductor sales data from the SIA, along with upwardly revised fiscal Q2 guidance from SWKS.


We are also long the Financials (XLF), but they lagged the broader index yesterday.  After outperforming in a down week last week, the banking group was weaker on the day with the BKX (0.4%).   There was not a lot of news flow yesterday to point to the decline.  


As we wake up today, Equity futures are trading above fair value and at session highs on anticipation the EU will agree to an aid package for Greece.   It’s a quiet day for economic data points today; we will get API Crude Inventories, ABC Consumer Confidence, and February domestic Vehicle Sales will be reported throughout the day.  As we look at today’s set up, the range for the S&P 500 is 19 points or 1% (1,103) downside and 1.0% (1,122) upside. 


Copper fell from the highest in more than five weeks in London as mines reopened in Chile after a magnitude-8.8 earthquake halted operations and the dollar rallied.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.18) and Sell Trade (3.39).


In early trading gold is unchanged.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,096) and Sell Trade (1,124).


In early trading OIL is trading above $79.00.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (77.12) and Sell Trade (80.91).


Howard Penney

Managing Director


US STRATEGY - QUIET and to the UPSIDE - sp1


US STRATEGY - QUIET and to the UPSIDE - usd2


US STRATEGY - QUIET and to the UPSIDE - vix3


US STRATEGY - QUIET and to the UPSIDE - oil4


US STRATEGY - QUIET and to the UPSIDE - gold5


US STRATEGY - QUIET and to the UPSIDE - copper6


Selling The Freakout!

“Art is making something out of nothing and selling it.”

-Frank Zappa


Frank Zappa was an iconoclastic musician who wrote all of the lyrics to his own songs. He was a critic of mainstream groupthink. He was a father of four. He was an American success story who understood how to make the passionate sale.


In 1966, Zappa and his band, The Mothers of Invention, released their debut album, “Freak Out!” You know I love that album’s name as much as I loved Zappa’s facial hair. Zappa had a great firefighter’s ‘stache. He could have easily doubled as Al Nicholls in Slapshot (Captain of the Charlestown Chiefs).


The art of risk management is “making something out of nothing and selling it” when the Manic Media is having their little Freakouts. We’ve talked about the efficacy of Selling Fear and shopping You Tube videos of empty Chinese cities to your local trading desks – when it’s consensus, these aren’t very effective short selling strategies.


With Greece up +3% and the SP500 up +1%, global stock markets put on quite a show yesterday. Short sellers from Athens to Albany got run-over old-time hockey style. Sorry wanna-be short sellers, the pros are playing this game now and this is what happens when you are Selling The Freakout!


Back in my day, I wasn’t afraid to dawn the cut-off jean shorts on Yale’s campus, so I can assure you that changing my mind from the long to the short side of a market isn’t a conceptual problem. Having a pair of scissors is sometimes all it takes when you want to make art out your Canadian denim portfolio.


Covering your shorts can be both a figurative and mathematical exercise. It all depends on where your goods are positioned before the tide rolls out. Every short position is a liability. Never forget that, or the water level will forget you. Gains on the short side are meant to be taken.


As opposed to some of the unaccountable 2009 short selling artists formerly known as Depressionistas, I have an investment portal where I can change my tunes real-time. It’s not iTunes, but it seems to work. Sometimes I’m buying. Sometimes I’m selling. It’s all virtual – and I’m cool with that too.


Currently I have 11 short positions in the Virtual Portfolio. On strength yesterday, I shorted the Russell 2000 (IWM) smaller cap index into the market’s close. We professional short sellers call this the ole hedge in the Hedgeye.


Zappa’s “Freak Out!” is frequently cited as one of America’s first “concept albums” (unified by a theme), and I think that’s a good way to think about how a global macro risk manager makes intraday moves. I start every investment quarter (every 3 months) with 3 Macro Themes. This quarter, those themes have been:

  1. Buck Breakout (long the US Dollar (UUP); short gold, GLD )
  2. Rate Run-up (bearish on long term US Treasuries – short IEF)
  3. Chinese Ox In A Box (we have covered our short position in Chinese equities, CAF)

Like a musician, I wake up repeating these themes over and over again, until I think I have it right. Sometimes, I wake up realizing that I either have it wrong, or that I am about to get it wrong. So I stop the music, and start over. Why be wed to your own lyrics when you can just change them?


Of our 3 Macro Themes for Q1 of 2010, the one that’s most likely to turn on me is the 3rd one – Chinese Ox In A Box. Rather than overstay my bearish welcome,  I have already started to transition my team to focusing on where we could go wrong in staying negative on China. Consensus is clearly starting to Sell The Freakout!


Here are some Chinese lyrics from Mr. Macro Market that we are listening to:

  1. China rallied +1.2% yesterday on a horrible (but proactively predictable) Producer Manufacturing (PMI) print of 52 (vs. 55.8 last month)
  2. Chinese stocks then traded down -0.48% last night, but made another higher-low
  3. The Shanghai Composite closed at 3073 and, critically, that’s held my immediate term TRADE line of support at 3041

On their own, these one liners are less-bearish. Collectively, they may start singing a song that’s outright bullish. Stay tuned. The art of risk management is that the music is always changing. After all, Selling The Freakout isn’t a unique idea. Zappa started doing that in 1966.


My immediate term TRADE lines of support and resistance for the SP500 are now 1103 (which is also the intermediate term TREND line of support) and 1122, respectively.


Best of luck out there today,





FXC – CurrencyShares Canadian Dollar — Canada's currency was on sale on 2/25/10 and we are bullish on the Loonie's long term TAIL, at a price. Look for rate hikes in Canada in the coming 6-9 months.


XLF – SPDR Financials — With sentiment negative and a Piggy Banker Spread hitting a record wide spread on 2/23/10, we bought red.


XLK – SPDR Technology — Technology is underperforming the SP500 YTD; a down day on 2/22/10 prompted us to buy more. We expect to see some positive mean reversion for Technology as M&A picks up.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10, we got the entry price that the risk manager makes a sale on strength.


GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.


XLP – SPDR Consumer StaplesGiven how many investors own Consumer Staples stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.


IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.


The Macau Metro Monitor, March 2, 2010



According to Lusa and the Macau Post Daily, the Macau gaming market generated revenues of ~13.4-13.5 billion MOP for the month of February, an increase of ~69-70% YoY and a decline of ~3.6% sequentially. February 2010 set a new record for gaming revenues in one day--more than MOP1 billion. As for market share, SJM continues to lead with 32%; LVS had 20%; WYNN had 15%; MPEL had 14%; Galaxy had 10%; and MGM Grand Paradise had 9% of the market share.

Foot Locker (FL): Black Book & Conf. Call Wednesday

Conference Call Wednesday March 3rd, 12 p.m. EST

We've been vocal about warming up to both Nike and Foot Locker as key ideas for 2010. We covered NKE on Friday's call, and now it's Foot Locker's turn.
Our Foot Locker Conference Call marks the publication of our Foot Locker Black Book. The call is open to institutional subscribers of Hedgeye's Retail vertical -- and for qualified prospective institutional clients.

The call will cover in detail why we think Foot Locker deserves a closer look, focusing on:

  • Historical underperformance in context of new leadership, with a new strategy
  • Store rationalization, brand realignment, product mix, private/exclusive branding, and reinvestment in marketing
  • Assets like e-commerce and international that have been overshadowed by lackluster U.S performance


Dial-in number:    (code: 668844#)


Have questions? Please send them to  either during, or at any point leading up to Wednesday's call. We will address every question either on the call, or in a personal response after its conclusion.



Contact to request access to the conference call, or to request access/pricing on the NKE Black Book and/or the FL Black Book. A replay of Friday's NKE call is also available to institutional subscribers of Hedgeye's Retail vertical -- and for qualified prospective institutional clients upon request.



Foot Locker (FL): Black Book & Conf. Call Wednesday - FL Cover


When Starbucks first opened they had traditional sizing of small, medium and large choices of beverage.  After raising prices for several years, the company looked to changing out the cups size as a way of raising prices and getting consumer to buy more, even though they may not want it. 


It appears that Starbucks is testing a new size in the Phoenix market: Trenta.


The old Starbucks…       

Small = 8 fl oz
Medium = 12 fl oz
Large = 16 fl oz


Today’s Starbucks…

Short = 8 fl oz (you have to ask for this and in many cases the store does not have it)
Tall = 12 fl oz
Grande = 16 fl oz
Venti = 20 fl oz

The word venti stands for 20 in Italian. 


Tomorrow’s Starbucks…

Tall = 12 fl oz
Grande = 16 fl oz
Venti = 20 fl oz 

Trenta = 30 fl oz


According to Wikipedia - Trenta is a town and comune of 2,616 inhabitants in the province of Cosenza in the Calabria region of southern Italy.  Trenta is situated high in the Crati Valley. The town's ancient name, Triginta, derives from the Latin number triginta or thirty.



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%