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Yesterday, the S&P declined 0.17%. Though the uptrend remained intact, we saw a serious late-day reversal on Thursday. The waning upside momentum and negative internal divergences are catching up with the market; the Hedgeye models now have Energy (XLE) and Utilities (XLU) broken on TRADE AND TREND.  On the margin, the markets did have more support from the MACRO data flow.  Volume was up 13% day-over-day.


A better than expected jobless claims number provided more evidence for the RECOVERY trade.  Initial claims for the week ending March 20th were 442,000; lower than consensus 450,000 and down from the prior week’s revised number of 456,000. This is the lowest level in six weeks.  The 4-week moving average was 454,000; down from a revised prior week number of 465,000.


As our Financials analyst Josh Steiner noted yesterday “It is worth noting that the seasonal adjustment factors were updated this past week, as they are annually, which had the effect of lowering claims by 10,000 more than they would have been under the old methodology.  We think it's also worth noting that while the rolling average claims remain outside our 3-standard deviation channel, the one-week claims data is now tracking the high side of our channel suggesting further improvement ahead. We continue to expect to see a claims tailwind throughout the spring months (April, May) as census hiring picks up and weather-related effects dissipate.”


European Central Bank President Jean-Claude Trichet endorsed an aid plan for Greece, toning down his opposition to IMF involvement.  Disagreement over Greek aid, coupled with a downgrade for Portugal’s credit rating, has fueled concern that the European sovereign debt issues will undermine the RECOVERY trade.


Yesterday, the best performing sector was the Consumer Discretionary (XLY) and we shorted it.  At the highest prices we have seen in the US stock market since 2008, we are now shorting what's has been THE PAIN trade the entire way up: short the US consumer.  Helping the XLY was positive performance by the retailers (BBY and LULU) and a more positive outlook on employment driven by the jobless claims data.  AMZN and PCLN were the two best performing stocks in the XLY.


For the fourth day in a row, the Financials (XLF) outperformed although dropping well off their highs in the last hour.  Bernanke’s testified yesterday that his free money policy will continue as the “economy still requires accommodative monetary policies.”  The banking indexes (BKX) lead the way again driven by the larger money center banks; the regional’s underperformed the sector. 


The Dollar index had another strong day improving 0.34%, but is trading down slightly in early trading.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.69) and sell Trade (82.32).  The strong dollar is putting significant pressure on the REFLATION trade, as the CRB is broken on TRADE and TREND.   Materials (XLB) and Energy (XLE) were the two sectors that were down the most yesterday. 


While the VIX remains broken on all three durations - TRADE, TREND and TAIL - it has improved 12% over the last two days.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy Trade (15.98) and sell Trade (18.60). 


In early trading oil is trading higher for the first day in the last three as the dollar weakens.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.55) and Sell Trade (81.49). 


Gold prices are trading higher in early trading for the second day in a row.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,080) and Sell Trade (1,120).


In early trading, copper is trading higher on lower weekly Chinese stockpiles.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.35) and Sell Trade (3.42).


In early trading, equity futures are trading above fair value and near session highs in an attempt to reverse the sharp selloff into the close yesterday.  As we look at today’s set up the range for the S&P 500 is 25 points or 1.3% (1,151) downside and 0.9% (1,176) upside. 


Today's MACRO highlights are:

  • GDP (Q4 3rd read)
  • U. of Michigan - March final


Howard Penney

Managing Director














Some tidbits we’ve picked up recently.  LVS good (hold), WYNN not so good, MGM bad.




  • Business is slow aside from room bookings around events…won’t see a pick up until 2H2010
  • Problem is that the lower end properties are giving rooms away and dragging everything down
  • Weekends are good. Weeknights are filling with unemployed people
  • Feb should be up for the Strip – as we wrote about in our 3/23/10 post “FEB STRIP REVS COULD BE POSITIVE”
  • High end play continues to be the only gaming bright spot, driven by strong Baccarat play
  • Cosmo may bleed into next year opening wise, which shouldn't be a surprise as the opening has already been pushed back to "late 2010"


  • 1Q will be an ugly quarter, 2Q will probably be as well – we are expecting a miss and need to lower our numbers
  • Occupancy in the high 80’s/low 90’s
  • No longer saying that they can hold rate… but even discounted convention business or business travel is better than the unemployed visitors today – even at $50 per night
  • 20-25% of occupied room nights come from convention customers, however those customers generate 30-35% of their revenues
  • 60-70% occupancy mid week at CityCenter and they have zero convention business so far. Weekends are high 80’s low 90’s.
  • High end play is good – all on Baccarat (volume wise)



  • LVS could put up a $100MM EBITDA quarter in Las Vegas due to high hold percentage – we need to raise our $90 million estimate
  • Convention business is doing ok – better than last year but that is not saying much



  • Wynn continues to struggle like everyone else
  • High end play is good but still very reliant on room rates.

Walk-in Closets and Consistent Deflation

Walk-in Closets and Consistent Deflation


One of the few categories of goods or services that has been consistently deflationary for decades is apparel and footwear.  Whether this is good for the industry or the companies we watch day in and day out is debatable, but one thing is sure.  Apparel and footwear is the most affordable it has EVER been when measured as a percentage of personal disposable income.  Thankfully, this keeps consumers from running around naked and keeps those with big closets happy.  While none of this is new (after all spending on apparel as a % of income has decreased in 20 of the past 22 years) , it’s still eye opening to take a look at the trend over time and consider how affordable clothing and footwear has become. 


Walk-in Closets and Consistent Deflation - Clothing Expenditures Share Historical


Global competition, technology advancement, and productivity gains have all been key drivers of deflation across the space for years.  The question now is how much lower can prices actually go?  It’s hard to envision retailers like Old Navy, H&M, Target, Wal-Mart, and even Aeropostale finding much more room to drive prices lower with sufficient demand elasticity.   On the other hand we’ve created a society of hoarders, consumption junkies, and walk-in closets. 


Walk-in Closets and Consistent Deflation - CPI History


Eric Levine


Frau "Nein"

With Germany’s Chancellor Angela Merkel leading the debate on Greece’s debt bailout via the IMF rather than a European-led endeavor (a stance counter to her French counterpart Nicolas Sarkozy), she recently earned the title of Frau “Nein” by the European media.  While Merkel’s stance is fiscally rooted, politically she also wants to avoid tapping into German coffers, an important point as confidence in her party’s management toward the return of economic growth has waned in recent months.


As we get more vocal on owning quality on the long side (own High Grade Versus High Yield) in the face of domestic and global PIIGS, Germany’s fiscal conservatism continues to be a factor we’re bullish on. And recent German fundamentals suggest a favorable environment of low inflation, with CPI registering +0.5% in February Y/Y [versus +3.0% in the UK and +2.1% in the US] and lower input prices benefiting Producers, with PPI at -2.9% in Feb. Y/Y [versus +4.1% in the UK and +4.4% in the US].


While exports took a dive of -6.3% in January sequentially, we’d expect the weakness in the EUR versus the USD (EUR is down 6.8% versus the USD YTD) to benefit exports in the months ahead. As an aside, consensus is clearly now short the Euro; we’d guide to TRADE the range in a narrow band – buy/cover at $1.33 and sell/short at $1.36.


Additionally, over the last two days we received German business and consumer sentiment surveys. Although we don’t put our chips on surveys alone, the charts below show (consensus) trends. IFO’s business survey is making higher highs since early 2009, confirming margin improvement and global demand acceleration. On the consumer front, the fear of unemployment remains a dominating force, underlining the sideways trend, despite unemployment holding stable at ~8.2% over the last months. 


In terms of German stocks, our intermediate term TREND line of support on the DAX is now 5791. The DAX is building another bullish long term base.


Matthew Hedrick



Frau "Nein" - G1


Frau "Nein" - G2


A Briefcase Tradition

Yesterday, Chancellor of the Exchequer Alistair Darling delivered the UK’s 2010 Budget.  Below are segments of his speech concerning go-forward policy that we found worthy of mention:

  • At its heart is a £2.5bn one-off growth package – to help small business, promote innovation, invest in national infrastructure and key skills.
  • At the Pre-Budget Report I put in place a one-off 50 per cent tax on the excessive bonuses of bankers….I can tell the House that this tax has raised £2bn, more than twice as much as was forecast.
  • Last week’s figures, however, showed that UK unemployment had fallen, and is lower than in the euro area and America.  Even after the severity of this recession, the claimant count stands today at 1.6m people. This compares with three million people in the recessions of the early 1980s and 90s.
  • For younger workers, I have introduced a guarantee of a job or training for every 18 to 24 year-old after six months out-of-work, which is already proving a success.
  • This year, as I said in last year’s Budget and Pre-Budget Report, I expect the economy to grow by between 1 and 1 ½ per cent. I will bring my forecast for 2011 in line with that of the Bank of England, to growth of between 3 and 3 ½ per cent.
  • I want, however, to help families and business through this period…. Instead of the planned increase, fuel duty will rise by a penny in April, less than inflation [currently at +3.0% in February].
  • By the time the full rise comes in, at the beginning of next year, I am forecasting inflation to be back below 2 per cent.
  • At the Pre-Budget Report, I forecast that public sector net borrowing would reach £178bn this year…. As a result, I can tell the House that borrowing this year should now be £11bn lower than forecast, at £167bn.
  • But with the economy recovering in later years, together with the revenue from tax increases already announced, borrowing will fall to £131bn in 2011-12; then £110bn; in 2013-14 it will be £89bn; and it will reach £74bn in 2014-15 - that is £8bn lower than forecast in December.
  • As a share of the economy, borrowing is forecast at 11.8 per cent of GDP this year. It will then fall to 11.1 per cent next year; then 8.5 per cent; in 2012-13 it will be 6.8 per cent; then 5.2 per cent; and fall to 4.0 per cent in 2014-15.
  • I know there are some demanding immediate cuts to public spending. I believe such a policy would be both wrong and dangerous. To start cutting now risks derailing the recovery …
  • The 50 per cent rate of income tax will come in next month, but only affects those with earnings over £150,000 a year, the top 1 per cent of earners.
  • I have no further announcements on VAT, on income tax, or National Insurance rates.
  • At the Pre-Budget Report we committed government departments to find over £11bn of new savings through reforms, without damaging front-line services… In total, [we have now found] over £20bn worth of savings to reduce borrowing and protect front-line services.
  • I will help small businesses to expand by doubling the annual investment allowance to £100,000. As a result, 99 per cent of businesses will be able to deduct in the first year, from their taxable profits, all investments in plant and machinery.

One remark from the speech is Darling’s tone on UK banks. He notes that, “We will sell our shares in RBS and Lloyds, as well as Northern Rock, in a way that maximises value for the taxpayer and recoups the money we invested.” He paints with a wide brush the excesses of UK banking bonuses and stresses the benefit of the revenue generated from the one-time banker tax, but in his populist stance ignores mentioning that such taxes could cause employees to walk from the country to such centers as Frankfurt or Zurich, a not inconsequential point due to the significance of the banking industry for the UK economy. 


While yesterday's budget announcement doesn’t change our bearish view on the UK economy, it adds incremental data to our investment outlook.


Matthew Hedrick



Claims data this morning showed further improvement. Claims dropped 14k week over week to 442k from 456k (last week was revised down 1k), while the 4-week rolling average declined by 11k to 454k from 465k. The following chart shows the rolling average trend line. Below that we show the raw data.




It is worth noting that the seasonal adjustment factors were updated this past week, as they are annually, which had the effect of lowering claims by 10k more than they would have been under the old methodology. We think it's also worth noting that while the rolling average claims remain outside our 3-standard deviation channel as depicted in the above chart, the one-week claims data is now tracking the high side of our channel suggesting further improvement ahead. We continue to expect to see a claims tailwind throughout the Spring months (April, May) as census hiring picks up and weather-related effects dissipate.




The following is the census hiring chart showing hiring in the 2000 and 1990 census by month, which should be a reasonable proxy for hiring this Spring.





Joshua Steiner, CFA

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