On the First day of the second quarter, the S&P 500 was higher in an uneventful, pre-holiday trading session.  The biggest tailwind for stocks today was the upbeat and inflationary manufacturing surveys out of China, Japan, the UK, Europe and the US.


As reported Friday morning, payrolls rose 162,000 vs. the 184,000 consensus, while the unemployment rate was unchanged at 9.7%, in line with consensus. The payrolls increase was the largest since March 2007, though temporary 2010 Census hiring boosted the figure by 48,000. Net revisions were +62,000, with February payrolls revised to (14,000) from (36,000), and January revised to +14,000 from (26,000).


Some Hedgeye observations:

  • March unemployment rose to 9.8% (9.7% reported) net of census hiring
  • March employment gain of 162,000 was 114,000 net of temporary census hiring
  • The government continues to overstate the employment numbers

In early 2010, we learned that it’s the government bias to overstate payroll employment levels (to understate employment declines during recessions).  This bias was confirmed by the BLS’s benchmark revision published with the January 2010 employment report.  In January, the BLS had indicated that the underlying assumptions were failing to account for certain job losses.  We will not know the extent to which the government is making up the numbers until the next benchmark revision is published in February 2011 - after the November 2010 elections.


The better-than-expected economic data (and a declining dollar) helped fuel the outperformance on the part of market most leveraged to the REFLATION trade.  The Dollar index declined on Wednesday and Thursday last week and declined 0.47% for the week.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.66) and sell TRADE (82.31). 


With dollar down and commodities up on Thursday, the best performing sector on Friday was Energy (XLE).  Within the XLE, the E&P and oil services stocks led the sector higher.  Both subsectors finished higher every day last week.  The Materials (XLB) was the second best performing sector, with the precious metals stocks were among the best performers on the day.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (82.34) and Sell TRADE  (85.79). 


The Financials (XLF) outperformed by 10bps, with asset managers, life insurers, and guarantors providing the bulk of the outperformance.


The Hedgeye Risk Management models have all nine sectors positive on TRADE and TREND.  On Thursday, Technology (XLK) was a notable underperformer and the only sector to decline on the day. The software group was a notable laggard, with much of the focus on the weakness in MSFT.  The biggest loser was RIMM, which was down after the company missed on February quarter sales and units growth. 


Consumer stocks were higher on the day, but underperformed on a relative basis.  Consumer Discretionary (XLY) slightly outperformed Consumer Staples (XLP) on the back of the strength in Retail and names leveraged to the autos.


The VIX declined slightly on Thursday, down 0.7%.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.32) and sell TRADE (18.01).  We are currently long the VXX.


In early trading, gold is trading higher and stronger economic growth.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,114) and Sell TRADE (1,127).


Copper is trading at a 20-month high as China’s manufacturing expansion and shrinking global inventories helping drive copper higher.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.40) and Sell TRADE (3.67).


In early trading, equity futures are trading above fair value in reaction to encouraging non-farm payrolls data released while the markets were closed Friday, although the unemployment figure muted the impact of the payrolls information.  As we look at today’s set up the range for the S&P 500 is 12 points or 0.7% (1,170) downside and 0.3% (1,182) upside. 


Today's MACRO highlights are:

  • ISM Non-Manf. Composite - March data
  • US Pending Home Sales - February data

Howard Penney

Managing Director













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