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The data is getting worse, but the jury is still out until we get past the Easter anomaly. After getting positive datapoints out of both JPM's March subprime unsecured print yesterday and this morning's COF March data (and DFS for that matter), the jobless claims data this morning laid an egg (for the second week in a row). Claims climbed 24k this week, and are now up 42k in two weeks - now 484k. There was no revision to last week's number. The 4-week rolling average rose 7,500 to 457,750.  Consensus had expected just 430k initial claims.  The chart below shows the rolling average trend line. 




The last two weeks of data have been pushing claims farther outside our 3 sigma channel. To be fair, the Labor Department said that there were significant one-time items and Easter-related distortion affecting this week's number to the upside, but that's also the reason they gave last week, which is why the consensus for this week's number was off by a mile. We've said for the last month that we expect claims to improve, and so far we've been dead wrong. We'll reserve more final judgment until we see whether the Labor Department's explanations are valid (i.e. the next two weeks). Census hiring should continue to heat up this month and next. The following chart shows the raw claims data.




As a reminder, the following chart shows census hiring from the 2000 and 1990 census by month, which should be a reasonable proxy for hiring this spring. 




Joshua Steiner, CFA


Allison Kaptur


US STRATEGY - “I could go on and on”

“There is clear and broad-based improvement in the economic factors in the United States and around the world”

-JPM CEO Jamie Dimon said yesterday in talking about the economy 


The S&P 500 finished higher by 1.1% on Wednesday, with the average up 11 of the last 13 days.  The earnings calendar was the driver of yesterday’s performance, with better-than-expected results out of the Financials (XLF) and Technology (XLK) - two of the three best performing sectors.  Rounding out the top three was consumer discretionary (XLY). 


The MACRO calendar was another bright spot for some, as inflation appeared subdued and the resilient consumer is Omnipresent.  Lastly, despite JPM’s blow out earnings and positive economic commentary, Fed Chairman Bernanke reiterated today that rates will remain low for an extended period. 


The speculation that China would print a better-than-expected Q1 GDP was correct, which continues to help support the RISK/RECOVERY trade. 


Yesterday, the Financials (XLF) were the best performing sector, as the banking group resumed its upside leadership today with the BKX +3.4%; the BKX is now up 34% year-to-date.  Yesterdays’ rally was largely driven by Q1 results from JPM (up 4.1% yesterday and 14.5% YTD), which beat on both the top- and bottom-line.  


To quote the CEO of JPM: “China’s growing, India’s growing, Japan is growing, home prices have stopped going down, consumers income is up, consumers are spending, service and manufacturing indexes are up, inventories are still low, I could go on and on.”  Yet, according to the FED, we still have the need for interest rates to stay at exceptionally low levels.


The Consumer Discretionary (XLY) was help by a strong retail sales number and LBO speculation in the housing group as Lennar was up 5.8%; the most since February 11th.  Retail sales rose 1.6% month-to-month in March vs. expectations for a 1.2%.  In addition, February retail sales were revised higher to 0.5% vs. the originally reported 0.3% increase.   Retail stocks also put in a strong performance, with the S&P Retail Index +1.7%.


Yesterday crude rallied 2.1% to close at $85.45, on the back of an unexpected draw in crude stockpiles. 


The commodity complex has also benefited for the dollar declining for the past four days.  The Dollar Index was down 0.39% yesterday and 1.65% over the past three days. 


Helping to boost the BETA trade yesterday was he continued meltdown in the VIX.  The VIX declined 3.8% yesterday and in now down 28% year-to-date. 


In early trading gold is trading lower, as the dollar rebounds from four down days. 


Copper prices are trading lower, despite a blowout GDP number from China. 


In early trading, equity futures are trading below fair value as Europe pares gains amid Chinese measures to reign in borrowing to curb the threat of inflation.  As we look at today’s set up the range for the S&P 500 is 23 points or 1.6% (1,191) downside and 0.3% (1,214) upside. 


On the MACRO calendar today:


  • Initial Jobless claims
  • March Empire Manufacturing
  • Feb TIC Flows
  • March Industrial Production
  • Capacity Utilization
  • April Philly Fed
  • Natural Gas Inventories
  • April NAHB Housing Market Index


Howard Penney

Managing Director


The Macau Metro Monitor, April 15th, 2010


Visitor arrivals in package tours increased by 16.3% YoY to 464,370 in February 2010. Visitors from Mainland China (336,551); Japan (21,944); Taiwan, China (21,456); and Hong Kong (19,922) rose by 9.4%, 17.3%, 47.2% and 5.4% respectively. In the first two months of 2010, visitor arrivals in package tours rose up by 12.9% YoY to 923,277.

At the end of February 2010, total number of available guest rooms of the hotel sector increased by 1,360 (+7.7%) YoY to 18,937 rooms.

A total of 578,877 guests checked into hotels and guest-houses in February 2010, up by 12.3% YoY. The average occupancy rate of the hotels and guest-houses increased by 8.5% YoY to 77.8% and that of the hotels reached 78.5%, with 3-star hotels leading at 82.2%. The average length of stay of the guests increased by 0.2 night to 1.5 nights. The cumulative number of guests reached 1,243,276 in the first two months of 2010, up by 19.5% over the same period in 2009.



The Tourist Price Index (TPI) for the first quarter of 2010 rose by 9.40% YoY to 161.81. TPI reflects the price changes of goods and services purchased by visitors, which is compiled according to the consumption pattern of visitors.


The price indices of Miscellaneous Goods; Accommodation; Transport & Communications; Food, Alcoholic Drinks & Tobacco; and Restaurant Services increased notably by 19.26%, 11.66%, 4.94%, 4.59% and 4.59% respectively, attributable to rising gold prices; substantial rise of hotel room rate, airfares, food prices, as well as higher charges for restaurant services during the Lunar New Year. On the contrary, price index of Clothing & Footwear registered a slight decrease of 0.38% year-on-year.



The preparation of a law to create an independent salary guarantee fund to which employees of insolvent companies can apply is in its final stages, says Secretary for Economy and Finance, Francis Tam Pak Yuen. Salary guarantee funds help ensure employees their due salary, compensation and other legally recognised benefits. Tam said that, by law, a portion of the taxes paid by gaming concessionaires is already destined for such a fund.  At present, the accumulated contributions amount to MOP600 million, a figure considered sufficient by the government to start this new scheme, said Tam. One of the goals of the law proposal in preparation is to create a sustainable guarantee fund, noted Tam.



Lawmaker Chan Meng Kam has proposed the creation of a new gaming license in Macau, to be managed by a government-backed company. Chan believes that each resident, as a shareholder in the new gaming concessionaire, would enjoy the benefits of the city's gaming boom. Chan is president of Golden Dragon Group which operates Hotel Golden Dragon, which includes a casino managed under SJM's gaming license.



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%

High vs. Low Society

“We took a perfectly useless psychopath like Valentine, and turned him into a successful executive. And during the same time, we turned an honest, hard-working man into a violently, deranged, would-be killer! Now, what are we going to do about taking Winthorpe back and returning Valentine to the ghetto?”

-Randolph Duke from the movie Trading Places 


When thinking about some of the topics that have been discussed in our morning meeting recently, the topic of a HIGH vs. LOW society has come up several times.  I joked that it’s like working at Hedgeye Risk Management where you have the Ivy League educated vs. everyone else.  All kidding aside, as a firm, we have some of the most talented young people working at Hedgeye, thanks to our ties with Yale University. 


That being said, the first thing I think of when talking about the HIGH vs. LOW society is the highly entertaining movie Trading Places.  (Sadly, our talented young group from Yale is too young to remember the movie.)  The storyline is that of a HIGH vs. LOW society and the movie has been called a modern take on Mark Twain's classic 19th century novel The Prince and the Pauper.


Fast forward to yesterday’s press briefing by White House Press Secretary Robert Gibbs and Treasury Secretary Tim Geithner; Mr. Gibbs commented that the market is going up because of Obama’s Administrative policies.  Mr. Gibbs is correct to a degree, and Mr. Obama gets full credit for the market’s performance under his term as president.  In fact, the President even gets credit for calling the bottom in the market when on March 3rd he offered some advice on the market saying stocks are "potentially a good deal for those willing to think long term.”  Great call!


Obama’s policies have created a V-shaped recovery and a 78% return in the market since he nearly called the bottom perfectly.  In many respects, his policies have created this HIGH vs. LOW society which might be very difficult to get out from under.


Yesterday, the S&P 500 rallied 1.1% (now up 8.6% YTD) on the back of the earnings calendar, with better-than-expected results out of the Financials (XLF - up 18.4% YTD) and Technology (XLK - up 4.4% YTD).  The Financials led the way yesterday, thanks to JP Morgan, and is the most striking example of the HIGH vs. LOW society.  


FOOD STAMPS VS PIGGY BANKERS SPREAD - The most recent statistics from the NY Times are that one in eight Americans rely on food stamps; one in four children in the United States rely on food stamps; and one in 50 Americans live on nothing but food stamps.  Contrast those disturbing facts against JPM’s reported earnings, which is a company that is printing money because of the Piggy Banker Spread.


To quote the CEO of JPM - “China’s growing, India’s growing, Japan is growing, home prices have stopped going down, consumers income is up, consumers are spending, service and manufacturing indexes are up, inventories are still low, I could go on and on.”  Yet, according to the FED, we still have the need for interest rates to stay at exceptionally low levels.     


President Obama’s campaign promised “Change” and to help the middle class.  Unfortunately, his policies that have helped drive the V shape recovery in the S&P 500 are only making the rich feel richer.


RICH vs. POOR - Back in early 2009, the spread in confidence levels, as measured by the Conference Board, between those people making more than $50,000 per year and those making less than $15,000 was 2 points.  As of the most recent reading the spread stands at 17 points.  


YOUNG vs. OLD - The Millennials were often cited as a strong political force that helped the Obama administration get elected.  It’s also the Millennials that are being hurt the most by the current recession.  Unemployment levels among the youngest demographic of our society stand at 25% versus 9.7% for the national average.    


BULLISH BEARISH SURVEY vs. CONSUMER CONFIDENCE - The most recent Institutional Investor survey shows one of the widest spreads between “bulls” and “bears” since 2007.  This, contrasted against the most recent ABC consumer confidence index, which fell to -47 in the week ending April 11, down 4 points from a week earlier, highlights the Wall Street vs. Main Street disconnect.  As an aside, today it was reported that the UK Nationwide consumer confidence fell to 72 in March vs. 81 in February.  We are not alone!


We have a chart book of MACRO data points that has only one relevant shape to describe the current economic recovery and that is a V and the signs of “over stimulation” continue.  China’s economic growth accelerated to the fastest pace in almost three years in 1Q10 - GDP rose 11.9%.  The market reaction to the news was muted as the case for continued policy tightening is clear.   


We are short the S&P 500 and "fighting the Fed" which makes us wrong, for now.  Right now, it’s more prudent to manage risk around the excessive stimulus measures that are unsustainable and inflationary.


As for Billy Ray Valentine and Louis Winthorpe III - they're not just getting rich... They're getting even!


Function in disaster; finish in style


Howard Penney

Managing Director


High vs. Low Society - ABC Piggy



Well not quite an elephant but Cosmopolitan may be IGT’s 2nd SBG property.



Finally, a positive catalyst emerges for IGT.  We think IGT may have landed a contract with Cosmopolitan to provide Server Based Gaming (SBG) across the property.  While probably not material in terms of financial contribution and it won’t hit until IGT’s FY2011, this should be considered a positive from a sentiment perspective.


IGT’s first SBG property, MGM’s Aria, opened in December.  IGT received a one-time payment of roughly $6 million for the system hardware and is essentially providing a free two year trial of its SB software.  Not bad from MGM’s perspective.  We believe the Cosmopolitan deal could be similar.  IGT should also procure a 50-55% market share at Cosmopolitan, similar to that at Aria and above its recent 35% ship share.  This is also good news for IGT.


A few other slot supplier tidbits:

  • IGT has a promising new application for SB called Random Riches whereby if a player bets X ($$'s/lines/etc) they know they will get Y (ie bonus rounds/ spins/ etc) thereby extending the time on device
  • SB Window for legacy games was a defense move against iVIEW DM (Pechanga for example)
  • WMS has submitted their operating system that would allow them to go SB at Aria.  Issue is that their games aren’t performing very well now because they have a limited library that has been approved….. since they built SB into all the games – it’s a slow process for them
  • BYI still has 5 outstanding issues to get compliant with SB but should get there by year end - moving but moving slowly.  Their games are performing well at Aria

A Tale of Two Commodities

Yesterday we added a long position in oil to our portfolio and gave a brief synopsis of the investment thesis in a follow-up research note.  The primary bullish factor in the longer term for oil, as we noted yesterday, is supply.  Global supply is constrained by almost any measure.  Some argue that Goldman Sachs manipulates the price (we heard this the other day), and maybe these pundits are correct, but the reality remains that there are serious supply issues globally for oil based on the current normalized demand picture.


Conversely, natural gas is exactly the opposite scenario.  The primary issue facing natural case pricing in the United States is natural gas supply.  Natural gas is primarily a local market, and therefore priced locally, with the swing factor being the increasing global supply of LNG (liquefied natural gas). 


Domestically in the United States, natural gas storage is well above the 5-year average.  In fact, as of the most recent report from the Energy Information Administration, natural gas in storage in the United States is 12 percent above the 5-year average.


Interestingly, the EIA expects natural gas consumption to increase 1.9% year-over-year in 2010.  In contrast, the current pace of production growth over the past six months has averaged 4.4%.  Needless to say, the combination of above average gas in storage with production growth outstripping projected demand, will be bearish for the price of natural gas.


LNG will also create a bearish overhang on the price of natural gas in 2010.  By some estimates, a 1% change in global liquefaction impacts global supplies by approximately 360 mmcf/d.  According to the IEA, from a mid-2009 report, LNG supply globally will increase by 50% between 2009 and 2013.  This will be a massive increase in supply, with the marginal amount being exported into the United States.


Below we’ve charted the price performance between oil and natural gas in the year-to-date, and the bifurcation is very clear.  We would expect the next couple of quarters to continue to be A Tale of Two Commodities.


Daryl G. Jones

Managing Director


A Tale of Two Commodities - Oil vs Nat Gas


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