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CLAIMS IMPROVE BUT REMAIN IN SAME RANGE THEY'VE BEEN IN YTD

Consistent with the trend year to date, claims remain in their ~450k range, too high for unemployment to improve meaningfully. This morning the reported number fell 14k to 460k, down from last week's revised print of 474k, and higher than consensus of 458k.  Rolling claims climbed 2k to 457k week over week.  Remember, we need to see initial claims fall to a sustained level of 375-400k in order for unemployment to fall meaningfully and, by extension, lenders' net charge-offs to return to normalized levels.  We remain well above that level.  

 

As a reminder around the census, May is the expected peak employment month. Starting next week the census will become a headwind for job creation.

 

CLAIMS IMPROVE BUT REMAIN IN SAME RANGE THEY'VE BEEN IN YTD - raw

 

CLAIMS IMPROVE BUT REMAIN IN SAME RANGE THEY'VE BEEN IN YTD - rolling

 

The following chart shows the census hiring timeline.  If the past two cycles are an appropriate model for this year's census, we should start to see Census employment draw down as we move into June, creating a headwind for employment. 

 

CLAIMS IMPROVE BUT REMAIN IN SAME RANGE THEY'VE BEEN IN YTD - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


CLAIMS IMPROVE BUT REMAIN IN SAME RANGE THEY'VE BEEN IN YTD

Consistent with the trend year to date, claims remain in their ~450k range, too high for unemployment to improve meaningfully. This morning the reported number fell 14k to 460k, down from last week's revised print of 474k, and higher than consensus of 458k.  Rolling claims climbed 2k to 457k week over week.  Remember, we need to see initial claims fall to a sustained level of 375-400k in order for unemployment to fall meaningfully and, by extension, lenders' net charge-offs to return to normalized levels.  We remain well above that level.  

 

As a reminder around the census, May is the expected peak employment month. Starting next week the census will become a headwind for job creation.  

 

CLAIMS IMPROVE BUT REMAIN IN SAME RANGE THEY'VE BEEN IN YTD - raw

 

CLAIMS IMPROVE BUT REMAIN IN SAME RANGE THEY'VE BEEN IN YTD - rolling

 

The following chart shows the census hiring timeline.  If the past two cycles are an appropriate model for this year's census, we should start to see Census employment draw down as we move into June, creating a headwind for employment. 

 

CLAIMS IMPROVE BUT REMAIN IN SAME RANGE THEY'VE BEEN IN YTD - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: UNEMPLOYMENT RISES

The Macau Metro Monitor, May 27th, 2010

 

UNEMPLOYMENT RATE INCREASES macaubusiness.com

The unemployment rate for February-April 2010 was 3.0% and the underemployment rate was 2.0%, up by 0.1% and 0.2% respectively over the previous period (January-March 2010).  Unchanged from the previous period, total labor force stood at 323,300 and the participation rate remained at 71.1%.


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US STRATEGY – CHINA SPEAK

It takes two to speak the truth. One to speak and another to listen.
    --Henry David Thoreau

 

Yesterday, the S&P 500 fell amid rumors that China may consider reducing its investment in European government bonds, creating a very bearish close for the S&P 500; lower-highs on the open; lower-YTD-closing-lows on the close.  We are waking up to a big rally in Europe and Asia, as China said it remains a long-term investor in Europe.   Commodities are rallying across the board with the exception of gold.  One of our favorite sayings last year was that President Obama needs to “shake hands with the client.”   The power of the Chinese continues to grow.  I hope we, as a nation, are listening.

 

Consistent with our 1Q10 theme “Chinese Ox in a Box,” the Chinese market rolled over in Q1, taking down the US market in 2Q10 - “April Flowers, May Showers.”  Concern of an overheating Chinese economy has had broad implications for commodities and the REFLATION trade.  The Chinese market officially “crashed” in early May, putting copper and crude in a bearish formation, which both have a very high correlation to Energy (XLE) and Materials (XLB).   

 

With the Chinese market up in four of the last five days, commodities prices are starting to rally (China was up 1.1% last night.)  Yesterday, the CRB closed at 253, up 1.4%.  Crude closed at 71.55, up 4% and is trading higher again today.   The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (68.51) and Sell Trade (73.78).

 

Yesterday, Treasuries were weaker despite the pullback in stocks.  The Dollar index was up 0.39% to $87.12.  The DXY is looking slightly lower today.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.08) and Sell Trade (87.18).  We are short the Dollar. 

 

Another sharp downturn in the EURO may have also weighed on sentiment yesterday, but the EURO held our level of $1.21 and is trading higher today.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.24).

 

The notable stand out in yesterday’s weakness was Technology (XLK).  The downward pressure was attributed to comments from MSFT (down 4.1% yesterday) CEO Steve Ballmer, who reportedly said that the fallout from the fiscal crisis will not be limited to Europe and the company may have to shift its focus elsewhere in Asia given the impact of China's enforcement laws.   There have also been a number of articles recently criticizing the CEO’s performance and suggesting he should maybe step down.  The S&P Software index fell 2.6% yesterday.   

 

On the MACRO front in the US, April housing data continued to come in ahead of expectations as new home sales surged 15% following an upwardly revised 30% gain in March.  Not surprisingly, housing-leveraged stocks were among the best performers yesterday; HOV +1.5%, SPF +0.9% and LEN +0.5% were among the big gainers.  TOL was up 0.8% despite a somewhat disappointing April quarter, but all is forgiven with outsized order volume growth.

 

The VIX remains in a bullish formation and was up 1.1% yesterday.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (27.23) and Sell Trade (44.95).

 

As the demand outlook improves, so goes copper.  China up, copper up!  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.01) and Sell Trade (3.18).    

 

For the time being, gold may have seen its day in the sun.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,204) and Sell Trade (1,240).

 

As we look at today’s set up for the S&P 500, the range is 55 points or 2.3% (1,043) downside and 2.8% (1,098) upside. Equity futures are trading above fair value following Wednesday's late day sell-off, which saw gains reversed with Technology stocks leading the decline.

 

On the economic front, to be reported today are:

  • Q1 GDP (2nd read)
  • Personal Consumption
  • Core PCE
  • Initial Jobless Claims
  • Natural Gas Inventories
  • Treasury Secretary Geithner and German Finance Minister Wolfgang Schaeuble hold press conf 

Howard Penney

 

US STRATEGY – CHINA SPEAK - S P

 

US STRATEGY – CHINA SPEAK - DOLLAR

 

US STRATEGY – CHINA SPEAK - VIX

 

US STRATEGY – CHINA SPEAK - OIL

 

US STRATEGY – CHINA SPEAK - GOLD

 

US STRATEGY – CHINA SPEAK - COPPER


The Biggs Squirm

“I wouldn’t be surprised to see us go to a new recovery high, just to make everybody squirm.”

-Barton Biggs, May 27, 2010

 

Mornings like these are what I love about this game. A veteran player steps up to the plate and grabs headlines being on the polar opposite side of my positioning. Barton Biggs is now officially the bull who is going to dance with the Thunder Bay Bear.

 

The aforementioned quote comes from the #2 story on Bloomberg early this morning: “Barton Biggs Says Stock Market Set to Pop in Days.” Notwithstanding that this is a fairly easy call to make after the futures are already “popping”, what I’m more interested in here is whether or not the likes of Mr. Biggs are teeing themselves up for another performance redo of their 2008 seasons. There is systemic risk in that.

 

With the exception of our short selling and risk management processes, Biggs and I have a lot in common. We both went to Yale. We were both student athletes. We are both overly confident strategists who fancy ourselves as men of the Global Macro Gridiron.

 

We are both actually pretty grumpy too…

 

All pleasantries aside, these days it’s Mr. Biggs who is doing the squirming. His NYC based global macro hedge fund, Traxis Partners, cannot afford to prove that the rumor is indeed true – he cannot make money in down markets…

 

Biggs isn’t alone in this camp. So let’s just call this for what it is. A lot of people grew up in this business like Biggs did, not having to manage interconnected global macro risk on a marked-to-market basis (he was on the sell-side). After going to the buy-side, Biggs missed calling the global macro crash of 2008, and now he is missing the global equity and commodity market meltdowns being perpetuated by the Keynesian Fiat Fools.

 

I am all for doing global macro but when it comes to defining global macro at Traxis, what is it exactly, Mr. Biggs, that you do? Let’s go through who has been doing the squirming in 2010 to date.

 

I have no idea what Biggs is down YTD, but here’s a summary of what the perma-bulls in global equities may have missed:

  1. Asian Equities: Chinese Ox In Box – the Chinese tightened and knocked their stock market to -22% YTD on May 20th 
  2. European Equities: Sovereign Debt Dichotomy has proven disastrous for all of the major European indices, with Greece, Spain, and France down -28%, -24%, -12% YTD, respectively.
  3. Latin American Equities: Inflation’s V-Bottom has provided the impetus for Mereilles to raise rates in Brazil and mark the Bovespa’s lows at -14% on the YTD low which was established earlier this week.

Now if Biggs’ version of global macro is simply being long-only US Equities, he’s probably doing a lot less squirming. After all, all squirming must be relative, right? Nevertheless, he is calling for a “recovery high” on the morning after the SP500 made a fresh YTD low?

 

The SP500’s closing low of 1067 yesterday was a lower-low for both the YTD and the current cycle. We called for this at the beginning of Q2 with our April Flowers/May Showers slide presentation. I hope Biggs wasn’t buying stocks on the April 23rd peak of 1217, because the market has lost 12.3% of its value since and is now down -4.3% YTD.

 

We are all for a good bull/bear battle. We want to be the change that we want to see in this business. That starts with being transparent and accountable to our market positioning, real time. If Mr. Biggs is going to get on Bloomberg TV and call our bearish call on European and US Equities “ridiculous”, he will be forced to dance with the Bear in front of a larger audience. Ridiculous is as ridiculous does…

 

This isn’t Morgan Stanley anymore Barton. Crises in our industry has created a generational opportunity and youth is ambition’s ladder. My former Morgan Stanley analysts are all grown up now. Don’t expect them to be the underlings who will stand down to your former title. The modern day Roman Empire of Wall Street Perceived Wisdoms is falling.

 

We have moved to 70% cash in our Hedgeye Asset Allocation Model. In terms of US Equities, our asset allocation remains ZERO percent and we are short both the SP500 (SPY) and Nasdaq (QQQQ).

 

We are still a seller of all buy-and-hope oriented strength. We will likely short the SP500 (SPY) again today. We will cover our shorts when the real squirming out there is over.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Biggs Squirm - Biggs



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