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Initial claims this week fell 21k (18k net of the revision).  This positive print continued the volatile pattern of the last four weeks, in which the week-over-week change has been more than 15k up or down each week.  The four-week rolling average, which removes this volatility, decreased by 1k to 466k.  For another week, claims remain in the 450-470k range they've occupied for most of the year, well above the 375-400k range needed for unemployment to materially improve.  




Below the jobless claims charts, we show the correlations between initial claims and each of the 30 Financial Subsectors. To reiterate, Credit Card and Payment Processing companies show the strongest correlations to initial claims, with R-squared values of .62 and .72 over the last year, respectively.  Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up.  These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.  


In the table below, we found the correlation and R-squared of each company with initial claims, then took the average for each subsector.  For composition of the subsectors, see Chart 5 below.


INITIAL JOBLESS CLAIMS FALL 21K (1K ON A ROLLING BASIS) - init. claims subsector correlation analysis


The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical. 


INITIAL JOBLESS CLAIMS FALL 21K (1K ON A ROLLING BASIS) - init. claims company correlation analysis


As we've highlighted previously, astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .32 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared. 


Below we chart the raw claims data. 




The table below shows the stock performance of each subsector over four durations. 




As was noted in last Friday's unemployment report, May was the peak month of Census hiring, and it should be a headwind to jobs from here as the Census winds down.




Joshua Steiner, CFA


Allison Kaptur


Yesterday the Russell 2000, S&P 500, NASDAQ and Dow Jones were the four best performing indices globally.  For the time being, fears of a “double-dip” are being dismissed due in part to yesterday’s retail sales figure and today’s news that the IMF is raising its 2010 world growth forecast.  The retail sales data on Wednesday showed the strongest pace of growth in four years.  Despite the reported good news for the consumer, the Consumer Discretionary sector (XLY) unperformed on the day.  Yesterday’s 3.1% move in the S&P 500 came on an unconvincing 1% sequential improvement in volume.       


Overnight there was some follow-through in Asia; Japan was up 2.8%.  India (up 1%), Hong Kong (up 1%), and Australia (up 2.25%) also showed strength.  China declined 0.25% on the day amid speculation that China would implement a new round of property market tightening measures.  


In Europe, the supposed transparency and credibility surrounding the European bank stress tests also helped to underpin sentiment.  While the euro has traded higher in four of the last five days, it closed down 0.24% yesterday at 1.26.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.24) and Sell Trade (1.27).


Yesterday, treasuries were weaker with the dampened risk aversion in the markets.  The VIX declined 9.5% yesterday: a 22.3% decline over the past week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (25.01) and Sell Trade (29.99).


The dollar index was down 0.31% breaking our intermediate term TREND line of $83.96. It is now down -5.5% since the Hedgeye Q3 Macro theme of American Austerity started.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.35) and Sell Trade (84.96).


Looking at the sector performance, the Financials (XLF +4.4%), Materials (XLB +4.0%) and Energy (XLE +3.5%) were the three best performing sectors.  While Consumer Discretionary (XLY +2.8%), Healthcare (XLV +2%), Consumer Staples (XLP +1.9%) were the bottom three. 


Driving the XLF higher was the banking group as the BKX posted its biggest one-day gain today since May 10th.  The Trust names NTRS +6.9% and BK +6.4% were among the standouts in the group following the positive Q2 pre-announcement from STT.  Regional banks outperformed with the pickup in risk appetite; the KRE was up 4.5%.


Yesterday, we shorted the Industrials (XLI) into the significant outperformance.  The S&P steel index rose 6%; the industrial metals names have some of the best leverage to the risk/recovery trade.  Our GDP growth forecast remains below consensus.


The consumer related names underperformed as the risk aversion trade saw a move into higher beta names.  The low priced retailers and dollar stores provided the big headwind for the retail space.  With retail sales being reported today, it’s expected to be one of the more influential directional drivers for the broader market today. 


Commodity related equities outperformed, despite OIL and Copper being broken on TREND and TRADE.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.83) and Sell Trade (3.09).


Yesterday GOLD fell to $1,185 an ounce yesterday, the lowest price since May 24, before rebounding to close above $1,200.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,180) and Sell Trade (1,229). 


Oil continues to trade higher as the Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.51) and Sell Trade (75.28).  


As we look at today’s set up for the S&P 500, the range is 71 points or 5.2% (1,005) downside and 1.5% (1,076) upside.   Equity futures are trading mixed to below fair value ahead of the initial jobless claims number. 


Howard Penney













Shorting Slowly

“It does not matter how slowly you go so long as you do not stop.”



I started making short sales into yesterday’s US stock market close by re-shorting Spain (EWP) and US Industrials (XLI). During last week’s market down moves to fresh YTD lows I was on the sidelines from a short selling perspective. On market rallies, my strategy has been to start shorting slowly.


There is no other way to explain why I do what I do other than to tell you I have learned how to play this short selling game by doing. In my mid-20’s (the year 2000) I was tasked by a major hedge fund in Connecticut to do one thing – make money. Given that my first 3 years managing risk with real-ammo were in down markets (2000, 2001, and 2002), I learned pretty quickly that the primary path towards making money was not losing it.


A lot of people lose money in down markets. Then they blame a “great depression” or something that “everybody missed.” The truth is that most people aren’t experienced/competent short sellers. I have witnessed this both in analyzing the short selling processes of former colleagues and by generally observing markets. In order to make money on the short side, you have to trade.


From a purist “long term” investor’s perspective, “trading” is often considered a bad word. It doesn’t quite fit the storytelling in the marketing flip book that some asset managers who are too big to perform need to uphold. I use this modern day institutionalization of Duration Dogma to my advantage.


This isn’t to say that I am always right on the short side. I’m more focused on not losing money than anything else and that’s just how I think about risk management. As the interconnectedness of global markets continues to drive volatility in daily prices, I need to change our positioning alongside that. As far as I know, the only way to change a position in your portfolio is to “trade” it.


Let’s go back to the top and consider a real-time example of managing risk around what I consider a “core” Hedgeye 2010 short position – shorting Spain (EWP). For practical transparency/accountability purposes, here are the 3 most recent time stamps in the Hedgeye Virtual Portfolio:

  1. 5/18/10 re-shorted EWP at $34.74
  2. 5/24/10 covered EWP for a gain at $33.47
  3. 7/7/10 re-shorted EWP at 331PM EST at $36.93

What you should quickly notice here is that as bearish as Daryl Jones and my Macro Men were on Spain in Q2, I wasn’t able to hold onto the short position and pick the bottom (the EWP put in a YTD low at $30.14 on June 7th, a few weeks after I covered our short position).


What you’ll also notice is that I didn’t get squeezed for the +23% rally in the ETF from that June 7th low to yesterday’s close or the +12.5% rally we saw in the local Spain stock index (Spain’s IBEX YTD low was registered on 6/8/10 at 8869).


Altogether, the absolutist in me is satisfied with the outcome – we didn’t lose our clients’ money by adhering to the “this is our best idea, so we are going to let it ride because we are smarter than you” strategy. Short-And-Hold is not a long term risk management process. Shorting for absolute return is.


Shorting Slowly is another way to communicate how I think about getting back into short positions that I’ve recently covered with accurate, rather than emotional, timing. When you are bearish in a market that’s going up like yesterday’s did, the hardest thing to do is not hit the SHORT button.


I think I am sufficiently bearish (email for the slides we have on our Q3 Bear Market Macro theme). But that doesn’t mean I have to be short the SP500 (SPY) at any price. I wasn’t short the SPY for yesterday’s +3.1% melt-up and I’m not short it this morning either. I am waiting and watching.


What am I waiting and watching for? That’s easy – time and price. Across all 3 of the Hedgeye Risks Management durations (TRADE, TREND, and TAIL), the SP500 is broken – we call this a Bearish Formation and here are the lines that matter:

  1. TRADE = 1076
  2. TREND = 1144
  3. TAIL = 1094

So, why not wait and watch for my most immediate term line of resistance (1076) to confirm that this market is immediate term bearish from a TRADE perspective before I hit the button? I guess if you don’t have a line, it’s harder to adhere to planning your risk management process this way.


Most of yesterday’s melt-up in the US stock market has to do with the gravitational forces associated with chaos theory, not a Buy-And-Hope forecast by a conflicted IMF that both US and global economic growth is setting up to accelerate. Bear markets often bounce higher than bull markets do.


It’s mathematically impossible for us to get to this IMF 2010 GDP forecast for the US of 3.3% (upped from 3.1% last night) unless growth accelerates in the back half of the year. Don’t forget that Q1 GDP for 2010 was recently downwardly revised to 2.7% and 1.9% of that 2.7% was inventories. Our Q3 estimate for US GDP growth is 1.7% and this is why we shorted the Industrials (XLI) instead of another sector in the US into yesterday’s close.


On yesterday’s strength (which was the 1st up day of more than +0.54% in the last 12 - hooray) I sold all of our US Equity exposure in the Hedgeye Asset Allocation Model again taking our allocation to US stocks back to the “risk free” rate of return that the US Government is promoting – ZERO percent.


My immediate term support and resistance lines for the SP500 are now 1005 and 1076, respectively. If you’re looking to get short out there today, take your time and short slowly.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shorting Slowly - bear

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The Macau Metro Monitor, July 8th, 2010


According to the Macau Association of Workers, the few hundred local construction workers who had signed contracts with Galaxy Entertainment Group have not been called to work.  As a result, the association wants the Government to investigate Galaxy's recruitment fair held in March.  The association also said 816 construction workers who have participated in a government-sponsored training program have not found jobs.


LV Strip revs declined 6% in May, in-line with our projection. Baccarat volume was flat, despite the 26% increase in table supply, bucking the recent positive trends.



Baccarat volume carried the Strip last year, increasing every month except February (Chinese New Year calendar shift) and July (only a slight negative).  The Nevada Gaming Board released May statistics yesterday and Baccarat volume was essentially flat, despite the 26% increase in Baccarat table supply, mostly from the addition of CityCenter.  May represented the third straight month of sequential declines in YoY growth in that important metric.


At this juncture, it’s difficult to discern whether the slowdown is related to difficult Baccarat comps, the deceleration of the Chinese economy, or loss of business to Macau.  However, the trend is disconcerting, considering that slot and table volume excluding Baccarat continues to be sluggish as can be seen in the following chart.




Overall, Strip gaming revenue declined 6% which was right in-line with our projection.  As expected, slot hold percentage normalized versus a very low number last year related to the timing of the hopper count.  Consistent with what we’ve been hearing in the market – and in our projection, Baccarat hold percentage was significantly below normal at 8.3%, causing Baccarat revenues to fall 37%. 


Again, the only real surprise in the month was the aforementioned Baccarat volumes which is a metric we will be closely monitoring.  Given the addition of CityCenter and the sluggish results, the promotional activity in this important segment is ripe for acceleration.  The MGM properties likely will show significant share gains, although a very low hold percentage will prevent the gains from hitting the bottom line.  We believe WYNN and LVS lost Baccarat share in Q2.  Stay tuned.

Ukraine: The Silent Mover

For the last weeks we’ve been staring at the outperformance of the Ukrainian equity index, PFTS, which has held the top spot in year-to-date performance among global indices, and currently stands at +39.5% YTD.


While we expect that Ukraine’s equity market is not front and center on your screen, the country did make headlines yesterday after Fitch Ratings upgraded Ukraine’s sovereign credit grade one step to B from B-. More broadly, Ukraine, much like Hungary and Romania, has jockeyed with the IMF over funding to maintain its “fiscal and financial stability” over the last months. And while its lifeline with the “West” is important for market confidence, it’s clear that Ukraine’s attention is to the East, despite recent efforts by the US to “reset” relations with Moscow and the former Soviet states.  Note that Secretary of State Hilary Clinton visited Ukraine’s President Viktor Yanukovych last week on a five-nation tour that also included Poland, Azerbaijan, Armenia, and Georgia.


Washington may be playing a game of catch-up it can’t win. 


Irrespective of Washington’s goals, the election of Moscow-backed Yanukovych in February of this year has set the political tone for the country, one in which the Kremlin is pulling the strings. In that light, President Yanukovych has abandoned his predecessor’s commitment to join the North Atlantic Treaty Organization (NATO) and secured gas subsides with President Medvedev that should bring an end to gas disputes for him at home. (Remember the critical role Ukraine plays as the main transit supplier of Russian gas to Europe, moving up to 80%, with the remainder channeled via Belarus.)


Perhaps it is the confluence of optimism from an agreement with the IMF on July 3rd  for a new $14.9 Billion loan tranche; the hope of the country's upcoming road show for its first Eurobond sales since 2007 (to raise $1.3 Billion); and a more secure geopolitical environment with its near unilateral ties to Moscow, which could continue to drive Ukraine’s equity market and local currency, the Hryvnia, higher.  The charts below give context to the equity and currency moves over the last three years, while CDS prices indicate a waning in the risk premium YTD.


After the economy slid 15.1% last year, Fitch expects the economy to expand 4.5% this year, driven by stronger external demand. We don’t have an investment position in Ukraine, but monitor the country due to its geopolitical impact.  


Matthew Hedrick



Ukraine: The Silent Mover - ukr1


Ukraine: The Silent Mover - ukr3


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