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INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH!

Jobless Claims Hit 500k

Initial jobless claims rose 12k last week to 500k, the highest level since November 2009.  Consensus had called for a small decline.  Rolling claims rose 8k to 482.5k, also the highest level since last November.  We have been looking for the range of 375-400k as the maximum level for unemployment to fall meaningfully, but with claims moving the wrong direction, the spectre of rising unemployment looms.  

 

To reiterate, our firm is of the strong view that US economic growth is going to slow markedly in the back half of this year and into 2011. We think this will keep a lid on new hiring activity and will keep cost rationalization paramount in the minds of C-suite executives. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - rolling

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - raw

 

Below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - 1

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind through September as the Census continues to wind down.

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER

Jobless Claims Hit 500k

Initial jobless claims rose 12k last week to 500k, the highest level since November 2009.  Consensus had called for a small decline.  Rolling claims rose 8k to 482.5k, also the highest level since last November.  We have been looking for the range of 375-400k as the maximum level for unemployment to fall meaningfully, but with claims moving the wrong direction, the spectre of rising unemployment looms.  

 

To reiterate, our firm is of the strong view that US economic growth is going to slow markedly in the back half of this year and into 2011. We think this will keep a lid on new hiring activity and will keep cost rationalization paramount in the minds of C-suite executives. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - rolling

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - raw

 

2-10 Spread Compresses Further

 

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. The 2-10 spread (a proxy for NIM) has been collapsing in the past two quarters.  The current value of 214 bps compares to 217 last week.

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - spread

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - spread QoQ

 

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

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - perf

 

Below we show the correlations between initial claims and each of the 30 Financial Subsectors. We have refreshed this table to reflect prices through the end of July. Using this updated measure, Credit Card and Payment Processing companies remain the most correlated to initial claims, with R-squared values of .63 and .65 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.  

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - init. claims subsector correlation analysis as of 8.4.10

 

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 .33 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. 

 

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 CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - init. claims company correlation analysis as of 8.4.10

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind through September as the Census continues to wind down.

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


SBUX: LINKING CAFÉ AND CPG BUSINESSES

Starbucks announced an interesting strategy to construct a relationship with supermarkets through its own cafes. 

 

Reports came through last night about a new strategy by Starbucks to use its rewards program to bring grocery store customers to its cafes.  Starbucks’ Via product reached sales of $100 million in its first 10 months and Starbucks has reiterated several times over the last few months that creating a significant packaged goods business is a centerpiece of its growth strategy. 

 

The chart below shows TRADE line resistance for SBUX building at $25.03.

 

SBUX:  LINKING CAFÉ AND CPG BUSINESSES - sbux levels

 

Howard Penney

Managing Director


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EARLY LOOK: Spread Your Wings

Subscribers have access to the EARLY LOOK note every trading morning at 8am (in real-time).  This is a one-off post for this morning.

 

 

_________________________________________________________

“You need to be decisive, open- minded, flexible and competitive.”
-Stanley Druckenmiller
 
Our profession saw one of its all-time greats retire yesterday. Stan Druckenmiller, as one of his good friends told me, was one of the best at this game because “when he knew he was going to be right, he just spread his wings.”
 
After they get access to an interview, the manic media quickly comes to realize that hedge fund people aren’t Avatars. The most consistent hedge fund managers in this game are very matter of fact and common sense people. They have their own repeatable risk management process. They are as competitive as a professional athlete in executing it. And they are mentally flexible enough to change their positioning as the game changes.
 
Stan Druckenmiller likes to look at charts. I have a beauty that’s taped on the inside of my notebook that I often show clients to depict the correlation between hedge fund strategies going back to the early 1990’s. I use the early 90’s because that’s when we started to see the divergence between the real pros in this business and the monkeys in the hedge fund mafia who chase one another’s positions.
 
This chart demonstrates one very obvious fact: hedge funds used to have very low correlations to one another (0.3 in 1993) and now they have very high correlations to one another (averaging between 0.7-0.8 from 2007-2009). Therefore, you should invest with those hedge fund managers that can generate absolute returns in down markets. Druckenmiller was +11% in 2008.
 
From our skunk-works of chaos theory here in New Haven, CT, here are some deep simplicities associated with hedge funds who consistently drive absolute returns across bull and bear markets:
 
1.      Hedge funds that consistently find alpha in their idea generation.

2.      Hedge funds that maximize that alpha (spreading their wings) when they find it.

3.      Hedge funds that hedge.

 
What not to do: run 140% net long and cut your net your exposure to 107% when you realize it’s a bear market. That’s not what I call being hedged. That’s called being levered long. The nascent history of this industry has shown plenty of real pros who end up feeling like monkeys when they go there.
 
Another way that a real pro can start having performance issues is when they miss a big macro move. On top of the statistical reality that there are upwards of 10,000 hedge funds trading their gross and net exposures in a highly correlated way, you also have the institutionalization of asset management driving fund flows. When the macro wind moves from bullish to bearish, you need to be flexible.
 
Going back to 1993, when hedge fund returns weren’t correlated, the % of the US market controlled by “institutional investors” was running just inside of 45%. Today, that number is running closer to 65-70%, and there is an intense amount of pressure for asset managers to be “fully invested.”
 
Being “fully invested” means having a very low position in cash as a percentage of assets under management. After all, the art of managing money is actually having money to manage, so asset managers need to feed the beast. That doesn’t make it right.
 
If you look at the cash positions in US Equity Mutual Funds today versus the early 1990’s, the chart may or may not shock you. Cash as a percentage of assets under management has plummeted from 13% in 1991 to less than 4% today. Which way do you think this chart goes next?
 
And what do you do when long only investors are chasing relative performance bogeys on a monthly basis while levered long funds (disguised as hedge funds) are chasing them daily and weekly? I think those asset managers who are “open-minded and flexible” about thinking through this question of dynamic asset allocation to cash are going to continue to deliver to their clients what they really want – not losing their money.
 
I wake up every day with one risk management goal in my head – don’t lose our clients money. Maybe I should have been a goalie – or maybe I should have submitted my resume to a pro like Druckenmiller who could have taught me how to spread my wings when I get the hot hand. I have much to learn.
 
Our cash position in the Hedgeye Asset Allocation model is currently 61% (when we were bullish in August of 2009 it was 23%). We remain a short seller of both the US Dollar (UUP) and the SP500 (SPY) on strength and our best long ideas in global equities remain Utilities (XLU), Brazil (EWZ), and Indonesia (IDX).
 
My immediate term TRADE levels of support and resistance for the SP500 are now 1062 and 1099, respectively.
 
Enjoy time with your family and friends Mr. Druckenmiller. Your world class risk management performance will be missed, but never forgotten.
 
Best of luck out there today,
KM


Spread Your Wings

“You need to be decisive, open- minded, flexible and competitive.”

-Stanley Druckenmiller

 

Our profession saw one of its all-time greats retire yesterday. Stan Druckenmiller, as one of his good friends told me, was one of the best at this game because “when he knew he was going to be right, he just spread his wings.”

 

After they get access to an interview, the manic media quickly comes to realize that hedge fund people aren’t Avatars. The most consistent hedge fund managers in this game are very matter of fact and common sense people. They have their own repeatable risk management process. They are as competitive as a professional athlete in executing it. And they are mentally flexible enough to change their positioning as the game changes.

 

Stan Druckenmiller likes to look at charts. I have a beauty that’s taped on the inside of my notebook that I often show clients to depict the correlation between hedge fund strategies going back to the early 1990’s. I use the early 90’s because that’s when we started to see the divergence between the real pros in this business and the monkeys in the hedge fund mafia who chase one another’s positions.

 

This chart demonstrates one very obvious fact: hedge funds used to have very low correlations to one another (0.3 in 1993) and now they have very high correlations to one another (averaging between 0.7-0.8 from 2007-2009). Therefore, you should invest with those hedge fund managers that can generate absolute returns in down markets. Druckenmiller was +11% in 2008.

 

From our skunk-works of chaos theory here in New Haven, CT, here are some deep simplicities associated with hedge funds who consistently drive absolute returns across bull and bear markets:

  1. Hedge funds that consistently find alpha in their idea generation.
  2. Hedge funds that maximize that alpha (spreading their wings) when they find it.
  3. Hedge funds that hedge.

What not to do: run 140% net long and cut your net your exposure to 107% when you realize it’s a bear market. That’s not what I call being hedged. That’s called being levered long. The nascent history of this industry has shown plenty of real pros who end up feeling like monkeys when they go there.

 

Another way that a real pro can start having performance issues is when they miss a big macro move. On top of the statistical reality that there are upwards of 10,000 hedge funds trading their gross and net exposures in a highly correlated way, you also have the institutionalization of asset management driving fund flows. When the macro wind moves from bullish to bearish, you need to be flexible.

 

Going back to 1993, when hedge fund returns weren’t correlated, the % of the US market controlled by “institutional investors” was running just inside of 45%. Today, that number is running closer to 65-70%, and there is an intense amount of pressure for asset managers to be “fully invested.”

 

Being “fully invested” means having a very low position in cash as a percentage of assets under management. After all, the art of managing money is actually having money to manage, so asset managers need to feed the beast. That doesn’t make it right.

 

If you look at the cash positions in US Equity Mutual Funds today versus the early 1990’s, the chart may or may not shock you. Cash as a percentage of assets under management has plummeted from 13% in 1991 to less than 4% today. Which way do you think this chart goes next?

 

And what do you do when long only investors are chasing relative performance bogeys on a monthly basis while levered long funds (disguised as hedge funds) are chasing them daily and weekly? I think those asset managers who are “open-minded and flexible” about thinking through this question of dynamic asset allocation to cash are going to continue to deliver to their clients what they really want – not losing their money.

 

I wake up every day with one risk management goal in my head – don’t lose our clients money. Maybe I should have been a goalie – or maybe I should have submitted my resume to a pro like Druckenmiller who could have taught me how to spread my wings when I get the hot hand. I have much to learn.

 

Our cash position in the Hedgeye Asset Allocation model is currently 61% (when we were bullish in August of 2009 it was 23%). We remain a short seller of both the US Dollar (UUP) and the SP500 (SPY) on strength and our best long ideas in global equities remain Utilities (XLU), Brazil (EWZ), and Indonesia (IDX).

 

My immediate term TRADE levels of support and resistance for the SP500 are now 1062 and 1099, respectively.

 

Enjoy time with your family and friends Mr. Druckenmiller. Your world class risk management performance will be missed, but never forgotten.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Spread Your Wings - EL st


MACRO: The Daily Outlook

RISK MANAGER subscribers receive the DAILY OUTLOOK every trading morning.  This is a one-off post for this morning.

 

_______________________________________________________________________________________________

As we look at today’s set up for the S&P 500, the range is 37 points or 2.9% (1,062) downside and 0.4% (1,099) upside.

  • PERFORMANCE ONE DAY: Dow +0.09%, S&P +0.15%, Nasdaq +0.28%, Russell 2000 +0.28%
  • PERFORMANCE MONTH-TO-DATE: Dow (0.48%), S&P (0.68%), Nasdaq (1.73%), Russell (3.51%)
  • PERFORMANCE QUARTER-TO-DATE: Dow +6.56%, S&P +6.16%, Nasdaq +5.05%, Russell +3.05%
  • PERFORMANCE YEAR-TO-DATE: Dow (0.12%), S&P (1.88%), Nasdaq (2.36%), Russell +0.43%
  • ADVANCE/DECLINE LINE: 538 (-1221) Breadth was very negative
  • VOLUME: NYSE - 922.63 (-5.96%) - continues to be light
  • SECTOR PERFORMANCE: Three sectors negative - the safety trade - XLU XLV and XLE
  • MARKET LEADING/LOOSING STOCKS: King Pharma +8.88% and US Steel +4.8%; Safeway -4.52% and Sealed air -3.06%


EQUITY SENTIMENT:

  • VIX - 24.59 +1.07 - up 5 of the last 8 days.
  • SPX PUT/CALL RATIO - 1.92 up from 1.72 moving up for the last two days

 

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD 18.89 down 3.28%%
  •  3-MONTH T-BILL YIELD .16% down 0.01%
  • YIELD CURVE - 2.12 to 2.15

 

 

COMMODITY/GROWTH EXPECTATION:

  • CRB: 269.90 -0.11%
  • Oil: 75.42 -0.46%
  • COPPER:337.05 +0.36% - looking to up 5 of the last 6 days
  • GOLD: 1,231 +0.43% - up 5 straight days - Bullish formation

 

 

CURRENCIES:

  • EURO: 1.2875 +0.01% up for the last 3 days
  • DOLLAR: 82.223 -0.01%

 
OVERSEAS MARKETS:

  • ASIA - Most Asian markets moved modestly higher today, encouraged by the move in the USA China closed up 0.81%; Japan up 1.32%
  • EUROPE - European markets trading higher.
  • EASTERN EUROPE - Trading higher - Czech Republic and Russia leading the way.
  • MIDDLE EAST/AFRICA - Trading higher  - Jordan and the UAE up; Saudi Arabia down 0.66%

 

MACRO: The Daily Outlook - chart1

 

 

MACRO: The Daily Outlook - chart2

 

 

MACRO: The Daily Outlook - chart3

 

 

MACRO: The Daily Outlook - chart4

 

 

MACRO: The Daily Outlook - chart5

 

 

MACRO: The Daily Outlook - chart6

 

 

MACRO: The Daily Outlook - chart7

 

 

 

Howard Penney
Managing Director


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