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Strength At Home

“The strength of a nation derives from the integrity of the home.”

-Confucius

 

Slowly, but surely, the US Dollar is re-capturing some credibility. Yes, we get that credibility amongst the Fiat Fools is a relative measurement. But for now, with the Europeans doing their best to become Japanese, we’re long the US Dollar and we’ll take what we can get.

 

The strength of a nation is not derived from Piling Debt-Upon-Debt. The strength of a nation is not derived from professional politicians funding long term liabilities with short term fiat paper. The strength of a nation derives from the integrity of a country’s fiscal position.

 

I am well aware of the deficit and debt risks in America. I am certainly not saying they have gone away. That said, everything that matters in global macro happens A) on the margin and B) relative to everything else. What global currency prices are telling me now is that a strong currency at home could be more than just an immediate term TRADE.

 

Last week the US Dollar Index closed up +2.37% and +5.84% higher than its November 4th YTD low. That was the 4th consecutive week of gains and all of a sudden the Buck is Breaking Out above both its immediate and intermediate-term TRADE and TREND lines. Critically, what was resistance for US style fiscal conservatism is now support:

  1. TRADE support = $77.89
  2. TREND support = $79.71

As always, trending currency strength needs multiple factors of support - not the least of which are other foreign currencies weakening. When managing foreign currency risk, never underestimate the power of what’s going on in the rest of the currency basket.

 

In the last 3 weeks, the Euro has dominated headline news. This morning, “news” of an Irish bailout comes with the associated political nonsense. France’s central banking Fiat Chef went as far as to suggest that ze package “is very well tailored and will restore competitiveness in Ireland.” He’s got to be kidding me. Ask someone in Ireland how competitive they are feeling this morning.

 

Euros bulls are obviously having trouble swallowing that weekend old French toast. After losing -3.6% of its value last week, the Euro is trading down another -0.61% this morning at $1.32 versus the USD. It’s broken on both our TRADE and TREND durations:

  1. TRADE = $1.38
  2. TREND = $1.33

All the while, there is this large island of compromised Bureaucrats called Japan that is seeing its currency weaken as the #1 driver to economic-hope slows to a screeching halt. For the month of October, Japanese exports were effectively HALVED in term of their sequential (monthly) growth rate (+7.8% OCT versus +14.4% in SEP). As Asia slows, Japan slows… and these are the globally interconnected days of our lives.

 

Euro DOWN + Yen DOWN = US Dollar UP. Cool. Now Americans need to have the political backbone to maintain the integrity of the home currency. Can we do it? Yes, We Can.

 

I’ve got no problem cheering this Buck Breakout on. Yes, it will equate to immediate term US stock volatility, but I’m already proactively prepared for that. I cut my position in US Equities to The Ber-nank’s favorite exposure (ZERO percent) before the current 3% correction in US Equities started to take hold and this morning I have a 64% asset allocation to Cash waiting, as les bulls like to say, on ze sideline, eh.

 

The Volatility Index (VIX) was up a monster +23.2% last week to 22.22, so at least we’ve dropped some of the levered-long kids off at the pool. Volatility is a concurrent measurement of emotion and can quite often be a contrarian indicator of future performance. Naked swimmers may want to bear that in mind as the price momentum tide rolls out.

 

Strong Dollar nips The Ber-nank’s global inflation race in the bud. Strong Dollar also helps drive up short-term interest rates on my hard earned personal and corporate savings accounts. No, no, Mr. Hard Core Leverage Man, that doesn’t help you too. Strong Dollar helps men and women who are debt-free run strong like bull all over you when you are least expecting it. And this is where the true strength of this Nation lives.

 

My immediate term support and resistance levels for the SP500 are now 1173 and 1197, respectively. I remain short the SP500 (SPY) in the Hedgeye Portfolio.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Strength At Home - buck


A LOOK AT VEGAS AIR CAPACITY

Lower airline capacity and higher airfare could slow recovery 

 

 

As we mentioned in our note last week, “A SOLID OCTOBER ON THE STRIP,” McCarran visitation increased 2% YoY in October, the first increase since November 2009.  We wonder if this growth can be sustained, given what’s happening with air capacity and airfare.

 

The number of average daily seats at McCarran has fallen every month on a year-over-year comparison since Feb 2008.  Based on the released schedules, November is no exception, falling 4.5% YoY and 4.2% MoM, as Southwest Airlines, the busiest carrier at McCarran, had announced it was cutting 12 McCarran round-trip flights starting Nov 7.  This capacity shrinkage is not universal as North American air carriers, on a nationwide basis, increased capacity by 3% in November, according to aviation intelligence OAG.  Year-to-date, McCarran capacity is down 5.4%.  Furthermore, airlines are focusing more on business travel routes which yield higher than leisure markets such as Las Vegas.

 

A LOOK AT VEGAS AIR CAPACITY - mccarran1

 

What about for 2011?  Hard to say.  MGM’s CEO Jim Murren is confident McCarran capacity will be higher in 2011.  The Air Transport Association and Randall Walker, Director of Clark County Aviation Department, believe capacity will have a small gain next year but nowhere close to 2007 levels.  Some of the smaller international carriers are also predicting greater number of seats.  But the domestic carriers, which account for 95% of the capacity, are cautious.  Southwest will only add one Vegas daily round-trip flight a day when winter seasonal changes are completed in February 2011.  Jet Blue’s CEO, David Barger, said he is reluctant to add Vegas flights and Andrew Levy, president of Allegiant Travel Co., the parent of Allegiant Air, said he doesn’t see higher number of planes at McCarran because of the focus on profit margins.  In addition, US Airways is unlikely to return to McCarran after its massive withdrawal in late 2009 and the proposed Continental and United merger may further cut capacity.

 

Meanwhile, lower capacity is contributing to higher airfare.  The average lowest LV airfare has remained stubbornly higher in 2010, compared with a year ago - higher lows if you will, which could mean lower highs for Vegas stocks.  The Bureau of Transportation Statistics data show that, as of June 30, 2010, Las Vegas airfares had risen quicker than the national average.  Using Expedia’s TrendTracker and FareCompare’s Airfare Tracker, we believe higher Vegas airfares continued in Q3 and will continue into year-end. 

 

A LOOK AT VEGAS AIR CAPACITY - AIRFARE

 

Unless the airlines reverse their tactic of higher prices/lower capacity, Vegas could see limitied visitation growh and less discretionary spending - potential impediments to any Vegas recovery.


RESTAURANTS – GOOGLE INSIGHTS

Some interesting search trends pertaining to the restaurant space over the last seven days

 

  • Domino’s is the most searched-for restaurant chain over the last seven days leading up to Black Friday.  For restaurants, the “Black Friday” is the day before Thanksgiving, Wednesday, rather than the day after.
  • Cracker Barrel also showing up as a “rising search” on Google Insights as people hit the road for the Holiday
  • Jared continues to drive the subway brand – an example of what good advertising can achieve
  • Bobby Flay has become synonymous with gourmet burgers.  This is a category that is becoming more and more populated and RRGB have referenced the impact of this competition on their ability to drive sales

RESTAURANTS – GOOGLE INSIGHTS - google insights restaurants

 

Howard Penney

Managing Director


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The Stream and The Rock

This note was originally published at 8am this morning, November 26, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“In the confrontation between the stream and the rock, the stream always wins.”

-Buddha

 

Global equity markets are a riskier place than they were 48 hours ago. The North Koreans are calling this an “escalated confrontation.” The Europeans are calling this post Thanksgiving trading day a mess.

 

Since the Fiat Fools in Europe introduced their 750 BILLION Euro rescue plan in May, the confrontation between the Fiats and those of us who loathe leverage has been crystal clear. Some people call this debate political. Some people think it’s ideological. I think it’s a marked-to-marked battle between The Stream and The Rock.

 

If Piling Sovereign Debt-Upon-Debt is the stream and Big Keynesian Government Intervention is the rock, we think those levered to the liability side of this trade are going to eventually get wiped out.

 

Spain’s Prime Minister of a leverage-fest gone global, Jose Luis Zapatero, begs to differ with the Thunder Bay Bear on this matter. This morning, as Spanish 10-year sovereign yields (5.24%) hit a record wide spread versus German bund yields (+258 basis points), this is what Mr. Zapatero has to say:

 

“I should warn those investors who are short-selling Spain that they are going to be wrong and will go against their own interests”

 

Gee, thanks for the warning.

 

Markets, as we like to say at Hedgeye, don’t lie; politicians do. So let’s look at our expert network called Mr. Macro Market for the score:

  1. Spain – stocks on the Spanish IBEX Index are down another -2.1% this morning, taking their cumulative losses since October 22nd to down -13.0%. For the YTD, Spain is down -20.4%.
  2. Italy – stocks on the Italian MIB Index are down another -1.9% this morning, taking their cumulative losses since October 21st to down -9.4%. For the YTD, Italy is down -15.8%.
  3. Greece – stocks on the Greek Athex Index are down another -1.3% this morning, taking their cumulative losses since October 25th to down -13.1%. For the YTD, Greece is down -35.2%.

Pundits may be quick to point out that I didn’t use Ireland’s unequivocal disaster to make my point. I don’t need it. The big boy talk that’s going on with the Euro in the market today (the Euro is breaking my intermediate term TREND line of support of 1.33) has a lot more to do with the big nuts of European sovereign debt (Spain and Italy) coming down the stream than the rock that is another compromised Irish politician.

 

I say this every other morning on the Hedgeye Morning Macro Call to our clients, but I think it’s worth repeating in print today – I think Italy and Spain will be the biggest sovereign debt concerns in the world for the next 3-6 months.

 

In terms of 2011 share of Eurozone gross investment debt for 2011, Italy, Spain, and Greece represent the Top 3:

  1. Italy = 23%
  2. Spain = 9%
  3. Greece = 4%

Nope, that Italian number isn’t a typo. Neither is the fact that Italy has the highest labor costs in the Eurozone by a country mile (second place on that score goes to Mr. Zapatero’s Spain).

 

Next to Japan, Italy is also the oldest country in the world today. These people are old, levered, and expensive. If you were looking for a company to invest in, I don’t think this place would be your rock.

 

Sure, there are plenty of issues sacking markets from Portugal to Hungary this morning as well (Hungary’s stock market is down -3.5% this morning and its Fiat Currency, the Forint, is down a full -1.2%, after the government issued an ultimatum to it’s citizenry to move their pension savings to the state’s accounts!), but The Stream of sovereign debt that’s piling up in Italy, Spain, and Greece override all of that.

 

Interestingly, ECB hawk Axel Weber said in Berlin this morning that, while he considers it “inconceivable”, if they needed to re-finance the entire wad (Greece, Ireland, Portugal, and Spain), they’d need 1.07 TRILLION of EU bailout moneys.

 

Nope, Weber leaving Italy’s mother-load of liabilities out of this calculation isn’t a typo either. And, from Capua to California, no matter where conflicted and compromised charlatans of government leverage go this morning, there it is – The Stream.

 

My immediate term TRADE lines of support and resistance for the SP500 are now 1173 and 1209, respectively. I re-shorted the SP500 (SPY) into Wednesday’s extremely low-volume rally.

 

Best of luck out there today and enjoy the rest of Thanksgiving with your loved ones,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Stream and The Rock - capua


The Week Ahead

The Economic Data calendar for the week of the 29th of November through the 3rd of December is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - cal1

The Week Ahead - cal2

The Week Ahead - cal3


Geopolitical Risk Update: Korea & Brazil

Conclusion: Geopolitical tensions continue to heighten in Korea and violence continues to flare up in Brazil.

 

On a sleepy Friday that equates to a half-day for many U.S. market practitioners, it’s important to remember the old adage, “markets wait for no one”. While it may be en vogue to chat about “Black Friday” and how many handbags Coach is going to sell this year, the fact of the matter is that there’s a great deal of geopolitical risk globally that you should keep on your radar screen as you head into the weekend.

 

First, an update on the situation brewing on the Korean peninsula:

 

North Korea’s state news agency KCNA warned that any “escalated confrontation” will lead to war and that the government is “greatly enraged at the provocation” from South Korea. Further, it strongly reiterated that any further encroachment of its sovereign territories will lead to retaliation. This marks the fourth time this week Kim Jong Il’s regime threatened further strikes against its Southern neighbor. In a show of bravado following the aggressive rhetoric, the North fired a few explosives on Yeonpyeong as part of its regular artillery drills from 12:00-3:00pm local time.

 

In the latest move to counter mounting political pressure for a stronger response, South Korean President Lee Myung Bak appointed former Joint Chiefs of Staff Chairman Kim Kwan Jin to defense minister. Jin, 61, replaces Kim Tae Young, who quit amid criticism that the response to Tuesday’s attack was inadequate. Young originally offered his resignation back in May, two months after the S. Korean warship Cheonan was sunk by the North and South Korea failed to respond in kind.

 

This latest appointment may potentially be a step in the more aggressive direction, which, on the margin, increases the probability of a full-out military conflict in the region.

 

From a quantitative perspective, South Korea’s KOSPI index remains bearish from an immediate-term TRADE perspective and ever-so-slightly bullish from an intermediate-term TREND perspective:

 

Geopolitical Risk Update: Korea & Brazil - 1

 

We remain bearish on Korean equities for two main reasons: 1) growth looks to slow sequentially for the next 2-3 quarters; and 2) inflation will continue to be a headwind and will require more aggressive tightening of monetary policy.

 

Moving over to Brazil, we see the death toll from the violence in Rio has increased to over 30 from as few as 13 on Wednesday. In response, President Lula has dispatched 800 army troops into the region to join forces with the 17,000-plus police that are swarming the city’s streets. Newspapers from Germany to Spain to Australia (i.e. nearly everywhere, but the U.S.) are calling the move both “unprecedented” and “desperate” and are also calling into question Brazil’s ability to guarantee security for visitors of the upcoming World Cup.

 

Other reports cited in the Brazilian press point to the estimated tens of millions of reais of lost revenue in Rio’s businesses.  The umbrella organization representing the trade, retail and tourism industries said one day’s closure of the major outlets in the areas of Rio affected by the violence represents R$ 39 million in lost revenue. The violence is having a broad effect as other companies not in the affected areas let workers return home early to avoid the evening hours when the streets are more dangerous.  This includes such major enterprises as Petrobras.  Companies are reporting worker absences of up to 30% and schools and universities have cancelled classes as terrorized residents remain indoors to avoid the danger of traveling across Rio.

 

Brazilian intelligence sources report Rio’s two major criminal gangs are planning a “mega-action” for tomorrow.  Presumably the military was called up in anticipation.  This could be incredibly ugly, as Rio’s heavily-armed police are reputed to have zero regard for human life once they enter the favela neighborhoods.

 

From a quantitative perspective, Brazil's Bovespa is bearish from an immediate-term TRADE perspective and bullish from an intermediate –term TREND perspective, though it is trading below its TREND line of support of 68,826 intraday. A close below that line is an explicitly bearish quantitative signal – particularly if it is confirmed by further weakness:

 

Geopolitical Risk Update: Korea & Brazil - 2

 

We remain cautious on Brazilian equities for the intermediate-term TREND. While we stand behind the robustness of Brazil’s bullish consumer story, we are cognizant of the intermediate-term inflation risks and the potential for further tightening of monetary policy in 1H11.

 

Darius Dale

Analyst

 

Moshe Silver

Managing Director / Chief Compliance Officer


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