“They sicken of the calm, who know the storm.”
While it’s tempting for a man with an Arctic Cat Pantera snowmobile parked outside his front door to poke fun at Americans wearing dress shoes in NYC this morning, I’ll just roll with a quote from a self proclaimed “wisecracker” poet from New Jersey. Dottie Parker was a beauty.
Whether you are observing global financial markets from the Big Lake they call Gitche Gumee this morning or from a window on Madison Avenue, you’ll find that plenty has changed in the last 72 hours:
Now, some things, like Canadian demand for gold on ice, are expected. Other things, like China funding deficit-financed American hopes for a continued stock market rally, aren’t…
In fact, China’s Premier, Wen Jiabao, made an important statement to China’s citizenry on Christmas Day that “inflation expectations are far more dire than inflation itself.” FDR-esque.
When it comes to the global inflation on your screens this morning, China’s leadership using the word “dire” wasn’t misrepresented. If you don’t want to use the all-time high price for something like copper (up another +2.4% last week to $4.24/lb) as a leading indicator for inflation, just use the price moves in the CRB Commodities basket (19 different commodities) and look at what they’ve done across the following 3 durations:
The word “expectations” wasn’t misused either. As Shakespeare said, “expectations are the root of all heartache” and I have no reason to believe that the last price of a commodity that represents a large part of a human being’s buying power isn’t the same.
Whether it’s the price to warm your home in Connecticut (oil $91.34/barrel this morning is trading at a 26-month high) or the price to feed your family in Asia this morning, the Chinese aren’t sitting on their hands while the US Federal Reserve opts to Quantitatively Guess (QG) about how this all ends.
While He Who Sees No Inflation (Bernanke) does his best to extend and pretend the Fiat Fool experiment, the calm (US stock market investor complacency) that’s come before every emerging market storm (inflation) is finally rearing its ugly head.
Before you get a bull to try to tell me that this storm is actually great for US “growth” let’s look at what effect the force majeure of China tightening interest rates has had on the Shanghai Composite Index:
Again, if you’re one of the bulls that’s in the US “growth” is back camp and you’re willing to tell me that Chinese growth slowing as inflation accelerates plays no part in your global risk management model, I don’t know what to say in response other than good luck in the New Year with that…
In US equity market action, the low-volume and low-volatility calm may very well be a reality for revisionist stock market historians, but the break-downs in US Treasury and emerging debt markets look eerily similar all of a sudden. They look like they are both staring into the same storm of global inflation.
In the eye of the NYC storm this morning, UST yields continue to breakout to the upside with 2-year and 10-year yields hitting 0.67% and 3.44%, respectively. If the bulls want to tell me higher-highs in yields are “growth” signals this morning, I’ll just call that out for what it is – a smoke signal that The Calm and The Storm of Wall Street story-telling remains.
My immediate term TRADE lines of support and resistance for the SP500 are now 1246 and 1262, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Financial Risk Monitor Summary (Across 3 Durations):
1. US Financials CDS Monitor – Swaps were mostly negative across domestic financials last week, widening for 20 of the 28 reference entities and tightening for the other 8.
Tightened the most vs last week: SLM, MET, PRU
Widened the most vs last week: TRV, MBI, AGO
Tightened the most vs last month: SLM, MET, PRU
Widened the most vs last month: ACE, CB, TRV
2. European Financials CDS Monitor – In Europe, banks swaps were almost universally worse. Swaps widened for 38 of the 39 reference entities.
3. Sovereign CDS – Sovereign CDS widened out by 26 bps week over week with the greatest widening occurring in Italy (30 bps wider).
4. High Yield (YTM) Monitor – High Yield rates fell very slightly last week, closing at 8.36 on Thursday.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index hit another new high, rising 4 points to close at 1568.
6. TED Spread Monitor – The TED spread fell back to 17.1.
7. Journal of Commerce Commodity Price Index – Last week, the index rose half a point, closing at 26.4 on Thursday.
8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds. Last week yields rose sharply, ending the week 28 bps above a week ago and just 10 bps off of their crisis-level highs in May.
9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices. Spreads increased last week, closing at 208 bps, 10 bps higher than a week prior.
10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index fell 23 points to close at 177, bringing the index to its lowest level since July.
11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins. Last week the 2-10 spread tightened 7.5 bps, falling to 274 bps.
12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: 0.9% upside to TRADE resistance, 1.4% downside to TRADE support.
Joshua Steiner, CFA
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McCarran Airport reported a 1.2% decline in passenger traffic. Here’s how it may have translated into revenues.
November Strip gaming revenues face a relatively difficult comparison as November 2009 grew over 8%. Last year’s increase was derived on the tables – table volume up almost 20%. Specifically, similar to much of 2009, Baccarat volume was the standout in November, up 84%. Hold percentages were close to normal last November so with Airport volume down, our model projects only a small single digit decline in gaming revenues for November 2010. Of course, our estimate assumes normal hold percentages.
Slot handle should continue to be the Strip laggard. Following October’s surprising handle growth of 2%, we expect that metric to turn negative once again. With Vegas still flat lining, it’s hard to get excited about the prospects for anything more than muddling growth next year.
The following chart shows our projections for the Strip in November:
This note was originally published at 8am on December 23, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Inflation is taxation without legislation.”
Ben Bernanke got what he ordered for Christmas - global inflation.
While economic news in the US is light this morning, the rest of the world is waking up to continued signals that Global Growth is Slowing as Global Inflation Accelerates.
With Chinese Equities closing down for the 6th out of the last 7 trading days in Shanghai (China is down -12.9% YTD), here are the 3 most important inflation headlines that continued to pressure Asian Equity markets overnight:
1. India’s weekly wholesale food inflation accelerated to +12.13% versus +9.46% last week
2. Singapore reported another sequential acceleration in consumer prices (CPI) to +3.8% in NOV vs +3.5% in OCT.
3. CRB Commodities Index closed at another YTD high of 328 = +15% since OCT and +29% since JUL.
Unlike in the US where the government has changed the inflation calculation 9 times since 1996 and tells you to focus on the “core” (no gas in your car, heat in your home, or food in your belly), India’s food inflation index includes the things that people eat. Things like lentils, veggies, and rice are very popular items for consumption.
Onions are a sought after food item in most parts of the world as well. It’s hard to fire up your curry without onions and the Indian government takes this practical matter quite seriously. India is calling for “emergency measures” this morning to address the onion supply imbalances due to rainfall damaged crops. Global food and water supply shocks? Heli-Ben, what are those?
Not that the people making curry for the holidays notice this (they’re probably much more focused on Quantitative Guessing and how great that is for Americans who still have 401k’s that aren’t choking on bond allocations), but the price of onions is up +34% year-over-year.
We get the year-end storytelling about “cheap” American stocks and how the world is awash with fiat currency, but we also get that inflation is a policy. Governments either fight it or perpetuate it – and there’s an Eastern versus Western view of the world emerging on this front.
Inflation is the #1 fear of emerging market economies and global bond investors alike. That’s why China, India, and Brazil’s stock markets have been going down since November. These markets apparently don’t care so much for how many 600 thread count sheets Americans are buying at Bed Bath and Beyond.
As global inflation accelerates the US Dollar Index and US Treasury yields are also rising. Again, the bulls are saying what they said on this score back in 2007 (after 64 consecutive quarters of positive US consumer spending) – everything is benign in the land of riskless nod until year-end bonuses are paid out.
We remain bullish on US Dollars and bearish on US Stocks and Bonds. Either the rest of the world won’t matter in 2011 or it will. And while hope is not an investment process, we can only hope and pray that the 45 MILLION Americans who are on food stamps this Christmas are sheltered with one of the only things left in life that the government can’t infuse with price volatility – the love of their families in times of need.
My immediate term support and resistance lines for the SP500 are now 1245 and 1259, respectively. I shorted the SP500 again yesterday.
Merry Christmas and Happy Holidays to you and your loved ones,
Keith R. McCullough
Chief Executive Officer
POSITIONS: long US Dollar Index (UUP), long Canadian Dollar (FXC), long Chinese Yuan (CYB), short Euro (FXE), short Yen (FXY)
While we don’t currently have a position in Gold (GLD), we’ve been very active in foreign currency as of late. We did make the call to sell our entire long Gold position in both the Hedgeye Portfolio and Asset Allocation models on December the 6th. I’ve been following up with notes on why (Early Look note from December 17th, “The Golden Haze”) since.
The question in my mind right now isn’t where do I buy gold back? It’s where do I short it?
Gold is competing against rising bond yields. Gold is also fighting the Fed’s policy to inflate. Gold is always a lot of different things to a lot of different people, but the most important thing about gold is its last price.
If gold closes below $1379/oz this week, this will be the 3rd consecutive week of gold closing down on a week-over-week basis. That would be bad for the immediate-term price momentum in gold but, by our risk management score card, its already broken from an immediate-term TRADE perspective anyway.
In the chart below we show the refreshed immediate-term TRADE line of resistance for gold up at $1399. There’s significant resistance between $1, so you can also use that as a range of resistance.
There’s an immediate-term TRADE line of support down at $1368, but it’s a weak one. The more important line to manage risk towards is the mean reversion move down to gold’s intermediate-term TREND line of $1313.
Last year I gave my Dad gold bullion coins for Christmas – this year I hope he doesn’t give them back!
Keith R. McCullough
Chief Executive Officer
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