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German IFO Business Survey Down

Positions in Europe: Long British Pound (FXB)

 

The German IFO business survey for April was published today. As we called for in previous weeks and mentioned in a note yesterday titled “Europe: Sweden Hikes Rate as PIIGS Tumble”, we expected to see a slowdown in the German survey numbers, and we got it. IFO reported:

 

Germany IFO Business Climate               110.4 APR    vs 111.1 MAR

Germany IFO Current Assessment           116.3 APR    vs 115.8 MAR

Germany IFO Expectations                      104.7 APR    vs 106.5 MAR

 

German IFO Business Survey Down - IFO

 

While one survey does not confirm a trend (and we tend to focus more on the 6-month forward-looking Expectations number), recent confidence numbers are in line with a slight slowing of high frequency data from Germany, including Services and Manufacturing PMI, as inflationary pressures gradually increase.

 

The capital markets of Europe’s stronger and fiscally sober economies like Germany, France, Sweden held relatively strong this week despite existing sovereign debt contagion fears, namely an outstanding bailout to Portugal and continued concern over Greece’s fiscal house. Equally, the EUR-USD trade has held strong, largely a function of the severe weakness in the USD, in our opinion. Our immediate term TRADE range for the EUR-USD is $1.44-$1.46.

 

German IFO Business Survey Down - EUR2

 

In other European news, German Finance Minister Wolfgang Schaeuble praised Mario Draghi, the favorite to take over as ECB President when Trichet steps down in late June, calling his qualifications undisputed. This sentiment is a clear inflection from the German camp (although German Chancellor Angela Merkel remains silent on her pick) that has largely voted against him, due in part to assumptions that he was a dovish-leaning puppet of Trichet, and preference for Bundesbank President Axel Weber. However, in February when Weber announced he would not run for another term as Bundesbank President, nor put his name in for the ECB job, his decision has left the German camp uncertain on who to back.

 

Fresh in the mind of Merkel, in particular, has been the baggage Draghi carries as Italy’s Central Banker (a state with a considerable load of public debt--2nd highest after Greece-- and scandalous headlines from the country's PM Berlusconi) and his 3-year stint at Goldman Sachs in early 2000 in which among other responsibilities he arranged currency swaps that helped Greece hide the extent of its budget deficit. 

 

There’s no question that Draghi comes with much international experience, including as Executive Director of the World Bank. While we can only speculate how he’ll direct monetary policy should he win the seat, it’s clear that given his affinity with Trichet we’d expect he’d follow through with Trichet’s hawkish interest rate stance to control rising inflation across the Eurozone. This again could be a positive for the common currency and global investment in the region.

 

Matthew Hedrick

Analyst


JOBLESS CLAIMS MOVE SIDEWAYS FOR 8TH WEEK IN A ROW

Jobless Claims Moving Sideways - No Improvement for Past 8 Weeks

The headline initial claims number fell 9k WoW to 403k (13k after a 4k upward revision to last week’s data).  Rolling claims rose 2.25k to 399k. On a non-seasonally-adjusted basis, reported claims fell 67k WoW, a typical seasonal move. 

 

We have been looking for claims in the 375-400k range as the level that can begin to bring unemployment down.  If this level is held, we expect to see unemployment improve. We consider unemployment to be ~200 bps higher than the headline rate due to decreases in the labor force participation rate. In other words, if the labor force participation rate were at the long-term average level of the last decade, unemployment rate would be 10.8% rather than 8.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 10.8% actual rate.

 

Rolling claims have now trended sideways for the past 8 weeks.  

 

JOBLESS CLAIMS MOVE SIDEWAYS FOR 8TH WEEK IN A ROW - rolling

 

JOBLESS CLAIMS MOVE SIDEWAYS FOR 8TH WEEK IN A ROW - raw

 

JOBLESS CLAIMS MOVE SIDEWAYS FOR 8TH WEEK IN A ROW - nsa

 

Two relationships that we are watching closely are the tight correlation between the S&P and claims and between Fed purchases (Treasuries & MBS) and claims.  With the end of QE2 looming, to the extent that this relationship is causal, it is quite concerning. 

 

JOBLESS CLAIMS MOVE SIDEWAYS FOR 8TH WEEK IN A ROW - S P and

 

JOBLESS CLAIMS MOVE SIDEWAYS FOR 8TH WEEK IN A ROW - Fed and

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 4 bps tighter than 1Q.  The current level of 273 bps is flat from than last week.

 

JOBLESS CLAIMS MOVE SIDEWAYS FOR 8TH WEEK IN A ROW - spreads

 

JOBLESS CLAIMS MOVE SIDEWAYS FOR 8TH WEEK IN A ROW - spreads QoQ

 

Financial Subsector Performance

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

 

JOBLESS CLAIMS MOVE SIDEWAYS FOR 8TH WEEK IN A ROW - perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur



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Currency Rodeos

“A national debt, if it is not excessive, will be to us a national blessing.”
- Alexander Hamilton

 

Like Keith, I’m a born and bred Canadian.  Despite my nationality of birth, after living in the United States for upwards of the last fifteen years, I can quite confidently say this is a great country.   At Hedgeye, we spend a lot of time critiquing the political leadership in Washington, DC in our research, but that shouldn’t be confused with a general critique of the United States. I’ll say it again, this is great country. 

 

In 1999, the 106th Congress passed a bill that allocated federal funds to renovate the Hamilton Grange, which was Alexander Hamilton’s family home.  In that bill, Congress indicated that this preservation was to “honor the man who more than any other designed the Government of the United States.”  At times, we’ve sided more with the Jeffersonian philosophy as it relates to governing, but there is no disputing Hamilton’s influence on the founding of this nation.  Indeed, as the first Secretary of the Treasury his words continue to have relevance in fiscal and monetary policy discussions.

 

Setting aside the discussion of the extent to which the government should be involved in our lives, I think we would all agree that government does have its place and can, with the right leadership, do great things.  In fact, to Hamilton’s point, based on a government’s ability to tax and borrow (if done prudently these don’t have to be bad words!) it can build infrastructure and provide appropriate social services, which make the outcome of any government debt a “national blessing.” That is, if its use is not “excessive”.

 

Late last week in our Q2 quarterly theme call, we called for a potential crash in the U.S. dollar.  Once again, we didn’t make this call because we lack American patriotism, but rather because of the fundamentals.  Stepping back for a second, though, we should frame up what exactly a crash means for a currency.

 

In the last 30 years, the largest annual decline in the U.S. dollar index was -18.5% in 1985, while the average decline for that period was 0.11%.  In the year-to-date, the U.S. dollar index is down -6.6%.  So, we are four months into 2011 and the U.S. dollar is already down close to 1/3  of its largest annual decline ever.  Our view is that the U.S. dollar could decline potentially another -5% through the course of the quarter and roughly -10%-ish through the course of the rest of the year.  If this occurs, it would be the largest annual decline for the U.S. dollar index in 30-years and that, my friends, is a crash.

 

This morning, we are seeing a continuation of this move with many currencies, once again, trading up close to a percent versus the dollar.  Interestingly, even in Europe, where sovereign debt woes continue to accelerate, the currencies are strong this morning with the British Pound up +0.92% versus U.S. dollar and the Euro up +0.73%.

 

We certainly get that being bearish on the U.S. dollar at this point isn’t exactly a contrarian call, but, to be fair, we’ve traded the U.S. dollar in the Virtual Portfolio 20 times since the firm’s inception and have been right 20 times. In addition, of the 46 currency positions we’ve taken in the Virtual Portfolio over the same duration, we booked a gain on 41 of them. Clearly, this isn’t our first Currency Rodeo. That said, according to a recent survey by Bank of America, all but 6% of their global clients are bearish on the U.S. dollar, which is not inconsistent with some of our internal surveys.  In addition, Barclays reported the commodity assets under management have reached an all-time high at $412BN.

 

Being long commodities is in many respects the same trade as being short the U.S. dollar, and we’d be remiss to not at least factor into our models that the investment community is leaning hard in one direction.  But the question remains: is consensus bearish enough on the dollar?  Our answer on this, until the facts change, is “no”.

 

As we analyze the U.S. dollar versus global currencies, we focus on three key factors: debt, deficit, and interest rates.  Currently, the U.S. dollar lines up negative on all three of these fronts, specifically:

 

1.  Excessive debt – In the last couple of years, it has become cool to quote Reinhart and Rogoff and bandy about sovereign debt-to-GDP ratios, so this isn’t new, but according to usdebtclock.org, the United States has a debt-to-GDP ratio of 96%.  This is negative for GDP growth, which is negative for the U.S. dollar as slower growth leads to longer term accommodative monetary policy and higher than expected fiscal deficits.  Further, the United States’ future debt trajectory is much steeper than any of its “AAA” peers (Canada, United Kingdom, Germany and France) due to a lack of a credible deficit reduction plan.  To add insult to injury, the politicians in Washington will once again debate increasing  the debt ceiling in mid-May while global currency traders watch real-time;

 

2.  Long term deficit – This year the United States federal government will run a deficit north of $1.5 trillion dollars, which is more than 10% of GDP.  (This is slightly better than Sierra Leone.)  The real issue with the deficit is a lack of a credible plan to reduce the deficit going forward.  While many nations globally have already begun austerity programs, the United States has no plan and the recently approved $38 billion spending reduction for the duration of this year is only likely to have a real benefit of some $380 million.  President Obama has given June as the time frame by which he hopes to have an agreement on a long term budget, but our view is that based on how far apart the Democrats and Republicans are on the tenets of the plan, this time frame will be blown threw;

 

3.  Monetary policy bifurcation - Simply put, interest rates and perceived future interest rates move currencies.   Almost every major modern nation in the world has either tightened policy (witness Sweden and China most recently) or is reporting data that suggests tightening is imminent.  In contrast, not only is the United States still implementing Quantitative Guessing Part II, but recent signals out of the Federal Reserve suggest we could see a version of QE-lite after June, so we think the U.S. Dollar will fall victim to additional easing in the face of the world tightening.

 

In order to shift our investment view on the U.S. Dollar we need to believe that these factors will improve absolutely and relatively and, as of yet, it is hard to make that case.  Meanwhile, the U.S. dollar index continues to be in a bear market in our quantitative models.

 

Currently in the Virtual Porfolio we are long the Canadian dollar, long the Chinese Yuan, and long the British Pound. We covered our short position in the U.S. dollar (UUP) yesterday.   This isn’t about politics or patriotism, but risk management.

 

Enjoy the long weekend with your families.

 

Keep our head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

Currency Rodeos - Chart of the Day

 

Currency Rodeos - Virtual Portfolio


THE M3: CHANGI TRAFFIC; VISITOR ARRIVALS; CPI

The Macau Metro Monitor, April 21, 2011

 

 

CHANGI AIRPORT PASSENGER TRAFFIC UP 7.5 IN MARCH Changi Airport Group

Traffic at Singapore Changi Airport saw a 7.5% YoY in March with 3,708,592 passengers.

 

VISITOR ARRIVALS FOR MARCH 2011 DSEC

Visitor arrivals totaled 2,190,865 in March 2011, +8.9% YoY.  Visitors from Mainland China increased by 18.6% YoY to 1,254,117, with the majority coming from Guangdong Province, Fujian Province and Zhejiang Province.  Mainland visitors traveling to Macau under IVS were 501,276, +18.9% YoY.

 

THE M3: CHANGI TRAFFIC; VISITOR ARRIVALS; CPI - macau1

 

CONSUMER PRICE INDEX FOR MARCH 2011 DSEC

Macau CPI rose 5.46% YoY and 0.47% MoM in March.


Getting to the Puck

This note was originally published at 8am on April 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”

-Wayne Gretzky

 

Late last week Keith and I were in Boston meeting with clients on the eve of the beginning of the Boston / Montreal first round playoff series.  While Bostonians and hockey fans around the world are gearing up for the beginning of the NHL playoffs, money managers, as usual, are contemplating portfolio positioning for the upcoming months.

 

Whether your strategy involves bottom-up company analysis, top-down economic analysis, or a healthy dose of both, the objective is the same: to anticipate where the Investment Puck is going ahead of the competition.  To borrow from Mr. Gretzky, good money managers play the market where it is, great money managers play the market where it is going to be.

 

Currently, from a macro perspective, the primary focus of many money managers is attempting to determine the timing of the next move in monetary policy.  Given the high correlation between U.S. monetary policy, the U.S. dollar, and many global asset classes, this is the key area to focus.

 

To emphasize this point, in the Chart of the Day attached below, we show the correlation of Federal Reserve Treasury Purchases with the CRB index, which highlights the high correlation to loose U.S. monetary policy and inflation of many U.S. dollar-based commodities. 

 

While “fundamental” supply and demand certainly matters, if you are invested in oil, or oil related equities, keep one market quote front and center: the U.S. Dollar Index.  Over the past three months, the correlation between the U.S. dollar index and WTI Crude Futures is -0.86, while the correlation between the U.S. Dollar Index and Brent Crude Futures is -0.91.  Dollar down continues to equal oil up, and decidedly so.

 

In our presentation late last month titled, What’s Next For Oil?, we highlighted turmoil in the Middle East as a key factor supporting the price of oil.  Indeed, violence in Libya continued to escalate this weekend as the recent U.S. led NATO intervention so far seems largely ineffectual.  According to British Prime Minister Cameron this weekend:

 

“We have to ask ourselves, what more can we do to protect civilian life and to stop Qaddafi’s war machine unleashing such hell on his own people.”

 

With an unknown outcome Libyan oil production remains well below its full output of 1.8MM barrels per day, which supports oil prices.

 

On the other side of the ledger for oil, there are mounting bearish supply and demand data points.  Specifically, according a recent report from the International Energy Administration, oil consumption grew 2.6% year-over-year in Q1 2011.  This was a sequential slowdown from 4.1% year-over-year growth in consumption in Q4 2010.  Further, the IEA now expects oil consumption to grow 1.6% year-over-year in all of 2011 versus 3.4% for 2010.  In addition, crude oil stocks in the United States grew 0.5% year-over-year, which is near decade highs.  With the price of gasoline up 24.6% year-over-year, oil stocks should continue to build.

 

If you don’t believe the oil market is oversupplied in the short term, take it from the Saudis. This weekend the Saudi Oil Minister said the following in a press conference:

 

“The market is overbalanced ... Our production in February was 9.125 million barrels per day (bpd), in March it was 8.292 million bpd. In April we don't know yet, probably a little higher than March. The reason I gave you these numbers is to show you that the market is oversupplied."

 

This morning China increased the reserve ratio for their banks by 50 basis points to 20.5% and pledged there is more to come.  So unlike The Bernank who attempts to manage monetary policy via a press conference (according to the top article on Bloomberg this morning), the Chinese continue to proactively combat inflation.

 

Chinese tightening is incrementally bearish for commodities, to argue different is simply story telling. (Interestingly, the Chinese equity market closed up +23 basis points despite this incremental tightening, which is positive for our long Chinese equity position in the Virtual Portfolio.)

 

As bearish supply and demand data points continue to mount for oil and other U.S. dollar based global commodities, the increasing focus is on determining the direction of the U.S. dollar, which will be driven by U.S. monetary policy. So, where do we stand on the direction of monetary policy?  To some extent, it will depend on the data. 

 

We are quite confident housing has another leg down (email sales@hedgeye.com if you are an institutional prospect and want to talk to our Financials Sector Head Josh Steiner about his 100+ page negative thesis on housing).  Further, employment is seeing anemic improvement, which is mostly being driven by people leaving the workforce and will not see much improvement with U.S. GDP growth likely to come in lower than expected this year.  On both of these key fronts, Chairman Bernanke will have plenty of cover to keep rates low for an “extended period”.

 

Ironically, government CPI, which is not the best proxy for inflation in our estimation, may actually be the thorn in The Bernank’s side.  As we highlighted in our Q2 Theme presentation, CPI compares are set to get very easy in the United States.  In fact, June CPI last year was +1.1%, which is really the beginning of the easy comps.  Starting this summer it is likely that we see government reported data that looks inflationary and will make it difficult for The Bernank to remain perpetually dovish. 

 

As monetary policy begins to tighten in the U.S. and theoretically strengthen the U.S. dollar, the music will likely stop for the commodity rally in the intermediate term. This will create an investment opportunity of another kind if you are at the Investment Puck.  And as famed U.S. Olympic Coach Herb Brooks once said:

 

“Great moments are born from great opportunities.”

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

Getting to the Puck - Chart of the Day

 

Getting to the Puck - Virtual Portfolio


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