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Indefinitely Dovish

“The dove descending breaks the air with flame of incandescent terror.”

-T.S. Eliot, Little Gidding (1942)

 

“Little Gidding” was the final of four brilliant poems in T.S. Eliot’s “Four Quartets” which helped him win the Nobel Prize for Literature in 1948. Each of the four poems considers the lessons of history within the context of one of the four elements: air, earth, water, and fire.

 

The element of fire in the aforementioned quote is an important metaphor to consider when watching what the US Government is doing to the US Dollar. Through a deliberately dovish monetary policy to inflate, the US Federal Reserve is Burning The Buck.

 

Since the unaccountable bureaucrats at the Fed and their friends who are working for Groupthink Geithner at the US Treasury will be the last to call up a chart of the US Dollar Index (career risk management), we’ll do it for you, weekly, until this Currency Crash looks less likely:

  1. Week-over-week, the US Dollar Index was down another -0.91% last week to close at $74.11 = a fresh 2-year low
  2. Closing down for 13 out of the last 17 weeks, the USD Index has lost -8.6% of its intermediate-term value in the last 4 months
  3. Since President Obama and Treasury Secretary Geithner strapped on the accountability pants in 2009, the US Dollar is down -16.8%!

So who cares?

 

Evidently our Almighty Central Planners don’t. They don’t even talk about it… and neither do the kowtowing “blue chip” economists who allegedly analyze their Keynesian policies.

 

But, The People do…

 

With the US stock market up +97.8% from its March 2009 low, you’d think that the policy to get us paid with some equity market performance would make this country really happy about all of this. Not.

 

Why not?

 

Alongside last week’s Crashing Currency, here’s what the price of other things that trade predominantly in US Dollars did last week:

  1. Oil = +2.1% to $112.29/barrel
  2. Gold = +1.1% to $1503/oz
  3. CRB Commodities Index (19 Commodities) = +1.4% to 367

Nice. If you are long of The Inflation, that is…

 

If you aren’t, well – I guess the message for you from The Bernank is too bad. Take it in the pump – and like it.

 

Ben Bernanke’s incompetent forecasts will be center stage on this week’s Macro Catalyst Calendar with following events:

  1. Tuesday – New Home Sales (trending at record lows despite Bernanke begging you to lever yourself up with a “cheap” mortgage)
  2. Wednesday – FOMC interest rate decision (Indefinitely Dovish); and Case/Shiller Home Prices for FEB (train wreck)
  3. Thursday – Q1 US GDP (running at least 30% below Bernanke’s initial forecast - almost all of Wall St has cut their estimates)
  4. Friday – Michigan Consumer Confidence for April (making lower-highs); and April month-end markups (US equities)

How will The Bernank spin alchemy’s free money spool into an Indefinitely Dovish message on Wednesday?

 

He’ll flip the switch from saying there is no inflation to worrying the world about Growth Slowing As Inflation Accelerates. At $112/barrel oil (up +180% since Obama and Geithner took office in 2009), The Inflation at the pump is almost 2x that of the US stock market. Meanwhile, gold and silver are trading at all-time highs this morning (all-time is a long time) – so he’s going to admit he sees that, I hope…

 

And while hope is not an investment process, watching marked-to-market expectations in both the US currency and Treasury markets is. Both the US Dollar crashing and UST yields breaking intermediate-term TREND support of 0.71% this morning are signaling Bernanke will remain dovish. He’ll blame growth slowing (Q1 GDP report Thursday) and US housing being the train wreck that he and Greenspan helped perpetuate.

 

In terms of asset allocation, this still leaves me long of The Inflation (Gold and Oil), and long of relatively unlevered growth where I can find it (China and US Tech). Since the week of March 28th, I’ve taken down my Cash position from 52% to 40% - the updated Hedgeye Asset Allocation Model has the following composition:

  1. Cash = 40% (down from 43% week-over-week)
  2. International Currencies = 30% (Chinese Yuan, Canadian Dollar, British Pound = CYB, FXC, and FXB)
  3. International Equities = 9% (China = CAF)
  4. Commodities = 9% (Gold and Oil = GLD and OIL)
  5. US Equities = 6% (Technology = XLK)
  6. Fixed Income = 6% (US Treasury Flattener = FLAT)

Understanding full well that the US Dollar correlation-risk to just about everything that I am long is surreal at this point, I’ll just call this positioning out for what it is – an explicit bet that the Fed remains Indefinitely Dovish until the US Government is forced to face a US Currency Crash and all of the understood consequences embedded therein.

 

My immediate-term support and resistance lines for oil are now $109.12 and $112.91, respectively. My immediate-term support and resistance lines for the SP500 are now 1319 and 1339, respectively.

 

My personal thanks to Big Alberta for riding shot-gun for the team last week, and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Indefinitely Dovish - Chart of the Day

 

Indefinitely Dovish - Virtual Portfolio


IGT: FQ2 BUCKS THE TREND

We knew IGT had more levers to pull than the other guys and was regaining some share but a beat and raise of this magnitude was a surprise. 

 

 

IGT had been our favorite supplier heading into earnings season because we felt it was the safest pick.  Despite our longer term concern with participation share, we felt IGT had more near-term margin levers to pull and ship share was on the rise over the next few quarters.  What we didn’t bank on was a big beat and raise.

 

For the first time in a really long time IGT not only beat consensus but also raised guidance.   The beat was across the board – higher product sales, better game operations, and better margins.  IGT’s guidance raise was due to a combination of cost efficiencies and reduction in borrowing costs.  IGT also appeared to gain ship share this quarter in North America (NA).

 

 

Q2 Detail

  • Product sales of $215MM beat our estimate by 3%, while gross margins were $18MM above our estimate
    • Total units recognized were in-line with our estimate but once again NA units beat our estimate while international units fell short of our estimate
    • ASP’s were below our estimate – decreasing 4% YoY and over $1k QoQ.  While IGT did not elaborate on the call – nor did any analysts bother to ask, part of the reason for the depressed ASPs was due to a new promotional launch, which we wrote about in our preview.  The other reason for depressed ASPs was due to the conversion of 1,200 leased units to for sale units at very low prices.  Leases often have buyout options so this is not that unusual but would also explain the depressed ASPs in the quarter.  We estimate that the sale of the leased units could have depressed ASPs by about $600.
    • Domestic gross margins were also a lot higher than we estimated although IGT guided that a more normalized margin should be around 52%.  We suspect that some of the margin lift has to do with growth of high margin software included in non-box sales.
    • While international units were weak, margins of 56% were the best that IGT has had in at least 10 quarters.  We assume that normalized margins are lower (low 50’s).
  • Gaming operations revenue of $267.5MM beat our estimate by 4% and gross margins were 5% above our estimate
    • The install base was 300 units better than we estimated
    • Daily yields were 3% above our estimate
  • Other stuff:
    • Excluding the $1.7MM restructuring charge, SG&A was $7MM higher
    • D&A was $3MM lower than we estimated.

Outlook:

  • IGT increased the midpoint of its guidance range by 5 cents. 
    • We estimate that the interest savings from the new credit facility and the swap accounted for $0.02
    • This quarter was a beat – we estimate it contributed at least 2 cents to the guidance raise
    • Also, better gaming operations results and lower D&A, offset by higher SG&A

Hedge Fund Advisor Long China, Gold; Short US Stocks, Treasuries, Dollar


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THE HEDGEYE DAILY OUTLOOK

THE HEDGEYE DAILY OUTLOOK


TODAY’S S&P 500 SET-UP - April 25, 2011


The Inflation trade remains in place; US Dollar down (down 13 of the last 17 weeks); continued signs of growth slowing with copper down -1.2% this morning (bearish TREND); while monetary inflation skyrockets (gold and silver hitting new highs).  As we look at today’s set up for the S&P 500, the range is 20 points or -1.37% downside to 1319 and 0.12% upside to 1339.

 

SECTOR AND GLOBAL PERFORMANCE


The Financials remain the only sector broken on both TRADE and TREND.    

 

THE HEDGEYE DAILY OUTLOOK - levels 425

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING GLOBAL

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 952 (-1033)  
  • VOLUME: NYSE 812.78 (-15.44%)
  • VIX:  14.69 -2.52% YTD PERFORMANCE: -17.64%
  • SPX PUT/CALL RATIO: 1.60 from 2.17 (-26.33%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.30
  • 3-MONTH T-BILL YIELD: 0.06%
  • 10-Year: 3.42 from 3.43
  • YIELD CURVE: 2.74 from 2.74 

 

MACRO DATA POINTS:

  • 10 a.m.: New Home Sales, est. 280k (up 12%), prior est. up 250k (down 16.9%)
  • 10:30 a.m.: Dallas Fed Manufacturing, est. 13.4, prior 11.5
  • 11 a.m.: Export inspections, grains
  • 11:30 a.m.: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 4 p.m.: Crop progress (winter wheat, cotton, corn)

WHAT TO WATCH:

  • Average pump price climbed 11.5c to $3.88 thru April 22: Lundberg survey. Obama said last week a task force will examine if oil, gas prices driven higher by market manipulation. 
  • Nike (NKE) may be poised to climb as it works to control rising materials and labor costs, Barron’s
  • China’s 2011 trade surplus may narrow to 2% of GDP because of rising commodity prices, Reuters says, citing a report from the State Council’s Development Research Center.

COMMODITY/GROWTH EXPECTATION


THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Silver Surges to All-Time High as Investors Seek Protection From Inflation
  • Crude Oil in New York Rises a Fourth Day as Middle East Violence Escalates
  • Copper Drops in New York on Signs of Ample Supplies in China, Biggest User
  • Palm Oil Declines as Lower Malaysian Exports Threaten to Boost Inventories
  • Corn Advances as Rains Delay Seeding in U.S.; Wheat Jumps to 2-Month High
  • China's Corn Imports May Expand This Year to 2 Million Tons, Baize Says
  • Rubber in Tokyo Declines as Demand May Weaken on Reduced Car Production
  • Hedge Funds Bullish on Natural Gas as Nuclear Output Falls: Energy Markets
  • Corn, Soybeans May Rise as Cold, Weather Slows U.S. Seeding, Survey Shows
  • India Gold Imports May Fall for Third Month on Prices, Industry Group Says
  • Tsunami Quickens ‘Terminal Decline’ of Northern Japan’s Fishing Industry
  • Most China Aluminum Capacity Lacks State Approval, Business News Reports
  • Corn Seen Topping Wheat on Demand, Raising Tyson's Costs, Helping Syngenta  

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • European markets are closed in observance of the Easter holiday

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIA PACIFIC MARKTES:

  • Asian stocks were mixed overnight on earnings concerns and China declined on increased inflation concerns.
  • Japan March corporate services price index +0.4% m/m, (1.2%) y/y.
  • Japan March supermarket comps +0.3% y/y.
  • Hong Kong’s market is closed for a holiday.

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

Howard Penney

Managing Director


The dollar, less almighty: Big investors see possible long-term currency weakness



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