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The Big Red: European Manufacturing PMI

Positions in Europe: Long Germany (EWG); Short Spain (EWP)

 

In the chart below we present May European Manufacturing PMI figures according to Markit Economics. The May numbers show a major downward inflection from April, and confirm a negative trend over the last three months. We think declining factory production is largely in line with our Q2 Theme of Growth Slowing and Inflation Accelerating and consistent with eroding business and consumer sentiment and spending as headline risk surrounding peripheral sovereign debt contagion moves further to the forefront. With the EU-area the largest trading partner of most EU states, it comes as no great surprise that the majority of the countries are moving (downward) in tandem. [On the PMI survey, 50 is the line in the sand, with figures above 50 indicating expansion, and below indicating contraction. Spain is firmly in the latter camp.]

 

The Big Red: European Manufacturing PMI - zeechart

 

As we noted yesterday, statements from Eurogroup head Jean-Claude Juncker that a total restructuring of Greece’s debt is out of the question and that EU leaders will decide on a new aid package for Greece by the end of June may give some level of respite to European capital markets and the common currency in the near term. However, European equity markets are selling off today after a sizable rally yesterday, bond yields across the PIIGS are back up day-over-day, and a debt auction today from Portugal of €850 Billon of 3M bills yielded an elevated 4.967% (versus a previous auction of 4.625%).

 

As the high-frequency data slows, so too does our conviction. While Germany (via the etf EWG) has been a strong position for us in the Hedgeye Virtual Portfolio over the last two years, the data is slowing on the margin, and we’ll be managing our position accordingly.

 

Matthew Hedrick
Analyst


Hakuna Matata

This note was originally published June 01, 2011 at 08:24

“It means no worries,
For the rest of your days,
It's our problem-free philosophy,
Hakuna Matata.”

 

-The Lion King

 

Hakuna matata is a Swahilli phrase that means, literally, there are no worries. The term was first popularized by 1980s rock band, Boney M, but gained most of its popularity in the 1994 Disney animated hit, Lion King. Yesterday, the U.S. equity markets closed solidly to the positive with the benchmark SP500 closing at 1,345 near the highs for the day. Hakuna matata! Right?

 

Certainly, yesterday’s stock market action reflected a care free / hakuna matata type of attitude, especially given the backdrop of the economic news of the day. There were actually three data points out that caused your grumpy old risk managers at Hedgeye a little concern. They were as follows:

 

1)      Chicago PMI - The ISM’s Chicago business barometer dropped from 67.6 in April to 56.6 in May, which was its lowest reading since November 2009. This was the largest one-month deceleration since October 2008. Clearly ominous, although perhaps somewhat attributable to the region’s exposure to the auto industry and shortage of auto components from Japan (at least, that’s the spin). The comments from the recipients of the survey were fascinating and can be found here: https://www.ism-chicago.org/chapters/ism-ismchicago/files/ISM-CMay2011.pdf

The common themes were price inflation and slowing growth.

 

2)      Case-Shiller Index – According to the Case-Shiller Index, U.S. home prices fell for the 8th straight month and were down 4.2% for Q1 2011 versus Q4 2010. This is an accelerated decline versus Q4 2010, a quarter in which home prices fell 3.6% quarter-over-quarter. Declining home prices are negative for the financial sector, as banks have to adjust residential mortgage loan books accordingly, and negative for the outlook for consumer spending, especially on the low end.  According to the Case-Shiller report, home prices have now fallen as much as they did during the Great Depression. In that period, it took 19 years for the prior peak to be revisited.

 

3)      Consumer Confidence Index – The Conference Board’s index of consumer confidence dropped 5.2 points in May and is now at its lowest level since November. The Hedgeye Optimism Spread continues to contract, as the expectations component led the decline falling to 75.2 from 83.2 (previously 82.6). The present situation component dipped to 39.3 from 40.2 (previously 39.6). Overall, the assessments of future business and labor market conditions fell in May.

 

As we noted at the outset of the note, the equity markets completely shrugged off the economic data points above and closed at, or near, the Hakuna Matata Highs of the Day. Now to be balanced, these data points are mostly backward looking, except for perhaps the consumer confidence reading, so it is, maybe, understandable that the market looked through the news. 

 

That said, speculating on the meaning of market price moves is just that - speculation. To reduce speculation, we incorporate a quantitative process around looking at market prices. As Keith and I learned in our early days in the hedge fund industry, markets or stocks going up on bad news is an important signal, but it does need to be confirmed. That is, one day a trend does not make.  As well, short term price action needs to be placed into the greater context of market sentiment and psychology. 

 

To the last point, we have posted in the chart below a look at NYSE margin debt versus the SP500 going back to January 1997. The takeaway from this analysis is that when margin debt has reached an extreme of 1.5 standard deviations above the mean, the SP500 has seen a 50% correction in the ensuing 18 months.  We are certainly not calling for a crash or correction to that degree, but wanted to highlight this context, which is simply that stock market operators are leaning levered long - in a large way.

 

Over the course of the past couple of quarters, there is no doubt most stock market operators have experienced some level of cognitive dissonance. Yesterday’s action likely accelerated those experiences.  On the positive side of the ledger yesterday, a Greek default seems to have been punted, which is positive on some level for some time frame, and the economic data suggested, to our Q2 Theme, that The Bernank has continued clearance to stay Indefinitely Dovish. Therefore, if fixed income earns you little, or at least historically low rates of return, then perhaps equities are marginally more appealing? Thus the equity markets reacted accordingly yesterday . . .

 

We certainly understand this line of reasoning, but remain concerned that the “valuation” case for the U.S. stock market may not be what it is cut out to be. As inflation accelerates and growth slows, corporate margins contract, and earnings growth becomes challenging. Recall that at the end of 2007, the SP500 was trading at 17.3x forward earnings of $84.67 per share, except for the fact that the real earnings number was actually $60.57, or 28% lower than expected. There was little cognitive dissonance by the end of 2008.

 

Hakuna matata!

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

Hakuna Matata - Chart of the Day

 

Hakuna Matata - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - June 1, 2011

 

Overnight Asia turned in a mixed performance, while Europe and the futures are headed lower.  On the MACRO front, we are looking at another day of where the data points will be uninspiring.  As we look at today’s set up for the S&P 500, the range is 21 points or -1.13% downside to 1330 and 0.43% upside to 1351.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 61

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1577 (+198)  
  • VOLUME: NYSE 1515.01 (+118.72%)
  • VIX:  15.45 -3.32% YTD PERFORMANCE: -12.96%
  • SPX PUT/CALL RATIO: 1.61 from 1.20 (+33.89%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 19.70
  • 3-MONTH T-BILL YIELD: 0.06%
  • 10-Year: 3.05 from 3.07
  • YIELD CURVE: 2.60 from 2.59 

 

MACRO DATA POINTS:

  • 7 a.m.: MBA Mortgage Applications, prior 1.1%
  • 7:30 a.m.: Challenger job cuts, prior (-4.8%)
  • 8:15 a.m.: ADP Employment, est. 175k, prior 179k
  • 10 a.m.: Construction spending, est. M/m 0.3%, prior 1.4%
  • 10 a.m.: ISM Manufacturing, est. 57.1, prior 60.4
  • 11:30 a.m.: U.S. to sell $28b 4-wk bills, $24b 52-wk bills
  • 4:30 p.m.: API inventories

WHAT TO WATCH:

  • EU said to consider incentives for Greek debt rollovers -- wires
  • Greek Central Bank Governor Provopoulos dismissed scenarios that Greece could leave the Euro and return to the Drachma -- Reuters
  • Sinking housing prices threaten to derail economic recovery - WSJ
  • Coca-Cola interested in listing in China - Reuters
  • Car companies finalising large investment plans for Russia - WSJ

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Shipping Rates Seen Dropping as French Wheat Cargoes Sink: Freight Markets
  • Oil Trades Near 3-Week High on U.S. Supply; MF Global Says $105 Possible
  • Gold May Decline in London Trading on Outlook for Greece Debt Resolution
  • U.S. Mint Silver Eagle Coin Sales Through May Are the Highest Since 1986
  • Cattle ‘Being Tortured’ in Indonesia, Australian Senator Says, Urging Ban
  • Bonds Losing to Bullion With Inflation at a Three-Year High: China Credit
  • Copper in London May Drop After Reports Signal China Manufacturng Slowdown
  • Rubber Declines as Slowing China Manufacturing Growth Dims Demand Outlook
  • U.S. House Committee Approves Department of Agriculture Spending Proposal
  • China Drought Parches Fish Farms, May Cut Feed Sales, Citic Futures Says
  • China’s Millionaire Ranks Leap Past a Million as Legacy of Communism Fades
  • Power Thieves Keep 400 Million Indians in Dark as Singh Misses Energy Goal
  • Billionaire Adani May Sell a 20% Stake in Coal-Mining Unit in London IPO
  • Europe Commodity Day Ahead: Gold Declines as Greece Default Concern Eases

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

EUROPEAN MARKETS

  • European indices are trading lower on disappointing May Manufacturing PMI numbers accross Europe.
  • UK April mortgage approval 45.166k vs consensus 47.500k and prior revised 47.145k; Uk April mortgage lending +0.7B vs consensus +0.7B and prior +0.5B
  • Eurozone May Manufacturing PMI 54.6 vs consensus 54.8 and prior 54.8
  • Germany May Manufacturing PMI 57.7 vs consensus 58.2 and prior 58.2
  • France May Manufacturing PMI 54.9 vs consensus 55.0 and prior 55.0
  • France Q1 ILO jobless rate +9.7% vs Q4 +9.7%
  • UK May Manufacturing PMI 52.1 vs consensus 54.1 and prior revised to 54.4 from 54.6

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • China May PMI 52.0 vs April 52.9.
  • Australia Q1 GDP (1.2%) q/q vs survey (1.1%), +1.0% y/y, matching expectations. Q4 GDP revised to 0.8% q/q vs initial +0.7%.

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

Howard Penney

Managing Director


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%

Hakuna Matata

“It means no worries,
For the rest of your days,
It's our problem-free philosophy,
Hakuna Matata.”

 

-The Lion King

 

Hakuna matata is a Swahilli phrase that means, literally, there are no worries. The term was first popularized by 1980s rock band, Boney M, but gained most of its popularity in the 1994 Disney animated hit, Lion King. Yesterday, the U.S. equity markets closed solidly to the positive with the benchmark SP500 closing at 1,345 near the highs for the day. Hakuna matata! Right?

 

Certainly, yesterday’s stock market action reflected a care free / hakuna matata type of attitude, especially given the backdrop of the economic news of the day. There were actually three data points out that caused your grumpy old risk managers at Hedgeye a little concern. They were as follows:

 

1)      Chicago PMI - The ISM’s Chicago business barometer dropped from 67.6 in April to 56.6 in May, which was its lowest reading since November 2009. This was the largest one-month deceleration since October 2008. Clearly ominous, although perhaps somewhat attributable to the region’s exposure to the auto industry and shortage of auto components from Japan (at least, that’s the spin). The comments from the recipients of the survey were fascinating and can be found here: https://www.ism-chicago.org/chapters/ism-ismchicago/files/ISM-CMay2011.pdf

The common themes were price inflation and slowing growth.

 

2)      Case-Shiller Index – According to the Case-Shiller Index, U.S. home prices fell for the 8th straight month and were down 4.2% for Q1 2011 versus Q4 2010. This is an accelerated decline versus Q4 2010, a quarter in which home prices fell 3.6% quarter-over-quarter. Declining home prices are negative for the financial sector, as banks have to adjust residential mortgage loan books accordingly, and negative for the outlook for consumer spending, especially on the low end.  According to the Case-Shiller report, home prices have now fallen as much as they did during the Great Depression. In that period, it took 19 years for the prior peak to be revisited.

 

3)      Consumer Confidence Index – The Conference Board’s index of consumer confidence dropped 5.2 points in May and is now at its lowest level since November. The Hedgeye Optimism Spread continues to contract, as the expectations component led the decline falling to 75.2 from 83.2 (previously 82.6). The present situation component dipped to 39.3 from 40.2 (previously 39.6). Overall, the assessments of future business and labor market conditions fell in May.

 

As we noted at the outset of the note, the equity markets completely shrugged off the economic data points above and closed at, or near, the Hakuna Matata Highs of the Day. Now to be balanced, these data points are mostly backward looking, except for perhaps the consumer confidence reading, so it is, maybe, understandable that the market looked through the news. 

 

That said, speculating on the meaning of market price moves is just that - speculation. To reduce speculation, we incorporate a quantitative process around looking at market prices. As Keith and I learned in our early days in the hedge fund industry, markets or stocks going up on bad news is an important signal, but it does need to be confirmed. That is, one day a trend does not make.  As well, short term price action needs to be placed into the greater context of market sentiment and psychology. 

 

To the last point, we have posted in the chart below a look at NYSE margin debt versus the SP500 going back to January 1997. The takeaway from this analysis is that when margin debt has reached an extreme of 1.5 standard deviations above the mean, the SP500 has seen a 50% correction in the ensuing 18 months.  We are certainly not calling for a crash or correction to that degree, but wanted to highlight this context, which is simply that stock market operators are leaning levered long - in a large way.

 

Over the course of the past couple of quarters, there is no doubt most stock market operators have experienced some level of cognitive dissonance. Yesterday’s action likely accelerated those experiences.  On the positive side of the ledger yesterday, a Greek default seems to have been punted, which is positive on some level for some time frame, and the economic data suggested, to our Q2 Theme, that The Bernank has continued clearance to stay Indefinitely Dovish. Therefore, if fixed income earns you little, or at least historically low rates of return, then perhaps equities are marginally more appealing? Thus the equity markets reacted accordingly yesterday . . .

 

We certainly understand this line of reasoning, but remain concerned that the “valuation” case for the U.S. stock market may not be what it is cut out to be. As inflation accelerates and growth slows, corporate margins contract, and earnings growth becomes challenging. Recall that at the end of 2007, the SP500 was trading at 17.3x forward earnings of $84.67 per share, except for the fact that the real earnings number was actually $60.57, or 28% lower than expected. There was little cognitive dissonance by the end of 2008.

 

Hakuna matata!

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

Hakuna Matata - Chart of the Day

 

Hakuna Matata - Virtual Portfolio


THE M3: MAY GGR; DIRECT GAMING TAXES; CHINA MAY HOME PRICES RISE

The Macau Metro Monitor, June 1, 2011

 

 

MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DICJ

For May, Macau GGR was 24.31 BN MOP (23.60 BN HK$, 3.04 BN US$), up 42.4% YoY.


GOVT EXPENDITURE RISES 115% IN JAN-APRIL Macau News

Macau govt’s expenditure in the January-April period stood at 10.4 BN patacas, up 115.6% YoY. Direct gaming taxes accounted for 84% of the total revenue, compared with 83.8% in the first four months of 2010.

 

CHINA'S HOME PRICES ROSE IN MAY FOR NINTH MONTH AS SMALLER CITIES CLIMB Bloomberg

According to SouFun Holdings, the nation’s biggest real-estate website owner, China home prices rose 0.5% MoM in May.  Residential prices increased in 76 out of 100 cities tracked by SouFun, with average home values nationwide climbing to 8,819 yuan ($1,361) a square meter (10.76 square feet).


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