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Swissy Strength and SNB Handcuffs

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

 

Up, Up, and away. That’s the trend move in the CHF-USD over the last decade and CHF-EUR since late 2007. A white hot currency has both advantages and disadvantages from a macro perspective. Typically a strong currency is harmful for exporters; however recent data suggests just the contrary for Swiss exporters. Interestingly, monetary policy from the Swiss National Bank (SNB) to hike benchmark interest rates off the rock-bottom level of 0.25% (since March 2009) has largely been handcuffed due to 1.) low inflation, 2.) mild growth prospects, and 3.) the threat that a rate hike could impose further currency appreciation.

 

Swissy Strength and SNB Handcuffs - ch1

 

However, recent statements from SNB President Philipp Hildebrand suggest a more hawkish tone on monetary policy. Given the increased likelihood of a intermediate term rate hike and the continued CHF flight to safety trade alongside Eurozone sovereign debt contagion, we’d recommend getting long the CHF-USD (via the etf FXF). Switzerland more broadly can be played with the etf EWL.

 

Swissy Strength and SNB Handcuffs - ch2

 

Marginal Shift from SNB

SNB President Hildebrand has indicated a growing unease about price pressures, saying that the economy is expanding “more vigorously than anticipated” and “certain upside risks” on inflation “are beginning to emerge.”  Further, Vice Chairman Thomas Jordan said that while policy makers are “very concerned” about currency developments, exporters have “coped relatively well” with the franc’s appreciation.

 

Exports Defy Strong CHF

Quantifying “coping relatively well”, exports rose 9.8% in Q1 year-over-year and +7.9% in April month-over-month, driving a positive trade balance of 1.5 Billion CHF in April.

 

A recent report from the IMF on Switzerland shows that despite the strength of the CHF, due to the low level of price elasticity of demand from the Eurozone (0.4%), exporters have seen little hit. In contrast, price elasticity of demand is much higher in the emerging market, and therefore in the go-forward there’s a real threat that volumes will be dented. For reference, exports to the Eurozone contribute ~ 60% of total exports, while EM contributes ~ 15%, with the balance going to other advanced economies.

 

As the chart below shows, exports from Switzerland are diverse; yet the main goods include: chemicals, machinery and transport equipment, and various manufactured goods.

 

Swissy Strength and SNB Handcuffs - ch3

 

Currency and Interest Rate Risks

We continue to see the pile-in trade to the CHF as Europe’s sovereign debt contagion threats continue to press to the forefront.  Managing a strong CHF versus major currencies is after all nothing new to the SNB, which throughout 2009 intervened to depreciate the currency versus the EUR.  The bank again intervened (again largely unsuccessfully) from the end of 2009 to mid-2010 to prevent “excessive” appreciation.

 

Now, a main threat is the credit risks associated with an increase in mortgage lending activities.  According to the latest IMF report on the SNB, the abundance of liquidity has increased risk taking, leading to declining lending standards in the mortgage market, especially to less affluent households.

 

Under the Hood

Fundamentals continue to look solid in Switzerland. Unemployment is at 3.1%, the lowest since February 2009, the KOF leading indicators rose to the highest in almost five years last month and the latest PMI Manufacturing numbers are strong, showing a major inflection from its Eurozone peers which collectively slid in the May numbers (for more see yesterday’s post titled The Big Read: European Manufacturing PMI). 

 

Consensus expects the Swiss economy to expand 2.4% this year and 1.9% in 2012.

 

Conclusion

We’d expect the CHF to appreciate versus the EUR and USD over the intermediate term as Europe remains mired in sovereign debt contagion (flight to safety) and the US remains unclear on a strategy to tackle its elevated debt and deficit (the debt ceiling debate). While the SNB exchange rate may be more driven by developments in Greece rather than the bank’s monetary policy stance, more hawkish comments on rates by the bank should only further propel the CHF versus the EUR and USD. 

 

Matthew Hedrick

Analyst


CONFIDENCE BY INCOME DOES NOT BODE WELL FOR PRICE HIKES

Consumer confidence was disappointing onTuesday in general and the trend among low income cohorts suggests that the discounting environment in the restaurant space is far from over.

 

As the chart below shows, confidence levels among households in lower income brackets is suffering while confidence levels among households earnings $50,000 or more per year remain high.  The consumer at the high end is performing well; steakhouses and higher average check concepts have seen robust performance metrics of late while lower end concepts are continuing to rely on discounting to drive comps.  With high food costs compressing restaurant margins, many companies are either taking price or signaling their intention to do so.  Higher food and fuel costs are also impacting consumers, however; lower income cohorts’ confidence levels have declined sharply from February.

 

Some consumer data points have emerged over the past couple of days that corroborate with this view:

  • Saks May comp sales were up +20.2% in May.
  • Nordstrom reported May comps +7.4% versus StreetAccount +5.7%.
  • TGT sales came in at +2.8%, below StreetAccount consensus, and the CEO commented that “guests today continue to shop cautiously in light of higher energy costs and inflationary pressures on their household budgets”.
  • TJX reported comps +2.0% versus StreetAccount +3.2%.
  • JCP reported May comps -1.0% versus +3.4%.
  • DRI is focusing on value this summer with an LTO of a $15 four-course meal.  The “$15 Seafood Feast” includes soup, salad, entrée, dessert and unlimited Cheddar Bay Biscuits and runs through July 25th.

Restaurant companies from CMG to SBUX are going to be taking price to offset inflation.  How successful this strategy is will partly depend on where their core consumer is drawn from and how inelastic demand is for their product.  Casual dining is particularly prone to this effect, in our view.  While CBRL may continually raise prices, traffic is negative quarter after quarter.  Other companies, like DRI, will continue to discount heavily to maintain traffic.  For the foreseeable future, though, the economic health of each concept’s core consumer will be the primary driver of sales.  The consumer confidence data, and company commentary, point to a continuing divergence between the high- and low-end concepts.

 

How long the robust confidence levels continue for the upper income bracket is uncertain.  The Bloomberg Consumer Comfort Index for people with household incomes over $100,000 per year was -6.3, negative for a third week and below the 2010 and 2011 averages.  According to Langer Research Associates, the firm that compiles the data for the Bloomberg Index, the 1.4% drop in the S&P 500 in May, the biggest monthly decrease in shares since August, may be starting to concern people in higher income brackets.  Steak concepts, in the event of a further downturn in economic conditions, may begin to retrace some of the significant progress they have made in top-line growth, as the chart below shows.

 

CONFIDENCE BY INCOME DOES NOT BODE WELL FOR PRICE HIKES - confidence by income

 

CONFIDENCE BY INCOME DOES NOT BODE WELL FOR PRICE HIKES - steak chart

 

 

Howard Penney

Managing Director


INITIAL JOBLESS CLAIMS DROP SLIGHTLY AS YIELD CURVE TIGHTENS

Initial Claims Fall Slightly

Initial Claims fell 2k to 422k last week (-6k after the upward revision to last week's data). Rolling claims dropped 14k to 425.5k.  On a non-seasonally-adjusted basis, claims rose 5.6k to 377.4k.  

 

We use claims as our primary frequency determinant in thinking about losses for the consumer book of balance sheet dependent financials. Thus, it is a critical signal that we remain right around the YTD high in rolling claims. (The last time we saw such an inflection in the trend in jobless claims was summer 2010, a period in which the XLF lost roughly 20% of its value.) Even with the XLF underperforming, we remain cautious given this continuing development on the jobs front. Specifically, it's our expectation that claims will, at best, stagnate post QE2's end and, at worst, rise. To this end, take a look at our fourth chart showing the overlay of jobless claims with S&P 500. The current divergence is among the widest we've seen in the last few years suggesting that either the market is due for a significant correction in the near-term or claims should fall precipitously in the next few weeks.

 

INITIAL JOBLESS CLAIMS DROP SLIGHTLY AS YIELD CURVE TIGHTENS - rolling

 

INITIAL JOBLESS CLAIMS DROP SLIGHTLY AS YIELD CURVE TIGHTENS - reported

 

INITIAL JOBLESS CLAIMS DROP SLIGHTLY AS YIELD CURVE TIGHTENS - 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. 

 

INITIAL JOBLESS CLAIMS DROP SLIGHTLY AS YIELD CURVE TIGHTENS - s p

 

INITIAL JOBLESS CLAIMS DROP SLIGHTLY AS YIELD CURVE TIGHTENS - fed and

 

This week we are adding a chart of initial claims and the XLF from 2009 to present. 

 

INITIAL JOBLESS CLAIMS DROP SLIGHTLY AS YIELD CURVE TIGHTENS - XLF

 

Yield Curve Tightens 10 bps

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 10 bps tighter than 1Q.  The current level of 250 bps is 10 bps tighter than last week.

 

INITIAL JOBLESS CLAIMS DROP SLIGHTLY AS YIELD CURVE TIGHTENS - spreads

 

INITIAL JOBLESS CLAIMS DROP SLIGHTLY AS YIELD CURVE TIGHTENS - spreads QoQ

 

Financial Subsector Performance

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

 

INITIAL JOBLESS CLAIMS DROP SLIGHTLY AS YIELD CURVE TIGHTENS - perf

 

Joshua Steiner, CFA

 

Allison Kaptur


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THE M3: MAY MACAU SHARES; MARCH S'PORE VISITORS

The Macau Metro Monitor, June 2, 2011

 

 

GOOD MAY FOR GALAXY macaubusiness.com

Preliminary market shares for May:

  • GALAXY: a little over 13%
  • WYNN: less than 13%
  • SJM: slightly below 34%
  • LVS: 15%
  • MPEL: 14%
  • MGM: 11%

SINGAPORE VISITOR ARRIVALS STATISTICS STB

Singapore welcomed 1.07MM visitors in March 2011, up 25% YoY.  The two largest visitor segments--Indonesia and China--increased 16% and 47% respectively in March.

 

THE M3: MAY MACAU SHARES; MARCH S'PORE VISITORS - SPORE MARCH


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - June 2, 2011

 

Nothing in the last week has changed our Global Macro risk management view.

  1. Growth is slowing
  2. Inflation (reported) is sticky
  3. Stagflation is bad for asset prices (commodities and equities in particular)

Growth Slowing is bullish for UST bonds (TLT) and Compression in the Yield Curve (FLAT). Those 2 positions remain Hedgeye’s highest conviction macro longs alongside Gold (GLD).  Although, all 3 of them are getting overbought in the immediate-term.  As we look at today’s set up for the S&P 500, the range is 18 points or -0.73% downside to 1305 and 0.64% upside to 1323.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 62

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1943 (-3520)  
  • VOLUME: NYSE 1189.94 (-21.46%)
  • VIX:  18.30 +18.45% YTD PERFORMANCE: +3.10%
  • SPX PUT/CALL RATIO: 2.19 from 1.61 (+35.79%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 21.22
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 2.96 from 3.05
  • YIELD CURVE: 2.52 from 2.60 

 

MACRO DATA POINTS:

  • 8:30 a.m.: Jobless claims, est. 417k, prior 424k
  • 8:30 a.m.: Nonfarm Productivity, 1Q final, est. 1.7% from 1.6%
  • 9:45 a.m. Bloomberg consumer comfort, est. (-47.0), prior (-48.4)
  • 10 a.m.: Factory orders, est. (-1.0%)
  • 10:30 a.m.: Natural gas storage change, est. 93
  • 11 a.m.: DOE Inventories  

WHAT TO WATCH:

  • Japan Prime Minister Naoto Kan survives no-confidence vote - Nikkei
  • European bank stress test results to be delayed until July - WSJ
  • Greece’s risk of default was raised to 50% by Moody’s as European officials rushed to put together the second bailout plan in two years to stave off renewed financial turmoil in the region. 

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Billionaire Deripaska Joins Russia Grain Rush as Export Sales Ban Ends
  • Rice Soaring 50% in Thailand as Thaksin Seeks Votes in World’s Top Shipper
  • Wool Rallies to Highest Since 1995 as Flock Shrinks, Stockpile Replenished
  • Drought in China’s Yangtze May Be Relieved by Rains, Helping Rice, Cotton
  • Wheat Gains in Chicago on Speculation of Increased Livestock Feeder Demand
  • Copper, Aluminum Drop as Weaker Data Drive Speculation Recovery May Falter
  • Gold May Advance as Economic Slowdown, Greece’s Debt Turmoil Spur Demand
  • Cooking Oil Imports May Climb as Indian Farmers Dump Soybeans for Cotton
  • Japan Steel Works to Target Non-Atomic Energy Sales After Nuclear Disaster
  • Rubber Declines to One-Week Low as U.S. Data Raises Concern Demand to Slow
  • Oil Falls to Lowest in Week as Manufacturing Slows; U.S. Supplies Increase
  • BHP Facing First Strike in 10 Years at World’s Biggest Steel Coal Supplier
  • N.Z. Proposes Agency to Regulate Exploration, Mining in Its Offshore Zone
  • Goldman, Major Banks See 55% Average Rise in Commodities Income, WSJ Says

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • Spain's treasury sells €2.75B of 2014 bond, bid-to-cover ratio 2.5 vs 1.8 at previous auction, bond average yield 4.037% vs 3.568% at previous auction

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • Indonesia was closed for Ascension Day.
  • Will China raise rates over the weekend?
  • Japan Q1 manufacturing capex +27.7% y/y, corporate capex +3.3% y/y. Monetary base +16.2% y/y vs +23.9% seq.
  • Australia April trade surplus A$1.60 vs A$1.69B seq. April retail sales +1.1% m/m vs revised (0.3%) seq

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

Howard Penney

Managing Director



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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