“Weather forecast for tonight: dark.”
When 2011 is all said and done, we’ll separate the winners in this Globally Interconnected Game from the whiners. Whoever had their growth estimates right will have had a lot of other things right.
In the meantime, we’ll have to deal with politicians, journalists, and bankers obfuscating this very simple fact – Global Growth Has Been Slowing Since The End of 2010.
That’s it. That’s what Wall Street, Washington, SocGen, and the Government of France all have in common this morning – their top-line estimates for GDP Growth are still way wrong. And, as a result, being long any of their conflicted promises that are associated with using the wrong GDP assumptions will continue to be wrong. Markets don’t lie; politicians do – and the market has this right.
Markets don’t trade on politicians, journalists, and bankers using the wrong sources – they trade on expectations. To amplify this point about Growth Expectations, let’s take a step back and review where these “blue chip” forecasters were on these matters in Q1 of 2011:
Forecasts for 2011 US GDP Growth:
- Bank of America = 3.2%
- Barclays = 3.1%
- Citigroup = 3.1%
*Disclaimer: these estimates must have all been based on the exact same Keynesian model for garden variety “recovery”
Forecasts for 2011 SP500 Returns:
- Bank of America (David Bianco) = 1400 (up +11.4%)
- Barclays (Barry Knapp) = 1420 (up +13.0%)
- Citigroup (Tobias Levkovich) = 1400 (up +11.4%)
*Disclaimer: two of these forecasting czars opted for round numbers on the absolute; one opted for the rounded off % return
2011 Reported Numbers (Year-To-Date):
- US GDP Growth Q1 2011 = 0.36%
- US GDP Growth Q2 2011 = 1.29%
- SP500 YTD Return = DOWN -10.9%
3 investment banks with conflicted analysis + 3 train wrecks versus expectations = priceless.
Actually, that’s not fair – there is a price to pay for Wall Street/Washington groupthink. It’s being marked-to-market in every American’s 301k each and every day. While I’ll be the first to admit that this is not 2008 (it’s 2011), all it took to remind me how bad Wall Street’s forecasting models remain at calling growth slowdowns was another growth slowdown!
There isn’t really a trickle-down effect associated with getting growth estimates this wrong – it’s more like a waterfall. To borrow a frightening quote from Bank of America’s CEO, Brian Moynihan, on yesterday’s conference call, “think about it this way and you’ll have to trust us”:
- COUNTRIES – when they are wrong on GDP assumptions, they are wrong on their DEFICIT/GDP assumptions.
- RATINGS AGENCIES – when they see countries with DEFICIT/GDP assumptions rising, their ratings start falling (on a lag)
- BANKS – when their GDP assumptions are wrong, their assumptions for their net interest margins and cash flows are wrong
That last point is less clear to your average journalist attempting to “trust” Brian Moynihan on the numbers. What does it mean?
- Banks make money on a spread (the Yield Spread – that’s why La Bernank wants to keep rates of return on your savings low)
- When growth slows, the Yield Spread compresses (the 10s/2s spread has compressed by 28% in the last 6 months)
- When the Yield Spread compresses, Bank of America, Barclays, and Citigroups NIM (net interest margin) and cash flow declines
So… if you get that… and you’re still using Hedgeye’s GDP estimates for 2011 instead of a conflicted and compromised Street’s… you would have immediately recognized anything coming out of SocGen, the Government of France, or Bank of America’s mouths yesterday as irrelevant and/or wrong.
I continue to forecast that the sun will rise in the East today.
My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $77.20-88.29, and 1087-1137, respectively. We bought Goldman Sachs yesterday in the Hedgeye Portfolio and we remain short Citigroup.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Keith shorted Coach in the Hedgeye virtual portfolio into the close. The stock is broken below both his TREND support of $63.54 and immediate-term TRADE support of $58.18.
While the company came in slightly better than expected on the top-line, it missed on gross margins and made up for it with lower SG&A in Q4 – not the formula you want to see for a company looking to maintain double-digit top-line growth. In addition, calling the for a bottom in gross margins after breaching a “very achievable” 72% boundary (they came in at 71.8%) as we head into the 2H does not insight confidence. Sentiment is at peak, management has been selling stock, and inventory growth remains twice the rate of sales growth. We see room for further downside from here.
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Conclusion: Singapore's recent economic data is supportive of our call that the slope of global economic growth will continue to remain negative over the intermediate-term TREND.
Position: Long a U.S. Treasury Curve Flattener (FLAT).
Today, Singaporean officials came out and cut their forecast for 2011 non-oil export growth to 6-7% from a previous estimate of 8-10%. This is just two days removed from a -100bps cut to the country’s 2011 GDP forecast of 5-7% (now 5-6%). Slowing U.S. and E.U. growth were cited as the main culprits.
Why does this matter? Well, simply put, Singapore is the largest exporter in all of Asia on a per capita basis. Its trailing three-year average exports/GDP figure of 215.8% completely dwarfs China’s 33.5% reading. Further, Singapore is home to the world’s second-busiest container port, and those containers are typically filled with a great deal of high-end products (i.e. consumer electronics, corporate machinery, and pharmaceuticals) waiting to be shipped all over the world (no single country accounts for more than 1/8thof Singapore’s exports). The key takeaway here is that the Singaporean economy is very relevant as it relates to short-to-intermediate term read-throughs on the global economic cycle.
Given, we think it pays to pay attention to Singapore and patiently wait for the turn in the global economic cycle – a turn that Singaporean economic data currently suggests is nowhere in sight. One quick look at the recent contractions in the key forward-looking subcomponents of Singapore’s manufacturing PMI should lead one to conclude that this global growth-sensitive country doesn’t like what’s currently under the hood of the world’s economy.
As long-time value investor Marty Whitman once famously said, “A bargain is not a bargain if it remains a bargain.” Along these lines, we continue to believe valuation remains no catalyst to buy equities when the growth expectations investors are valuing stocks on continue to be off the mark. As a reminder, current Bloomberg Consensus forecasts for 3Q11, 4Q11, 2012, and 2013 U.S. real GDP are: +3.2%, +3.2%, +2.9%, and +3.2%, respectively - rates well above what our models continue to suggest.
In our opinion, if there’s one subtle takeaway to Bernanke’s comments yesterday, it’s that he’s seeing something negative out on the TAIL worthy enough of marking the risk-free rate of return at ZERO percent through “at least mid-2013”. Keep that in mind as you ponder the true “value” of any enterprises you’re looking to invest in at what appears to be “discounted” prices.
Last, but certainly not least, we think it’s appropriate to reintroduce an equation we published last November right ahead of the official QE2 announcement:
QG = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]
Now, just as it was then, it’s important for consensus to be careful what it wishes for.
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