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Forecasting Dark

This note was originally published at 8am on August 11, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Weather forecast for tonight: dark.”

-George Carlin

 

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:

  1. Bank of America = 3.2%
  2. Barclays = 3.1%
  3. 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:

  1. Bank of America (David Bianco) = 1400 (up +11.4%)
  2. Barclays (Barry Knapp) = 1420 (up +13.0%)
  3. 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):

  1. US GDP Growth Q1 2011 = 0.36%
  2. US GDP Growth Q2 2011 = 1.29%
  3. 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”:

  1. COUNTRIES – when they are wrong on GDP assumptions, they are wrong on their DEFICIT/GDP assumptions.
  2. RATINGS AGENCIES – when they see countries with DEFICIT/GDP assumptions rising, their ratings start falling (on a lag)
  3. 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?

  1. Banks make money on a spread (the Yield Spread – that’s why La Bernank wants to keep rates of return on your savings low)
  2. When growth slows, the Yield Spread compresses (the 10s/2s spread has compressed by 28% in the last 6 months)
  3. 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 $1684-1794, $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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Forecasting Dark - Chart of the Day

 

Forecasting Dark - Virtual Portfolio


THE M3: MORE SJM SHARES FOR ANGELA; S'PORE JULY NEW HOME SALES

The Macau Metro Monitor, August 16, 2011

 

 

ANGELA LEONG INCREASES STAKE IN SJM Macau Business

Stanley Ho's 4th wife, Angela Leong On Kei, bought 5MM shares of SJM in an off-exchange transaction and 750k additional shares through the market.  Her stake in SJM rose from 8.11% to 8.21%.  At the same time, Stanley Ho reduced his stake in SJM to 0.09% from 0.18% by selling 5MM shares, also in an off-exchange transaction.

 

SALES OF NEW PRIVATE HOMES UP 17% IN JULY Strait Times

1,386 new private homes were sold last month in Singapore, +17% MoM. 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - August 16, 2011

 

If you didn’t know it now you do - GLOBAL GROWTH IS SLOWING.  As we look at today’s set up for the S&P 500, the range is 159 points or -8.84% downside to 1098 and 4.36% upside to 1257.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 816

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 2548 (+1698)  
  • VOLUME: NYSE 1105.36 (-12.00%)
  • VIX:  31.87 -12.35% YTD PERFORMANCE: +79.55%
  • SPX PUT/CALL RATIO: 2.10 from 1.79 (+17.52%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 27.14
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.29 from 2.24    
  • YIELD CURVE: 2.10 from 2.04

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Import Price Index, est. (-0.1%), prior (-0.5%)
  • 8:30 a.m.: Housing starts, est. down 4.6% to 600k, prior 629k
  • 8:30 a.m.: Building Permits, est. down 1.9% to 605k, prior 617k
  • 9:15 a.m.: Industrial Production, est. 0.50%, prior 0.20%
  • 9:15 a.m.: Capacity Utilization, est. 76.9%, prior 76.7%
  • 11:30 a.m.: U.S. to sell 4-wk bills
  • 4:30 p.m.: API Inventories

WHAT TO WATCH:

  • WSJ is unconvinced of wisdom of Google's purchase of Motorola Mobility
  • Carlyle Group said to be in exclusive talks to buy Pharmaceutical Product Development
  • Nokia rises for second day after Google/MMI deal amid buyout speculation and as analysts say deal may benefit Windows Phone OS; J.P. Morgan values Nokia’s patent portfolio at EU5.4b
  • German Chancellor Angela Merkel meets with French President Nicolas Sarkozy; press briefing at 12:30 p.m. NY time
  • IMF’s Lagarde, writing in the FT, urges policymakers to include measures to support economic growth in the short term as they implement fiscal tightening plans under market pressure

COMMODITY/GROWTH EXPECTATION

  • COPPER – the Doctor gets Singapore + Germany = bad; Copper leading to the downside this week is a very bearish signal for global growth; Copper’s TAIL line of support broke last week (4.10/lb) – no support to 3.81/lb

                               

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • China Set to Achieve ‘Soft Landing,’ Conference Board Says
  • Sino-Forest Says Investigators Won’t Report Until Year End
  • Bananas in Cooled Ingersoll Trucks Help India Cut Food Waste
  • Gold Gains a Second Day in London on Concerns Growth Is Slowing
  • Soros, Mindich Cut SPDR Gold Share Holdings in 2nd Quarter
  • Oil Supplies Decline to Five-Month Low in Survey: Energy Markets
  • Oil Falls on Speculation Slowing Economy Will Curb Fuel Demand
  • Sugar Climbing 6% as Brazil Crop Drops Amid Importer Demand
  • Copper Drops on Speculation China, U.S. Slowdown to Hurt Demand
  • Western Europe Faces Higher Construction Costs on Commodities
  • Commodities May Be Poised to Decline 9.7%: Technical Analysis
  • Pemex Bonds Trading Safest to Petrobras in Year: Mexico Credit
  • Uranium Spot Prices Fall as Vacation Season Cuts Demand, Ux Says
  • Corn Drops as Rally to 2-Month High Slows Demand; Soybeans Fall
  • Copper Extends Drop After Report on Germany’s GDP: LME Preview
  • Oil Declines as Investors Speculate Global Economy Is Slowing

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: crash continues Germany down hard on a real big slowdown in; FTSE down -1.2% on stagflation.
  • GERMANY – when the best of a bad bunch is crashing, you get paid to pay attention; Germany’s Q2 GDP growth was cut in half sequentially to 2.8% vs 5.2% in Q1; German stocks down another 2% and crashing (down -22% since May)

 

THE HEDGEYE DAILY OUTLOOK - euro markets

 

 

ASIAN MARKETS

  • ASIA: no follow through; watch Singapore who leads in the East, down hard -1.5% overnight and signaling continues Asian growth slowdown
  • SINGAPORE –Singapore advises China and the rest of the region on upside/downside scenarios and now Singapore stocks are leading the East to the downside (down another -1.5% overnight)

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


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SENIOR LOAN OFFICER SURVEY: RESI DEMAND FALLS BUT STANDARDS FINALLY EASE

Fed Data Points To An Overall Improved Lending Environment

Yesterday afternoon the quarterly Federal Reserve Senior Loan Officer Survey was released. Across all asset classes banks are now more willing to make loans. This is evident both in the net percentage of banks easing/relaxing standards and in the net percentage of banks increasing/reducing spreads on loans. 

 

Borrowers are also emerging from the woodwork as demand for all loan types, save one, rose in the most recent survey. The sole exception being residential mortgage, where banks reported that demand fell yet again this quarter. Roughly 75% of the bankers surveyed predicted that 2H11 mortgage origination volume would be flat with volume seen in 1H11. The remaining 25% was split between expecting it to be up or down.

 

C&I Loans Continue to Move in the Right Direction 

All trends are positive in C&I lending. More banks reported strengthening C&I loan demand again in 3Q.  Lending standards are easing and spreads are contracting in C&I loans.  

 

SENIOR LOAN OFFICER SURVEY: RESI DEMAND FALLS BUT STANDARDS FINALLY EASE - C I TIGHTENING

 

SENIOR LOAN OFFICER SURVEY: RESI DEMAND FALLS BUT STANDARDS FINALLY EASE - C I SPREADS

 

SENIOR LOAN OFFICER SURVEY: RESI DEMAND FALLS BUT STANDARDS FINALLY EASE - C I DEMAND

 

CRE Loans Also Now Moving in the Right Direction

CRE loan demand rose again in the 3Q survey coming on the heels of last quarter's strongest advance in years.  Meanwhile, lending standards eased again this quarter - the second month in a row.

 

SENIOR LOAN OFFICER SURVEY: RESI DEMAND FALLS BUT STANDARDS FINALLY EASE - CRE TIGHTENING

 

SENIOR LOAN OFFICER SURVEY: RESI DEMAND FALLS BUT STANDARDS FINALLY EASE - CRE demand 

 

Residential Real Estate - Standards Finally Ease (Slightly) but Demand Continues to Fall

The residential real estate segment finally caught a break this quarter as banks reported a net easing of standards in 3Q11 for both prime and nontraditional loans. That said, the net easing was minimal with just 1.9% (net) of respondents easing standards on prime residential real estate loans and 4.2% (net) easing standards on nontraditional residential loans. 

 

Also of interest is the fact that in spite of the modest easing of standards, demand continued to decline. Bankers reported lower demand (-1.9%) for prime residential real estate loans and home equity lines of credit. Nontraditional loan demand fell at 12.5% of banks surveyed (net).

 

SENIOR LOAN OFFICER SURVEY: RESI DEMAND FALLS BUT STANDARDS FINALLY EASE - RESI TIGHTENING

 

SENIOR LOAN OFFICER SURVEY: RESI DEMAND FALLS BUT STANDARDS FINALLY EASE - RESI demand

 

Consumer Loans Show Improvement

On the non-mortgage consumer side, the percentage of banks expressing increased willingness to lend increased from Q2. Beyond this, the demand for these loans rose while lending standards eased.   

 

SENIOR LOAN OFFICER SURVEY: RESI DEMAND FALLS BUT STANDARDS FINALLY EASE - CONSUMER TIGHTENING

 

SENIOR LOAN OFFICER SURVEY: RESI DEMAND FALLS BUT STANDARDS FINALLY EASE - cons new

 

Joshua Steiner, CFA

 

Allison Kaptur

 


RESTAURANT INDUSTRY - SALES AND EARNINGS TRENDS

The biggest take away from this quarter’s earnings season was the decline in the earnings outlook for Full Service sector versus the Quick Service sector.

 

 

Full Service trends

  • 57.8% of the companies in the FSR space saw DOWNWARD revisions over the last month
  • 36.8% of the companies saw UPWARD revisions over the last month

 

QSR Earnings Trend

  • 52.9% of the companies in the QSR space saw UPWARD revisions
  • 11.7% of the companies saw DOWNWARD revisions
  • Two companies have not yet reported

 

Full Service Sales Trends

  • 7 concepts had negative SSS in 4Q10 - Industry average SSS was 2.2%
  • 7 concepts had negative SSS in 1Q11 - Industry average SSS was 2.4%
  • 9 concepts have negative SSS in 2Q11 - industry average estimates SSS is 3.0%
  • The Hedgeye estimate for 3Q11 SSS is 1.5%.
  • The Hedgeye estimate for 4Q11 SSS is 0.7%.
  • As many as 15 concepts could see negative SSS by 4Q11.

The concepts that are negative in 2Q11 are; Cracker Barrel, IHOP, Chuck E Cheese, McCormick & Schmicks, PF Chang, Pei Wei and California Pizza Kitchen.

 

 

Quick Service Sales Trends

  • 2 concepts had negative SSS in 4Q10 - Industry average SSS was 5.0%
  • 3 concepts has negative SSS in 1Q11 - Industry average SSS was 2.9%
  • 3 concepts have negative SSS in 2Q11 - industry average estimates SSS is 3.0%
  • The Hedgeye estimate for 3Q SSS is 2.0%
  • The Hedgeye estimate for 4Q SSS is 0.7%

The concepts with negative SSS trends in 2Q11 were Pizza Hut (-2%), KFC (-5%), and Taco Bell (-5%).

 

 

Sector Performance Trends

 

The response to the significant revisions in consensus EPS for the casual dining industry has led to a significant correction in the subsector.  As you can see from our subsector performance table (which we publish every day in the HBM) the group has begun to significantly underperform.  In contrast, the QSR sector has significantly outperformed.

 

In our view, contrarian investors could profit from looking at the food processing space for potential longs.  The Processing stocks have underperformed for quite some time, despite a correction in commodity prices.  However, TSN, recently commented that it expects protein prices to rise across the board in the coming months and SYY is also expecting high inflation for a few quarters. 

 

Looking at the broader consumer space over the past three weeks, the QSR segment showed significant outperformance along with Discount Stores.  The two sectors that underperformed the most over the past three weeks were Gaming, Lodging & Leisure and Homebuilders.

 

RESTAURANT INDUSTRY - SALES AND EARNINGS TRENDS - subsector consumer

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


The Cowboy Is Up

Conclusion: With Texas Governor Rick Perry officially in the race, former Massachusetts Governor Mitt Romney looks to be finally facing some meaningful competition for the Republican nomination.  Meanwhile, despite falling to near lows in approval, President Obama continues to poll well against most Republicans. He is vulnerable, but Obama is far from beaten.

 

President Obama actually trumped Governor Perry’s entrance into the Presidential race this weekend by garnering substantial news coverage of his own.  Unfortunately for Obama, the news coverage was related to the downward spiraling of his approval rating.  Specifically, a Gallup poll ending on August 13th showed Obama’s approval rating at 39%.  With the addition of this poll, the Real Clear Politics poll aggregate for Presidential Job Approval has now fallen to -6.7 – a mere 40bps off the lows of the Obama Presidency.

 

The Cowboy Is Up - 1

 

According to the history of Gallup’s polls, this places President Obama as the second least approved of President in the third week of August of the third year of a Presidency for all Presidents going back to President Eisenhower.  Not surprisingly, the least approved President in that period at this point in his Presidency was President Carter with an approval rating of 32%.  The President with the third lowest approval rating at this juncture in his Presidency was President Reagan, with a 43% approval. 

 

As it relates to contemplating President Obama’s re-election chances in 2012, his approval rating is certainly an instructive factor, but we would caution at reading too much into this one factor so far away from the general election.  As was proven by Reagan’s first term, the ability of a President to rally from a dismal approval rating and be re-elected is very realistic.  In Reagan’s case, he went on to a land slide victory over Walter Mondale winning 58.7% of the popular vote and 97.6% of the Electoral College votes. (Incidentally, Carter was the only Democratic President to not to be re-elected since 1888.)

 

Certainly there are many differences between Reagan and Obama, but the interesting basic similarities are that they are both incumbents up for re-election with low approval ratings and facing seemingly weak challengers.  In Reagan’s case, Mondale likely put the nail in the coffin of his electoral chances with the following statement at the Democratic convention when he accepted his nomination:

 

“Let's tell the truth. It must be done, it must be done. Mr. Reagan will raise taxes, and so will I. He won't tell you. I just did.”

 

In effect, Mondale explicitly told voters he was going to raise taxes.  Even if realistic as a deficit cutting proposal, explicitly indicating you will raise taxes is not the most prudent campaign tactic. 

 

As it relates to Obama, despite the weak economy, broad dissatisfaction with politicians, and his low Presidential approval rating, Obama still polls well against most Republicans.  In the table below, we’ve outlined the most recent polls of Obama versus some of his key Republican challengers in August:

 

The Cowboy Is Up - 2

 

Two key events have occurred since the above polls were taken: Tim Pawlenty has dropped out of the race and the native of Paint Creek, Texas, Governor Rick Perry, has officially thrown his proverbial cowboy hat into the ring. 

 

As Perry just recently entered the race, no polls yet reflect whether his standing versus Obama has shifted, but InTrade does provide a bit of an insight.  Currently, the contract that Perry will gain the Republican nomination is reflecting a 39% chance that Perry will receive the nomination versus 30% for Romney and 7% for Bachman.

 

The Cowboy Is Up - 3

 

Even though no candidate has gained the nomination entering this late into the race, Perry has become the front runner for the nomination over night.  As a result, the Democrats have begun to attack Perry focusing on his love of God, purported lack of intelligence, coiffed hair, and his key platform position of limiting the power and influence of government.  Probably the best example of the tact that Democrats will take on Perry’s view of government came from former Clinton advisor Paul Begala over the weekend, when he wrote:

 

“Does Tim Pawlenty rant about Social Security? Hah. Perry told The Daily Beast's Andrew Romano that Social Security is “a Ponzi scheme,” and that both it and Medicare are unconstitutional.” 

 

As Perry steps from the conservative cloak of Texas and attempts to establish a national brand, it will be critical for him to withstand personal and philosophical attacks from the left.  Luckily for Perry he has substance behind his nicely groomed hair, especially as it relates to the economic success of Texas.  As he noted on Sunday at his campaign launch in South Carolina:

 

“Over the years, we’ve followed this recipe to produce the strongest economy in the nation. Since June of 2009, Texas is responsible for more than 40 percent of all the new jobs created in America. Now think about that, we’re home to less than 10 percent of the population in America but 40 percent of all the new jobs were created in that state. I’ve cut taxes. I have delivered historic property tax reductions. I was the first governor since World War II to cut general revenue spending in our state budget. We passed lawsuit reform including just this last session. Loser pays.”

 

For now, we are reserving judgement on Perry’s potential, but if the video of his launch, which is attached below, tells us anything, it is that Perry’s ability to reach and communicate with Americans may only be paralleled by the President himself in this race.

 

http://www.realclearpolitics.com/video/2011/08/13/texas_gov_rick_perry_announces_presidential_bid.html

 

The cowboy from Paint Creek is up, now the question is whether he can handle the national political bull.

 

Daryl G. Jones

Director of Research


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