“Gravity is only the bark of wisdom’s tree, but it preserves it.”
I am definitely not as long as I was 24 hours ago. This morning’s Global Macro Grind is just not good.
So before I get into Geithner, Lagarde (IMF), and Barroso (EU) policies to suspend gravity, let’s go through that grind and take a walk down the world’s fundamental path of a continued Growth Slowdown:
- JAPAN – Japanese stocks fell another -1.1% overnight to a fresh 18 month low. It’s not “headline” news, but that doesn’t mean that one of the world’s Top 3 economies ceases to exist. This remains the land of Keynesian nod.
- KOREA – as in the South side, saw its main stock index (and really one of the biggest leading indicators for industrial and tech demand, globally), the KOSPI, collapse for another -3.5% move overnight. Since May, the KOSPI has crashed (down -21.5%).
- CHINA – Chinese stocks bounced “off the lows” to close up +0.55% overnight. While we highly doubt that the best “idea” the Chinese have is investing in Berlusconi Bonds, they are captive to a Global Growth Slowdown, even if they don’t perpetuate it.
- GERMANY – the train wreck that has become the German stock market crashing continues. When I write the word crash, I mean it, literally. If the SP500 was down as much as the German DAX since May (down -33%), the SP500 would be testing the 900 level and Geithner would be promoting a $3 TRILLION TARP at today’s Delivering Alpha Conference.
- ITALY/SPAIN/GREECE – dead cats bounce all of the time in a global economic system where the suspension of gravity remains the primary policy – but they bounce to lower-highs. And unless Lagarde (IMF) and Barroso (EU) start TARPing these pig banks in the coming days, both the Euro and these European crash markets will come under further selling pressure.
- RUSSIA – yep, they’re still around but what was The Inflation Trade bid (USD Down, Oil Up) of Q1 2011 (QE2) in the Russian stock market is now gone. The RTSI index is down again this morning and testing fresh YTD lows.
- BRAZIL – like many of the countries in Asia, the Brazilians appropriately raised interest rates when the US should have and can now start cutting them. This has Brazil looking a lot better than most European and US stock market indices all of a sudden but, again, cutting interest rates requires fear mongering (ie Growth Is Slowing people), so plenty to ponder there.
- CANADA – if all Keynesian Policy finger pointing fails, Geithner can still blame Canada.
Sorry. Did I say I was going to wait until I addressed the Fiat Foolery of Geithner, Lagarde, and Barroso? I couldn’t help myself.
Sadly, Gravity’s Bark will have to deal with these people intervening in what were our “free” market lives until they sufficiently blow this entire thing up.
Obviously Greek bonds, Italian stocks, and US Financials have been blowing up since February. This is not new. What is new is that consensus has been forced to realize that policy perpetuates the growth slowdown problem as opposed to rescuing it.
Geithner loves this stuff. He’s a big Anti-Gravity guy. Spending 47% of his born life at the US Treasury and Federal Reserve (New York Banker kind) and not accepting any responsibility in his policy recommendations across 23 years of his being on the Big Government Intervention team is impressive. That’s what gets you the nod as a keynote to generate some alpha!
As for what France’s lovely Christine Madeleine Odette Lagarde (new head of the IMF post the other French guy having some transparency problems) and Jose Manuel Durao Barroso (President of the European Commission) can do to drive some volatility in these very price stable and socialized markets … let’s consider their options:
- TARP the Europig Banks with some Geithner/Paulson policy (that’s what the EFSF is – a hybrid TARP)
- Start issuing some Eurobonds so that the Europig Bonds get a little lift from the German Bund mix
- Fire Greece out of the EU
Fire, as in the “rapid oxidation of a material in the chemical process of combustion” (Wikipedia). Or, as in firing the Greeks (after the Troika meetings) for lying about their numbers. There may not be gravity in the Fiat world – but there will be fire!
This is obviously a gong show at this point and, as a result, I see no reason not to trade this Global Macro market risk aggressively.
Rick Perry went with the “treason” thing. And Jamie Dimon opted for the “blatantly anti-American” thing.
I am going to go with fading the anti-gravity thing.
My immediate-term support and resistance ranges for Gold, Oil, Copper, Germany’s DAX, and the SP500 are now $86.18-90.11, $1, $3.93-4.04, 4, and 1141-1181, respectively. Don’t be ideological about all of this – just trade the ranges.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
THE HEDGEYE DAILY OUTLOOK
TODAY’S S&P 500 SET-UP - September 14, 2011
Ultimately, what matters most to markets (longer term) is growth – our call in 2011 has been that Fiat Fool policy would perpetuate a growth slowdown; no matter where Geithner or Lagarde go this week. As we look at today’s set up for the S&P 500, the range is 40 points or -2.72% downside to 1141 and 0.69% upside to 1181.
SECTOR AND GLOBAL PERFORMANCE
SENTIMENT – most bullish data point of the morning is that Wall Street is finally capitulating (right on time – our Italian bond auction and EFSF debate catalyst has been mid-late September since we started making the call in May); bulls in the II survey plummet to 35.5% this morning and bears shoot up to 41%; that’s the 1st bearish spread (bulls minus bears) of 2011.
- ADVANCE/DECLINE LINE: +1569 (+1788)
- VOLUME: NYSE 1070.84 (-1.57%)
- VIX: 36.91 -4.35% YTD PERFORMANCE: +107.94%
- SPX PUT/CALL RATIO: 1.71 from 2.20 -22.45%
CREDIT/ECONOMIC MARKET LOOK:
FIXED INCOME: UST 10yr fails at my TRADE line of resistance (2.03%); no support to 1.85%
- TED SPREAD: 34.71
- 3-MONTH T-BILL YIELD: 0.01%
- 10-Year: 2.00 from 1.94
- YIELD CURVE: 1.79 from 1.73
MACRO DATA POINTS (Bloomberg Estimates):
- 7:00 a.m.: MBA Mortgage Applications, prior (-4.9%)
- 8:30 a.m.: Aug. Producer Price Index, est. M/m 0.0%, prior 0.2%
- 8:30 a.m.: Aug. Retail Sales, est. 0.2%, prior 0.5%
- 10:00 a.m.: July Business Inventories, est. 0.5%, prior 0.3%
- 10:30 a.m.: DoE inventories
- 1 p.m.: U.S. to sell $13b 30-yr bonds reopening
WHAT TO WATCH:
- ConAgra will withdraw $5.18b offer for Ralcorp unless company engages in “constructive dialogue” by 5 p.m. on Sept. 19
- ECB will lend two euro-area banks dollars tomorrow, a sign they are finding it more difficult to borrow the greenback in markets
- Caijing magazine reported China is willing to buy bonds of nations hit by debt crisis, citing Zhang Xiaoqiang, vice chairman of National Development and Reform Commission
- A majority of Americans don’t believe President Obama’s $447b jobs plan will help lower the unemployment rate; Obama’s approval rating drops to record low 45%: Bloomberg poll
- Dell (DELL) board authorized added $5b for stock repurchases
- President Obama promotes jobs plan in Raleigh-Durham, NC, ~1 p.m. Later, Obama attends and delivers remarks at Congressional Hispanic Caucus Institute’s Annual Awards Gala in Washington
COPPER - the Doctor is sick. Copper down another full 1% this morning testing its early august lows. Yes Oil holds TRADE line support of $86.03, but both Oil and Copper have bearish/broken TAILS. The TAIL risk trumps the bullish TRADE in oil.
MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:
- Korean Offshore Wind Farm Helps Shipyards Challenge Siemens
- Crude Drops From Six-Week High on Concern Recovery May Falter
- Gold May Fall in London as Europe’s Debt Woes Bolster Dollar
- Silvercorp Plunges After Muddy Waters Says It’s Shorting Stock
- Fuel-Oil Loss Set for Two-Year Low on Supplies: Energy Markets
- Corn Futures Extend Losses as U.S. Crop Improves, Soybeans Drop
- Atlas Iron CEO Rebuffs Approaches, Sees 10-Fold Stock Price Gain
- Copper Drops as Europe Sovereign-Debt Concern Outweighs Strike
- Freeport Miners in Peru, Indonesia Will Go on Strike Over Wages
- Oil, Copper Lead Commodity Declines on Demand Outlook Concerns
- Wheat Harvest in West Australia May Jump 89% on Weather
- Oil Drops From Six-Week High as Europe Crisis Threatens Demand
- China 2011 Corn Harvest May Exceed 180 Million Tons: China Daily
- West Australia’s Barnett to Visit China for Oakajee Ore Funding
- Palm Oil Declines as Slowing Global Economy May Hurt Demand
- Spot Gold Falls, Futures Pare Gains as Stocks, Commodities Drop
- Aluminum, Zinc ETPs Are Unviable on High Costs, Norilsk Says
- EUROPE: As socialists at both the IMF and EU unite, they still haven't delivered the short squeeze headline; DAX down now (still crashing).
- UK July ILO unemployment +7.9% vs consensus +7.9% and prior +7.9%
- UK August Claimant count unemployment change +20.3k vs consensus +35.0k vs prior +37.1k
- Eurozone July Industrial Production +4.2% y/y vs consensus +4.6% and prior revised to 2.6% from +2.9%
- ASIA – what’s going on in South Korean and Japanese equities isn’t headline news but that doesn’t mean that these equity market meltdowns cease to exist; KOSPI down hard on big volume last night (down -3.5% and crashing, down -21.5% since May) as the Nikkei hits a fresh 18 month low (lower than the tsunami low) – big economies; big slowdowns.
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Our outlook for the restaurant space at this point remains negative. The combination of a bleak jobs picture and sticky commodity prices (gasoline and foodstuffs) spells a scenario where we see several names within the restaurant space seeing a decline in the fundamental state of their business.
From a top-line perspective, the jobs picture continues to depress expectations for comparable-store sales growth in the restaurant space. As the chart below shows, the inverse correlation between initial jobless claims and the S&P 500 is quite tight. Unless the high level of weekly jobless claims declines, we wouldn’t expect significant gains in stocks, particularly restaurant stocks, whose top line growth anchors so heavily on employment.
The two charts below show the inverted initial claims again, this time versus a quick service restaurants index and a casual dining index. The casual dining index seems to track closely which makes sense to us given that it is the more discretionary of the two categories.
Consumer confidence is also a key metric for us to monitor as we attempt to decipher how restaurant revenues will look in the back half of the year. Casual dining trends, on a two-year basis, closely track the Conference Board Consumer Confidence Index, as the chart below shows. Gas prices, which are a key driver of negative consumer sentiment, remain at an elevated level despite having come down from peak May levels. The inelastic demand for gasoline in the U.S. as well as the asymmetric pass-through of changes in the price of crude oil to wholesales gasoline prices is largely to blame for this; gas prices, as discussed in a recent report by the Federal Trade Commission, tend to go up like rockets and down like feathers.
Foodstuffs, also, have remained sticky to the upside and we believe that the combination of softening top-line trends and continuing commodity headwinds will hamper earnings growth for many companies in 2H11. BWLD and TXRH are two of the names that are on the top of our list in this regard but we will be doing more granular work on both of those names in the coming days.
With all eyes on the consumer, there’s definitely a disconnect between weak consumer confidence and strong same store sales. Here are some stats showing that we need a BIG sequential comp ramp to offset recent Confidence numbers – just as yy compares are getting tough.
As a backdrop, let’s keep in mind the size of the major data points in question -- PCE vs. retail sales vs. chain store sales (SSS)
PCE = $11 trillion – about 72% of our economy
Retail Sales = $3.1 trillion. In other words, only 28% of consumers’ total expenditures take place in a retail store or online.
Chain Store Sales = about $300 billion per year. (That’s Billion – with a ‘B’). These are the data points that come out the first Thursday of each month. They account for only 10% of Retail Sales, and only 2.7% of what actually comes out of consumers’ wallets. And yes, they become less meaningful by the day as the major retailers opt out of reporting numbers.
We’d argue that Consumer Confidence should most closely track Retail Sales – which is 10x the size of the data points we get on SSS day and includes far more relevant categories. PCE is tougher to use as a benchmark, as it also includes housing, medical, and other expenditures that happen regardless of the consumer’s confidence level.
Even though Retail Sales SHOULD be the key number to watch, the fact of the matter is that it’s reported on a 2-month lag. The most real-time measure is consumer confidence, and (albeit incrementally not meaningful to the consumer) chain store sales.
As for some analysis…
1) Over the past year, chain store sales growth has only been about 30% correlated with consumer confidence; 2-year chain store sales have been ~60% correlated with consumer confidence over the past 12-months.
2) BUT, if we lag consumer confidence by a month – which makes mathematical and logical sense, and then compare that to an underlying run-rate for comps (2-year SSS) we get to a correlation closer to 88%.
3) On that lag, if we look at the sales numbers we’d need to see in order to maintain a) the underlying 2-yr sales growth rate and b) the .88 correlation, it would suggest a -8.5% comp decline (i.e. what we should be looking at this month, all else equal). If anything, there are more reasons for the industry to come in on the lower side of ‘all else equal’(storms, power outages on east coast and CA, etc…).
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