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Shorting the Aussie Dollar

Conclusion: Though we’ve seen a big move in recent months (AUD/USD -9.4% since peaking in late-July), we still think the Aussie dollar could go a lot lower vs. the U.S. dollar and, thus, we remain bearish on it over the intermediate-term TREND. 

 

Position: Short the Aussie Dollar (etf: FXA). Long the U.S. Dollar (etf: UUP).

 

Yesterday, we added a short position in Australia’s currency, the Aussie dollar (AUD), to our Virtual Portfolio.  This is not a new thesis for Hedgeye Macro clients, as we’ve been the bear in this market from a research perspective since 2Q and from a risk management perspective as early as July 27 (coincidentally the day the Aussie dollar hit an all-time closing price high vs. the USD), but it’s worth briefly rehashing the idea to those of you who may not be familiar.

 

The thesis behind our bearish view of Australia’s currency (particularly relative to the U.S. Dollar) is six-fold: 

  1. Slowing Growth is Australia’s domestic economy leading to dovish monetary policy;
  2. Slowing Growth globally – particularly in key export markets;
  3. Housing Headwinds in Australia’s domestic property market;
  4. Deflating the Inflation both across the commodity complex and in Australia’s domestic economy leading to declining terms of trade and incrementally dovish monetary policy;
  5. Winner’s Risk a.k.a. mean reversion; and
  6. Correlation Risk bred out of Interconnected Risk Compounding (the trailing 3yr positive correlations to the S&P 500 and CRB Index are r² = 0.90 and 0.82, respectively). 

Net-net, the confluence of these six factors should get the Reserve Bank of Australia to cut interest rates at some point over the intermediate-term TREND and reduce the Aussie dollar’s real yield advantage over the U.S. dollar. Admittedly, a lot of this is priced into various Aussie interest rate markets, but we see further room for decline in the currency market.

 

Shorting the Aussie Dollar - 1

 

As we’ve mentioned prior, the Aussie dollar has a lot of potential for mean reversion – particularly if the institutional investment community continues to have liquidity headwinds. It’s worth noting that the AUD has appreciated +58.1% vs. the USD since the March ’09 SPX bottom – the second largest advance out of the 48 currencies and FX indices we track over this time period.

 

Shorting the Aussie Dollar - 2

 

Regarding Australia’s domestic economy, Aussie economic data continues to come in largely sour on the margin. Manufacturing and Construction PMI’s are at 2009 [low] levels and the Services PMI has slowed in September as well. Business Confidence, which edged up in September, is likely to be contained absent further declines in the currency and an easing of corporate credit conditions – the latter of which we don’t see happening anytime soon (Aussie corporate credits spreads closed last week one basis point off of a 26-month high). We continue to think inflation – both at the consumer and producer level – will trend lower over the intermediate-term TREND and we’re seeing that in both the data and in market prices.

 

Shorting the Aussie Dollar - 3

 

Shorting the Aussie Dollar - 4

 

Shorting the Aussie Dollar - 5

 

In Australia’s housing market, a benchmark rate cut(s) should be pushed through to mortgage rates and eventually help mortgage demand, which continues to make new all-time lows. This glaring lack of demand is causing Australian housing prices to deteriorate further, which should incrementally slow consumer spending growth in the coming months alongside rising joblessness (the unemployment rate has backed up +40bps since April). Some key metrics to consider regarding the headwinds facing Australia’s housing market over the long-term TAIL:

  • Nearly 2/3rds of Australian citizens own homes (population = 22.5 million);
  • Roughly 90% of encumbered households have variable-rate mortgages, which makes consumer finances incredibly sensitive to interest rate fluctuations;
  • At 155% of disposable incomes, Australian households are more +16.5% more levered than U.S. households were just prior to the financial crisis (133%);
  • Australia has the most unaffordable housing in the English speaking world, according to a January Demographia survey (6.1x gross annual household income vs. 3x in the U.S.); and
  • A recent Zillow.com survey confirms the Demographia survey results: the median house price in Australia ($503k in May) is nearly 3x that of the U.S. ($184k in June).  

Shorting the Aussie Dollar - 6

 

Shorting the Aussie Dollar - 7

 

Our proprietary quantitative levels on the FXA etf and the CRB Index (raw materials account for 60% of Australia’s exports) are below:

 

Shorting the Aussie Dollar - 8

 

Shorting the Aussie Dollar - 9

 

For more in-depth analysis behind this position, refer to the notes below (email us for copies). We’re also happy to follow up with a call for those looking for additional color: 

  • April 6, 2011: Aussie Dollar – Getting Long in the Tooth: We remain bearish on the Aussie dollar for the intermediate-term TREND and forsee a correction from its near all-time high (AUD/USD), primarily due to slowing economic growth down under in part aided by slowing growth in key export markets, which may lead to lower interest rates and more accommodative monetary policy.
  • May 19, 2011: Aussie Dollar – Dancing ‘til the Music Stops: We expect the Aussie dollar to correct over the intermediate term as consensus expectations for an RBA rate hike(s) over the next 3-6 months are irrational due to a pending slowdown in domestic growth. Additionally, our 2Q Macro Theme of Deflating the Inflation is incrementally negative for the AUD as the Inflation Trade unwinds.
  • July 27, 2011: We Wouldn’t Want to be Glenn Stevens Right About Now: RBA Governor Glenn Stevens could shock the Australian economy into a pronounced economic downturn by looking through the current slowdown and hiking rates within the next few months, but given recent economic data it seems more likely that the tightening cycle has peaked in Australia. 

Darius Dale

Analyst


CA RETAIL SALES TAX RECEIPTS TAKE A DIVE IN 3Q

The California State Controller released the Statement of General Fund Cash Receipts and Disbursements for September 2011.

 

The monthly report issues yesterday by CA State Controller John Chiang covers the state’s cash balance, receipts and disbursements in September.  Revenues came in below projections from the recently passed state budget.  Chiang said that “September's revenues alone do not guarantee that triggers will be pulled. But as the largest revenue month before December, these numbers do not paint a hopeful picture.”

 

We focus on Retail Sales and Use Tax Receipts as one data point pertaining to the health of the consumer in the Golden State.  For the quarter ending September 30th, this figure dropped over 21% year-over-year.   Below, we chart this trend on a one- and two-year basis versus CAKE blended same-store sales.  The 3Q11 CAKE number (yellow bar) is a hypothetical comp arrived at by assuming that the two-year average trend in CAKE’s comparable sales trend holds flat.  We do not have access to enough data points to infer a meaningful correlation between these two metrics but certainly do not see the drop in retail sales tax receipts as bullish for the prospects of any restaurant/retail businesses with exposure to California.  20.7% of CAKE’s store base is in California.  BJRI and PFCB also have 50% and 14%, respectively, of their restaurants in California.

 

CA RETAIL SALES TAX RECEIPTS TAKE A DIVE IN 3Q - cake ca sales tax

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


JNY: Insight On A Jeanswear Deal

 

To the extent that this is not a firesale because business is tanking, it makes sense strategically. But the timing is suspect.

 

 

There are puts and takes on this proposed JNY Jeanswear sale to Israel’s Delta Galil Industries (DELT.IT). Netting it all out, I come out on the plus side – IF it actually happens.

 

Biggest positive:  It would provide a $4.50 slug of cash to a company with a sub-$10 stock. And let’s face some facts, with brands like l.e.i, energie, Gloria, and Jessica Simpson selling squarely in mid and lower tier channels in a stagflationary environment, it’s not the most defendable business out there.  In fact, much of this content exists not because it should, but because years of deflationary sourcing costs and lower interest rates allowed JNY to roll up a portfolio of average content, and then keep it afloat while milking for cash.

 

The new reality removes the opacity of this model, and management knows this. If they can relieve the balance sheet pressure, get rid of the low end of the portfolio, and simply rid themselves of a distraction while they focus on real content – like Jones New York and Weitzman – then I’m ok with this.

  1. On the negative side, the company came out and said that it would use proceeds to repo stock. That’s great…really, it is. But they have over $7 per share in debt, deferred payments remaining  for its Stuart Weitzman acquisition and a sub-$10 stock. Maybe they have such huge confidence in their business such that a sub-$10 stock is ridiculous to them. That’d be super bullish, and I definitely won’t ignore that. But in this market, I’d like JNY to finally put on its conservatism pants and get rid of debt.
  2. The price seems out of whack. Either; a) the multiple is either really low, b) the business is really bad, or c) the business being discussed is actually a subset of what we otherwise currently classify as JNY Jeanswear. Wholesale Jeanswear generated about $820mm in revs last year at a respectable 9.3% EBIT margin. On those numbers, the range discussed amounts to 4.0-4.5x EBITDA. Granted, those margins are what I’d consider a peak. Haircut them by 25% to what’s realistic for this year, and it suggests 5.0-5.8x EBITDA on the disposal.  This compares to JNY’s current multiple of around 4.8x EBITDA.
  3. Of course, the bigger curve ball would be that JNY is missing the quarter meaningfully, making the multiple higher than it seems. That would also synch with timing of this leak. I wouldn’t put this past them to divert investors’ attention away from the quarter in favor of a capital markets event.

Lastly, be careful on this one. LIZ looked like a great idea at $10, and not a whole lot changed while it dropped to $4 – certainly not enough to explain away a 60% loss in equity value. Yes, JNY looks cheap. But it could be a value trap waiting to happen. I think LIZ offers up a better portfolio, more upside, and far stronger downside support.

 

 

JNY Segment Results & 2011 Outlook:

JNY: Insight On A Jeanswear Deal - JNY Segs 10 11

 

JNY: Insight On A Jeanswear Deal - JNY Guid 10 11

 

JNY: Insight On A Jeanswear Deal - JNY 10 11

 

Brian McGough

Managing Director

 

 


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THE HBM: PNRA, RUTH

THE HEDGEYE BREAKFAST MONITOR

 

MACRO

 

Commodities

 

Corn has declined in Chicago as speculation mounts that the U.S. may raise its global supply estimate tomorrow.

 

 

SUB-SECTOR PERFORMANCE

 

Casual Dining outperformed peer subsector groups during yesterday’s trading.

 

THE HBM: PNRA, RUTH - subsector fbr

 

 

QUICK SERVICE

 

PNRA:  Shares of Panera Bread gained almost 4% yesterday.  Wedbush Securities were quoted in the media as saying that the company may start buying back its own stock, which would provide potential upside to the company’s estimates.

 

 

CASUAL DINING

 

RT: Ruth's Chris gained 15.7% on strong volume yesterday, outperforming both quick service and casual dining.

 

THE HBM: PNRA, RUTH - stocks 1011

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - October 11, 2011

 

Levels matter and ASIA looks more bearish in the majors (HK, Nikkei, KOSPI, etc) than Germany, France, and Italy do right now – that’s telling you something about Global Growth that is ringing in the -1.1% and -2.7% selloffs in oil/copper this morning that should be respected. Every stock market in Asia and every major commodity has failed at TRADE resistance. 

 

As we look at today’s set up for the S&P 500, the range is 31 points or -2.23% downside to 1167 and 0.26% upside to 1198

 


SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 1011

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 2530 (-1218) 
  • VOLUME: NYSE 888.12 (-22%)
  • VIX:  33.02 -8.8% YTD PERFORMANCE: +86.03%
  • SPX PUT/CALL RATIO: 2.24 from 2.54 (-11.80%)

 

CREDIT/ECONOMIC MARKET LOOK:

 

From KM - US TREASURIES: very interesting action on the short end of the curve continues to develop w/ 2-year yields having broken out above my TRADE line of 0.21% and now testing my TREND line up at 0.30%. I expect short-term yields to back off here, but the short end of the curve should continue to pressure the Gold price (which failed again at $1678 TREND resistance)

  • TED SPREAD: 38.91
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.16 from 2.08     
  • YIELD CURVE: 1.85 from 1.79

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30 a.m.: NFIB Small Business, est. 88.8, prior 88.1
  • 10:00 a.m: IBD/TIPP Economic Optimism, est. 39.4, prior 39.9
  • 11:30 a.m: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 1:00 p.m.: U.S. to sell $32b 3-yr notes
  • 2:30 p.m.: Treasury Secretary Timothy Geithner participates in Financial Stability Oversight Council meeting

 

WHAT TO WATCH:

  • FDIC to release Volcker Rule on proprietary trading
  • Chrysler talks with UAW continue
  • NBA cancels first two weeks of season
  • Hewlett-Packard said to decide future of WebOS, Palm this week, AppleInsider
  • FDA staff issues recommendation on Cook’s medicated heart stent ahead of 10/13 meeting; watch Medtronic, Baxter
  • Citigroup said to halt soliciting some Japanese retail business as it awaits government investigation outcome
  • Bloomberg/Washington Post Republican Presidential Debate at Dartmouth College, Hanover, N.H., 8 p.m.
  • No IPOs expeted to price today

 

COMMODITY/GROWTH EXPECTATION                                                                    

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • Soy Slump Ending as Record Demand Overwhelms Farms: Commodities
  • Oil Drops From Two-Week High in New York Before Europe Debt Vote
  • Copper Declines Most in a Week on Concern About Chinese Demand
  • Timah to Resume Refined-Tin Exports After Price Rebounds
  • Corn Falls as U.S. May Raise Supply Estimate; Wheat Advances
  • Gold Declines in London as Commodities Fall Before Slovakia Vote
  • Sugar Declines in New York as Slower Growth May Curb Demand
  • Rio Says Greece Risk Overdone as China Overcomes ‘Wall of Worry’
  • U.S. Refinery Runs at Four-Month Low in Survey: Energy Markets
  • Soy Sinks More Than Oil Deepens Bond Sell-Off: Argentina Credit
  • Economists Call for Crop-Trading Limits to Curb Volatility
  • Most Tankers Idled Since ‘80s Won’t Buoy Charter Rates: Freight
  • Alcoa’s Earnings Recovery Slows on Aluminum Price ‘Headwind’
  • COMMODITIES DAYBOOK: Gold Declines, Oil Falls From 2-Week High
  • Ship Futures Jump to Year’s High as China Surge Lifts Charters
  • Aluminum Demand to Grow as Much as 10% in 5 Years, Novelis Says

 

CURRENCIES                                                                             

 

EURO – yesterday KM put up the $1.36 line in the sand and said short the Euro with “impunity” there.

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director

 

 


Barroso's Bazooka

This note was originally published at 8am on October 06, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I don’t have to be careful, I’ve got a gun.”

-Matt Groening

 

It’s only a matter of time before the likes of Jon Stewart and Matt Groening (creator of The Simpsons) start mocking this European Gong Show for what it has become – a gong show.

 

Groening made his debut in Wet Magazine in 1978 with a cartoon called “Life in Hell.” That might be a better way to describe how a money manager feels about dealing with La Bernank et Le Trichet’s concepts of Keynesian “price stability.” Today’s game of Globally Interconnected Risk is being driven by rumors of Barroso’s Bazooka.

 

Does Jose Manuel Barroso (President of the European Commission) have a bazooka? What’s the timing on its deployment? Who supports it? Oh the drama…

 

What we do know is that the IMF, ECB, EU, and Timmy Geithner are working on it, feverishly. These are the said leaders of our lives who are going to centrally plan our way to long-term prosperity. What would we do without them?

 

On the topic of the bazooka, this is what Geithner had to say yesterday:

 

Europe needs a more powerful financial backstop.”

 

This, of course, comes on the heels of Christine Madeleine Odette Lagarde saying she (or the 187 countries she now represents on behalf of France and The DSK at the IMF) has ze “infinite resources” to print ze ammo for Le Bazooka.

 

Or is it La Bazooka?

 

Maman, pardon mon francais, but this is what a Yale education has reduced me to. I’m now just a man with a keyboard and a tweet machine fighting the Socialists of the world who are putting another bailout gun to capitalism’s head.

 

Back to the Global Macro Grind

 

With the SP500 up +4.1% from its Monday closing low of 1099, the pain being felt in the hedge fund community is much greater than that.

 

You see, if you shorted the immediate-term TRADE oversold bottom (Tuesday morning) of 1078, and you’re staring down the crosshairs of the S&P Futures indicated up another 10 handles this morning, you are feeling the bazooka of the Pain Trade yourself.

 

Obviously whoever shorted the low instead of seeing it for what it was – a Short Covering Opportunity – does not Occupy Hedgeye as part of their risk management process. Shorting low and covering high isn’t cool.

 

So what do we do now?

 

The thing about this Barroso Bazooka is that it’s real. Weeks ago we did a 52-slide presentation outlining what the size of the bazooka could be and we’ll go over this again for clients on our Q4 Macro Themes Call next Friday (email sales@hedgeye if you want in), but here’s our headline math (slide 42): 

  1. 1.25-1.75 TRILLION Euros to Recapitalize European Banks
  2. 0.75-1.25 TRILLION Euros to Fund Future Deficits
  3. = 2-3 TRILLION Euro-TARP Bazooka 

Now, to be clear, as our Director of Research, Big Alberta, often reminds me – size matters. But there are still some other things about this bazooka to consider: 

  1. Timing – there is no timing. That’s a problem.
  2. Coordination – to deploy a bazooka that big, herding politicians of the world will be like herding cats.
  3. Markets – remain real-time. Tick tock. 

So… on with our risk management day.

 

Instead of sending our Senior European analyst, Matt Hedrick, back to France to pose as one of two-eggs-side-by-each on Lagarde’s breakfast meeting plate, the best we can do is let Mr. Macro Market tell us what to do.

 

The German DAX is breaking out above our immediate-term TRADE line of resistance (5439) again this morning. So the 1stthing we do is don’t short European Equities. Wait and watch.

 

The 2ndthing we do is watch the Euro/USD currency pair. If the Euro can close above $1.34, then the short squeeze in almost everything inversely-correlated to the US Dollar can continue (EUR/USD drives USD Index). If the Dutch come out intraday and vote down the size of Barosso’s Bazooka (and the Euro fails again at $1.34), there is no support all the way back down to its 2011 lows of $1.29-1.30.

 

In the end, like you are seeing with US money-center banks post the 2008 Geithner/Paulson TARP1 Bazooka, there will be an end … and piling more short-term debt-upon-debt on insolvent banks and their incompetent political advisors will end badly. Very badly.

 

But, back to the immediate-term, if you’re not the one with the gun – things can end badly for the pig-headed short seller too.

 

My immediate-term support and resistance ranged for Gold, Oil, the German DAX, and the SP500 are now $1601-1673, $75.86-84.59, 5439-5767, and 1099-1172, respectively. On Tuesday morning, I cut our Cash position from 73% down to 67%, taking our asset allocation to US Equities up to 6% (versus 0% at this time last week).

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Barroso's Bazooka - Chart of the Day

 

Barroso's Bazooka - Virtual Portfolio


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