“Desire is proof of the availability.”
As I grind through the end of Sylvia Nasar’s “Grand Pursuit” this weekend, I’m looking forward to the most talked about book in the high-halls of intellectual hockey-head thought – Dan Kahneman’s recently published “Thinking, Fast and Slow.”
I love everything about that title. Being an amateur writer whose first English paper at Yale was deemed “un-grade-able”, I think the punctuation (using a comma) of the title provides a lesson for everyone in this business. Thinking is important – sometimes you need to do it fast. Sometimes you need to do it slow. Risk waits for no one.
Thinking back to his prior works in the 1970s (a period Bernanke should familiarize himself with), Kahneman (and Tversky) did a psychological experiment called the “Availability Heuristic” which essentially “operates on the notion that if you can think of it, it must be important.” (Wikipedia)
Can you think of anything going on in Europe right now?
Of course you can. That’s all the financial media talks and writes about every day. South Park’s Trey Parker must have Blame Europe in the works, right?
How many Old Wall Street meetings and/or interviews have you observed in recent months where the person speaking ends what they are saying with the word “right?”
That’s the business we are in. Whether people want to admit it or not, groupthink in our economic outlooks, politics, and choice of words is pervasive. Too Big To Think?
Back to the Global Macro Grind…
The reason why Global Equities have been going down since Q1 of 2011 has a lot more to do with Global Growth Slowing than it does anything else. If you got US and Global Growth right at the beginning of 2011, you’re having a good year.
This morning’s Global Macro data continues to hammer home the deep simplicity of this fundamental research point:
- China’s flash HSBC Producer Manufacturing Index (PMI) dropped again, sequentially, to 48 in NOV vs 51 OCT
- Hong Kong’s Consumer Price Inflation (CPI) remained elevated at +5.8% y/y in OCT (inline with SEPT)
- Germany’s manufacturing PMI dropped again, sequentially, to 47.9 in NOV vs 49.1 OCT
Oh, that last point is about Europe. Right.
Well the inconvenient truth is that Globally Interconnected Macro markets aren’t all about Europe. Asian Growth Slowing and USD Correlation Risk would be 2 of the Top 3 (next to Europe) that any objective global analyst has to be proactively prepared for.
Get the US Dollar right, and you’ll get The Correlation Risk right.
On our immediate-term TRADE duration, here’s how inversely correlated the US Dollar Index remains to the big stuff moving markets:
- SP500 = -0.83
- EuroStoxx600 = -0.89
- CRB Commodities Index = -0.79
- 10-year US Treasury Yield = -0.72
Anyone who trades stocks or commodities gets points 1 through 3, but point 4 is a stealth reminder that the US Bond Market had US Growth Slowing right throughout the entire US Equity and Global Commodity head-fake rallies of October 2011.
With the US Dollar strengthening again intraday yesterday, that’s partly why I sold my Gold position and took my allocation to Cash in the Hedgeye Asset Allocation Model back up to 67% from 58% day-over-day.
Gold is one of the most over-owned, over-valued, “asset classes” left in Global Macro markets.
With Gold’s immediate-term TRADE correlation to the US Dollar becoming more intense (-0.49 last) and the hedge fund community under liquidation pressure again here in November (the industry doesn’t do well when stocks and commodities stop going up), booking a small -3.6% loss in Gold makes me more comfortable than taking a predictably larger one.
In the meantime, Available Cash remains King. That’s a 2011 Availability Heuristic you’ll be talking about over Thanksgiving dinner.
My immediate-term support and resistance ranges for Gold (bearish TREND resistance = $1724/oz), Brent Oil (Bearish Formation), France (Bearish Formation), Hong Kong (Bearish Formation), and the SP500 (Bearish Formation) are now $1, $105.67-109.59, 2, 176, and 1177-1198, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Conclusion: In this three-part note, we update our outlook for Chinese economic growth and monetary policy, hit on recent economic growth trends and outlooks across Asia and the associated implications for U.S./E.U. growth, as well as offer some sobering analysis on Asia’s role in funding the Eurocrat Bazooka.
With the bulk of U.S. investor attention oscillating between a sequentially worse domestic equity earnings season and Europe’s Sovereign Debt Dichotomy, we thought it be a helpful to quickly focus your attention on a few data points out of Asia over the last 72hrs that we think are instrumental to constructing a more clear intermediate-term outlook for both the U.S. and global economy:
While Chinese Growth Is a Real Problem, Broad Easing of Monetary Policy Is Unlikely to Occur Soon Enough
On the heels of Chinese Vice Premier Wang Qishan’s urging that the nation adopt more “forward looking and flexible” monetary policy (i.e. ease), the People’s Bank of China cut reserve requirement ratios in the province of Zhejiang, where Wenzhou is located (home to the sensationalist media reports of a dramatic credit crunch). While the single-province, -50bps reduction is hardly something to get excited about, it does support our view that China is unlikely to broadly ease monetary policy for 1-2 quarters, instead electing to “fine-tune” economic policy, per the PBOC. Chinese equities, as measured by the Shanghai Composite Index, are in support of our view (broken on our TRADE and TREND-duration quantitative factoring):
Also consistent with our contrarian view that rate cuts aren’t always bullish when initially implemented because of the effect fear-mongering has on private sector confidence, Vice Premier Qishan’s call for monetary easing was accompanied by the following statement:
“The global economic recession triggered by the international financial crisis will be long-term.”
We remain convinced that this type of negative sentiment coming from high-ranking officials is not conducive for small business owners investing in additional capacity or consumers opening up their purses for big(er)-ticket items. Moreover, they aren’t conducive for international confidence in the world’s third-largest economy; it’s not a coincidence that the first decline in yuan holdings at Chinese banks (a gauge of “hot money” in/out flows) since December ’07 occurred in October. As such, we’re now seeing 12mo non-deliverable forwards for the Chinese yuan trade at a slight discount to spot prices – the first break into negative territory since September ’08.
Asia’s Woeful Export Growth and Downward Growth Revisions
Japan joined Hong Kong, Singapore, and Thailand as another large, export-dependent Asian economy to post flat-to-down YoY export growth in the latest reporting period. This is consistent with the general trend of softening industrial production statistics and weaker manufacturing PMI surveys throughout the region. This has obvious negative implications for the intermediate-term inventory build and consumption trends in the U.S. and E.U., given that Asia generally rests atop the developed-world’s supply chains. We say this time and time again, but it’s worth repeating:
“If the velocity of Asia’s production and shipment of goods and services is slowing or in decline, then the velocity of U.S./E.U. orders and consumption is sure to follow. Suppliers can’t sell what isn’t on the shelves and consumers can’t consume what hasn’t been produced.”
Elsewhere in Asia, Singapore updated its 2012 GDP estimate to a baseline forecast of +1-3% and revised down its 2011 forecast for export growth to +2-3% from +6-7% prior. Per the Trade Ministry, neither forecast is inclusive of "downside risks to growth", such as a Eurozone recession. This follows up the Monetary Authority of Singapore’s stern warning issued on Friday:
"The world economy and financial system are at their most fragile state since the 2008-09 global financial crisis."
Just a thought, but if Singapore – a place home to the world’s 1st, 5th, and 6thstrongest banks and consistent a ~2% unemployment rate – is growing at only +1-3%, where does that put French and Italian growth in 2012?...
Additionally, Singapore joins Japan, Hong Kong, India, Indonesia, Thailand, and Australia as key Asian economies to either reduce official GDP estimates or talk them down publically in recent weeks.
Are China and Japan Setting Consensus Up for an Asymmetric Downmove?
With global equity prices still elevated relative to their early October lows, we think it’s fair to say that there is a decent-sized faction of buyside consensus that is betting on an orderly resolution to the Eurozone’s Sovereign Debt Dichotomy. That, of course, requires a leveraging of the existing Eurocrat Bazooka, per the latest official commentary out of Germany. Unfortunately for this viewpoint, we continue to come across glaring data points that are supportive of our belief that the EFSF will struggle to attract capital – especially on the order of our estimate of $2-3 trillion needed for the upcoming fiscal year:
In China, Gao Xiqing, president of China Investment Corp (the country’s sovereign wealth fund) had this to say regarding the potential of them reallocating assets to aid in the Euozone bailout:
“When we talk about international investments, we must consider whether they serve our interests… We can’t say that we’re a generous nation and we can help you at whatever economic costs to us.”
Additionally, Jin Liqun, chairman of the board at China Investment Corp, had this to say as well:
“China cannot be expected to buy the highly risky bonds of euro-zone members without a clear picture of debt workout programs.”
Clearly, the powers that be over at CIC share our view that China is no lemming. They won’t be foolishly convinced to step in and bail out Europe at these prices! Refer to our 9/14 research note titled, “China to the Rescue?” for more details on what conditions China needs to see before stepping in to bid for European assets with size. Moreover, we are perhaps even farther from meeting those conditions than we were just over two months ago.
Turning to Japan, in recent weeks we’ve had conversations internally and also with various members of the buyside centering on the possibility that Japan can “save the day” with major purchases of EFSF issuance and/or PIIGS+French sovereign debt via central bank money printing. Japan appears to have a vested interest in weakening the yen from near-record levels, having carried out three largely-unsuccessful interventions in the YTD with record size. Such a bold move could prove a great deal more successful than their previous interventions (the yen is trading +5.4% YTD vs. the USD vs. a median decline of -2.0% for all other Asian currencies), in addition to perhaps giving them a boost to their public image and international influence.
Unfortunately, today Finance Minister Jan Azumi rejected the possibility of the Bank of Japan establishing a ¥50 trillion yen (~$650 billion) fund to purchase foreign debt (a plan proposed to him last month by BOJ Deputy Governor Kazumasa Iwata) by saying:
“We think that would be similar to intervention… Such an idea isn’t in-line with our thinking.”
This is a major blow to this creative line of Keynesian thinking, as the BOJ takes orders for currency intervention from Japan’s Finance Ministry – whose sole purpose for intervention has been to stem “speculative trading and excessive movements”. An outright currency devaluation isn’t on their agenda and certain members of the BOJ remain publically concerned of the ill-effects of Keynesian money-printing:
“We should minimize the chance of distorting markets [when the BOJ buys assets] and I’m very cautious about that.’’
-Sayuri Shirai, Monetary Policy Board Member, November 2011
“If a central bank starts to underwrite government bonds, there may be no problems at first, but it would lead to a limitless expansion of currency issuance, spur sharp inflation and yield a big blow to people’s lives and the economy, as has happened in the past.”
-“Masaaki Shirakawa, BOJ Governor, May 2011
To his point, in the last round of outright JGB monetization which occurred during the Great Depression era, Japan’s CPI and PPI eventually peaked at YoY growth rates north of +40% and Real GDP growth slowed sequentially for nearly 15 years. While buying EFSF or PIIGS+French paper isn’t the same thing as buying domestic securities, it is created from the same source – an expansion of Japan’s monetary base. Should such expansion eventually seep into Japan’s domestic money supply in the coming years, Shirakawa’s worst fears are at risk of being realized.
All told, we think Japan is doing the prudent thing by standing pat here. Moreover, our analysis would suggest it’s also prudent to remain cautious about the EFSF – at least in the short-to-intermediate term.
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Position: We sold our position in the Gold ETF (GLD) earlier today.
Earlier today, we sold our position in the Gold ETF (GLD) for a small loss of -3.6% in the Virtual Portfolio. Obviously, it is never enjoyable to take a loss, but, as it relates to our decision making process, it is actually pretty simple: we change our views as our factors change.
In the instance of gold, the inverse correlation with the U.S. dollar index has recently heightened (going from +0.08 on the 30-day duration to -0.45 on the 15-day duration) and our King Dollar thesis (bullish on the U.S. dollar) has not changed. Thus, in the shorter term it seems dollar up is likely to mean gold down, which is obviously not good for the long gold position.
The key catalyst for us with this sale was the price of gold. As outlined in the chart below, gold broke its TREND line of support at $1,724, which, according to our quantitative models, establishes the TAIL line of $1,559 as the next key line of support.
Longer term, the key reasons to own gold are in tact. First, inflation from fiat currencies is still, and will likely remain, a key support for the price of gold, especially as the size and scale of European sovereign debt bailout increases. Second, and as outlined in the chart below, when real interest rates are at, or below, zero, it provides a favorable backdrop for gold as investors search for return. (Incidentally, we don’t see a meaningfully increase in U.S. rates at least while Bernanke is at the helm.) Finally, gold continues to be a hedge for geopolitical risk, which is only accelerating in the Middle East due to concerns over the Iranian nuclear program and uncertainty over upcoming elections in Egypt.
Unlike other asset classes, specifically bonds, real estate and equities, the challenge with gold is that it is difficult to value. As outlined above, it is typically used as a hedge against certain macroeconomic environments. That said, in the charts below, we took a look at gold versus WTI oil and the U.S. housing market.
On the first metric, gold can currently purchase ~17.3 barrels of oil. This is just above the long run average going back to 1983 of 15.7 and well off the highs of early 2009 when one ounce of gold could buy 25.7 barrels of oil. So, on this metric, gold is basically fairly priced, at least versus the last thirty years of data.
On the second metric relating gold and U.S. home prices, the data suggests gold may be more extended on valuation. Currently, a hundred ounces of gold will buy 1.06 houses in the U.S. based on the current median home prices. Almost ten years ago, a hundred ounces of gold would buys less than 0.19 of a U.S. house. This analysis, at least over the last decade, suggests that gold is at an elevated valuation. Longer term, going back to 1963 as highlighted in the second chart below, gold has traded higher versus U.S. home prices, so it actually remains well off its highs.
The key negative fundamental data point relating to gold is on the demand side of the equation. According to the most recent data from World Gold Council, global demand for gold was 919.8 tonnes in Q2 2011. This was down -17% on a volume basis from Q2 2010 and down -5% sequentially from Q1 2011. While the actual volumes were down, the dollar value actually increased year-over-year by 5% and sequentially by 2.8%. The implication for the recent demand figure is that there is some elasticity in demand and price increases.
Even if demand is more tepid at higher prices of gold, as long as interest rates in the U.S. remain near all time lows and Keynesian policies remain intact globally, the bullish TAIL position in gold should hold.
Daryl G. Jones
Director of Research
THE HEDGEYE BREAKFAST MONITOR
Notes below from CEO Keith McCullough
Intraday yesterday I made the 4th“Short Covering Opportunity” call I’ve made since August 4th:
- OVERSOLD – is as oversold does. Yesterday’s SP500 immediate-term TRADE oversold line = 1187 and this morning’s math gets me 1186, so that’s the zone. Problem with that so far is that a 10-14 point bounce can’t get us back above 1203 (TREND line resistance)
- ASIA – better than bad is the best way to describe how Asian stocks traded after the European and US selloff. Again, immediate-term TRADE ranges are what they are – they always get overbought/oversold. India finally arrested its recent decline, +0.75%.
- GOLD – I’m long and wrong Gold here and do not like it having broke its intermediate-term TREND line of $1722/oz. Gold selling off like this has a lot more to do with liquidations in the hedge fund business than anything else. Performance is not good out there.
Growth Slowing in Asia and the US combined w/ European Stagflation remains our fundamental Global Macro view on the topline.
JACK: Jack In The Box reported 4Q EPS of $0.49 versus consensus $0.41. Company same-store sales at Jack in the Box restaurants gained 5.8% in the quarter versus consensus of 2.0%. Qdoba system same-store sales came in at 3.7% versus consensus 4.1%. Margins continue to improve. Guidance for 1QFY12 same store sales indicates a high level of confidence in the top line. Same-store sales are expected to increase approximately 4 to 5% at Jack in the Box (consensus +1.5%) and 2 to 3% at Qdoba system restaurants versus consensus of 2.7%. Below is a chart of Jack in the Box company same-store sales including management’s guidance for 1Q12. Commodity costs for the full year FY12 are expected to be up 5% on FY11.
YUM: Yum! Brands’ Taco Bell has cut 105 jobs across the nation and at its Irvine headquarters, according to media reports. 30 of those jobs were open and unfilled and 75 were layoffs. Taco Bell Chief Executive Greg Creed said that the structural changes being made were necessary to compete in an increasingly competitive marketplace.
CBRL: 1QFY12 EPS was reported at $1.03 versus Bloomberg consensus $1.05. Comparable store restaurant and retail sales were down -1.6% and -1.3%, respectively. The press release said that there was a sequential improvement in both metrics during the quarter. Food costs are expected to be up 5.5% to 6.5% versus FY11.
MSSR: McCormick and Schmick’s and Landry’s have announced that Landry’s tender offer to acquire all of the issued and outstanding shares of common stock of MSSR at $8.75 per share has commenced.