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Weekly European Monitor: The Difference a Day Makes

Positions in Europe: Short France (EWQ)


Asset Class Performance:

  • Equities: country indices were largely up w/w. Top performers: Ireland 5.1%; Austria 5.0%; Czech Republic 4.9%; Finland 4.8%; Sweden 4.7%. Bottom performers: Ukraine -2.3%; Russia (MICEX) -20bps
  • FX: The EUR/USD flat w/w. Divergences: RUB/EUR +2.6%, PLN/EUR +1.3%; CZK/EUR -1.7%
  • Fixed Income: 10YR sovereign yields broadly increased w/w, led by Italy +64bps; Greece +48bpsbps; and Spain +26bps. Italy’s 10YR is now up to 6.98%! Last week saw the ECB’s SMP buy 3.36 Billion EUR of secondary sovereign bond issuance, vs two weeks prior of a mere 635MM EUR. We think the continued elevated level of peripheral yields demonstrates that the SMP facility alone cannot arrest yields.

Weekly European Monitor: The Difference a Day Makes - 1. yields

 

 

Call Outs:

 

The European week was dominated by one major theme: the ECB’s LTRO

 

While on Tuesday European equity markets ripped ahead of Wednesday’s opening of the ECB’s first 3YR Long Term Refinancing Operation (LTRO) facility, with 523 banks taking up €489 billion in loans at 1% (vs initial estimates of €293B from Bloomberg and €310B from Reuters), European equities turned down on Wednesday and sovereign yields actually increased day-over-day, an indication to us that the LTRO will not be the panacea that the market had hope for. What a difference a day makes! (For more see our note on 12/21 titled “Optimism Is Over Ski Tips On LTRO”). Key points include:

  • We’d caution against an absolutist view that banks will be buying all European sovereign paper issuance going forward as they’ll stand to benefit from the carry trade, or spread.
  • These same banks have taken significant measures to sell their Europig debt holdings in the last 6-12 months. Why would they jump back in now? 
  • A more likely scenario is one in which banks look to take care of their own houses first before looking to participate in sovereign bond buying.
  • In the face of the inability to lever up the EFSF and no change on the ECB’s position to print money, we do think the opening of ECB’s LTRO facility is bullish, yet we don’t think we’re going to cross some magic bridge that will firewall the major issues.

 

Interest Rate Decisions:

 

(12/20) Riksbank Interest Rate CUT 25bps to 1.75%

(12/20) Hungary Base Rate HIKE 50bps to 7.00%

(12/21) Czech Republic Repo Rate UNCH at 0.75%

(12/22) Turkey Benchmark Interest Rate UNCH at 5.75%

(12/23) Russia Refinancing Rate CUT 25bps to 8.00%

 

 

Chart of the Week:

 

-Below we show Consumer Confidence from the countries reporting data this week. Of note is that while we are getting some slowing in the declines month-over-month (Germany here shows positive divergence), we’d expect confidence to continue to wane alongside the uncertainty on Eurocrat actions to reduce sovereign and banking risk.

 

Weekly European Monitor: The Difference a Day Makes - 1. consumer confid

 

 

CDS Risk Monitor:

 

-On a w/w basis, CDS was largely down across the periphery.  Italy saw the largest pullback at -32bps, followed by Spain (-18bps) and Ireland (-11bps).  On a m/m basis, Spanish CDS is down -95bps and Italian CDS is down -57bps.

 

Weekly European Monitor: The Difference a Day Makes - 1. cds a

 

Weekly European Monitor: The Difference a Day Makes - 1. cds b

 

 

EUR-USD

-Our position remains unchanged week-over-week: we’d short the cross at $1.33 for an immediate term TRADE.  The EUR/USD remains broken long term TAIL ($1.40) and intermediate term TREND ($1.42) in our models and we think the lack of resolve from the newest proposals for a fiscal union will encourage greater downside. 

 

 

The European Week Ahead:

 

Sunday: European Bank capital raising “plans” due for meeting 106 Billion EUR target

 

Monday: Nov. France Total Jobseekers and Net Change

 

Tuesday: Dec. Finland and Czech Republic Consumer/Business Confidence

 

Wednesday: Dec. UK Nationwide House Prices (Dec 28-30th); Q3 Russian Current Account (Dec 28-31st)

 

Thursday: Nov. Eurozone Money Supply; Dec. German Consumer Price Index – Preliminary; Dec. Italian Consumer Confidence; Q3 Hungarian Current Account; Q3 Ukraine’s GDP – Final

 

Friday: Nov. German Retail Sales; Q3 BoE Housing Equity Withdrawal; Nov. Italian PPI; Dec. Spain’s Consumer Price Index – Preliminary 

 

 

Matthew Hedrick

Senior Analyst


WMT: Under-Owned by Big Money

 

“Big money got a heavy hand, Big money take control, Big money got a mean streak, Big money got no soul...” Neil Peart



Big money is underweight Wal-Mart, just as the company is on the tail end of a multi-year comp slump, that we think has bottomed. In fact, based on the Hedgeye Retail Sentiment Monitor (see chart below), WMT’s current score of 69 is at its lowest level in over four years – and has declined from 94 at this time last year.


We’re rarely going to make a sentiment call (it’s just not what we do), but when the fundamentals are improving, returns are inflecting and it’s not represented in sentiment, we definitely pay attention.

 

WMT: Under-Owned by Big Money - WMT Sentiment

 

We think that Wal-Mart is outperforming this holiday. That’s in part because of a turnaround in its merchandise strategy from last year where the only category that comped positive was food, and also due to the layaway plan, which helps 4Q (even if a product was laid away in 3Q). But we also think that Wal-Mart will be among the biggest beneficiaries of our Macro team’s King Dollar theme, which calls for Consumption to follow the stronger dollar, with commodity prices easing on the margin.


In that regard, we can reasonably quantify how underowned WMT actually is by looking at public disclosure of its shareholder list. The bottom line is that when people (especially big long only money) realize that they need to at least get equal weight WMT, we think that roughly 6% of the float will need to trade hands. They’ll be competing with WMT, which will also be in the market buying 5-6% of its stock.


Here’s our math…


The S&P uses a float adjusted Market Cap re the sizing of S&P 500 components. With a float adjusted market cap of $104Bn, WMT accounts for 0.95% of the S&P500, which has a float adjusted market cap of $10.9T.


Looking at the top shareholders of WMT by AUM (not top holders), only 12 of the top 50 own enough of the stock to be considered equal weight or over-weight the stock relative to its representative weighting in the S&P.

  • According to the Investment Company Institute, approximately ~48% of mutual fund assets are allocated to domestic and international stock funds under which WMT would fall.
  • Assuming that 48% of fund assets are benchmarked to the S&P and its 0.95% WMT position, an equal weight position of WMT would equate to roughly 0.46% of a fund’s total assets.

Among the Top 80% of funds that currently own WMT as ranked by AUM, WMT accounts for only 0.39% of the average portfolio – over $6Bn shy of what this sample alone would need to acquire in order to be equal weight, or ~6% of the float. Given that our analysis does not account for the funds that don’t have a position in WMT at all, this figure actually understates what true demand in the market would ultimately be.


 

The following table of Top 50 shareholders by AUM is purely based on SEC filings:

 

WMT: Under-Owned by Big Money - WMT Ownrshp

 





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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


Dickens' Lead

“Lead on! Lead on! The night is waning fast, and its precious time to me, I know.”

-Scrooge

 

The next 72 hours of our lives in the McCullough household will be some of the most magical of the year. My little girl Callie is old enough now to be aware of Santa. My son Jack, well, he’s probably already peaked at what’s in store for him.

 

What’s in store for all of us at Christmas time is the wonderful gift of time. Time away from the office. Time away from the screens. Time with the people we love.

 

When Charles Dickens published A Christmas Carol on December 19th of 1843, it was perceived to be a dark time in Britain. It was a time of hunger. It was a time of class warfare. These are the times we want to avoid.

 

While the “tale has been viewed by critics like T.A. Jackson and Paul Benjamin Davis as an indictment of 19thcentury industrial capitalism” (Wikipedia), I prefer the context of the economic historian James Henderson as “an attack on Malthus.” (Grand Pursuit, page 6).

 

Reverend Thomas Robert Malthus is well known for this fear-mongering forecasts about population declines that never came to fruition. He and Thomas Carlyle became the most recognized “political economists” of their time by capitalizing on the Hungry Forties with charlatan lines of storytelling that were not only dark, but backward looking.

 

Dickens embraced the idea of uncertainty as an opportunity for change. Scrooge was his metaphor for the progressive side of capitalism, illuminating the human heart as the source code for morality.

 

Today, while Republican and Democrat fear-mongering views about our lives falling over the precipice into the depths of another depression may have captured the headlines of those who are weak enough to believe them, I know you are all stronger than that.

 

Leadership, principles, and values start in your home. Lead on!

 

Back to the Global Macro Grind

 

I think most Americans have figured out this year that what the stock market does on each and every tick is not what this country runs on. It may not run on Dunkin’s stock price either, but it certainly rides into your favorite coffee shop on the purchasing power of a Dollar, every day.

 

The most bullish Christmas Carol I can sing to this country this weekend is that the US Dollar Index has risen from the dead. After testing a 30-year low in April of 2011, King Dollar’s ascent has already added up to a +10% gain.

 

Even the crown of a sheepish looking Political Economist in Chief’s head cannot take the shimmer of hope of continued currency strength away from us this weekend. And while hope is not a risk management process, it will most certainly remain the fulcrum of my daily prayers.

 

Ben Bernanke wants you to believe in fear so that you will accept a 0% return on your hard earned savings. He wants you to believe that the price you pay at the pump doesn’t take away from what you might be able to put in the bucket when that Salvation Army bell rings.

 

This is not a political attack. This is called leading from the front lines every day with a progressive idea that our political ideologues on the US economy have not had the courage to try.

 

By simply getting the US Federal Reserve’s Quantitative Easing out of the way and putting a governor on government spending’s slope, consider what’s happened in the last 6-9 months:

 

  1. US GDP Growth has risen from +0.36% in Q1 of 2011 to +1.8% in Q3
  2. US Unemployment has fallen from 9.2% to 8.6% and weekly jobless claims are now hitting YTD lows
  3. US Consumer Confidence hit a fresh 6-month high yesterday at 69.9 on the University of Michigan survey (vs 67.7 in NOV)

If I have written this 100 times in the last 6 months, I’ve beaten it onto the Wall Street 2.0 Tape (Twitter) with 10,000 tweets:

 

Strong Dollar = Strong US Consumption = Strong Employment

 

Lead on, my capitalist friends, lead on!

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1, $105.95-108.11, and 1, respectively.

 

On behalf of my family and firm, Merry Christmas!

KM

 

Keith R. McCullough
Chief Executive Officer

 

 Dickens' Lead - EL

 

Dickens' Lead - vp 12 23


The Machinery

This note was originally published at 8am on December 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It is the machinery of banking which makes this imbalance possible.”

-John Maynard Keynes

 

While I am not sure what machinery Banker of America’s Brian Moynihan uses to make his economic and risk management forecasts, I am certain that he does not use the same machines we do. We use fractal math.

 

I’m also confident that The Machinery of a globally interconnected marketplace of colliding risk factors is completely misunderstood by the academic source code that drives these Investment Banking Inc. estimates – classical Keynesian economics.

 

The Machine” is actually what the best Global Macro Risk Manager of the 2007-2011 period (Ray Dalio, who I highlighted in yesterday’s Early Look when asking the question, What’s True?) calls economic “reality” – and sometimes it bites.

 

It certainly has in December.

 

At an “Economic Outlook” (scary) conference in Charlotte, NC yesterday, the embattled CEO of BAC channeled Hedgeye by suggesting “2012 will be another year that’s  a grind in the economy.”

 

Notwithstanding that Moynihan is 12 months late in recognizing economic reality and its impact on Bank Of America’s cash earnings (Net Interest Margins (NIM) collapsing), we still can’t figure out how he comes up with a +2.1% US GDP estimate for 2012.

 

Neither can his shareholders.

 

On December 31, 2010, BAC’s stock price was $13.34/share. Yesterday it closed at $4.99/share. While that sounds like a weekend special on a slab of flank steak, at down -63% for the YTD,  it’s even “cheaper” than that! A value meal at Mickey D’s is going to have a tough time competing with that price (even if you adjust for a black car service taking you through the drive thru, paying for gas).

 

As the venerable value investor Marty Whitman reminds us, “A bargain that remains a bargain, is no bargain.”

 

But what does this collapse of the US money-center banks mean? Isn’t this all Europe’s fault? Or this morning, should we just Blame Canada?

 

With the SP500 down -3.3% for December (after being down -0.6% in November and down -11.6% from the April 2011 high where the likes of Moynihan said US GDP Growth was going to be up +3-4%), how about we blame ourselves for once?

 

The Machinery of the globally interconnected marketplace has not changed. Unfortunately, neither has Old Wall St. It’s time we Embrace Uncertainty in our growth and inflation assumptions and stop begging for The Bernank to “smooth” the business cycle for us or our Too Big to Bail banks are going to be sitting right back where they were 23% higher in the S&P (October 2007).

 

In the meantime, here’s what going on in this morning’s USA Macro Grind:

  1. SP500 is testing its only remaining line of support in our TRADE/TREND/TAIL model (TREND = 1207)
  2. US Equity Volatility continues to hold its long-term bullish TAIL line of 23.11 support
  3. The Range (of risk) in my immediate-term probability model for the SP500 is 72 points wide (manageable)
  4. US Stock Market Volumes are as dead as the trust Americans have in Big Government Intervention markets
  5. Sector Risk: Financials (XLF) led decliners yesterday and remain in a Bearish Formation (crashing -23.2% YTD)
  6. Sector Signals: Consumer Discretionary (XLY) and Consumer Staples (XLP) hold up relatively well with Strong Dollar
  7. Strong Dollar = Strong US Consumption (try it at the pump this weekend, you’ll like it)
  8. US Dollar Index is busting a move into a Bullish Formation with immediate-term upside to 81.24
  9. US Treasury Yields continue to signal that Growth Slowing will be here through Q112 (10yr = 1.85% this morning)
  10. Yield Spread (proxy for growth and US bank earnings) = +161 basis points wide, and compressing

Outside of the USA, the Top 3 Risk Management items to recognize as reality today are:

  1. Eurocrat Bazooka is more like a pepper-gun
  2. China says they are not going to implement a “large stimulus”
  3. Greece is going away

Don’t worry SocGen vacationers, I don’t mean the Greek islands and beaches – I just mean their stock and bond markets. Greece issued 3-month piggy paper at 4.68% this morning and her stock market hit a fresh YTD low at 644 on the Athex Index (down -62.4% from Q111).

 

I suppose that if we give Keynes a bailout do-over on the quote about The Machinery of banking, he’d have to call the money printing and piling-debt-upon-debt solution to Greece one heck of an “imbalance!”

 

God Bless America and the opportunity we have here to stop what we are doing. It’s time to Re-think. Re-work. Re-build.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), German DAX, French CAC, and the SP500 are now $1568-1614, $101.34-106.28, 5573-5807, 2905-3043, and 1193-1213, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Machinery - Chart of the Day

 

The Machinery - Virtual Portfolio


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