Hypnotic Markets

“The only time I have problems is when I sleep.”

- Tupac Shakur

 

In Greek mythology, Hypnos is known as the god of sleep.  His palace was a dark cave where the sun never shone.  The palace itself had no gates or doors, so that he would never be awakened by sounds from doors opening and closing.  Unlike Hypnos, global macro markets, especially in these interconnected times, never sleep.

 

The most noteworthy news overnight, not surprisingly, comes fromEurope.  The first Italian bond auction of the week was held this morning and it was, on the margin, successful. Italysold 9 billion euro of 6-month bills at 3.25%, which was dramatic improvement over the last auction on November 25ththat sold at a yield of 6.5%.

 

As Greek mythology tends to work, Hypnos’ brother was Morpheus, the King of Dreams.  So, while you may still be asleep, especially given the holiday shortened week, the paragraph above is not a dream.  The Italians actually did have a better than expected bond auction this morning.  If there was any disappointment, it was likely in the tranche of 2013 zero coupon Italian debt that was auctioned this morning.  The Italians were able to sell only 1.7 billion euro of the maximum allotted 2.5 billion euro.

 

Certainly though, we need to jot down this auction as a positive data point in our notebooks, as it is a sequential improvement.  The true test of whether there is an improved appetite for Italian sovereign debt will occur tomorrow.  In tomorrow’s auction, the Italians will attempt to sell up to 8.5 billion euro of 3, 6, and 10-year debt.  In theory, if the Long-Term Refinancing Operation, or LTRO, of the ECB is even moderately successful, then tomorrow’s auction should see some improvement over the prior comparable auction.

 

Yesterday in an intraday note to our subscribers, we wrote a note titled, “The LTRO is No Bazooka” (email if you’d like a copy) and highlighted the following key points:

 

“In the chart below, we’ve highlighted the ECB liquidity facility going back one year and in the inserted chart going back roughly one month. The key takeaway is that the ECB liquidity facility, which is used by European banks to effectively park money, hit a new all-time high at 411 billion euros this morning and has been increasingly rapidly since the inception of the LTRO just over a week ago. In fact, the day before the LTRO was put into effect, the ECB facility was at 265 billion euro and as of this morning has increased by 146 billion euro, or more than 70% of the incremental liquidity from the LTRO.

So, not only is the LTRO not being used as a bazooka by the European banks, but these banks are parking the borrowed LTRO money with the ECB rather than using it to buy sovereign debt, and thus are experiencing a negative yield on the trade.”

 

Given the results of the Italian bond auction this morning, there is some evidence the LTRO is being used as the fabled bazooka.  Ironically, though, the amount of money parked at the ECB’s liquidity facility increased dramatically overnight to a record of 452 billion euro.  This is an increase of 41 billion euro from the prior day. We would caution reading too much into the “successful” Italian bond auction as clearly the risk aversion trade remains in full effect.

 

In other European news, the prominent Spanish newspaper, Expansion, is indicating that Rajoy may force Spanish banks to cut the valuation of the real estate assets on their books by up to 20%.  The fact that Spanish banks still need to write down real estate assets on their balance sheets should not be terrible surprising to anyone.

 

Spanish home ownership rates are above 80% on the back of cheap long-term mortgages, often up to 40 and 50 years. As well, the government encouraged home ownership by making 15% of mortgage payments a tax deduction.  The Spanish real estate bubble makes Phoenix and Florida housing look like a value investment.

 

Unfortunately, the Spanish real estate market isn’t likely to improve anytime soon. Specifically, in October, Spanish real estate loans decreased for an18th straight month and were down 43.6% year-over-year.  Our long term analysis has shown that demand for mortgages is one of the best predictors for future real estate prices.  Therefore a 20% cut in the valuation of real estate assets for Spanish banks seems more than reasonable.

 

On the domestic front, Bloomberg this morning is predicting that 2012 could be the biggest year for IPOs since 1999.  Given the current filings, internet IPOs may raise more than $11.0 billion in the coming year.  In the face of heightened volatility and a 2011 that was lackluster in terms of equity offerings, raising only $156 billion in 2011 versus $252 billion, the onslaught of internet offerings seems a bit excessive.  Undoubtedly, even Dionysus, the Greek god of partying and excesses, would agree with that.

 

Keep your head up and your stick on the ice,

 

Daryl G. Jones

Director of Research

 

Hypnotic Markets - DJ chart EL wednesday

 

Hypnotic Markets - hvp12 28


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more