Keith just added to our BBBY short position. Lower long-term highs in one of our favorite names on the short side, Bed Bath & Beyond. After being big bulls, we’re starting to question the sustainability of longer-term market share opportunity.
Claims Have Become an Significant 1H12 Tailwind to Bank Credit Quality and Loan Growth
The headline initial claims number fell 47k WoW to 352k (down 50k after a 3k upward revision to last week’s data). Rolling claims fell 3.5k to 379k. On a non-seasonally-adjusted basis, reported claims fell 125k WoW to 522k. For those unfamiliar with why we publish on claims every week, it's because they're the best indicator for how credit quality and loan growth trends are likely to fare over the next six months.
This morning's claims print is obviously strong. It also flies in the face of what we've seen in the last few years: claims tend to be weak in the start of the year. After the prior week's disappointing print, this week's print seems to lay to rest concern about an imminent back up in claims. We've pointed out that claims that are sustainably below the 385-400k range foster unemployment declines. While the unemployment rate is as much about the participation rate as the number of folks with jobs, the reason we think it matters is as a signal to broader confidence. As the unemployment rate falls it signals to the average American that things are improving, and that they should feel more confident about spending. In other words, it becomes an autocorrelated virtuous cycle.
We've also pointed out that an cointegrated relationship exists between claims and the S&P500. They don't stay diverged for long. It would seem that, just like last Fall, this time around the mean-reverting instrument is again the market. Full mean reversion from the market side would imply an index level around ~1360. Alternatively, claims would need to rise to ~410k to meet the market where the market is.
The 2-10 spread tightened less than 1 bp versus last week to 167 bps as of yesterday. The ten-year bond yield also fell less than 1 bp to 190 bps.
Financial Subsector Performance
The table below shows the stock performance of each Financial subsector over four durations.
Joshua Steiner, CFA
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THE HEDGEYE BREAKFAST MONITOR
Initial jobless claims dropped to 352k for the week ending January 14th versus 384k consensus and 402k (revised from 399k) the week prior.
Comments from CEO Keith McCullough
Note: my headlines that matter YTD have less and less to do with Europe – rest of the world matters too:
The only really bad news in my notebook this morning is Larry Summers being considered to run the World Bank.
MCD: McDonald’s U.S. December sales were “robust” according to a survey of McDonald’s franchisees carried out by Janney.
MCD: McDonald’s has raised prices for some items in China
SBUX: Starbucks may open its first store in India in 2H12.
NOTABLE PERFORMANCE ON ACCELERATING VOLUME:
CBOU: Strong showing at ICR and lower coffee prices helping this company.
NOTABLE PERFORMANCE ON ACCELERATING VOLUME:
TXRH: Shrugging off the downgrade from Tuesday to outperform casual dining.
BWLD: Declining on accelerating volume in a strong up tape yesterday.
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The Macau Metro Monitor, January 19, 2012
SANDS COTAI CENTRAL TO OPEN BETWEEN 22 AND 27 MARCH Macau Business
According to HSBC, the 1st phase of Sands Cotai Central will open between March 22 and 27. LVS expects to open a 2nd casino by 3Q 2012.
MELCO CROWN EYES $2 BLN DEBT FOR NEW PROJECT Reuters
MPEL is looking for raise $2 billion for its Macau Studio City project. The debt funding will feature a loan-and-bond combo with the loan expected to be for around US$1.25BN and the US dollar bond for the remainder, according to another source. The borrower is in discussions with banks for the loan financing and is seeking underwritten commitments.
Melco's last visit to the loan markets was in May 2011 when it raised US$1.2BN through a dual-tranche financing comprising of an US$800MM term loan and a US$400MM revolver (deal priced all-ins of 208-308bp over LIBOR). The term loan amortizes to 50% and has a two-year grace period. The blended average life is 4.1 years.
OKADA SEEKING THREE BOARD SEATS AT WYNN RESORTS Macau Business, Intelligence Macau
Kazuo Okada, has nominated three candidates to Wynn Resorts' board. According to Intelligence Macau, three current directors are up for reelection at the 2012 shareholders' meeting - Linda Chen (President of Wynn International Marketing and COO of Wynn Macau), Marc Schorr (COO of Wynn Resorts), and John A. Moran.
CHINESE OFFICIALS SAID TO WEIGH EASING CONSTRAINTS ON BANKS BusinessWeek
China is allowing the nation’s five biggest banks to increase 1Q lending and weighing a plan to relax capital requirements as economic growth cools. The PBoC will let the larger lenders increase new loans by a maximum of about 5% from a year earlier, according to two people at state lenders who have knowledge of the matter. The banking regulator is delaying implementing the most stringent capital adequacy ratios and may lower risk weightings for loans to small businessmen and companies, four people said separately.
The central bank also said that 30% of full-year lending should be in 1Q, with the same amount in the second and 20% in each of the final two quarters, the people said. The risk weighting on personal operating loans given to small businessmen may be cut to 75% from the current 100%, while the ratio on loans to small and micro-sized firms would be lowered to 50% from 75%, according to two people.
“The only thing that’s gone up for the last 12 years is my weight.”
Two nights ago Keith and I hosted a dinner for a number of our subscribers at the beautiful Patroon restaurant in midtown Manhattan. Keith’s quote above was in reference to asset classes generally. Now, truth be told, Keith and I snuck away to play noon hour hockey earlier this week and he’s actually staying in pretty good shape. Nonetheless, his analogy was an apt one. Asset class returns are not perpetual, nor are global macro investment views.
On the latter point, the big surprise we heard at the dinner and feedback from our Q1 Themes call last week is the shock that we are getting more constructive on equities and the U.S. economy. Yes, we are less bearish. Not raging bulls, per se, but on the margin less bearish. As a result we’ve upped the equity allocation in our asset allocation model to its highest level since mid-September ’11. So, what’s driving our more constructive outlook?
First, we believe the rally in the U.S. dollar will continue to gain momentum. The strength in the dollar is likely to be driven by a fiscal outlook in the United States that is improving, on the margin, due to automatic budget cuts via sequestration and the winding down of the Iraq war. In addition, both political parties have signaled, at least rhetorically, the importance of getting government spending under control, an issue that will be front and center in the 2012 election, and will likely lead to further budget cuts, or the perception of such.
The other key tailwind for the U.S. dollar is monetary policy. Since the financial crisis in 2008, the United States has led the world in accommodative monetary policy. This is changing and will continue to change. We believe the Fed is in a box related to its ability to implement additional quantitative easing due to an improving employment and economic growth situation. Conversely, central banks globally have plenty of room to ease, which naturally narrows the differential between U.S. interest rates and global rates. The most recent example of this is from China, where this morning reports suggest Chinese officials are weighing plans to relax capital requirements for the major Chinese banks. Add to this Brazil, which cut interest rates by 50 basis points overnight and the Philippines, which cut rates for the first time since 2009.
The primary benefit of a strong dollar is that it boosts the purchasing power of the U.S. consumer by deflating those commodities that are priced in U.S. dollars and by making global goods cheaper on a relative basis. This is important when considering the outlook for GDP since 71% of U.S. GDP is driven by consumption. Conversely, Eurozone government spending is almost 50% of GDP, which makes the outlook for European growth relatively bleak in comparison given the dramatic austerity being implemented in 2012. (Incidentally, a weak European economy and euro are also positive for the U.S. dollar.)
Last year at this time, consensus U.S. GDP estimates for 2011 were at 3.2% and came down steadily all year. It is likely that full year 2011 U.S. GDP comes in at, or under, 2%, which implies an almost 38% miss by the consensus Wall Street prognosticators. Call it process or luck, but we started last year with a much more pessimistic view of economic growth. Thus, for most of last year we were underweight equities and overweight fixed income, with a focus on FLAT and TLT.
This year the scenario is basically reversed. U.S. GDP consensus growth estimates are now just above 2% for 2012. Our models suggest a reasonable high end range of GDP growth in the U.S. could be 2.8%. This is almost 40% above the consensus number and an economic scenario in which growth is accelerating versus last year. Not surprisingly then, we have exited our fixed-income positions and have a much higher allocation to equities, both U.S. and global.
Currently, one of our key global equity positions is long Chinese equities via the closed end fund CAF. As of this morning, the position has already returned more than 15% for us in the Virtual Portfolio. Are we surprised? Well, perhaps by the rapid price appreciation, but it was a game of expectations in China. The Chinese bears have been perpetuating an end of the world scenario for China and the Chinese benchmark equity index was down more than -20% last year. Thus, when economic growth from China came in better than bad a couple of days ago at +8.9%, Chinese equities reacted favorably. This is not dissimilar to the economic setup we see in the United States.
In the Chart of the Day today we’ve highlighted gold versus the U.S. dollar going back twelve years. The key take away from the chart is that bull markets in gold have been perpetuated by bear markets in the U.S. dollar. After gold has gone straight up for the last decade plus, it might not seem to be a contrarian call to suggest there is bubble in gold and it is potentially primed for a potential major correction, but there is major complacency related to gold. Unfortunately for the gold bugs, nothing goes up forever, not even gold. But if you don’t believe us, ask India, the world’s largest consumer of gold, who is set to import 54% less gold in Q4 2011 on a year-over-year basis.
If there is one truism of investing, it is that prices revert to the mean. As Jeremy Grantham once said:
“I got wiped out personally in 1968, which was the last really crazy, silly stock market before the Internet era….After 1968, I became a great reader of history books. I was shocked and horrified to discover that I had just learned a lesson that was freely available all the way back to the South Sea Bubble.”
No asset class goes up, or down, in perpetuity.
Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, and the SP500 are now $1, $109.02-111.91, $1.26-1.29, $80.31-81.61, 2, and 1, respectively.
Keep your head up and your stick on the ice,
Daryl G. Jones
Director of Research
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