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UK Budget Summarized

Below we provide a summary of the UK's Chancellor of the Exchequer George Osborne 2012 Budget Speech on March, 21, 2012. 


The hot-button topic of tax relief for the rich was answered: Osborne lowered the top income tax rate to 45% from 50% for those earning more than 150,000 pounds, to appease his Conservative party. However these earners can claim only 25 percent of their income or 50,000 pounds, whichever is the greater, so together with the increase in stamp duty, they’ll lose an average of 1,300 pounds a year, according to initial projections.


But he also made concessions to the Liberals by clawing back lost revenue with higher taxes on homes bought for 2 million pounds ($3.2 million) or more, a squeeze on tax relief for pensioners and a clampdown on tax evasion by the rich.




  • This Budget:
    • supports working families and helps those looking for work
    • reaffirms our unwavering commitment to deal with Britain’s record debts
    • with a tax system that is more competitive for business than any other major economy in the world
  • Forecast:
    •  OBR are sharply revising down their forecast for euro area growth this year by 0.8% to - 0.3%
    • OBR forecast for world economic growth is also revised down over the next two years – by 0.2% and 0.3% respectively
    • OBR’s overall assessment of the outlook and risks for the British economy is “broadly unchanged” since last Nov
    • OBR expect the British economy “to avoid a technical recession with positive growth in the first quarter” of 2012
    • say that the British economy has “carried a little more momentum into the new year than previously anticipated”
    • OBR is slightly revising up in their growth forecast for the UK this year to 0.8%
    • forecast 2% next year; 2.7% in 2014; and 3% in both 2015 and 2016
    • forecast unemployment rate is the same as it was last Nov
      • expect it to peak this year at 8.7% before falling each year to 6.3% by the end of the forecast period
    • revised down estimate of the claimant count, to be around 100,000 lower in each of the next four years than they previously forecast – peaking at 1.67M this yr rather than the 1.8M
    • forecast one million more jobs in the economy over 5 yrs
    • Inflation is expected to fall throughout the period, from 2.8% this year to 1.9% next year, and then 2% by the end of the forecast period
    • deficit is falling and is forecast to reach 7.6% next year
    • borrowing is set to come in at £126B, £1B lower than prior forecast
      • will then fall to £98B in 2013-14…reaching £21B by 2016-17
  • Spending:
    • reinforce today our commitment to fiscal responsibility, not just this year – but in the years ahead
    • transfer of the £28B of assets from the Royal Mail pension fund to the Exchequer will free it from its crippling pension debts, ensure the pensions of hard-working staff are paid and help to bring in new private sector investment
      • use it to pay off debt
    • maintain control of Welfare spending
      • even with Welfare Reform Act (passed two weeks ago) the welfare budget is set to rise to consume one third of all public spending
    • will be pushing a White Paper on social care
    • future govt spending is expected to be lower in Afghanistan
  • Low Interest Rates/GILTS:
    • commitment to reduce the deficit is keeping interest rates low
    • Debt Management Office will consult on the case for issuing gilts with maturities longer than 50 years, and the case for a “perpetual” gilt with no fixed redemption date
    • rebuild Britain’s reserves
      • gold holdings have risen in value to £11B
    •  historic low mortgage rates
    • New Buy Scheme, introduced last week
      • help those who cannot afford the larger deposits
    • reinvigorated Right to Buy
  • Credit Easing:
    • passing on our low interest rates to small businesses, through the National Loan Guarantee Scheme
      • £20B of guarantees in total will be available
    • allocated £1B to invest in funds that lend directly to the mid-cap businesses
      • response has exceeded our expectations
      • 24 funds have submitted proposals.
      • decided to increase the size of the Finance Partnership by 20% and also expanding the Enterprise Finance Guarantee
  • Growth: 
    • Exports 
      • want to double our nation’s exports to one trillion pounds this decade
        • expanding UK Export Finance and setting out new plans to help smaller firms in new markets
    • Investment
      • want investment from British pension funds in British infrastructure
      • set out in a National Infrastructure Plan the projects we are going to prioritize in next 10 yrs
      • transportation investments (airports, railroads)
        • will support £150M of Tax Increment Financing to help local authorities promote development
        • will provide an extra £270m to the Growing Places fund
        • Royal Docks Enterprise Zone projects in London
    • Energy
      • launched the Green Investment Bank; open for business next month
      •  introduced a Carbon Price Floor into our tax system to encourage investment
      • environmentally sustainable has to be fiscally sustainable too
      • gas will be the largest single source of our electricity in the coming years
      • introducing a major package of tax changes to extract oil and gas from reserves in North Sea
      • introducing new allowances including a £3 billion new field allowance for large and deep fields to open up West of Shetland
    • Aerospace/Science/Creative Hub
      • creating the Francis Crick Institute at St Pancras and cutting taxes on patents to make this one of the most attractive places in the world to invent new medicines
      • establish a UK centre for aerodynamics
      • introduce schemes to boost the video games, animation and high-end TV production industries
    • Best Place to Start a Business
      • replacing 1000 pages of guidance with just 50 pages
      • introducing a presumption in favor of sustainable development
    • Education/Flexible Workforce
      • offering a record number of apprenticeships and our Youth Contract comes into force next month
      • exploring the idea of enterprise loans
      • exploring a way to make public sector pay more responsive to local pay rates
    • Tax Reform
      • need to give Britain a modern tax system fit for the modern world
    • Tax Transparency
      • tax small firms on the basis of the cash that passes through their businesses
      • pressing forward with ambition to integrate the operation of income tax and national insurance
      • simplifying tax system for pensioners
      • simplify the Basic State Pension and its interaction with the second state pension
    • Business Tax
      • cut the tax rate on small companies to 20%
      • increased the generosity of the R&D tax credit for smaller firms
      •  more than doubling the Enterprise Management Incentive Scheme grant limit to £250,000
      • in April corporate tax is due to fall to 24% (22% by 2014)
      • increasing the rate of the bank levy to 0.105 per cent from next Jan
    • Duties
      • no further changes to make to the duty rates
      • duty on all tobacco products will rise by 5 percent above inflation
      • introduce a new Machine Games Duty – with a standard rate of 20% and a lower rate for low stakes and prize machines of 5% of net takings
      • in April will also introduce double taxation relief for remote gambling
      • fuel: above inflation rises will only return if the oil price falls below £45 on a sustained basis, currently equivalent to around $75 dollars
      • increasing Vehicle Excise Duty by inflation only
    • Personal Tax/Tax Avoidance
      • increased both the resources and the number of staff working on evasion and avoidance at HMRC
      • anti-avoidance measures in this year’s Finance Bill will increase tax revenue over the next five years by around £1B – and protect a further £10B that
      •  increasing the Stamp Duty Land Tax charge applied to residential properties over £2M bought into a corporate envelope, charge will 15%
      •  consult on the introduction of a large annual charge on those £2M residential properties which are already contained in corporate envelopes
      •  introducing capital gains tax on residential property held in overseas envelopes
      •  announcing legislation today to close down the sub-sales relief rules
      • introduce a new Stamp Duty Land Tax rate of 7% properties worth more than £2M
      • capping reliefs: anyone seeking to claim more than £50,000 of these reliefs in any one year will have a cap set at 25 per cent of their income
      • top rate of tax will be 45p
    • Child Benefit
      • Child Benefit will only be withdrawn when someone in the household has an income of more than £50,000
    • Personal Allowance
      • Government has set itself the goal of raising the personal tax free allowance to £10,000 – and promised real increases every year to reach that
      • announced the largest ever increase in the personal allowance
      • from next April that amount will increase by £1,100
      • people will be able to earn up to £9205 before they have to pay any tax


Modeling the XLF from Claims and MBA Purchase Apps - Looking for 10% Downside

In the chart below, we use initial jobless claims and MBA purchase apps to model the XLF.  This multiple linear regression yields an r-squared of .92.  We expect that initial claims will rise by roughly 35-40k over the next six months, which implies a decline in the predicted XLF of -10.1%.  (This analysis holds MBA purchase applications flat from their most recent reading, a conservative assumption given the CAGR of MBA purchase apps over the last four years is -17%.)




Initial Claims Continue to Show Some Resiliency

The headline initial claims number fell 3k to 348k (falling 5k after the 2k upward revision to last week's data). Rolling claims fell 1.3k to 355k, while the non-seasonally adjusted series fell 24k to 316k. Rolling non-seasonally adjusted claims fell 7.7k to 338k. We would note the second derivative change in the series in the last three weeks. From the start of the year through week 8, rolling NSA claims were trending lower at a steady clip. However, for the last three weeks they have been moving sideways. This is consistent with our view of expecting to see claims first turn from tailwind into no wind into headwind. 














2-10 Spread

The 2-10 spread widened 3 bps versus last week to 192 bps as of yesterday.  The ten-year bond yield increased 2 bps to 229 bps.






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 




Joshua Steiner, CFA


Allison Kaptur


Robert Belsky


Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser.  









Initial jobless claims came in at 348k versus consensus 350k and 353k the week prior (revised up from 351k).  


THE HBM: MCD, SONC, SBUX, WEN - moving claims



Commentary from CEO Keith McCullough


Got global Growth Slowing? Markets are starting to:

  1. INDIA – Energy stocks (XLE) stopped making higher-YTD-highs on Feb 24 and India stopped going up on Feb 21; this morn India’s Sensex was down another -1.8% on fundamentals (Growth Slowing As Inflation Accelerates) and is down over 6% from its YTD high. India’s Yield Curve has pancaked.
  2. SPAIN – Growth Slowing was the most obvious message for the PMI reports across Europe for the month of March. Central Planners can arrest stock market deflations in the short-term, but in the long-run, their ideas to stop economic gravity are dead. Spain’s IBEX remains bearish across all 3 of our risk mgt durations (down -1.5% this morn)
  3. OIL – probably the only good news this morning is that Oil stopped going up. We sold our long Oil position and took our asset allocation to Commodities to 0% because the US Dollar looks like it could put on a big move to the upside again. Immediate-term support lines that broke for WTIC and Brent are $106.79 and $124.89, respectively.

Deflating The Inflation takes more time than a day. Tops in Energy and Basic Materials stocks are processes, not points. I shorted FCX yesterday too.







THE HBM: MCD, SONC, SBUX, WEN - subsector





MCD: McDonald’s CEO Jim Skinner is stepping down to be replaced by COO Don Thompson effective July 1.


SONC: Sonic reported 2QFY12 EPS of $0.03 versus $0.02.  Company same-store sales were in line with preannounced results of 3.1% but 1% of that was due to the extra day in February due to the leap year and there was some favorable weather impact also.  Sonic continues to perform inconsistently, from an operational perspective.


SBUX: The Starbucks AGM was another success for the company yesterday.  FY12 guidance was unchanged.  The company offered interesting commentary on international markets including the potential of drive-thrus in Europe as well as an initial look at its new Evolution Fresh concept.  Oppenheimer raised its PT on Starbucks this morning to $62 from $56.


WEN: Wendy’s is releasing a new Spicy Chicken Guacamole Club.  From a mix perspective, this product could help the company alleviate pressure from beef costs, although the price point was not disclosed.




GMCR: Green Mountain gained 10% on accelerating volume as the company announced its agreement with Starbucks yesterday to expand their partnership to make, market, distribute and sell Starbuck’s Vue coffee packs for use in Green Mountain’s Keurig Vue single-cup machines.


KKD: Krispy Kreme stocks plunged after the company reported a 4QFY12 earnings miss on Tuesday.


COSI: Cosi gained on accelerating volume – again. 







RT: Ruby Tuesday shares gained on accelerating volume following Raymond James’ upgrade yesterday.





Howard Penney

Managing Director


Rory Green



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Congratulations Don Thompson and we wish the best to Mr. Skinner.  COO Don Thompson will take over effective July 1.


Since I have been covering McDonald’s, there have been five different CEOs and none has stepped down as decorated as Jim Skinner is.  The timing of his decision is surprising but, given how long he has been at the company – 41 years – him stepping down is not an undue cause for concern. 


Mike Quinlan (CEO from March 1987 – July 1998): The Quinlan era was very different.  The MCD of today is not the public company it was in the 1990’s.  Mr. Quinlan did not have a relationship with “Wall Street”, in fact he shunned analysts.  His primary achievement was the dramatic overseas growth of McDonald’s.  The stock was up more than 400% during his tenure.


Jack Greenberg (CEO from July 1998 – January 2003): Unfortunately Mr. Greenberg held the top spot during a tumultuous period for the company.  Excessive growth, particularly in the USA, was a problem for McDonald’s.  It was Mr. Greenberg’s idea to launch salads in the Spring of 2003 which lead to the first positive month of same-store sales after 13 painful months.  What he could not shake off was seven quarters of earnings disappointments.   The stock was down roughly 60% during his tenure


Jim Cantalupo (CEO from January 2003 – April 2004): Mr. Cantalupo gets credited with bringing about the “Plan to Win” strategy in 2003, but passed away just as the company was turning the corner.  The stock has gained 60% during his tenure, what ended up being the beginning of a long upward trend for the stock.


Charlie Bell (CEO from April 2004 – November 2004): It was during this period in McDonald’s’ history that it became the role model company for always having a succession plan in place.  Mr. Bell passed away mere months after taking the reins at MCD.


Jim Skinner (CEO November 2004 – June 2012): When Mr. Skinner took the helm at MCD I joked to myself that it was his job not to mess things up.  With the stock up more than 200% during his tenure, he certainly did his job!


The question that comes to mind most is, “why now?”  Is it just a coincidence that the company just announced its first earnings disappointment of the Skinner era?  Does he see something investors do not?  The economic turmoil in Europe, among other factors, poses a significant challenge to McDonald’s going forward.


Of course, it is difficult to know why Skinner is stepping down now but after 41 years with the company he deserves some time off.  It will be difficult for Mr. Thompson to achieve the same results that Jim Skinner did but, as a veteran of 22 years, he is also a very capable executive.


To those of us that live and breathe MCD every day, Mr. Skinner retiring is not a surprise, as it could have happened any time in the past year, but the timing was somewhat surprising.  Mr. Thompson is not a surprising choice to take over but we are left wondering if there is any reason for the change taking place in July.



Howard Penney

Managing Director


Rory Green









Roped In

“In the contest between inflation and deflation, the rope is the dollar.”

-James Rickards


I’ve finally jumped into a book I’ve been really excited about, James Rickards’ “Currency Wars”, and the preface does not disappoint. From a risk management perspective, I couldn’t agree more with the aforementioned quote.


Rickards takes the currency debate right up the middle on the Chairman of the Federal Reserve reminding us that “by printing money on an unprecedented scale, Bernanke has become a twenty-first century Pangloss, hoping for the best and quite unprepared for the worst.”


As a reminder to The Ben Bernank and his central planning followers, hope is not a risk management process.


Back to the Global Macro Grind


On Tuesday, I bought back my Strong Dollar position via the UUP. Yesterday, I sold my only remaining long Commodity position (Oil), taking my asset allocation to Commodities back down to ZERO percent.


Even though he’s never traded a Global Macro market with his own capital at risk in his life, Bernanke would probably smile when considering my 0% strategy move. The man likes zeroes.


The Zero Bound, or a 0% “risk-free” rate of return, concept is littered with unintended consequences. If you don’t believe that, ask the Japanese. They’ve had 20 years of anemic economic growth and will have 25% less people living in Japan come 2050.


If you do believe in the globally interconnected risk associated with the world’s reserve currency, you probably get why this entire “contest between inflation and deflation” comes down to what Bernanke/Geithner do to US Dollar policy (monetary and fiscal). When it comes to commodities inflating/deflating the CRB Index (19 commodities) has a 60-day correlation to the US Dollar of -0.64%.


Correlation? Yes Keynesians of the academic gridiron, unite! Correlation Risk in markets doesn’t always imply causality. But sometimes it does.


So why get long the US Dollar right here?

  1. It’s going up today, and we know performance chasers just love a good chase
  2. It is breaking out above our intermediate-term TREND support line of $79.33 again
  3. It has fortified its base, holding our longer-term TAIL support line of $76.11
  4. The Japanese Yen has moved into crash/crisis mode (bullish USD/YEN)
  5. The Euro continues to fail at $1.33 resistance as European Growth Slowing continues

Got Growth Slowing?


Apparently consensus doesn’t want to agree with us on this yet. In a note earlier this week I highlighted the Credit Suisse call to action that “economic momentum indicators suggest global and US growth is still well above consensus” – and while the people I used to work with there are good people, that call on growth is simply just wrong this morning.


1.   ASIA: China and India, in particular, are showing glaring signs of Growth Slowing sequentially here in March. Whether it was India’s stock market down another -1.8% overnight (down -6.1% since the Feb YTD top) on a mounting deficit problem or both the Shanghai Composite and Hang Seng snapping their respective immediate-term TRADE lines of support in the last week as China’s PMI (HSBC) was printed overnight at a fresh 4-month low – it’s all there. #GrowthSlowing


2.   EUROPE: Inflation Slows Growth; particularly when Europeans have to deal with Brent Oil prices of $122-127/barrel – never mind being bent over a barrel by that sneaky little Keynesian critter called debt (which structurally impairs long-term growth). Looking at Europe’s PMI numbers for March, here’s what the river cards look like:



A)     France 47.6 MAR (exp. 50.2) vs 50 FEB

B)      Germany 48.1 MAR (exp. 51) vs 50.2 FEB

C)      Eurozone 47.7 MAR (exp. 49.5) vs 49 FEB



D)     France 50 MAR (exp. 50.3) vs 50 FEB

E)      Germany 51.8 MAR (exp. 53.1) vs 52.8 FEB

F)      Eurozone 48.7 MAR (exp. 49.2) vs 48.8 FEB


Now we all know that Swiss turned American bankers can get creative in their accounting, but by our Canadian-American math, this morning’s Global Growth data is well below consensus.


How about US Growth?

  1. It has never NOT slowed with oil prices over $100/barrel (that’s why the FEB ISM number dropped 3% from JAN)
  2. Since 71% of US GDP = Consumption, real (inflation adjusted) growth slows, big time, when inflation accelerates
  3. Q4’s US GDP print of 3.0% carried a 0.86% Deflator; that deflator should double or triple in Q1

In other words, our Global Macro Model will not be surprised if US GDP growth gets cut in 1/2 , sequentially, from Q4 of 2011 to Q1/Q2 of 2012. If we don’t see a Strong Dollar (like we did in Q4) soon, you’ll see weakening US Consumption.


So that brings me to a comma, instead of a full stop. If you are staying one step ahead of me, you’re going to ask if Strong Dollar would get me more bullish on both US Economic Growth and US Equities. The answer to that (as it was every day in January 2012 up until Ben Shalom Bernanke decided to debauch the Dollar on January 25th), is yes.


Whether our almighty central planners like to admit it or not, we’ve all been Roped In. This “contest between inflation and deflation” has been called “risk on and risk off.” But risk is always on – especially the globally interconnected stuff. Risk never sleeps.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $122.12-124.89, $79.33-80.58, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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