The Economic Data calendar for the week of the 26th of March through the 30th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Positions in Europe: Short Greece (GREK), Short Spain (EWP)
Asset Class Performance:
Germany - Merkel is planning to build offshore wind farms that will cover an area six times the size of New York City and erect power lines that could stretch from London to Baghdad.
Germany - Mercedes dealers in China are offering record markdowns of 25% on high-end models such as the S300 sedan, according to data stretching back to 2009 at cheshi.com.
Ireland - A fund affiliated with Apollo Global Management said that it will buy the Irish consumer-credit-card portfolio from Bank of America BAC.
Spain/Ireland - Goldman notes Spanish housing market is bad and getting worse. Ireland remains the worst of the worst and Goldman sees yet another growing divide between the haves and have-nots of Europe as the residential property price performance can essentially be split into four groups: Strong, Recovering, Weak, and Ireland/Spain.
France - Sarkozy vs. Hollande: A BVA poll of 978 voters taken March 21 and 22 after the terrorist incident gave Hollande 29.5 percent support, compared with 28 percent for Sarkozy.
In last week’s European Monitor titled “Guiding Expectations” we set out the fundamentals and market trends that we believe should temper expectations that Europe is “out and in the clear”. These days of our lives spell very weak growth in Europe due to fiscal consolidation, a necessary evil in particular for the PIIGS.
This week, equity market performance tanked alongside Manufacturing and Service PMIs for March that showed a decidedly negative month-over-month move to the downside, to levels at or below the 50 line representing contraction (see chart below).
As we explained in recent research, we’re increasingly worried about Spain. This coming Friday’s budget announcement from Spanish PM Rajoy will be an important signal for the market. Rajoy must push through further fiscal consolidation to help meet the deficit target of 5.3% of GDP this year from 8.5% in 2011. This is a tall order, and already there’s been much push-back from the populace on issued austerity. Given an already fractured economy with weak confidence and sky-high unemployment (23% avg. and +50% for youth), we think a social uprising is in the cards.
One indicator of rising concern is 10 YR Spanish bond yields rising higher then Italian, the first occurrence since August 2011. Further there’s indication that many Spanish lenders have yet to recognize the full extent of their loan losses, which puts further pressure on the underfunded EFSF and ESM bailout packages.
CDS Risk Monitor:
CDS fell -94bps to 1217bps in Portugal on a w/w basis to lead decliners. Ireland fell -18bps to 617bps. Spain led gains, advancing +36bps to 440bps (or 140bps over the Lehman Line of default risk) and Italy pushed up +20bps to 384bps.
Eurozone Construction Output -1.4% JAN Y/Y vs 9.8% DEC [-0.8% JAN M/M vs -1.9% DEC]
Eurozone Composite 48.7 MAR (exp. 49.6) vs 49.3 FEB
Eurozone Current Account (net nsa) -12.3B EUR JAN vs 18.3 B EUR DEC [4.5B EUR JAN vs 3.4B EUR DEC]
Eurozone Industrial New Orders -3.3% JAN Y/Y (exp. -3.1%) vs -0.4% DEC [-2.3% JAN M/M (exp. -2.2%) vs 3.5% DEC]
Germany Producer Prices 0.4% FEB M/M (exp. +0.5%) vs 0.6% JAN [3.2% FEB Y/Y (inline) vs 3.4% JAN]
Italy Industrial Sales -4.4% JAN Y/Y vs 5.4% DEC
Italy Retail Sales -0.8% JAN Y/Y (exp. -3.4%) vs -3.7% DEC [0.7% JAN M/M (exp. -0.1%) vs -0.8% DEC]
France Business Confidence Indicator 96 MAR (exp. 93) vs 93 FEB
France Production Outlook -15 MAR (exp. -28) vs -27 FEB
France Own-Company Production Outlook 6 MAR vs -1 FEB
Switzerland Industrial Production 7.9% Q4 Q/Q (exp. +2.6%) vs -2.0% in Q3
Switzerland Money Supply M3 6.4% FEB Y/Y vs 7.3% JAN
Switzerland Exports 9.2% FEB M/M (exp. +0.3%) vs -10.4% JAN
Switzerland Import -12.3% FEB M/M vs 5.5% JAN
UK CPI 3.4% FEB Y/Y (exp. 2.3%) vs 2.6% JAN [0.6% FEB M/M (exp. 0.4%) vs -0.5% JAN]
UK RPI 3.7% FEB Y/Y (exp. 3.5%) vs 4.0% JAN
UK Public Sector Net Borrowing 12.9B GBP FEB vs -10.2B GBP JAN
UK Retail Sales w/ Auto Fuel -0.8% FEB M/M (exp. -0.5%) vs 0.3% JAN [1.0% FEB Y/Y (exp. 2.4%) vs 1.4% JAN]
UK BBA Loans for House Purchase 33,103 FEB (exp. 37,250) vs 37,977 JAN
Spain Producer Prices 3.4% FEB Y/Y (exp. 3.4%) vs 3.7% JAN [0.6% FEB M/M (exp. 0.7%) vs 0.9% JAN]
Portugal Producer Prices 4.1% FEB Y/Y vs 4.7% JAN [0.3% FEB M/M vs 2.3% JAN]
Ireland PPI 2.3% FEB Y/Y vs 2.7% JAN
Ireland Q4 GDP -0.2% Q/Q (exp. +1.0%) vs -1.1% in Q3 [0.7% Y/Y (exp 2.2%) vs 0.2% in Q3]
Finland Unemployment Rate 7.7% FEB vs 7.8% JAN
Interest Rate Decisions:
(3/21) Iceland Sedlabanki Interest Rate HIKE 25bps to 5.00%
The European Week Ahead:
Monday: Mar. Germany Import Price Index (Mar 26-20), IFO Business Climate, Current Assessment, and Expectations; Mar. UK Nationwide House Prices; Feb. France Jobseekers; Mar. Italy Consumer Confidence Indicator
Tuesday: Apr. Germany GfK Consumer Confidence Survey; Mar. UK CBI Reported Sales; Mar. France Consumer Confidence Indicator; Feb. Spain Budget Balance YtD
Wednesday: Feb. Eurozone Money Supply; Mar. Germany CPI; Q4 UK GDP – Final; Q4 France GDP – Final, Total Business Investment – Final, Current Account; Mar. Italy Business Confidence
Thursday: Mar. Eurozone Consumer Confidence Indicator – Final, Business Climate Indicator, Economic, Industrial, and Services Confidence; Mar. Germany Unemployment Data; Mar. UK GfK Consumer Confidence Survey, Feb. UK Net Consumer Credit, Net Lending, Mortgage Approvals, M4 Money Supply; Jan. UK Index of Services; Mar. Spain CPI – Preliminary; Jan. Spain Total Housing Permits
Friday: Mar. Eurozone CPI Estimate; Feb. Germany Retail Sales; Feb. France Producer Prices, Consumer Spending, Hourly Wages; Feb. Italy PPI; Jan. Greece Retail Sales; Spain Prime Minister Rajoy to present 2012 Budget; Feb. Spain Retail Sales; Jan. Spain Current Account
Extended Calendar Call-Outs:
22 April: French Elections (Round 1) begins, to conclude in May.
29 April: Potential Greek Presidential Elections.
30 June: Deadline for EU Banks to meet €106 billion capital target/the 9% Tier 1 capital ratio.
1 July: ESM to come into force.
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THE HEDGEYE BREAKFAST MONITOR
Commentary from CEO Keith McCullough
Finally! The Japanese Yen is the Most Read story on Bloomberg (ahead of Angry Birds):
SP500 down 3 days in a row after the 2ndlargest down day of 2012 yesterday. When -0.72% is the 2ndworst day you’ve seen, mean reversion thoughts should be dancing in your head. This is not normal.
PEET: Peet’s Coffee estimates were raised at Jeffries. The price target was raised to $88 from $68.
MCD: McDonald’s Japan plans to introduce a service that will enable customers to place an order and pay for it using their mobile phones, according to Bloomberg.
NOTABLE PERFORMANCE ON ACCELERATING VOLUME:
SBUX: Starbucks gained 2.6% on accelerating volume.
DPZ: Domino’s Pizza declined 8.8% on accelerating volume. The stock was downgraded on Tuesday by BofA following the announcement of a special dividend that investors were baking in. JP Morgan also lowered its price target to $37 from $40.
SONC: Sonic is facing a tough compare (sales and margin) next quarter and investors are less-than-convinced by the strategies being put forward by the current management team.
DRI: Darden Restaurants reports 3QFY12 EPS of $1.25 versus expectations of $1.24. Blended US same-restaurant sales for Olive Garden, Red Lobster, and LongHorn Steakhouse came in at 4.1% versus guidance of approximately 4% provided a month ago.
NOTABLE PERFORMANCE ON ACCELERATING VOLUME:
RT: Ruby Tuesday declined 2% on accelerating volume.
The Macau Metro Monitor, March 23, 2012
MACAU VISITOR ARRIVALS DSEC
Visitor arrivals totaled 2,130,977 in February 2012, down by 1.5% YoY. In the first two months of 2012, visitor arrivals increased by 8.3% YoY to 4,592,617. The average length of stay of visitors decreased by 0.1 day YoY to 0.9 day. Visitors from Mainland China increased by 6.7% YoY to 1,285,266, with those traveling to Macao under the Individual Visit Scheme dropping by 11.4% to 514,095
SINGAPORE EYES UP TO 10% RISE IN 2012 VISITOR ARRIVALS Reuters
Singapore Second Minister for Trade and Industry S Iswaran said, "STB (Singapore Tourism Board) is projecting visitor arrivals to be between 13.5 and 14.5 million this year, an increase of up to 10% from 2011." The board also expects tourism receipts to reach S$23 to S$24 billion ($18.95 billion) this year, a rise of up to 8% YoY.
SINGAPORE'S INFLATION RATE EASES TO 4.6% IN FEBRUARY Channel News Asia
Singapore's inflation rate eased to 4.6% YoY in February 2012 from 4.8% in January. This was lower than Street expectations of 4.9%. Core inflation, which excludes accommodation and private road transport, eased to 3.0% YoY in February, down from 3.5% YoY in January.
This note was originally published at 8am on March 09, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“That the chance of gain is universally overvalued, we may learn from the universal success of lotteries.”
-Adam Smith, The Wealth of Nations
The concept of risk management is, at least for me, a continual learning process. Strictly speaking, what I do is research but naturally when discussing ideas with teammates here at Hedgeye, risk is always on and something that is always foremost in our thinking.
Confidence in the market has increased over the last 6 months and commentary from financial media outlets of all kinds seems to be increasing in its assuredness that the recovery is finally showing some teeth. A notion confirmed today by Bank of America CEO, Brian T. Moynihan, as he suggests that the consumer using leverage again to increase spending. He said “purchases by the bank’s credit and debit-card customers have increased 5%-7% for each of the last five months.” If consumer are levering up again, it is not a positive!
The risk here, clearly, is that the market is attracting those that are trying to chase performance and not what the consensus believes, which is “we have turned the corner.” When thinking through what the reality of our position is, it’s important to always consider two things. First, recall how your counterpart gets paid. Second, it’s paramount to remind oneself that good luck is not a given. Unfortunately, we humans generally believe ourselves to be, individually, held above the rest in the pecking order of fortune. This trait, as Smith puts it, is “an ancient evil remarked by the philosophers and moralists of all ages”. For a contrite buyer of a market top, or the people whose money he or she loses, that is certainly an apt description and something we can all relate to in one way or another.
Looking back on this week it reminds me that there is something to learn every day in this business. Writing this morning piece is something that is forcing me to do something publically that I have tried to do privately at the end of each week, which is assess the week and any lessons that can be taken from it.
Sitting here after the first four days of the week, my macro question is “what is driving this market?”
On Monday, the S&P had its biggest one-day decline of 2012, -1.54%, on the notion that the bailout plan for Greece was going to unravel (a credit event related to Greece looks to be on the cards today). On Wednesday, the improving jobs picture – at least according to the ADP Employment report – helped the market move higher by +0.69%. Yesterday, the market rallied another 1% as private debt holders agreed to convert 85% of Greece’s debt to new securities in the “biggest sovereign debt restructuring in history”.
Ever is a long time and Greece certainly matters, if only because of the possible repercussions in broader Europe in the event of a disorderly default. However, the S&P500 being bid up yesterday despite claims disappointing was interesting.
It is impossible for anyone, least of all myself, to state with certainty why market prices moved in any direction on a given day, but the Wall Street Journal’s report that the Federal Reserve may engage in “sterilized QE” which will please all of the people (inflation hawks and doves) all of the time. Surely, that rumor of Fed intervention abounds anytime the equity market shows any weakness belies the supposed confidence that investors feel in being long this market.
The Hedgeye Financials team has conducted some tremendous research into the initial claims data that is usually so important for market sentiment; much of the recent upsurge in equity prices is attributed to improving employment conditions as shown by the trend in claims.
One would think, then, that a disappointing initial claim print yesterday – albeit one week’s data point – may have had more of an impact on a market that has gained so handsomely in recent months. The “Ghost of Lehman” (as the financials team has called it) distortion in the claims dataset, which has been a headwind and is set to turn into a headwind gradually in the summer months, may have helped boost equity prices over the last six months; the question at this point is whether or not a series of disappointing jobs numbers will lead to a commensurate retracement in the S&P.
That question is perverse to read and it feels perverse to write. Surely deterioration in the underlying fundamentals, especially the all important jobs picture, should lead to a sell off. The S&P is up 8.6% year-to-date and up 102% from the March2009 low. Still, with the QE is the go-to strategy the instant any “concerns” creep into the market, will a pause in the jobs picture have any impact on equity prices at all?
What’s increasingly difficult to discover at this point is truth. The truth is not always beautiful, as Lao Tzu wrote. In the case of our financial “markets”, the truth would likely be downright ugly. Maybe a truth, as Jack Nicholson might say, that we couldn’t handle. My aim is not to vilify actors in or prescribe solutions for the ills facing our economy. As a equity analyst, looking back on this past week and thinking about the pending jobs report, my conclusion is that the rumors of intervention by central banks is deterring people from truth and thus market prices might not reflect reality.
Even in vain, the quest for truth must be sustained. Yesterday was cheering on inflation - Dollar down, Euro up, oil up, gold up, and XLI and XLB were the best performers. It’s the type of move that has corroborated many of the points that our Macro team has argued recently. First, inflation slows consumption. McDonald’s – one of the most macroeconomic-immune companies of the past four years – mentioned inflation as an issue for its business in its press release yesterday. Second, at this point investors need to embrace uncertainty and stay nimble. With the VIX at 17, there is plenty of complacency in the market that “we have turned the corner” and not reflecting increased inflation.
If good news is good and bad news is QE, surely the only way is up! Looking at a simple chart of short term interest rates versus the S&P shows that the frequency and amplitude of stock market cycles has increased coincident with the implementation of easy money policies. The lack of truth in financial markets is rendering trust impossible and that is illustrated clearly in the volatility of the past few years. As buyers up here, it is worth asking whether or not we are overvaluing the chance of gain.
Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1692-1717, $123.98-126.89, $79.02-80.12, and 1345-1382, respectively.
Function in Disaster; Finish in Style
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