“To succeed, you must study the end game before everything else.”
- José Raúl Capablanca (Chess Grandmaster)
José Raúl Capablanca was one of the world’s first great Chess champions. In fact, statistical ranking systems rank him the fifth greatest player of all time. He was a Cuban national and was world champion from 1921 – 1927. His nickname was the “Human Chess Machine” which characterized the simple nature of his style combined with his total mastery over the board. To him, understanding the end game was the preeminent focus for any player.
For those of you that aren’t Chess grandmasters, the end game is the point in the game when there are a relatively limited number of pieces on the board. Many chess analysts disagree as to when exactly the end game begins, but they all agree that when the end game begins strategy is much different than the middle game. In fact, over time the world’s best chess players have always excelled at the end game and utilized a consistent strategy.
Yesterday was one of those stock market days that certainly made a few investors wonder whether the global economic growth end game is actually here yet, or close. The snap back in U.S. equities didn’t necessarily surprise us but obviously characterized the almost bi-polar sentiment that currently exists in global equities. One day bad news matters, the next day good news matters more. The global economic growth slowing end game is here, then it isn’t.
Meanwhile in Spain over night we did get more evidence of the debt end game. The nation that will continue to be the pressure point in European sovereign debt issues this year, reported that non-performing bank loans accelerated from December and now total €143.82B, which is a 18-year high. This compares to a 1% level before the correction of the real estate market that began in 2008. As we’ve noted, the key risk is that this level of non-performing loans accelerates dramatically as property prices continue to revert to the mean.
The key issue with Spain accelerating to the downside from a debt perspective is that Germany is basically on record saying that Spain is too big to save. And so is Italy. Not being able to save either Italy or Spain is certainly a European sovereign debt end game that is increasingly concerning. To be fair, though, Spanish 10-year yields have come in again over night and are now solidly below the 6% line at 5.78%, which is a positive, but the IBEX this morning is down -3.2%. Tomorrow we get the longer term Spanish bond auctions and they, too, will likely be as successful as any artificially controlled market.
The major political catalyst this week in Europe is the French elections with the first round this weekend. Since a major candidate has to garner 50% to win, it is likely there is a second round given there are major candidates competing. Currently, the most recent polls from CSA have Hollande leading Sarkozy 29% to 24% in Round 1. This is an improvement from being tied a few days ago. The polls then show Hollande mercy crushing Sarkozy in Round 2, by a margin of 58% to 42%.
The French election is critical because: A) Hollande is a Socialist, B) Hollande is a Socialist, and C) Hollande has stated that if elected he will renegotiate the EU budget compact and that he will not accept austerity as rule for countries. Things are about to get a lot more challenging politically in the great monetary union that is the Eurozone.
In the U.S. we are fully in the midst of earnings season. As part of earnings season, we our having our Sector Heads participate in our morning calls for clients ( ping firstname.lastname@example.org if you don’t have access ) and also write a brief summary of their thoughts on earnings in their sectors. Our Financials Sector Head wrote this yesterday as it related to financials:
“Roughly one third of financial companies have reported earnings so far. 7 of the 8 large or mid cap companies have beaten estimates on the bottom line. Revenue trends have been more mixed, with just over 1/3 beating estimates, 1/3 in-line and just under 1/3 missing. However, this is a bit misleading because of Debt Value Adjustment. With DVA, the big banks’ revenue lines are adversely affected by an accounting convention that requires them to recognize negative revenues when their credit default swaps tighten. First quarter saw sizeable CDS tightening, so the headwind was significant for all the large-cap capital markets sensitive names: C, JPM, BAC, GS, MS.”
The remainder of his note can be found at www.hedgeye.com in unlocked content and we will be updating these summaries over the course of the next week. But if there was one take away from Josh, it is that so far his companies are beating estimates, which is a positive driver for stock prices in the financial sector in the short term.
Related to U.S. growth, we have a number of negative catalysts that will come more and more into focus in the coming months. Namely, as of January 1st, 2013, the Bush tax cuts, the temporary payroll tax cut, and the long-term unemployment benefits all expire. Then on January 15th, 2013 the automotive government spending cuts, driven by the failure of the Joint Select Committee on Deficit Reduction, go into effect. Will it be check mate for U.S. economic growth? Probably not, but Q1 2013 is certainly an end game to start contemplating.
The immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Euro/USD, and the SP500 are now $1, $117.69-120.93, $79.26-79.64, $79.96-82.30, $1.30-1.32, and 1, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
This note was originally published at 8am on April 04, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Early triumph can promote future failure.”
Last week I wrote a pointed Early Look note titled Bernanke’s War. When my Global Macro Process sees Growth Slowing like this (like it did in Q1 of 2008, Q1 of 2010, and Q1 of 2011), I am not shy making a call that’s counter to consensus. We have fought the Fed before, and won.
Fighting The Fed’s conflicted and compromised 0% Policy To Inflate means that, at some point, the man runs out of either political room or the ability to ban Global Macro-economic gravity. If either or both happen, I think I can win.
Bernanke’s Bubbles are vast. That’s why I have a 0% allocation in the Hedgeye Asset Allocation Model to both Commodities and Fixed Income right now. If these bubbles are in the process of popping, why stay in them?
Back to the Global Macro Grind…
Dollar up = Correlation Risk On, eh. All it took yesterday was the US Dollar Index arresting its most recent 4 consecutive-week debauchery for US stocks to stop going up. At one point in the day, the SP500 was down almost 1%. That’s only happened 1 other time in 2012 (no, that’s not normal).
Another way to say what happened yesterday, and what’s happening across asset classes in Global Macro this morning for that matter, is what we have coined Deflating The Inflation. Functionally, whether Romney or Obama figures this out or not is left to be seen, but popping Bernanke’s Bubbles at the pump would be most easily achieved by raising interest rates.
What other long-term bubbles are popping this morning?
1. GOLD (we’re short GLD): down another -2.4% this morning to $1632/oz and finally snapping my long-term TAIL support line of $1652. Over the longest of long terms, no matter what your religion on the subject matter of Gold, it does not act well when Treasury Yields are rising. People look at “risk free” rates of return relative to absolutes; particularly when 0% was the absolute comparison.
2. US TREASURIES (we’re short TIP): Treasuries are down with 10yr bond yields rising to 2.25%, taking the rip in 10yr yields to +22% from 1.84% (immediately after Bernanke tried his best to ban economic gravity during his January 25th speech, pushing easy money to 2014, sort of).
3. JAPANESE YEN (we’re short FXY): yes, during a Currency War where the Americans, Europeans, and Japanese are in a race to the bottom to de-value their respective fiat currencies, the US and European Keynesian Policy Makers perpetuated a bubble in the Japanese Yen up until February of 2012. Then kaboom – Yen down -9% in a straight line as the Euro and USD stopped going down.
The popping is a process, not a point. Unless you think that there is political inertia, from here (i.e. throughout the US Election), that allows Bernanke to keep this 0% Policy To Inflate ball under water, you won’t have to take my word for it on hearing the popping.
“Pop, pop, bang!”
Remember that line from Cinderella Man’s Jimmy Braddock (played by Russell Crowe in 2005)? That was one of the many metaphors I used when Fighting The Fed during Q1 of 2008. Braddock was an Irish-American boxer from New Jersey. I am a Canadian-American Fed fighter from Connecticut. And, Mr. Bernanke, I am not going away.
Back to the ring. I have a 73% position in Cash and am in no hurry to add to my 9% asset allocation to US Equities this morning. Why? Well, because US Equities are bubbly too. Not as bubbled up as Bonds and Gold were, but they’re certainly worthy of wearing a bobble head.
The most interesting thing about Equities, globally, is that with the exception of the USA and Venezuela (ran by 2 serial currency debauchers in Chief who think stock market inflations reflect economic prosperity), equity markets around the world stopped going up a month ago. Check out the corrections in markets that have stopped making higher YTD highs:
- Greece = down -15.2%
- Spain = down -12.4%
- Italy = down -9.5%
- China = down -8.0%
- Brazil = down -6.0%
- India = down -5.1%
- Japan = down -4.2%
- Germany = down -4.1%
- Hong Kong = down -4.1%
- USA = down -0.4%
The most obvious point here is that the SP500 is only down -0.4% from its YTD peak. It has only had 1 down-day greater than 0.7% in 2012, and is now subject to the only risk management strategy that has held true for the last 40 years – mean reversion.
It’s a good thing we have Apple. Or is it?
Maybe that’s a bubble too. Who knows until it starts popping. But the storytelling about this stock is hilarious. Next to a story that “Home Prices Seen Dropping 10%”, the 2ndMost Read story on Bloomberg is titled “Apple Fever, $1 Trillion Valuation.” Nice.
The thing about bubbles (centrally planned ones and all others) is that they need a darn good story. Apple’s is fantabulous at this point, and so was that of The Ben Bernank.
That said, don’t forget where I started this morning – if that quote from Nassir Ghaemi’s “A First-Rate Madness” comes home to roost, the “early triumphs” of Keynesian Economics could very well lead to Bernanke losing this war.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen, and the SP500 are now $1632-1666, $121.98-126.12, $79.19-79.64, 81.91-83.78, and 1388-1419, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
The Macau Metro Monitor, April 18, 2012
GOVT CLOSE TO GIVING THUMBS UP FOR WYNN COTAI: REPORT Macau Business
According to Jornal Tribuna de Macau, the Macau government and Wynn Macau may sign its Cotai land grant contract within this month depending on the Lands and Public Works Bureau.
GALAXY PREPPING FOR PHASE TWO Macau Business
Galaxy says it is doing “some preparatory land works” for phase two of its Galaxy Macau resort in Cotai. Francis Lui Yiu Tung, vice chairman of Galaxy, said recently that Galaxy Macau’s second phase would double the property’s size and add more non-gaming elements to it, including meetings and conventions facilities and more retail space.
NEW SYNDICATE LOAN FOR PONTE 16 Macau Business
Pier 16 - Property Development Ltd, the owner of Ponte 16 casino resort, announced the signing of HK$1.9 billion (US$245 million) and RMB400 million (US$63.6 million) five-year syndicated loan facilities with 11 financial institutions. The proceeds will be used primarily to refinance existing credit facilities, to repay shareholders’ loans and to fund the construction of the third phase of the Ponte 16 development.
The loan facilities are guaranteed by the borrower’s shareholders, SJM and Success Universe Group Ltd at the ratio of 51 percent and 49 percent respectively. The third phase of Ponte 16 will feature a riverside commercial complex with a total floor area of approximately 40,000 square metres. The complex will also encompass space for the expansion of gaming areas and car parks, with construction expected to be completed by 2014.
TOURIST PRICE INDEX FOR THE 1ST QUARTER 2012 DSEC
1Q 2012 Tourist Price Index increased by 10.15% YoY, attributable to rising price indices of restaurant services and accommodation. Increasing hotel room rate, higher charges of restaurant services and entertainment in the Lunar New Year, as well as dearer prices of gold jewelry pushed up the price index of Restaurant Services (+18.60%); Entertainment & Cultural Activities (+15.09%); Miscellaneous Goods (+14.55%); and Accommodation (+9.20%).
1Q TPI decreased by 2.93% QoQ.
TODAY’S S&P 500 SET-UP – April 18, 2012
As we look at today’s set up for the S&P 500, the range is 14 points or -0.78% downside to 1380 and 0.23% upside to 1394.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: on 4/17 NYSE 1632
- Up from the prior day’s trading of 411
- VOLUME: on 4/17 NYSE 709.77
- Decrease versus prior day’s trading of -3.50%
- VIX: as of 4/17 was at 18.46
- Decrease versus most recent day’s trading of -5.58%
- Year-to-date decrease of -21.11%
- SPX PUT/CALL RATIO: as of 04/17 closed at 1.41
- Decrease from the day prior at 2.15
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: as of this morning 39
- 3-MONTH T-BILL YIELD: as of this morning 0.08%
- 10-Year: as of this morning 1.99
- Down from prior day’s trading of 2.00
- YIELD CURVE: as of this morning 1.71
- Decrease from prior day’s trading at 1.73
MACRO DATA POINTS (Bloomberg Estimates):
- IMF, World Bank holding annual spring meetings
- 7am: MBA Mortgage Applications, week ending April 13
- 10:30am: DoE inventories
- President Obama discusses economy in speech at community college near Cleveland, 2:30pm
- Republican Jess Kelly won primary, will face former Gabrielle Giffords aide Ron Barber in June special election to replace the wounded ex-congresswoman
- Secretary of State Hillary Clinton, Defense Secretary Leon Panetta attend NATO meeting in Brussels
- House, Senate in session:
- House Appropriations subcommittee marks up energy and water appropriations bill. 9:30am
- Senate Environment and Public Works Committee holds hearing on General Services Administration inspector general’s report, 10am
- House Foreign Affairs Committee holds hearing on North Korea, 10am
- House Homeland Security Committee marks up cyber security bill, 10am
- House Financial Services Committee marks up Affordable Housing and Self-Sufficiency Improvement Act, 10am
- House Homeland Security subcommittee holds hearing on trade and commerce with the Asia-Pacific region, 2pm
- House Foreign Affairs subcommittee holds hearing on terrorism, 2pm
- Senate Appropriations subcommittee holds hearing on the GSA inspector general’s report, 2:30pm
WHAT TO WATCH:
- North Korea broke off agreement to halt testing of nuclear devices and long-range missiles after U.S. canceled food aid
- Argentina rejects Repsol YPF’s demand for $10.5b in compensation after Argentina seized its YPF unit
- Berkshire Hathaway Chairman Warren Buffett yesterday said he had stage 1 prostate cancer; investors may focus on succession plans
- Alimentation Couche-Tard agrees to buy Statoil Fuel & Retail for $2.8b
- Intel, IBM both fell post market after reporting results; Yahoo gained
- Pfizer said to choose nutrition unit buyer as soon as next week after getting bids from Nestle, Danone
- U.S. Treasury officials said to lean toward recommending that Fannie Mae, Freddie Mac be replaced with government safety net for mortgage finance system
- News Corp. to suspend some foreign investor voting rights to get in compliance with U.S. broadcast ownership rules
- ASML reiterated 2Q sales forecast, sees 3Q orders stable
- Tesco reports FY trading profit in-line with est., plans to cut capex
- Huntington Bancshares (HBAN) 5:55 a.m., $0.14
- Knight Capital Group (KCG) 6 a.m., $0.30
- Polaris Industries (PII) 6 a.m., $0.77
- Bank of New York Mellon (BK) 6:23 a.m., $0.52
- Textron (TXT) 6:30 a.m., $0.35
- BlackRock (BLK) 6:30 a.m., $3.04
- PNC Financial Services Group (PNC) 6:34 a.m., $1.48
- Quest Diagnostics (DGX) 6:45 a.m., $1.02
- Halliburton (HAL) 6:51 a.m., $0.85
- Dover (DOV) 7 a.m., $1.02
- Metro (MRU CN) 7 a.m., C$0.92
- Abbott Laboratories (ABT) 7:24 a.m., $1.00
- St Jude Medical (STJ) 7:30 a.m., $0.83
- New York Community Bank (NYB) 8 a.m., $0.26
- First Republic Bank (FRC) 8 a.m., $0.67 (GAAP est.)
- Qualcomm (QCOM) 4 p.m., $0.96
- American Express Co (AXP) 4 p.m., $1.01
- VMware (VMW) 4 p.m., $0.60
- Cubist Pharmaceuticals (CBST) 4 p.m., $0.43 (GAAP est.)
- Greenhill & Co (GHL) 4 p.m., $0.38
- Plexus (PLXS) 4 p.m., $0.54
- Covanta Holding (CVA) 4:01 p.m., $(0.08)
- Select Comfort (SCSS) 4:01 p.m., $0.40
- Wintrust Financial (WTFC) 4:01 p.m., $0.41
- Albemarle (ALB) 4:05 p.m., $1.16
- F5 Networks (FFIV) 4:05 p.m., $1.07
- Lam Research (LRCX) 4:05 p.m., $0.46
- LaSalle Hotel Properties (LHO) 4:05 p.m., $0.17 (FFO)
- Polycom (PLCM) 4:05 p.m., $0.22
- Platinum Underwriters Holdings (PTP) 4:05 p.m., $0.94
- Kinder Morgan /Delaware (KMI) 4:05 p.m., $0.31
- Kinder Morgan Energy Partners (KMP) 4:05 p.m., $0.65
- Yum! Brands (YUM) 4:09 p.m., $0.73
- eBay (EBAY) 4:15 p.m., $0.52
- Stanley Black & Decker (SWK) 4:20 p.m., $1.12
- SLM (SLM) 4:30 p.m., $0.52
- Umpqua Holdings (UMPQ) 4:30 p.m., $0.18
- Cohen & Steers (CNS) 4:30 p.m., $0.41
- Noble (NE) 4:33 p.m., $0.40
- Marriott International (MAR) 5 p.m., $0.29
- HNI (HNI) 5 p.m., $(0.00)
- Crown Holdings (CCK) 5:01 p.m., $0.44
- RLI (RLI) 6 p.m., $1.06
- Steel Dynamics (STLD) 6 p.m., $0.21
- CVB Financial (CVBF) Post-Mkt, $0.20
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
COPPER – the Doctor is out. No bounce this morning in either Gold or Copper as Bernanke’s Bubbles continue to pop. Neither of these Commodities look like Nat Gas yet (crashing to $1.94 this morn), but both are in what we call Bearish Formations (bearish across all 3 risk management durations – TRADE/ TREND/TAIL).
- Brent Oil Drops on Concern Europe Debt Crisis Will Curb Demand
- Corn Drops for Fourth Straight Day on Planting; Soybeans Decline
- Copper Advances for Second Day as Chinese Demand May Improve
- Tyson Hurt by ‘Pink Slime’ as Peak Demand Nears: Commodities
- Sugar Advances as Lower Prices May Spur Demand; Cocoa Retreats
- Gold May Fall in London as Stronger Dollar Cuts Investor Demand
- Hindu Festival to Revive Indian Gold Demand After Shutdown
- Waning U.S. Food Inflation May Help Consumers: Chart of the Day
- Indonesia Readies Ban on Unprocessed Metal-Ore Shipments
- Exxon Inferior to Pipelines in Energy Investing: Riskless Return
- YPF Creditors Saved by Nationalization Clause: Argentina Credit
- Hurricane Season to Provide Little Gas Support: Energy Markets
- U.S. Feedlots Cut Cattle Purchases as Supply Drops, Survey Says
- Oil Near Two-Week High on Spanish Debt, IMF
- Silver-Inventory Surge Means Decline in Prices: Chart of the Day
- Mitsubishi Boosts Investment Threshold to 10%, Kobayashi Says
- India Said to Consider 1 Million Tons of Fresh Sugar Exports
US DOLLAR – hanging in here at its long-term TAIL of support ($76.13) like a champ. Despite all of the fiscal and monetary planning disasters in the US, that’s impressive – and that’s mainly because trading USD in the middle of a Global Currency War is relative (France could vote for a Socialist and Japan is on the fiscal brink).
SPAIN – do up your chinstraps because Spain is officially moving back into crash mode (down -19.4% from its YTD high in Feb where a lot in Global Macro stopped going up – gravity + #GrowthSlowing = nasty combo). Remember, the Germans are on the record saying Spain and Italy are potentially “Too Big To Save”… potentially…
The Hedgeye Macro Team
Positions in Europe: Short France (EWQ); Long German Bunds (BUNL)
European equity markets largely got a big lift today (+200 – 350bps d/d) on improving ZEW economic sentiment numbers from Germany and the Eurozone as well as news that Japan earmarked $60 Billion to the IMF to help firewall Europe’s sovereign and banking crisis, which was followed by a contribution of $26 Billion from Denmark, Norway, and Sweden late in the trading session. Markets seemingly shrugged off Eurozone inflation of 2.7% in March Y/Y versus an expectation of 2.6% and UK CPI jumping 10bps to 3.5% in March Y/Y.
Today’s performance rings true with the investor psychology we’ve witnessed around European capital markets (equities in particular) over the last two years: gains ahead or on positive headline numbers or news followed by selling and rising credit yields on weak underlying fundamentals, a shift in geographic risk, a better understanding of sovereign and banking risk, or the inability of governments to meet their fiscal consolidation targets (to name a few).
We continue to signal that despite all the positives from such programs as the EFSF, ESM, LTRO, SMP, and increased funding to the IMF, programs designed to help firewall and provide liquidity to Europe’s fiscal and banking risks, they do little to bind Europe under a growth strategy. A positive growth profile is critical for investor confidence to buy equities, countries to pay down their debt and deficits through tax receipts, and more broadly for the market to clearly diagnose that Europe is out from under its dark cloud.
We continue to signal Spain as a risk that may not be fully priced in the markets. Here our focal points are: Spanish housing prices could have another 30% downside; a housing drop would further impair Spanish lenders that are already levered to loan developers and homeowners; Spain’s massive unemployment rate at 23% will not improve anytime soon; and Europe may be underfunded to bailout Spain.
We’re long German bunds and short France in the Hedgeye Virtual Portfolio. More broadly, we’re comfortable shorting Europe’s PIIGS, at a price, because we think there’s a very long tail of negative to slow growth given their policy of austerity without a growth strategy. And we’re positive on Europe’s fiscally stronger nations, like Germany, but vigilant that the whole can bring down a strong entity. On the EUR/USD, we expect it to continue to be range bound between $1.29 and $1.34. Trade the range.
Below are today’s relevant data points in charts:
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