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MACAU TIDBITS

Due to the public holiday, we probably won’t have Macau numbers until Wednesday.  Here are some things we're hearing from Macau this past week:

 

  • Golden Week has already started on April 29, rather than the usual May 1, however, play levels this weekend were normal and have not yet seen a big move up on the holiday.
  • Volumes should pick up May 1 and this coming weekend should be strong
  • Since opening a few weeks ago, Sands Cotai Central (SCC) is running at approximately double the rate of Mass play compared to Venetian when it opened in August 2007
  • While SCC Mass volumes have been solid, the Group’s results have been dragged down by weak hold across LVS’s other properties.  We understand that hold at Sands Macau may have been only 2.2% while Venetian and FS are running around 2.5% MTD.
  • VIP volumes at SCC are probably below expectations, however, they are expected to start ramping this weekend
  • 80-120 tables from SCC came from other LVS properties
  • We don’t expect any announcements (including WYNN) on new Cotai licenses until after the May holiday - possibly on June 1
  • As far as approvals go, Sands China’s Lot 3 project is on the back burner. 
  • Galaxy Macau Phase 2:  land is approved but the additional tables are not approved.  They also do not have approval for the building.  They can however, start the pilings.
  • The gaming component of Phase 2 at Galaxy Macau was surprisingly large relative to the other amenities in Phase 2.

Fiscal Picasso

This note was originally published at 8am on April 16, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“My mother said to me, 'If you are a soldier, you will become a general. If you are a monk, you will become the Pope.' Instead, I was a painter, and became Picasso.”

-Pablo Picasso

 

The Spanish painter Pablo Picasso had no shortage of belief in his intrinsic talent as a painter.  His point in the quote above was to basically say that if you are going to do something well, you should endeavor to do it better than anyone.  Something his nation is not currently doing well, let alone better than any other nation, is managing their sovereign debt load.

 

As we wake up this morning to another week of managing risk in the global macro markets, Spain, as we highlighted in a detailed note last week, is once again front and center.  The leading indicator of an acceleration of sovereign debt woes in Europe is the Euro, which has dropped just below $1.30 versus the U.S. dollar for the first time in two months.

 

The Euro is moving in anticipation that there are a series of Spanish debt auctions this week that may not go quite as planned.  Specifically, tomorrow Spain will sell 12 and 18-month notes.  This will be followed on Thursday by longer term debt due in October 2014 and January 2022.  Watching these auctions will be critical in determining whether the European Union has the wherewithal to contain the once again accelerating crisis in confidence in the European sovereign debt markets.

 

To that point, if the debt and CDS markets for Spain are any indication, the Spanish sovereign debt issues are far from contained.  Spanish 10-year yields are now at 6.16% and at levels not seen since December 2010.  Meanwhile, Spanish credit default swaps are, literally, at all-time highs.

 

As we’ve previously written, Spain is a bigger concern than Greece for many reasons, but most specifically because its economy is almost 5x that of its Hellenic neighbor and is the 12th largest economy in the world.  Clearly, Spain is not an insignificant player on the world stage.

 

To be fair, Spain’s sovereign debt load is not elevated to a level that would suggest as much stress as we are currently seeing in its debt markets.  In fact, according to Euro Stat, Spain’s federal debt balance as a percentage of GDP was only 69% at the end of 2011.  Many sovereign analysts believe the number is a bit of a misnomer though and when regional debts are included, which are in effect a recourse to the federal government, the total amount of debt is closer to 90%.

 

Regardless, the more pertinent issue in Spain is the acceleration of debt.  By Spain’s own projections, the nation will add more than 10% to its debt-to-GDP ratio this year, taking that ratio closer to 80% on Euro Stat’s numbers. This will lead the industrialized world in growth in debt-to-GDP.

 

Spanish unemployment hit 23.6% at the end of February and the unemployment rate for the youngest demographic in Spain is literally at 50%.  Given the structural unemployment issue, Spain is literally unable to grow out of its debt issues.  This lack of growth potential is clearly what the markets are starting to bake in to Spanish yields.  That is, if there is a way out, it is not going to be easy and certainly won’t occur before the nation becomes substantially more indebted. 

 

This weekend Paul Krugman of the New York Times, in typical fashion, suggested adding more Keynesian stimulus to the mix.  Or, at the very least, Krugman suggests dispensing with the “insane” austerity.  If the United States is any case study, accelerating government spending does not appear to be the path to sustained economic prosperity.  

 

Krugman may actually get his way in France, where Socialist Francoise Hollande is extending his lead over Nicolas Sarkozy.  Currently, Hollande is expecting to win both the first round (April 22nd) and the second round (May 6th) of French elections.  Sadly, we actually know how Socialism ends as well. 

 

The other rumor out of Europe this morning is that Spain may re-instate a short selling ban.  That is a little counter intuitive to us.  Even if the markets are not giving you much in the way of confidence votes, changing the rules mid game is not going to increase confidence. 

 

In other global macro news this morning, we are also seeing increased evidence of growth slowing and inflation accelerating.  On the growth front, Sweden cut its 2012 growth outlook from +1.3% to +0.4% and the Bank of Korea cut its 2012 growth forecast from +3.7% to +3.5%.  Meanwhile, inflationary data from India continued to come in hot as wholesale prices “beat” consensus estimates coming in at +6.9% versus the +6.7% estimate.

 

Switching gears, and while we wouldn’t normally flag Barron’s as a leading indicator for tail risk, the weekly publication did do a nice job this weekend discussing the next impending debt disaster in the United States, student loans.  In terms of scale, the almost $1 trillion in outstanding student debt is larger than both the auto loan market and credit card market.  The most interesting statistic quoted in the article is that college tuition is up 300% since 1990, which far outstrips the increase in more traditional measures of inflation by a factor of 4x.

 

At the end of the day, though, the vast majority of the student debt is guaranteed by the federal government, so on some level it has much more security than the typical sub-prime mortgage.  Just make sure you add the $1 trillion asterisk when calculating the debt-to-GDP of the United States. Fiscal Picassos, we are not.

 

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 $1617-1653, $118.63-122.36, $79.64-80.27, $80.12-82.34, $1.29-1.31, and 1349-1388, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Fiscal Picasso - Chart of the Day

 

Fiscal Picasso - Virtual Portfolio


MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN

Key Takeaways

*European sovereign swaps tightened last week, with Spanish swaps tightening the most (-6.9%) and Irish swaps tightening the least (-2.85%).  While Spanish sovereign swaps saw tightening, most Spanish bank swaps continued to widen out.

 

* We published a note last week titled "Don't Be Fooled - Counterparty Risk is Rising" where we cautioned against using the Euribor-OIS spread as a measure of interbank lending within the Eurozone.  We looked at the relationship between the Euribor-OIS spread and French Bank CDS. It is evident from the results that the relationship between these two data series has been falling apart since mid-march. We now think the Euribor-OIS spread is a potentially dangerous and misleading risk indicator, which is understating the underlying risks. For reference, the Euribor-OIS was roughly flat over last week, while the TED spread continued to fall.

 

Financial Risk Monitor Summary  

• Short-term(WoW): Positive / 5 of 12 improved / 0 out of 12 worsened / 7 of 12 unchanged

• Intermediate-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged  

• Long-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged  

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - summary 2

 

1. US Financials CDS Monitor – Swaps tightened for 22 of 27 major domestic financial company reference entities last week.   

Tightened the most WoW: AXP, PRU, AIG

Widened the most WoW: MTG, RDN, MBI

Tightened the most MoM: COF, MBI, AIG

Widened the most MoM: BAC, RDN, XL

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - US CDS

 

2. European Financial CDS - Bank swaps were tighter in Europe last week for 24 of the 39 reference entities. The median tightening was 2.6%. Spanish banks continued to see their default probabilities rise notably week over week.

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - cds EURO

 

3. European Sovereign CDS – European Sovereign Swaps mostly tightened over last week. Spanish sovereign swaps tightened by 6.9% (-35 bps to 475 ). Irish swaps tightened the least, declining 2.85% (-17 bps to 570).

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - Sov table 2

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - Sov CDS 1

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - Sov CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates fell -14.4 bps last week, ending the week at 7.23 versus 7.37 the prior week.

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.7 points last week, ending at 1660.

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - LLI

 

6. TED Spread Monitor – The TED spread fell 2.0 points last week, ending the week at 37.69 this week versus last week’s print of 39.70.

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - TED 2

 

7. Journal of Commerce Commodity Price Index – The JOC index rose 4.6 points, ending the week at -5.54 versus -10.1 the prior week.

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - JOC

 

8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by less than one basis point to 39 bps.

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - Euribor OIS

 

9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - ECB

 

10. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. This week we moved from tracking the 14-V1 tenor to tracking the 16-V1 tenor basket. Last week spreads tightened, ending the week at 145 bps.

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - MCDX

 

11. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index rose 89 points, ending the week at 1156 versus 1067 the prior week.

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - Baltic

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 168 bps, 2 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.3% upside to TRADE resistance and 1.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - XLF

 

Margin Debt - March: +0.91 standard deviations 

We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did last April, it has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May 2011. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move. Overall, however, this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.  

 

The chart shows data through March. 

 

MONDAY MORNING RISK MONITOR: EUROPEAN SOVEREIGN SWAPS TIGHTEN - Margin Debt

 

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. 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 30, 2012


As we look at today’s set up for the S&P 500, the range is 17 points or -0.88% downside to 1391 and 0.33% upside to 1408. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 


EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 4/27 NYSE 1005
    • Down from the prior day’s trading of 1071
  • VOLUME: on 4/27 NYSE 787.79
    • Increase versus prior day’s trading of 0.97%
  • VIX:  as of 4/27 was at 16.32
    • Increase versus most recent day’s trading of 0.49%
    • Year-to-date decrease of -30.26%
  • SPX PUT/CALL RATIO: as of 04/27 closed at 2.21
    • Up from the day prior at 1.31 

CREDIT/ECONOMIC MARKET LOOK:


GROWTH – slowing, sequentially, is now a reported fact – but Treasury Yields (10yr 1.93%) and Equity Markets (making lower-highs, globally, since Feb-March) have been very stealth in discounting that before the Sell-Side has. This morning’s South Korean Export number was awful at flat y/y (ie no growth).

 

STAGFLATION – politically, it’s harder to say we have that in the USA right now (b/c of how we calculate GDP and inflation) than it is to say they have it in Europe. In Italy, the CPI was reported at +3.8% y/y for April, which is nauseatingly high relative to the no growth in Italian GDP (or France, Spain, etc). Brent oil $119 is a consumption killer. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.92
    • Down from prior day’s trading of 1.93
  • YIELD CURVE: as of this morning 1.67
    • Decrease from prior day’s trading of 1.68 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, Mar., est. 0.3% (prior 0.2%)
  • 8:30am: Personal Spending, Mar., est. 0.4% (prior 0.8%)
  • 9:45am: Chicago PMI, Apr., est. 60.5 (prior 62.2)
  • 10:00am: NAPM-Milwaukee, Apr., est. 53 (prior 51.8)
  • 10:30am: Dallas Fed Manu. Act., Apr., est. 8 (prior 10.8)
  • 11:30am: U.S. to sell $30b 3-mo., $28b 6-mo. bills
  • 5:30pm: Fed’s Fisher speaks on jobs in Beverly Hills, CA 

GOVERNMENT:

    • Japanese Prime Minister Yoshihiko Noda visits White House to discuss U.S.-Japan Security Alliance, economy and trade
    • President Obama to speak at Building and Construction Trades legislative conference
    • House, Senate not in session
    • Supreme Court issues orders only

 WHAT TO WATCH: 

  • Collective Brands said to select group made up of Wolverine World Wide, Golden Gate Capital as leading contender to buy co.
  • Warner Chilcott said to be weighing options including possible sale after receiving interest from strategic, private-equity buyers
  • Spain’s economy enters second recession since 2009
  • LightSquared said to receive weeklong extension from creditors
  • Consumer spending in the U.S. probably climbed 0.4% in March as incomes  grew, economists est.
  • Occupy Wall Street demonstrators plan marches across the world tomorrow calling attention to what they say are abuses of power, wealth
  • Chrysler’s Dodge Dart overcoming snags before start of production, will have high-mileage version ready in 3Q
  • Apple uses offices in states other than California, countries outside the U.S. to help minimize its overall tax burden: NYT
  • Yahoo urged shareholders not to back board nominees put forward by holder Third Point
  • Boeing will ship all four 787 composite-plastic Dreamliners to Air India, the carrier that demanded $1b in compensation after production delays
  • Apple, Google deserve to be part of Dow Jones industrial average: Barron’s
  • Goldman Sachs Asset Management Chairman Jim O’Neill reported by Sunday Times to be a candidate for Bank of England governor
  • Accretive Health said yesterday it’s working with advisers to address concerns raised by Minnesota AG that it puts bedside pressure on patients to pay bills
  • Haemonetics agreed yesterday to buy blood-collection business of Pall Corp. for $551m in cash
  • Apple said to have held talks to let subscribers of Epix movie chanel watch films on its set-top box
  • Starwood Hotels plans to re-enter Iraqi market almost 20 years after exiting as a result of Gulf War
  • BOX Options Exchange won approval April 27 to become a U.S. securities exchange
  • Dewey Leboeuf said to end Greenberg Traurig merger talks
  • Analysts predict U.S. shares will rise this year to boost the S&P 500 to record, even as Wall Street strategists say the best is already over for American equities
  • No U.S. IPOs expected to price: Bloomberg data
  • Week Ahead : U.S. Jobs, French Debate, Buffett: April 30-May 5 

EARNINGS:

    • CNA Financial (CNA) 6am, $0.68
    • Humana (HUM) 6am, $1.55
    • Loews (L) 6am, $0.90
    • LyondellBasel (LYB) 6am, $1.04
    • Watson Pharmaceuticals (WPI) 7am, $1.59
    • Harman International Industries (HAR) 8am, $0.67
    • UDR (UDR) 8am, $0.34
    • DiamondRock Hospitality Co (DRH) 8am, $0.07
    • Mercury General (MCY) 8:30am, $0.68
    • Canadian Oil Sands Ltd (COS CN) 4pm, C$0.54
    • SBA Communications (SBAC) 4pm, $(0.18)
    • Veeco Instruments (VECO) 4pm, $0.22
    • Anadarko Petroleum (APC) 4:01pm, $0.83
    • Hologic (HOLX) 4:01pm, $0.33
    • CNO Financial Group (CNO) 4:02pm, $0.13
    • Plum Creek Timber Co (PCL) 4:02pm, $0.24
    • Shutterfly (SFLY) 4:02pm, $(0.21)
    • PMC-Sierra (PMCS) 4:04pm, $0.05
    • PartnerRe (PRE) 4:04pm, $2.01
    • Forest Oil (FST) 4:05pm, $0.20
    • Enbridge Energy Partners (EEP) 4:08pm, $0.37
    • Flowserve (FLS) 4:09pm, $1.61
    • Herbalife (HLF) 4:10pm, $0.81
    • McKesson (MCK) 4:10pm, $2.06
    • FMC (FMC) 4:30pm, $1.85
    • Masco (MAS) 5pm, $(0.01)
    • Suncor Energy (SU CN) 10pm, C$0.81
    • Jacobs Engineering Group (JEC) Post-Mkt, $0.74 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • Speculators Miss Biggest U.S. Corn Sale Since 1994: Commodities
  • Wheat Drops as U.S. Crop Development Accelerates; Soybeans Fall
  • Brent Oil Heads for First Monthly Drop Since December on Demand
  • Copper Falls 0.5% to $8,376 a Ton; Nickel Declines, Tin Gains
  • Gold May Gain as Lower Borrowing Costs, Debt Crisis Spurs Demand
  • White Sugar Rises as Lower Prices May Spur Demand; Coffee Falls
  • Mercuria Said to Hire Perkins as Agriculture Head in Singapore
  • Palm Oil Drops to Pare Monthly Advance on Higher Output Concern
  • U.S. to End Fuel Exports as Oil Discount Disappears, Facts Says
  • Hedge Funds Cut Bullish Gasoline Bets on Prices: Energy Markets
  • Roomier Pig Pens May Bolster Pork Prices as European Output Ebbs
  • Merkel’s Green Jobs Drive Faltering With Cuts for Solar: Energy
  • Record-High Gasoline Burdens Consumers as Europe Fights Slowdown
  • Funds Miss Biggest Corn Sale Since 1994
  • Fortescue Seen Luring Anglo-to-Glencore on China Iron: Real M&A
  • China Forestry Logging Assets Hold Value, Investor Carlyle Says
  • Crude April Trading Range Tightest Since 1995: Chart of the Day 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


US DOLLAR – whether people want to admit it or not, the US economic data was bad last week (jobless claims and GDP) – if the only thing left keeping asset prices afloat is the hope for iQe4, that’s dicey. We’ve seen this movie before – holding the USD down like a ball under water (down 6 of the last 7 wks) ends in deflationary tears when it pops back up.

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 


ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 



Capital Flight

“Capital flight is a traditional response to currency collapse.”

-Jim Rickards

 

During most “bull” markets you see a decisively bullish pattern of rising volumes and fund flows to those markets. Not this one.

 

Not in Venezuela either. While Chavez has been less subtle about devaluing Venezuela’s currency than Ben Bernanke has ours, at up +121% for 2012 YTD, the fund flows to the Venezuelan stock market are as dead as Keynes too.

 

The failed political strategy of inflating asset prices via Currency Debauchery is not new. Neither is the hyperinflation sometimes born out of those strategies. As Jim Rickards reminds us in Currency Wars, “In 1922, the inflation turned to hyperinflation as the Reichsbank gave up trying to control the situation and printed money frantically…” (page 59)

 

Back to the Global Macro Grind

 

Don’t worry, we don’t have hyperinflation in the USA yet. Nor are we likely to if the Global Macro Ball that is being held underwater (the US Dollar) suddenly pops up. That, last I checked, has Deflated The Inflation in a hurry, multiple times in the last 5 years. So manage your risk accordingly.

 

People aren’t stupid. If you burn their bucks with broken promises of iQe upgrades over, and over, and over again – they’ll stop giving you their hard earned Dollars to burn. Selling Commodities and Equities into their Q1 tops of 2008, 2010, 2011 proved to be very smart 3-6 month timing decisions. When it comes to the pending flight of your capital, you don’t want to miss that flight.

 

Last week’s rally in asset price inflation was trivial. As the US Economic data worsened, expectations for iQe4 rose. Whenever that happens – and it has happened multiple times in the last 5yrs – the US Dollar goes down, and asset prices catch another lower volume bid. In context, here’s how that looked last week:

  1. US Dollar = down another -0.6% to $78.71 (down for 6 of the last 7 weeks)
  2. SP500 = up +1.8% (getting back to flat for April, right on time, into month-end)
  3. CRB Commodities Index = +1.4% (led by Natural Gas, up +14% on the week)

Now political people really like to argue with me on this, primarily because I’m holding them accountable for not only Policies To Inflate, but also A) the shortened economic cycles and B) amplified market volatilities born out of their policies.

 

Fortunately, the data doesn’t lie; politicians do. Growth Slowing again is as obvious as the sun rising in the East. If an un-elected Central Planner in Chief didn’t arbitrarily decide to move the goal posts on January 25th, 2012 (pushing easy money to 2014), I don’t think the US Dollar would have had this decline – and I don’t think US Growth would have slowed like it just did.

 

Here’s what US GDP Growth looked like in Q1 of 2012:

  1. Q1 2012 GDP slowed to 2.2% from 3.0% in Q4 of 2011
  2. Q1 US Fixed Investment Growth slowed to 0.18% from 0.78% in Q4 of 2011
  3. Q1 US Export/Import Growth accelerated to -0.01% from -0.26% in Q4 of 2011

Ah, the elixir of a Keynesian life – Exports. Yes, in their textbook it says that if you devalue the currency of a country, you will “boost” exports. Ok, sounds good – but it has not and will not work in the United States of America if the broken promise is to keep doing this with the US Dollar testing 40 year lows.

 

Consumption and Investment drive the US Economy, not Government and Currency Devaluation. If you perpetuate spikes in price inflation, Consumption will fall. If you perpetuate economic volatility, Fixed Investment will slow.

 

US Consumption = 71% of US GDP. That’s why gas prices matter so much to real (inflation adjusted) US GDP Growth. Sure, Final Retail Sales Growth rose to +1.6% in Q1, but a lot of that simply has to do with prices at the pump going up. Mistaking inflation for growth has been, and will continue to be, the legacy of Keynesian economic forecasters in the Bush/Obama era.

 

In order to account for inflation adjustments, the US Government estimates what they call the “Deflator” and subtract that price from what you are paying at the gas station, grocery store, etc.

 

Look at what the US GDP Deflator has done in the last 2 quarters:

  1. Q4 2011 Deflator = 0.84%
  2. Q1 2012 Deflator = +1.5%

You don’t need a Ph.D in applied math to realize that (even if you believe these ridiculously low government “estimates” of inflation in your life) their estimates just almost doubled, on the margin.

 

On the margin is how real human beings live. It’s also how Globally Interconnected Risk is priced. Paycheck to paycheck, tick by tick – it’s real life for all of us who have to balance a family budget and firm payroll. It’s what most of these conflicted and compromised central planners have never been held accountable to in their working life.

 

The Fed’s “mandate” = Price Stability and Full Employment. US Jobless Claims just spiked +15% month-over-month (April versus March), and price volatility is plainly evident to anyone with live quotes. It’s time to get real about the credibility of the currency in this country, or we are going to see some serious Capital Flight.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, France’s CAC40, and the SP500 are now $1, $118.94-120.17, $78.66-79.22, 3099-3321, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Capital Flight - Chart of the Day

 

Capital Flight - Virtual Portfolio


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.

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