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What’s Asia Signaling About Trends in the Tech Sector?

Conclusion: The relevant growth data emanating from Asia suggests the tech sector is at risk of deteriorating operating metrics over the intermediate term.


If you’ve been following our research for the past 2-3 months, you’re likely well aware of our bearish intermediate-term outlook for the slope of Asian growth – which we typically view as a leading indicator for economic trends in the developed world, given Asia’s place in the global supply chain.


One supply chain that has had consensus a’buzzing in recent months is the tech sector (second-best S&P 500 performer YTD at +17.3%) – particularly at the consumer-facing end. While it can be strongly argued that the trend of stellar operating results out of AAPL are strong justification for its price performance, we’d be remiss to dismiss Apple’s tempered guidance in the context of the manufacturing, export, and headline growth trends coming out of what we view as they key tech-focused countries in Asia. Consider the following metrics:


Real GDP:

  • S. Korea: +2.8% YoY in 1Q12 vs. +3.3% in 4Q11; slowest rate of growth since 3Q09
  • Taiwan: +0.4% YoY in 1Q12 vs. +1.9% in 4Q11; slowest rate of growth since 3Q09
  • Thailand: reports 1Q12 GDP on MAY 20; likely to continue rebounding from the 2H12 flooding

What’s Asia Signaling About Trends in the Tech Sector? - 1


Manufacturing Production:

  • S. Korea: +0.4% YoY in MAR vs. +4.2% in JAN-FEB (combined to smooth out Lunar New Year distortions)
  • Taiwan: -3.8% YoY in MAR vs. -5.7% in JAN-FEB
  • Thailand: -3.7% YoY in MAR vs. -9.1% in JAN-FEB (Capacity Utilization has since rebounded; in fact, it’s at a 4yr high)

What’s Asia Signaling About Trends in the Tech Sector? - 2


What’s Asia Signaling About Trends in the Tech Sector? - 3



  • S. Korea: -1.4% YoY in MAR vs. +5.6% in JAN-FEB
  • Taiwan: -3.3% YoY in MAR vs. -4.5% in JAN-FEB
  • Thailand: -6.5% YoY in MAR vs. -2.4% in JAN-FEB

What’s Asia Signaling About Trends in the Tech Sector? - 4


Absent a marked-acceleration in production orders and developed-world consumer demand (occurrences we’d classify as “improbable”), we would expect the aforementioned sour trends in Asian growth data to negatively impact corporate operating metrics to varying degrees throughout the tech supply chain over the intermediate term. For example, AAPL, even if it has its own secular story independent of the broader technology supply chain, attributes 70% of its COGS to companies in Taiwan (50.9%) and S. Korea (19.1%) – not inconsequential in the context of heightening expectations.


What’s Asia Signaling About Trends in the Tech Sector? - 5


The caveat is that this is but one of many read-throughs into Apple’s and other tech companies’ operating trends and we seldom make calls on a stock without a thorough analysis of all of the puts and takes in a company’s business model. Still, the data is what it is and we see risk in ignoring it – an activity (i.e. ignoring bad data) consensus tends to do repeatedly when making valuation calls near cyclical market peaks. Another caveat is the potential for sour Asian economic data to be bifurcated at the micro level (particularly U.S. vs. the Eurozone) – a trend we’ve seen highlighted recently by Chinese export figures.


What’s Asia Signaling About Trends in the Tech Sector? - 6


All told, it is our view that this data should force tech-focused investors to, at a bare minimum, exercise caution over the intermediate term. AAPL is currently flirting with a quantitative breakdown on our immediate-term TRADE duration. Further, the quantitative setup (bearish TRADE & TREND) in both Korea’s KOSPI Index and Taiwan’s TAIEX Index are in support of our fundamental view. Thailand’s SET Index, which is bullish TRADE & TREND, continues to benefit from an idiosyncratic tailwind (flood recovery). All of these proprietary risk management levels are included in the charts below.


Darius Dale

Senior Analyst


What’s Asia Signaling About Trends in the Tech Sector? - 7


What’s Asia Signaling About Trends in the Tech Sector? - 8


What’s Asia Signaling About Trends in the Tech Sector? - 9


What’s Asia Signaling About Trends in the Tech Sector? - 10

Retail: Bullish Near-Term Factors???

There’ll be headline ugliness on Thursday bc of the holiday calendar shift, but the Macro consumer spending setup is positioned very favorably for the next quarter. Potential good news – for the retailers that have invested to capitalize on it.


Some interesting takeaways from today’s PCE data.

1)      With 2.6% growth in personal income, we saw the 12th sequential deceleration in the rate of personal income growth.

2)      Over that 12 months, the aggregate personal tax rate is up by 1 full point. That’s holding steady at 11.1%.

3)      So with income down by a full 220bps, and taxes up by 100bps, one would think that consumption must be down by 320bps, right?

4)      Nope. It’s +4.0%, versus +3.5% a year ago.

5)      We could nit-pick and point to the 30bp sequential erosion in the growth rate in consumption. But the reality is that the US consumer acted in the past year exactly like…well…the US Consumer. The personal savings rate oscillated between a 150bp band, and now sits at just 3.8%.

6)      Logically, one could make an argument that with Personal Income compares getting very easy this Spring, the savings rate will creep higher. Not so. History shows us that the savings rate – or the ‘Fear Index’ as we’ll call it – only goes up when consumers are afraid to spend.

7)      Given that the average Joe has no reason to be more afraid today – especially with the equity market having rallied – our sense is that any boost in the rate of personal income growth will be spent.

8)      Definitely a bullish setup for the next quarter – for those retailers that are prepared to capitalize on it.


Retail: Bullish Near-Term Factors??? - CIS


Retail: Bullish Near-Term Factors??? - consumption vs. income


Retail: Bullish Near-Term Factors??? - essential vs. disc spend

European Banking Monitor

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

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 caution 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.



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.


European Banking Monitor - 11. euribor


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.  The latest overnight reading is €793.96B.


European Banking Monitor - 11. facility


European Financials CDS Monitor – 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.


European Banking Monitor - 11. Banks


Security Market Program – For a seventh straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 4/27, to take the total program to €214 Billion. The Q&A in Thursday’s ECB conference call may provide some detail if this positioning will change. For now, the ECB appears to be at a “wait-and-see” mode, measuring the impact of the two 36-month LTRO programs before it commits more assets to the European project.


European Banking Monitor - 11. SMP


Matthew Hedrick

Senior Analyst

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 WEEK AHEAD (image refreshed)

The Economic Data calendar for the week of the 30th of April through the 4th of May 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.


THE WEEK AHEAD (image refreshed) - 1


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

Early Look

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