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WMS: PRICECHOPPERS

ASPs move the opposite way of IGT/BYI.  Too bad because there were some bright spots in the Q. 

 

 

As we summed up in our teaser from our conference call notes and Report Card, low ASPs and weak international sales spoiled what could have been a good quarter from WMS.  While international sales can be volatile, the drop in ASPs is disconcerting.  We know Konami was very aggressive in pricing during the quarter but both IGT and BYI reported almost 10% ASP increases.  Clearly, WMS is feeling the competitive heat more so than the competitors.

 

In any event, WMS clearly missed the mark this quarter vis-a-vis investor expectations on both revenues and EPS by a considerable margin.  If not for the low tax rate in the quarter, WMS would have reported $0.38 vs. consensus of $0.44.  Coupled with the recent run-up in the stock, investors are probably taking little solace that there were actually several bright spots in the quarter. 

 

Since WMS led with their left foot this quarter, we’ll start with what went wrong.

 

THE BAD

  • ASPs:  It’s true that large shipments to new openings typically get a decent discount but IGT and BYI reported strong ASPs.  It’s also true that it’s a very competitive market and therein lies the worry for WMS.  There was no signal from the company since December that pricing could be an issue.  The issue may be that WMS started from a higher point than its competitors and since their competitors have stepped up their product quality, WMS has had to simply get more competitive on price.
  • On the VLT front, WMS was the only supplier to sell rather than lease units to Maryland Live.  Since their contract fell under Spielo, the purchase price was not disclosed.  However, our understanding behind WMS’s rationale to sell vs. lease the units at $25-28/day to the facility was based on a lucrative sales price.  So we’re left scratching our heads here a bit.
  • International units:  While international units are notoriously difficult to predict since they are mostly replacements, WMS’s low number of shipments definitely surprised us.  Based on our conversations with management, we expected a 2,000/Q run rate.  Instead, it looks like WMS’s units are slipping below FY2007 levels.  No doubt various jurisdictions are reviewing their regulatory standards but it does seem a bit odd to us that this is not impacting any of the suppliers.

A TREND

  • Declining unit revenues in gaming operations:  Both IGT and WMS attribute declining win per day to mix shift which makes sense from the anecdotal evidence.  WMS specifically mentioned that they have an increasing number of games out on a fixed fee or daily lease.  Just a few years ago, BYI was the only supplier to consider this pricing model outside of markets where true participation was not possible.  We also know that casinos have been targeting WAP games to increase margins.

THE GOOD

  • North American shipments:  Shipments (not recognized units) to North America came in 500 units above our estimate.  While we are still waiting to speak to several suppliers, we believe that WMS could be in second place for market share this quarter.  Lower ASPs helped.
  • Healthy margins:  Despite the disappointing ASP’s, margins were strong.  Of course, the large number of conversion kits sold in the quarter didn’t hurt.
  • Install base no longer stalled?  After 6 quarters of declines in their install base, dare we say that WMS has turned a corner?  It certainly appears so.  Unfortunately, all the new great content they have coming out still faces competition and that’s the new market norm. 

Damned Lies

This note was originally published at 8am on April 17, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I am not well qualified to criticize the theory of rational expectations and the efficient market hypothesis because as a market participant I considered them so unrealistic that I never bothered to study them.”

-George Soros

 

Just as Keith has his pile of reading, I also have mine.  The quote above from George Soros was in a speech he gave to the Institute for New Economic Thinking Annual Plenary Conference.  The quote itself was buried somewhat deep in Soros’ comments, but it jumped off the page at me.  To me it is somewhat akin, and I hate to use another hockey analogy, to Wayne Gretzky being told he couldn’t score 90+ goals in a NHL season (which is more than one goal per game) after he did it.

 

Soros, of course, is in a similar situation in the realm of investing.   He has absolutely crushed it in terms of outperforming the market over long periods of time.  His performance has been so staggering, in fact, that his net worth today is estimated north of $22 billion.  Now I haven’t always admired Soros’ political positions, but it is very difficult not to admire his investment track record. 

 

More importantly, I’ve always admired his desire and interest in attempting to explain his investment process.  Much of what Soros has written about his investment process revolves around reflexivity.  He loosely based this way of interpreting the markets on a theory by philosopher Karl Popper that suggests that the individual’s interpretation of reality never quite correspond with reality itself.  

 

According to Soros, in financial markets this is taken one step further in that individuals with a flawed sense of reality actually take action based on this flawed interpretation of the future.  In turn, these collective actions often influence future events, or more likely, as Soros said, create a “divergence between the participants’ view of reality and the actual state of affairs and a divergence between the participants’ expectations and the actual outcome.”

 

From my seat, the pin action in Europe over the past 18-months highlights Soros’ idea that collectively market participants really have no idea what the ultimate outcome in Europe will be to resolve the intrinsic issues associate with the Maastricht Treaty. Specifically, I’m referring to the issue that a European monetary union cannot exist sustainably without a strong political union or fiscal solidarity.

 

This morning the first of two key Spanish debt auctions occurred for the week.  The reflexive response from the equity markets is that the auction was a success, as European equities are up across the board with beleaguered French banks leading the way.  According to reports we are receiving from some of our contacts on the ground in Europe, the Spaniards sold 3.2 billion euros of 12 – 18 month bills versus a maximum target of 3.0 billion euros at a total bid-to-cover of 3.19.  On the negative side, the bills sold yielded 2.6% on the 12-year versus 1.4% prior and 3.1% on the 18-year versus 1.7% prior.  So, yes the auction was “successful”, albeit at usury type rates.

 

It’s quite possible that the Spanish debt auction this Thursday is just as “successful”.  Although as always, I would recommend watching not necessarily what the government officials say, but what they actually do.  In that vein, this week European officials are headed to Washington, DC with hat in hand to ask for more money from the International Monetary Fund.  The IMF meetings occur from April 20 – 22nd.  Interestingly, the Europeans may meet at least one surprising fiscal hawk in the way of U.S. Treasury Secretary who has already ruled out additional contributions to the IMF based on the belief that the IMF already has “substantial financial resources.”

 

Meanwhile as the loose monetary policies in Europe appear likely to be extended in perpetuity, inflation readings came in stickier, even if marginally, across the board this morning.  Eurozone March CPI came in at +1.3% month-over-month and +2.7% on year-over-year basis, both ahead of expectations.  The acceleration in U.K. inflation was even more noteworthy coming in at +3.5% versus estimates of +3.4%.

 

The scary thing with inflation is that, just like George Soros’ returns, it also compounds.  So, at this rate of inflation, in 10 years someone in the U.K. who makes $50,000 now will have to make $70,000 to have the same purchasing power.  Thus we have the hidden tax of inflation. 

 

Switching gears briefly, I wanted to touch on U.S. politics.  Yesterday the Senate blocked the so-called Buffett Tax, which would have implemented a mandatory tax of 30% on anyone earning over $1 million in income.  The legislation was blocked basically on party lines.  In terms of true tax reform, the Buffett tax is basically meaningless and is clearly not much more than a political stunt, although perhaps an adroit one by the Obama camp as according to a recent Gallup poll 6 in 10 eligible voters supported passage of the bill. 

 

The Democrats are only going to continue to focus on this class warfare type issue heading into the Presidential elections this fall.  In fact, yesterday I received a blast email from Stephanie Cutter, the Deputy Campaign Manager for Obama which invited me to compare my tax rate to Romney’s.  Ultimately, this “war on the rich” is and will continue to backfire on Obama in one key way: political donations.  So far, corporate executives across almost every industry have been giving less money to Obama and the Democrats this election cycle.  (We will have a note on this up today.)

 

For those looking for some interesting and enlightening reading this morning, the IMF releases the world economic outlook and fiscal monitor at 9am and ECB President Draghi is delivering an intro speech at the 6thECB Statistics conference.   Thinking about an annual ECB statistics conference reminds of Mark Twain’s famous quote (who he purportedly borrowed from former U.K. Prime Minister Benjamin Disraeli):

 

"There are three kinds of lies: lies, damned lies, and statistics."

 

Indeed.

 

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 $1617-1662, $117.67-121.61, $79.27-79.67, $80.03-82.34, $1.30-1.32, and 1349-1383, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Damned Lies - Chart of the Day

 

Damned Lies - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 1, 2012


As we look at today’s set up for the S&P 500, the range is 19 points or -0.49% downside to 1391 and 0.86% upside to 1410. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1A

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 4/30 NYSE -665
    • Down from the prior day’s trading of 1005
  • VOLUME: on 4/30 NYSE 851.91
    • Increase versus prior day’s trading of 8.14%
  • VIX:  as of 4/30 was at 17.15
    • Increase versus most recent day’s trading of 5.09%
    • Year-to-date decrease of -26.71%
  • SPX PUT/CALL RATIO: as of 04/30 closed at 1.92
    • Down from the day prior at 2.21 

CREDIT/ECONOMIC MARKET LOOK:


APRIL – you can only put lipstick on a pig for so long, then lower-highs start to concern the bulls; particularly as the Macro data confirms that price momentum. Perma-Bulls have had to learn this lesson the hard way in 3 of the last 4yrs (ie sell in Q1, buyem back in Q3 a lot lower) and I don’t think Pavlov’s bells are going to keep them in it on “valuation” this time either.

 

10YR TREASURIES – bond yields continue to tell you all you need to know about Growth Slowing in the USA. At 1.92% this morning, yields are testing 6 week lows and have gone straight down since mid-March when the US growth slowdown picked up on the downside. Yesterday’s PMI print was -10% m/m and Jobless Claims are up +15% m/m – it matters. 

  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.91
    • Unchanged from prior day’s trading
  • YIELD CURVE: as of this morning 1.66
    • Unchanged from prior day’s trading 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 9:30am: Fed’s Kocherlakota speaks to tribal leaders in Washington
  • 10am: Construction Spending, Mar., est. 0.5% (prior -1.1%)
  • 10am: ISM Manufacturing, Apr., est. 53.0 (prior 53.4)
  • 10am: ISM Prices Paid, Apr., est. 59.0 (prior 61.0)
  • 11am: Fed’s Williams speaks on economy in Beverly Hills, CA
  • 11:30am: U.S. to sell $30b 4-wk, $26b 52-wk bills
  • 12:30pm: Fed’s Evans & Lockhart speak on monetary policy in Beverly Hills
  • 3pm: Fed’s Plosser gives economic outlook in San Diego
  • 4:30pm: API inventories

 GOVERNMENT:

    • Secret Service Director Mark Sullivan to provide panel with details on agents’ involvement with prostitutes in Colombia
    • U.S. travel industry kicks off $12.3m marketing campaign, with ads rolling out in U.K., Canada, Japan
    • SEC, CFTC holds closed meetings on enforcement matters
    • House, Senate, Supreme Court not in session 

WHAT TO WATCH:

  • Fed said to have criticized how some of the 19 largest U.S. banks calculated potential losses, planned dividends in this year’s stress tests
  • Group that includes Wolverine World Wide, Golden Gate Capital said to be near agreement, may announce deal as soon as today to buy Collective Brands for $21-$22 per share
  • Mitsubishi, Mitsui agreed to buy 14.7% stake in Woodside Petroleum’s proposed Brose LNG project in Australia for $2b
  • ISM’s factory index probably eased to 53 last month from 53.4 in March, economists’ est. ahead of today’s report
  • Chesapeake Energy says IRS reviewing executive-incentive program that allowed CEO Aubrey McClendon to buy stakes in thousands of co.’s oil and natgas wells, in filing yesterday
  • April U.S. auto sales rate may be 14.3m, up from 13.2m year- ago, decelerating from 1Q rate 14.6m
  • Bank of America may cut 2,000 banking jobs on top of plan announced last year to eliminate 30k jobs in 3 years: WSJ
  • House Financial Services Cmte Chairman Spencer Bachus said he’s been cleared by congressional ethics office of allegations he improperly traded securities during 2008 financial crisis
  • NYC’s pension funds will vote against the five Wal-Mart directors standing for re-election at next month’s shareholder meeting: NYT
  • Isuzu Motors said it’s considering forming business alliances with companies including General Motors; Nikkei reported April 29 GM may buy 10% stake in Isuzu
  • American Hospital Association says Obama administration’s $14.6b program to encourage doctors to adopt electronic medial records too ambitious, goals may not be met, in letter to HHS
  • May Day holiday, some overseas markets closed, Occupy Wall Street stages protests
  • No U.S. IPOs expected to price: Bloomberg data 

EARNINGS:

    • Corn Products International (CPO) 5:30am, $1.22
    • Becton Dickinson and Co (BDX) 6am, $1.38
    • Huntsman (HUN) 6am, $0.39
    • Emerson Electric Co (EMR) 6:30am, $0.80
    • Harris (HRS) 6:30am, $1.34
    • NiSource (NI) 6:30am, $0.71
    • Foster Wheeler (FWLT) 6:45am, $0.39
    • Archer-Daniels-Midland Co (ADM) 7am, $0.60
    • Avon Products (AVP) 7am, $0.28
    • Biogen Idec (BIIB) 7am, $1.48
    • Cobalt International Energy (CIE) 7am, $(0.11)
    • Marsh & McLennan Cos (MMC) 7am, $0.61
    • Marathon Petroleum (MPC) 7am, $1.31
    • Pfizer (PFE) 7am, $0.56
    • Sirius XM Radio (SIRI) 7am, $0.02
    • Techne (TECH) 7am, $0.85
    • Thomson Reuters (TRI CN) 7am, $0.41
    • TRW Automotive Holdings (TRW) 7am, $1.61
    • Wisconsin Energy (WEC) 7am, $0.73
    • DENTSPLY International (XRAY) 7am, $0.52
    • Legg Mason (LM) 7am, $0.47
    • Automatic Data Processing (ADP) 7:30am, $0.91
    • Cummins (CMI) 7:30am, $2.22
    • Hospira (HSP) 7:30am, $0.48
    • Arch Coal (ACI) 7:45am, $0.19
    • HCP (HCP) 7:45am, $0.66
    • Valero Energy (VLO) 7:45am, $0.28
    • AGCO (AGCO) 8am, $0.86
    • Arrow Electronics (ARW) 8am, $1.09
    • Cameco (CCO CN) 8am, C$0.25
    • Prologis (PLD) 8am, $0.40
    • Martin Marietta Materials (MLM) 8:05am, $(0.24)
    • Ecolab (ECL) 8:25am, $0.48
    • FirstEnergy (FE) 8:30am, $0.80
    • CBOE Holdings (CBOE) 4pm, $0.36
    • Motorola Mobility Holdings (MMI) 4pm, $0.01
    • Unum Group (UNM) 4pm, $0.76
    • WebMD Health (WBMD) 4pm, $(0.18)
    • CBS (CBS) 4:01pm, $0.44
    • Chesapeake Energy (CHK) 4:01pm, $0.28
    • DaVita (DVA) 4:01pm, $1.45
    • Fiserv (FISV) 4:01pm, $1.14
    • TripAdvisor (TRIP) 4:01pm, $0.34
    • Broadcom (BRCM) 4:05pm, $0.55
    • ONEOK (OKE) 4:05pm, $1.31
    • OpenTable (OPEN) 4:05pm, $0.34
    • Genworth Financial (GNW) 4:07pm, $0.13
    • Arthur J Gallagher & Co (AJG) 4:11pm, $0.26
    • TECO Energy (TE) 4:15pm, $0.24
    • Yamana Gold (YRI CN) 4:28pm, $0.24
    • Boston Properties (BXP) Post-Mkt, $1.13
    • General Growth Properties (GGP) Post-Mkt, $0.21
    • Intact Financial (IFC CN) Post-Mkt, C$1.26 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • Fat Pigs Means Pork Bust as Record Herd Ends Rally: Commodities
  • Jeremy Charles Will Retire as HSBC’s Head of Precious Metals
  • Corn Declines as U.S. Planting Progress May Boost Global Supply
  • Oil Near Two-Day Low After China PMI Expands Less Than Forecast
  • Sugar Falls as Delivery Seen Bigger Than Forecast; Coffee Drops
  • Copper Swings Between Gains, Drops Amid Doubt About China Easing
  • Gold Is Seen Falling on Concern Physical Purchases Are Slowing
  • U.S. Lags in Cattle ID Seen as More Effective Than Mad Cow Tests
  • Aluminum Set to Strengthen in Next 10 Days: Technical Analysis
  • Rubber Gains for Fourth Day as China’s Manufacturing Expands
  • Wind’s $168 Billion North Sea Boom Lures Oil Industry: Energy
  • Utility Puts Hit Record in Bet Against Defensive Rally: Options
  • Batista Considers Industrial Partner to Tap $1.5 Trillion Assets
  • Pork Surplus May End Four-Year Price Rally
  • Kansas Draws Record 100 to Measure Wheat in World’s Top Exporter
  • Oil Supplies Surge to 21-Year High in Survey: Energy Markets
  • Record Fuel Output Returning Exmar’s Tankers to Profit: Freight 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 


ASIAN MARKETS


JAPAN – while we were lugging around our 100 slide deck presentation on Japan in March, the most common question was “what’s the catalyst to make Japanese stocks go down?” A: economic gravity. Just when consensus thought Japan couldn’t go down it’s down for 15 of the last 19 trading days (down hard, -1.8% overnight).

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 


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%

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION

Very Bullish Senior Loan Officer Survey in All but One Category

The Fed released its second quarter Senior Loan Officer Survey yesterday afternoon. The survey covers lending standards and loan demand and was conducted between March 27th and April 10th. 

 

Overall, the survey paints a very positive picture, though admittedly is somewhat backward looking given the survey period was 3-5 weeks ago. Across C&I and CRE loans, lending standards eased while loan demand improved. On the consumer side, residential mortgage demand rose significantly. That said, lending standards tightened modestly for both prime and nontraditional borrowers. Consumer non-mortgage loans saw lending standards ease again this quarter and demand strengthened considerably. Most notably, banks willingness to make auto loans increased substantially. 

 

We saw relatively strong loan growth trends from a majority of the regional banks in 1Q12. This survey suggests that those trends should persist through 2Q12, barring any sharp loss of confidence intra-quarter. 

 

C&I Loan Demand Rises Sharply

Demand for C&I loans continued to rise in the 2Q survey, spreads tightened, and standards continued to ease. The Loan growth in C&I remains the strongest out of any loan category, according to the Fed's H.8 data.

 

Notably, a net 60% of banks reported not tightening spreads for large and mid-size firms, while a net 31% of banks reported stronger demand for C&I loans among large and mid-size borrowers. 

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - C I demand 1  2

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - C I demand 2  2

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - C I standards2

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - C I spreads2

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - C I loans

 

 

CRE Loan Demand Rises Further While Standards Continue to Ease

Commercial real estate loan demand improved in the quarter with a net 39.7% of banks reporting stronger demand for CRE loans. Meanwhile, a net 13.8% of banks reported easing CRE loan standards 2Q12 - the highest percentage recorded since the downturn began. In spite of the turn in this data, H8 data shows that CRE loans, overall, remain in decline.

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - CRE standards2

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - CRE demand2

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - CRE loans

 

Residential Real Estate - A Mixed Picture

Residential mortgage loan standards were tighter in 2Q for both prime and nontraditional borrowers. A net 1.9% of banks reported tightening standards on prime borrowers, while a net 11.5% of banks reported further tightening on nontraditional borrowers. 

 

The demand side, however, saw the sharpest uptick in demand since the housing downturn began. Demand was reported as stronger for prime residential loans by a net 30.2% of banks, while a net 23.1% of banks reported stronger nontraditional loan demand. 

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - Resi Demand2

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - Resi Standards2

 

Consumer Loans - Cards, Cars & Installment

Banks reported a net easing of standards for credit cards, auto loans and installment credit. This survey was roughly in-line with that of recent surveys. On the demand front, demand picked up sharply. Demand for credit card loans rose to a net 17.5% of banks from 8.1% in the prior quarter. Demand for auto loans rose to a net 35.3% from 14.3% in the prior quarter and installment loan demand picked up to a net 16.4% from negative 1.9%. These are very positive readings on the demand front. Finally, This quarter also saw a net 23.6% of banks report an increased willingness to make consumer loans. This is roughly consistent with the readings from the last several quarters.

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - Consumer standards2

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - Consumer Demand2

 

2Q12 SENIOR LOAN OFFICER SURVEY: BROAD-BASED IMPROVEMENT WITH ONLY ONE EXCEPTION - Consumer Loans

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link below to view in your browser.  

 



Back To Bed

“We are in bed too much.”

-Franklin D. Roosevelt

 

That classic FDR quote comes from a dramatic excerpt in Ian Toll’s latest book about WWII, The Pacific Crucible. If you are a history buff, I highly recommend it. The book is very well researched and provides a unique Japanese perspective on how they forced Americans to think differently about globally interconnected risks.

 

The context of the quote is important. FDR said it in the immediate aftermath of Pearl Harbor when being grilled by Senator Tom Connolly of Texas, “How did it happen that our warships were caught like tame ducks… How did they catch us with our pants down? Where were the patrols.” Roosevelt replied, “I don’t know, Tom. I don’t know.” (page 31)

 

Unlike most modern day Republican and Democrat “leaders”, Roosevelt didn’t point fingers. He went on to explain that it wasn’t enough not to know. It was time to take the time to re-think US strategy and understand. “They are doing things and saying things during the daytime out there, while we are all in bed.” (page 31)

 

Back to the Global Macro Grind

 

If you want to pretend it’s the 1990s or 2003-2007 bull markets, that’s cool. All you have to do is know where the 50-day moving average is and you won’t miss a thing. Just look at the US Equity futures every morning and go back to bed.

 

With the US Dollar being debauched (down now for 7 of the last 8 weeks), Risk Managers are starting to pick up on the idea that more QE would only inspire a weaker World Reserve Currency and higher oil prices. That, in turn, will slow growth further.

 

QE1 may have worked. But QE2 didn’t, and QE3 definitely won’t. Why? Because as the USA gets a short-term “pop” in stock prices, the rest of the world gets asset price inflation (i.e. in their cost of living and/or cost of goods sold) right when they need that the least. Policies To Inflate (from these prices) slows growth and compresses margins.

 

Global Equity markets have obviously figured this out. With the exception of Venezuela and Egypt, Global Equity prices have been making lower- highs since February-March. The slowdown in US Equities (which somehow were last to figure this out) was much more pronounced in April than it was in that February-March performance period.

 

Performance period? Qu’est-ce que c’est le performance chasing period? It’s been glaringly obvious that seasonal Institutional performance chasing has called the top in US Equities in Q1 of 4 of the last 5 years. Notwithstanding the no-volume rally in 4 of the last 5 days of the month, here’s how US Equities finished in April:

  1. SP500 -0.8%
  2. Nasdaq -1.5%
  3. Russell2000 -1.6%

From a S&P Sector performance perspective, the complexion of the SP500’s -0.8% loss is interesting:

  1. Top 3 Sectors = Utilities +1.8%, Consumer Discretionary +1.2%, Consumer Staples +0.3%
  2. Bottom 3 Sectors = Financials -2.3%, Industrials -1.1%, Tech -1.1%

With our only Global Equity asset allocations being US Utilities and Chinese Equities (up +1.8% and +5.9% for the month, respectively), we were quite pleased with being positioned for US Growth Slowing. The question now is what will please the monthly performance chasers for May?

 

Can the SP500 make higher-highs for the YTD if Financials and Tech continue to pull back? What happens to the Industrials if Growth Slowing continues? The Sector Studies tell me that the most bullish outcome for May could be Deflating The Inflation. That would be good for American Consumers (good for US Consumer and Healthcare longs).

 

Deflating The Inflation is already in motion, but you’ll only be able to take it out of market expectations if we stop waking up late every morning begging for Ben Bernanke to bail us out with another QE experiment.

 

Politicians hate the idea of Deflating The Inflation via a Strong Dollar because that would be bad (in the very short-term) for the stock market. Our Hedgeye Election Indicator has already picked this up (see Chart of The Day). President Obama just had his 1st bullish week in the last 5 (up +130bps week-over-week), primarily because the stock market was up +1.8% last week.

 

It’s perverse, but it’s real. That’s a big reason why neither Bush or Obama have been advised to back a Strong Dollar Policy.

 

Causality? Policies To Inflate cause “speculators” to bet on the inflation policies they expect from conflicted and compromised politicians at the Fed and Treasury. From an immediate-term correlation risk perspective, the writing is on the wall too:

 

Immediate-term TRADE correlations between the US Dollar and:

  1. SP500 = -0.83
  2. WTIC Oil = -0.86
  3. Equity Volatility = +0.93

In other words, as Colonel Jessep would have said, “You want the truth? you can’t handle the truth!” (YouTube video from A Few Good Men http://www.youtube.com/watch?v=5j2F4VcBmeo&noredirect=1). It’s the US Dollar, Stupid.

 

There should be no politics associated with the Purchasing Power of America’s Currency. Every American who championed the Strong Dollar Periods of 1 (US Dollar Index Averaged $115.18) and 1 (US Dollar Index Averaged $92.93), gets this.

 

At $78.69 this morning, the US Dollar Index is -32% and -15% below those 1980s and 1990s averages. The price of oil is +377% and +465% higher than those 1980s and 1990s Strong Dollar, Strong American GDP Growth Peiods of 4.3% and 3.8%, respectively.

 

We have a Crisis of Credibility in this country because no one wants to talk about the truth. Our currency is what we buy things with. It’s not something we can borrow respect with. Fighting for it is what should be getting you out of bed.

 

My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, and the SP500 are now $1, $103.96-105.23, $78.69-79.22, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Back To Bed - Chart of the Day

 

Back To Bed - Virtual Portfolio


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