This note was originally published at 8am on April 19, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Show me a good loser, and I’ll show you a loser.”
Losing sucks and there is basically not much to debate beyond that. In the investment world, losing means you lose both your family and client’s hard earned capital. It’s almost a double whammy in terms of managing the emotions related to losing in that sense. If it were just you losing an individual tennis match at the country club, that’s probably cool on some level. But when you make a bad investment, you actually have to put the accountability pants on and answer to both your clients and your family.
Losing is also part of the big boy’s game of being a professional stock market operator. We lose, we analyze the loss, and then we adjust and improve. Or, at least, that is how it is supposed to work. In reality, though, most investors, and people generally, tend to overweight and over-emotionalize their losses. While winning is great, losing is painful. This occurs in part to our culture where losing, to Lombardi’s point above, is broadly characterized as a bad thing. I’m here to tell you it’s not. In fact, losing is a chance to improve.
This morning Spain sold €2.54 billion of 2 and 10-year bonds. On one hand, Spain won. They sold more than the maximum target of €2.5 billion. As well, the bid-to-cover was 2.42 versus 2.17 in the last auction in January. Yields, on the other hand, have ticked up since January from 5.4% on the 10-year to 5.74% in this auction. (Incidentally, the actual market yield is higher.) But, still, mostly a win, right?
Well, not so much. The European sovereign debt market is hardly a market anymore. Government intervention is enabling these auctions to be “successful”, but the stark reality remains that the monetary union has failed. The key evidence of this is in interest rate differentials. In the Chart of the Day, we show the spread between Germany and Spain interest rates going back three years. In a successful monetary union, the rates at which the key players sell sovereign debt would be comparable. Unfortunately, at least for monetary union enthusiasts, this is not the case in Europe.
The more unfortunate fact in Europe is that while the market is attempting to do its job and price sovereign debt according to appropriate sovereign risk, there is no currency mechanism to adjust and aid these beleaguered sovereigns. In theory, what should be happening is that the Spanish currency should naturally adjust to reflect its weak fiscal and economic situation, which then, over time, would boost Spanish exports and subsequently boost the Spanish economy as Spain’s goods become cheaper.
Unfortunately, Spain, and really all nations in the Eurozone, has a currency that reflects the strongest members, but doesn’t have the commensurate ability to borrow at low rates. In effect, the weaker economic nations in the Eurozone are all structural losers. So, then, it should be no surprise that the Socialists are about to take over the government of France.
As an aside, my favorite quote about socialism comes from Winston Churchill, who said:
"The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries."
It is sad that the structural issues of the Eurozone are forcing the people of the France to choose the equal sharing of misery via socialism versus rolling the proverbial bones on the upside of capitalism.
Although Keith is on a much deserved vacation this week, he was kind enough to flag to me the fact that both copper and long term yields in the U.S. continue to signal an ominous outlook for global growth. Copper has basically been going down in a straight line over the past thirty days. Meanwhile, the 10-year yield on U.S. Treasuries remains below our key line of resistance at 2.04%. Call it reflexivity if you will, but typically these two market prices are good leading indicators for the direction of economic activity.
You may not believe Chinese officials when they say they will temper growth, and you may not believe the tempered growth numbers from China when they get reported, but the price of copper does not lie. I can tell you the shareholders of Freeport McMoran (FCX) are starting to believe it. FCX, one of the world’s largest copper miners, is down 20% in a straight line since February 1st, despite trading at less than 5x trailing earnings.
Speaking of earnings, our retail Sector Head Brian McGough did an excellent job summarizing his views of earnings for retail this quarter. While the full note can be found at ( www.hedgeye.com ), the key takeaway was as follows:
“a) The current consensus earnings growth forecast for the next 12-months is 23%. We have not seen this kind of growth since we came off of recessionary earnings numbers in 2010.
b) The market is giving this earnings growth a 17x p/e. We’ve only seen that kind of multiple five times in 3-years, but always at times when the group was still clearly under-earning. Who are we to say that it is NOT under-earning today? But to make this case, we need to see a considerable upshift in consumer spending alongside another decline in raw materials costs. We don’t like that call.”
To paraphrase Brian, I think he is saying that the asymmetric risk / reward in retail is not tilted towards the upside in retail land this earnings season.
But enough about losing, go out there and get wins on the board today!
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 $1628-1653, $116.91-120.45, $79.23-79.64, $81.11-82.31, $1.30-1.32, and 1378-1394, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research