This note was originally published at 8am on April 20, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”
First of all, sorry for the long quote this morning. I’m sure after reading some of my more eclectic quotes and missives this week, you are all awaiting Keith’s return with bated breath. But as I was contemplating the stock market this week and the earnings results that were released, somehow Dickens’ quote from “A Tale of Two Cities” seemed appropriate.
The SP500 opened Monday up near 1,380 and closed yesterday at near 1,378. So despite the sizeable swings mid-week, the broad equity market has done nothing all week. It seems Mr. Market, just like the Dickens’ quote, can’t decide: Is growth slowing? Or is growth accelerating? Is Europe out of the woods? Or is sovereign risk accelerating in Europe? Is China going to ease more? Or is inflation more of risk than growth in China?
We’ve been somewhat definitive on our views that we believe global growth is slowing sequentially, but the market hasn’t totally come around to accept the Hedgeye views just as of yet. (I guess we will have to get Keith on CNBC more next week to preach the gospel.) On the growth front, an interesting data point we recently picked up was that traffic through the Suez Canal was only up 1.2% for the month of February year-over-year basis and has been in steady decline for really the last year. In the Chart of the Day, we show this trend and have combined it with a couple pictures of Hedgeye friend and former NHLer Jeff Hamilton. As the pictures show, life as a pro hockey player is sometimes good and sometimes bad as well.
Obviously this is but one data point, but this is literally the worst month of traffic through the Suez Canal since the end of the most recent global recession. As well, the Suez is far from an insignificant indicator. It is estimated that in total almost 8% of the world’s sea trade is transported through the Suez Canal. So, this is a data point worth writing in the notebook.
Just as with the continued angst over the direction of global growth, there remains debate over the direction of Europe from a debt perspective. Some, like Bank of America, are ready to call a bottom in Europeans debt woes as indicated by B of A’s positive call on European Banks this morning. The actual sovereign market itself, as manipulated as it is, begs to differ though, as Spanish yields on 10-year government bonds are back above 6.0% this morning.
My brothers up in Canada are even getting into the European mix this morning. Canadian Finance Minister Jim Flaherty came out publically yesterday to propose that non-European nations should have a collective veto when European nations come to the IMF to ask for aid. Obviously, Flaherty sees what we see, which is that the likelihood of a Socialist getting elected in France means that “the ask” from Europe could soon get a lot bigger.
As well, you can’t really blame Canada (pun intended) for pushing back on continued carte blanche aid to Europe. In 1993, Canada’s fiscal house was in terrible order and Standard & Poor’s rightfully downgraded Canada debt. The Canadians then righted the fiscal ship the hard way by implementing a consumption tax and making tough budget cuts, by some estimates almost 20% across the board. As Canadian Finance Minister Paul Martin said at the time, “Let there be no doubt about that. We will balance the books.” There are some other nations that could use some of that Canadian fiscal resolve. (Incidentally, we like the Loonie on the long side over the long term in part due to this.)
As usual during earnings season, we are going to have a note up on our website later today that discusses our view of the broad energy sector this earnings season. One quote from the note is worth sharing this morning, which is as follows:
“The macro backdrop for the quarter is muddled – Brent crude averaged $118.70/bbl in the quarter, +13% YoY and +9% QoQ; NYMEX natural gas averaged $2.50/Mcf, -40% YoY and -28% QoQ; rig count growth slowed in North America to +12% YoY (vs. +19% YoY in 4Q11); and worldwide rig count growth slowed to +9% YoY (vs. +15% YoY in 4Q11). Our proprietary US oil and gas inflation index shows that costs for producers were +8.1% YoY in 1Q12, the lowest level of inflation since 4Q10.”
To say that the energy pictures is currently muddled is definitely the Hedgeye understatement of the week, but the key fact I would point out is that natural gas is down 40% y-o-y and oil is up 13% y-o-y. Thematically, those companies that use natural gas as an input, like certain industrial and chemical companies, are receiving the input cost boon of a life time.
Meanwhile, any company that competes with the price of gasoline for the consumer’s wallet is certainly feeling the pinch.
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 $1633-1654, $116.71-119.34, $79.25-79.65, $81.12-82.67, $1.30-1.32, and 1356-1395, respectively.
Enjoy the weekend with your families,
Daryl G. Jones
Director of Research