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WERE WE SIMPLY TOO EARLY OR JUST PLAIN WRONG ON BRAZIL?

CONCLUSION: The central bank’s upcoming monetary policy meeting is a major catalyst that will either serve to put a floor in the BRL in the near-term, or set the currency on a sustainable [and continued] path lower vs. the USD – an outcome that would likely continue to drag Brazilian equities down with it over the intermediate term.

 

VIRTUAL PORTFOLIO: We sold our long position in Brazilian equities on MAY 22.

 

In this business, which demands positive P&L on an increasingly high frequency basis, being early = being wrong. Regarding Brazil specifically, our Global Macro risk management task from here [as always] is making a call on what we see coming down the pike vs. expectations. Bearish TREND and now bearish TRADE, Brazil’s benchmark Bovespa Index is signaling to us that fundamentals for Brazilian asset prices (both domestic and international) are likely to deteriorate in the immediate-to-intermediate term.

 

WERE WE SIMPLY TOO EARLY OR JUST PLAIN WRONG ON BRAZIL? - 1

 

As Keith highlighted in today’s Early Look, our proprietary three-factor (PRICE/VOLUME/VOLATILITY) quantitative model has proven to be far superior than traditional sell-side channel checks at signaling critical inflection points, as well as confirmation of many major trends across the global macro universe consisting of both single securities and broader asset classes. Currently, our model is confirming the “falling knife formation” in Brazilian equities, which forces us back to the drawing board on our once-bullish bottom-up view.

 

From an immediate-term perspective, the next major catalyst out of Brazil (aside from waking up to daily headlines from Finance Minster Guido Mantega), is the central bank’s upcoming monetary policy meeting (MAY 29-30). In short, we think there is a very, very dramatic need for them to put their foot down and stake their claim to sovereignty with regards to setting Brazilian monetary policy.

 

Regardless of whether or not there’s truth to the claim, many market participants are increasingly of the view that the central bank has become a mere extension of the central government and its drive to improve competitiveness via currency debasement and structurally lower the cost of capital throughout the Brazilian economy, which may require the central bank being significantly less vigilant in fighting inflation as it has been over the past ~10yrs or so. Up until recent weeks, such an outcome was being modeled into local economists’ NTM inflation expectations – which remain ~100bps above the median of the central bank’s +4.5 +/- 200bps target that continues to be guided to by Tombini as an EOY event.

 

WERE WE SIMPLY TOO EARLY OR JUST PLAIN WRONG ON BRAZIL? - 2

 

One key reason we think both analysts and market participants are worried about the central bank’s sovereignty is the recent change to disclosure regulation – specifically in that each board member’s vote on monetary policy will be made public going forward. The risk here is that members who are increasingly likely to succumb to the political pressure to lower interest rates for career risk management purposes (central bank board members can be fired at the will of the President in Brazil). That makes the upcoming action, accompanying commentary and guidance out of the central bank very important as it relates to reeling in market expectations for decreased central bank autonomy and, along with it, accelerating inflation expectations.

 

Per Banco Central do Brasil’s latest minutes: “… even considering that the activity recovery has occurred more slowly than anticipated, the Committee believes that, given the cumulative and lagged effects of policy actions implemented so far [i.e. 350bps of rate cuts], any movement of additional monetary easing should be conducted with parsimony.” We’ll see if they meet and extend their guidance – an outcome which our proprietary G/I/P model identifies as the most rational.

 

WERE WE SIMPLY TOO EARLY OR JUST PLAIN WRONG ON BRAZIL? - 3

 

Doing both would go a long way towards putting in a floor in the BRL/USD cross, which has dropped -6.1% from when we initially forecasted that we’d see limited downside relative to peer currencies over the intermediate term in our MAY 3 note titled, “WHAT THE HECK IS GOING ON IN BRAZIL?”. That decline is second only to the decline in the MXN/USD cross over that same duration within the region.

 

While we were clearly wrong here, three weeks does not a TREND make and we continue see asymmetric risk in what the Brazilian interest rate swaps and currency forwards markets are pricing in over the NTM relative to Brazil’s GROWTH/INFLATION dynamics – provided the central bank pushes back on the central government’s potentially inflationary policies. Alas, POLICY remains the lone holdout here and that can get investors right run over when central planners don’t behave according to expectations. For more on our view here, as well as a deep dive into the recent policy initiatives coming out of the central government, refer to our MAY 11 piece titled, “DON’T FIGHT THE FED… IN BRAZIL?”.

 

WERE WE SIMPLY TOO EARLY OR JUST PLAIN WRONG ON BRAZIL? - 4

 

All told, we can’t stress this enough: we expect both Brazil’s equity market and currency to experience continued downside over the intermediate term post the MAY 29-30 central bank meeting if their actions are perceived to be in line with the broader central plan of Brazilian policymakers. The strongest TREND-duration short thesis for Brazilian equities (i.e. the opposite of our long thesis) is quite consensus at this juncture, given that the Bovespa Index has indeed crashed from its MAR 13 YTD high (-20.1%).

 

Shorting Brazil from here requires true guts, but if the USD continues to make higher-highs over the intermediate-term – dragging cross-asset volatility up alongside it (the two are +94% correlated on an immediate-term duration) – Brazilian equities and the Brazilian real will likely continue to get tattooed if policymakers don’t commit to providing international investors with higher rates of expected return(s) via doing what they must to stem the tide/reverse the trend in the exchange rate (i.e. selling dollars, lowering cross-border IOF taxes, introducing a rhetorical floor for the BRL, hiking rates [not likely], etc.).

 

To this tune, the BRL is up over +2.8% vs. the USD on the day after being down earlier in the morning – a sign that the central bank might be buying dollars here and coming to the currency’s rescue. We’ll see if that this [potential] drive to support the currency becomes a trend.

 

As an aside, when cross-asset volatility breaks out, as it is doing currently, capital inflows to emerging markets slow markedly and those countries with current account deficits such as Brazil (2% of GDP) are at increasing risk of seeing their growth rates decelerate as investment and/or consumption growth slows.

 

WERE WE SIMPLY TOO EARLY OR JUST PLAIN WRONG ON BRAZIL? - 5

 

Lastly, given the recent acceleration in the pace of policy adjustments in Brazil, we thought it’d be helpful to compile the most recent headlines below in addition to Moshe Silver’s notes (our Portuguese-speaking CCO who mines the Brazilian press daily for incremental research nuggets): 

  • Latest Policy Maneuvers:
    • Brazil’s central government is considering cleaning up the balance sheets of certain state-owned banks through a transfer of “bad credits” to EMGEA, which is the government asset management company originally created to administer housing contracts held by Caixa Economica Federal under government housing programs.
    • Brazil will reduce a transaction tax charged on consumer loans; the said IOF tax on consumer credit will fall to 1.5% – the level it was at the start of 2011 – from the current 2.5%.
    • Brazil’s central bank will relax bank reserve requirements to specifically stimulate auto financing… should free up as much as 18 billion reais ($8.8 billion).
  • Moshe’s Notes:
    • Brazil central bank sees more rate cuts – speaking to O Globo, central banker Tombini says inflation should slow, from a current level of 5.1%, towards the 4.5% midpoint of the target range towards the end of 2012.  He rejected concerns over the recent decline in the real and fears of inflation.  “We recently laid in a course.  This course continues to be valid regarding future monetary policy,” he said.  “In the future, this process must be undertaken with frugality and care.” 
    • COPOM votes to be made public – starting with the upcoming meeting of COPOM – central bank monetary policy committee – the votes on monetary policy decisions will be published.  This goes against the traditional opacity that has been intended to shield the COPOM from political pressure.  In the past, the COPOM decision was presented as unified.  The decision has provoked heated debate, with many observers believing this will place pressure on individual bank directors to cave in to government pressure.  Partisans of the move claim it will provide transparency and shield dissenters with the “disinfectant of sunlight.”  This underscores what may be a new trend at the central bank – or perhaps what government officials hope will become a trend.  Over its history, the COPOM meetings have been marked by a high degree of unanimity.  Of the 153 COPOM meetings, only 25 have reported dissenting votes.
    • Treasury adds BNDES support – Brazil’s treasury is set to free up an additional R$ 10 billion to shore up BNDES lines of credit, as part of a program to add liquidity to the credit markets and stimulate economic expansion, after a weak Q1.  Government sources report that finance minister Mantega met with BNDES president last week and boosted the government’s lines of support for the bank from R$ 30 billion to R$ 45 billion, to show that the government will not skimp on resources to stimulate productivity.  Treasury lines of credit to BNDES are at subsidized below-market interest rates.  BDES says they will probably not draw down the entire amount this year, and will likely leave some over for 2013.  

Darius Dale

Senior Analyst


CHINA’S INCREMENTAL GROWTH SLOWDOWN CONFIRMED

CONCLUSION: While Deflating the Inflation remains a bullish catalyst for the Chinese economy, the lag between this event and the turn in both the reported growth data and growth expectations may have just increased. As such, we are of the view that waiting and watching for clarity is the best strategy in the immediate term for China.

 

VIRTUAL PORTFOLIO: Sold our long positions in Chinese equities (CAF) on MAY 21.

 

***This is an adjunct to our MAY 16 note titled, “CHINA: LESS BORING; MORE CONFUSING”. If you haven’t yet seen it, we encourage you to check that out in conjunction with our update below.***

 

The incremental growth slowdown in China has been confirmed. Per the State council: “We must proactively take policies and measures to expand demand and to create a favorable policy environment for stable and relatively fast economic growth.”

 

We can’t stress this enough: this is a dramatic rhetorical shift from guiding down growth expectations to trying to support falling growth expectations. Easing to support growth is a far superior driver of improvements in investor sentiment than easing to save growth, with the latter potentially being a bearish catalyst.

 

As outlined in the previous note, we anticipate that Chinese GDP bottoms here in 2Q – function of our Deflating the Inflation theme and the accompanying policy maneuvers giving us the scope to roll with our proprietary median forecasts for Chinese growth. That led us to the following conclusion (from last week’s research note): “… while we don’t view a material acceleration in Chinese economic growth in 2H as a probable event absent a removal of the property market curbs, we do think further RRR reductions and actual interest rate cuts will start to filter through the economy and provide an eventual boost to Chinese economic growth.” If we start accepting our predictive tracking algorithm’s downside guidance as the highest probability scenario, the range of Chinese GDP expectations is unlikely to bottom over the intermediate term.

 

CHINA’S INCREMENTAL GROWTH SLOWDOWN CONFIRMED - 1

 

Mixed signals make it too soon to tell which is the correct interpretation, however. Chinese rate sensitive sectors (Financials; Industrials) are not outperforming in the face of accelerating easing expectations in the interest rate swaps and currency forwards markets, while property developers have accelerated their outperformance over the last 6-8 weeks.

 

CHINA’S INCREMENTAL GROWTH SLOWDOWN CONFIRMED - 2

 

CHINA’S INCREMENTAL GROWTH SLOWDOWN CONFIRMED - 3

 

CHINA’S INCREMENTAL GROWTH SLOWDOWN CONFIRMED - 4

 

As an aside, we continue to wrestle with the thought that accelerating FX deprecation speculation is a sign of accelerating capital outflows – which would coincide with an acceleration to the downside in Chinese property prices and a potential Chinese banking crisis. That’s far from our baseline TREND-duration expectations currently, but we’ll adjust our outlook according with real-time data (i.e. market prices). Chinese banks sold a net CNY60.6B of foreign currency in APR (-0.2% MoM) and, while modest, this marks the first sign of a sequential capital outflow since DEC.

 

CHINA’S INCREMENTAL GROWTH SLOWDOWN CONFIRMED - 5

 

Regarding our market price indicators, the broader Chinese equity market is in the process of confirming a TREND breakdown on our proprietary quantitative models – a clear signal to us that investors should get to the sidelines here and wait for further confirmation. Sometimes the hardest thing to do in a business that demands positive P&L on an increasingly high frequency basis is “doing nothing”. In spite of such institutionalized pressures to act, our new call on China is just that for now.

 

Jumping back to the point regarding Chinese property developers’ recent outperformance, there are a handful of potential catalysts that can shift both sentiment and operating metrics in a positive direction over the near term that warrant keeping an eye on as it relates to the Chinese demand curve (Gross Fixed Capital Formation = 46.4% of GDP): 

  • Per today’s statement out of the State Council: “China will start a series of key infrastructure projects that are vital to the overall economy and can facilitate growth and speed up construction of existing railway, environmental protection and rural projects.”
  • Per Chen Guoqiang, Vice Chairman of the China Real Estate Society: “China is unlikely to expand a property tax trial to more cities in the near term and the government will continue home purchase restrictions.”
  • Per the Ministry of Land Resources, China will boost land supply for housing by 21 percent from last year to 172,600 hectares... Regardless of the unsustainable nature of adding incremental supply of unoccupied apartment buildings and shopping malls, stepping up construction here is bullish for Chinese growth from a TREND-duration perspective; bearish for property prices over the long-term TAIL, however.
  • Per the Ministry of Housing and Urban-Rural Development, China’s municipal governments were recently asked to submit by end-May a report on the progress of social housing construction over the past 2yrs and plans for 2013-2015. The reports are designed to help decide if adjustments are needed to social home construction targets in the 5yrs through 2015 (i.e. likely an acceleration in construction if anything). 

All told, while Deflating the Inflation remains a bullish catalyst for the Chinese economy, the lag between this event and the turn in both the reported growth data and growth expectations may have just increased. As such, we are of the view that waiting and watching for clarity is the best strategy in the immediate term for China.

 

Darius Dale

Senior Analyst


THE M3: WYNN COTAI FINANCING; CHINA MAY LOANS PLUNGE; VLADIVOSTOK; VISITOR ARRIVALS; INFLATION

The Macau Metro Monitor, May 23, 2012

 

 

BASIS POINT-WYNN MACAU LAUNCHES $1.5 BLN SYNDICATED LOAN Reuters

Wynn Macau Ltd launched a US$1.5 billion two-tranche syndicated financing for a new project on Macau's Cotai Strip. According to sources, the deal consists of a US$1 billion five-year revolving credit and a US$500 million six-year term loan. Deutsche Bank AG and JP Morgan had joined with US$200 million each prior to syndication.  Sources said Wynn Macau will be issuing a bond and the two banks could be involved.

 

Sources said the margin on both tranches opens at 250bp over LIBOR for the first two quarters after which they will be based on a leverage ratio grid.  The margin will be 250bp for 4.5 times or more, 225bp for 4-4.5 times, 200bp for 3-4 times, or 175bp for less than 3 times.  Banks are invited to join at a top-level upfront fee of 200bp for commitments of US$200 million and the global coordinating lead arranger title; a 150bp fee for US$150 million and the lead arranger title; a 100bp fee for US$100 million and the arranger title; and a 75bp fee for US$50 million and the lead manager title.

 

Banks that join before June 8 or 9 will get an additional 12.5bp early bird fee.  The revolver comes with a 75bp commitment fee. The term loan tranche repays in 16 unequal instalments after a two-year grace period.  Banks can choose to join in US$ or HK$. Responses are due end of June.

 

CHINA BIG FOUR BANKS ISSUE CNY 34 BILLION NEW YUAN LOANS IN MAY Dow Jones, Reuters

China's biggest four banks issued only CNY34BN ($5.4BN) in new yuan loans in the first three weeks of May, and their deposits declined by CNY270BN over the same period, the 21st Century Business Herald reported on Tuesday, citing unidentified banking sources.

 

The four banks--Industrial & Commercial Bank of China Ltd, China Construction Bank Corp, Bank of China Ltd., and Agricultural Bank of China Ltd.--were previously reported by local media to have barely issued any new yuan loans in the first two weeks of May.  These banks usually account for 30% of new yuan loans issued by China's whole banking system.

 

New loans issued by Chinese financial institutions fell to CNY681BN in April, down from CNY1.010 trillion in March and posting the lowest monthly level so far this year.  China loans in May 2011 reached CNY 551.6BN.

 

RUSSIA EYES VLADIVOSTOK CASINO ZONE TO WOO ASIAN MONEY Reuters

Russia's state-owned Nash Dom Primorye said it is seeking private investors and/or companies to build casino resorts in a six square kilometre area near Vladivostok.  The masterplan includes luxury hotels, a yacht club, shopping malls as well as outdoor sports such as golf. As it stands now, the zone is 2.6 square kilometers, but can be extended to six square kilometers.  Known as the Integrated Entertainment Zone, the project has space for roughly five large resorts.

 

Marina Lomakina, general director of Nash Dom, said she hoped the zone would be fully completed within five years.  "We want companies who are well known and will help create amenities that are more than just casino gaming," she said, adding that the zone would require a total minimum investment of $2BN from private investors looking to develop properties.


Vladivostok is one of four official Russian government zones where casino gambling is legal but is the only one that has formally initiated plans to lure foreign investors.

 

Nash Dom Primorye has appointed Las Vegas-based Galaviz & Co as lead strategic adviser for the tender.  The tender will be initiated in June, giving potential international operators 60 days to send in a pitch and budget estimates.  The Russian government will then enter into discussions with potential investors by the end of October.

 

APRIL 2012 MACAU VISITOR ARRIVALS DSEC

Visitor arrivals totaled 2,382,156 in April 2012, up 1.9% YoY.  The average length of stay of visitors increased by 0.1 day YoY to 1.1 days.  Visitors from Mainland China increased by 9.5% YoY to 1,391,119, with those traveling under the Individual Visit Scheme rising by 9.3% to 541,551.

 

THE M3: WYNN COTAI FINANCING; CHINA MAY LOANS PLUNGE; VLADIVOSTOK; VISITOR ARRIVALS; INFLATION - macau

 

SINGAPORE'S INFLATION RISES TO 5.4% IN APRIL Channel News Asia

Singapore's inflation rate accelerated in April to 5.4% YoY, from March's 5.2% rise.


Daily Trading Ranges

20 Proprietary Risk Ranges

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WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE

“Get the US Dollar right, and you’ll get a lot of big beta in macro right”

Keith McCullough

 

The MACO team has said many times that there has been “plentiful evidence” that the US Dollar has been driving “The Correlation Risk” in Global Macro markets since 2008 - "the US Dollar up means stocks and commodities have arrested their ascent."  This has positive intermediate-term implications for Restaurant Industry margins.   

 

On Monday at the Alltech International Symposium it was suggested that the current world population of 7 billion is supposed to grow to 9 billion by the year 2050, which could require 70 percent more food production than currently is the case.  (The amount of food needed will grow by a larger percentage than the population due to a higher standard of living around the world.)  This would suggest that there is substantial long-term demand for food and in the overall Ag commodity complex.

 

We continue to hit our chicken theme (long SAFM and short BWLD) as corn and commodity prices (corn down and chicken prices up) move in our favor.   (See the charts below)

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - hrmcomm

 

SAFM: While the tone from management has been cautious, we see declining corn prices and tight chicken supply over the next 18 months as strong positives for the stock.  SAFM’s superior balance sheet, versus its peers, helps its position as the industry turns. Intermediate term risk is seasonality in the stock Jul-Sep.

 

BWLD: This stock is highly valued as it one of the few “growth” plays in casual dining.  The year-over-year increase in wing prices has a direct impact on EPS that we believe consensus is underestimating.  We expect negative FY12 EPS revisions over the next two-three months.

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - hfbrd

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - corn

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - broil

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - wings

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - breast

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - wheat

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - soy

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - beef

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - coffee

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - cheese

 

WEEKLY COMMODITY CHARTBOOK - FEEDING 9 BILLION PEOPLE - rice

 

 

 


It's Your Problem

This note was originally published at 8am on May 09, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The Dollar is our currency, but it’s your problem.”

-John Connolly, US Treasury Secretary (1971)

 

That’s the quote Jim Rickards uses to start Chapter 5 of Currency Wars. From an economic history perspective, it’s a critical quote to contextualize as President Richard Nixon was the first Republican President to go all-in Keynesian.

 

I’m not a Republican or Democrat. I am Canadian. So sometimes I just have to laugh when Republicans blame Obama for everything. It’s as if these partisan political pundits think we are dumb enough to believe that the likes of Nixon and Bush didn’t uphold the same monetary and fiscal policies to debauch the Dollar.

 

At least Nixon admitted it when he said plainly, “we’re all Keynesians now.” But are we? Inquiring minds in this country would like to know. Are we as numb to economic reality as the economically partisan media? Being Keynesian (Republican or Democrat) is partisan you know. And that probably had something to do with Republican veteran Lugar losing to the Tea Party in Indiana.

 

Back to the Global Macro Grind

 

You can blame Greece or Canada at this point, but the market doesn’t care to hear the excuses. The global economy is as interconnected as it has been for the last 5 years. The idea of “de-coupling” is only something the Sell-Side could make up.

 

If you didn’t know that the US Dollar is still the world’s reserve currency and that its daily, weekly, and monthly moves are driving what we call The Correlation Risk, now you know.

 

The US Dollar Index is having its 6th consecutive up day (touching $80 this morning), and one of our major Global Macro Theme calls for Q2 2012, Bernanke’s Bubbles (as in Commodities), are popping.

 

Since the Old Wall begged for Bernanke to do it, market expectations became addicted to it. Now it, as in “It’s Your Problem”, is on the tape.

 

Deflating The Inflation of easy money Commodity bubbles in Gold, Oil, etc. are riding the following immediate-term TRADE correlations to the US Dollar: 

  1. Gold -0.85
  2. Palladium -0.81
  3. Copper -0.67
  4. Oil -0.84
  5. Heating Oil -0.82
  6. Soybeans -0.79 

If you want to call these mathematical ironies, you can. As a matter of fact, you can call anything in this profession whatever you want to call it until you have to report your performance results back to your clients. If you are just a pundit, not held accountable to the TimeStamps of what you say and when, I can’t help you from yourself. Twitter’s gotcha!

 

In our 50 slide Q2 Global Macro Themes Deck (April 2012) we walked through the Top 10 Bernanke Bubbles (email sales@hedgeye.com if you’d like to review it with refreshed risk management levels).

 

The aforementioned immediate-term TRADE correlations anchor on 6 commodities. If you want to look at The Correlation Risk from a bigger picture perspective, here’s how the USD Index is trending versus some fairly major stuff: 

  1. CRB All-Commodities Index (19 Commodities) = -0.93
  2. S&P 500 = -0.85
  3. Euro Stoxx 600 = -0.84 

It’s Your Problem” or its your opportunity now. It’s a major performance problem if you are long anything US, European, or Japanese Equities (all Keynesian Policy Bubbles) or commodities. It has been since the middle of March.

 

Now plenty people who are long Gold (I have a zip lock bag of the stuff in my desk, fyi) will quickly say that’s precisely why they are long Gold – because it’s “protection against all the money printing and Keynesian central planners” of the world.

 

Fair e-nuff.

 

But what if the world is pricing in an end to the Nixonian madness? They did in the early 1980’s. What if we are on the verge of actually getting off the iQe drugs? Gold being up for 12 consecutive years naturally implies some mean reversion risk to the idea that Americans are dumb enough to vote for Dollar Debauchery for much longer.

 

In addition to their Keynesian economic policy making teams, Bush and Obama have one thing in common – Ben Bernanke. This is not unlike what Nixon and Carter had in common – Arthur Burns (who was also tasked, politically, with devaluing the Dollar and monetizing US Treasury debt).

 

Got Causality? 

  1. Dollar Debauchery in both the 1970’s and 2000’s perpetuated commodity price inflation
  2. Dollar Debauchery in both the 1970s and 2000’s perpetuated fear-mongering by policy makers to back their policies
  3. Dollar Debauchery in both the 1970s and 2000’s perpetuated a lack of confidence/trust and employment growth 

Both GDP Growth and US Employment Growth were as nasty as they have ever been (by decade) in both the Nixon/Carter and Bush/Obama periods of raging Keynesian Economic policy influence.

 

So, here’s a little reminder from little old me in New Haven, CT this morning to all of the Keynesians, from Larry Summers to Ben Bernanke, and all of their offspring – It’s Your Problem now. If that sounds like I am picking a fight, that’s old news. I did that in our April Themes presentation too. We are officially Fighting The Fed (and winning).

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Euro (EUR/USD), and the SP500 are now $1585-1647, $110.92-113.87, $79.42-79.88, $1.29-1.31, and 1349-1366, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

It's Your Problem - Chart of the Day

 

It's Your Problem - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 23, 2012


As we look at today’s set up for the S&P 500, the range is 40 points or -2.33% downside to 1286 and 0.71% upside to 1326. 

                                            

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 5/22 NYSE 104
    • Down from the prior day’s trading of 2143
  • VOLUME: on 5/22 NYSE 846.67
    • Increase versus prior day’s trading of 6.09%
  • VIX:  as of 5/22 was at 22.48
    • Increase versus most recent day’s trading of 2.14%
    • Year-to-date decrease of -3.93%
  • SPX PUT/CALL RATIO: as of 05/22 closed at 1.83
    • Up from the day prior at 1.58 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.74
    • Decrease from prior day’s trading at 1.77
  • YIELD CURVE: as of this morning 1.45
    • Down from prior day’s trading at 1.48 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week of May 18
  • 10am: House Price Index (M/m), Mar., est. 0.3% (prior 0.3%
  • 10am: New Home Sales, Apr., est. 335k (prior 328k)
  • 10am: New Home Sales (M/m), est. Apr., est. 2.1%  (prior -7.1%)
  • 10:30am: DoE inventories
  • 11am: Fed to purchase $1.5b-$2b notes in 8/15/2022 to 2/15/2031 range
  • 1pm: U.S. to sell $35b 5-yr notes
  • 2pm: Fed to purchase $4.25b-$5b notes in 5/31/2018 to 5/15/2020 range
  • 2pm: Fed’s Kocherlakota speaks in South Dakota 

GOVERNMENT:

    • President Obama attends campaign events in Colo., Calif.
    • Mitt Romney won Republican primaries in Arkansas, Kentucky yesterday
    • Nuclear Regulatory Commission Chairman Gregory Jaczko, who is resigning, holds news conference in Charlotte, N.C., 9:30am
    • Senate in session, House not in session
    • Senate Finance holds hearing on health-care delivery, with testimony from UnitedHealth, Advocate Health Care, Kindred Healthcare, Renaissance Medical Management officials, 10am
    • NRC staff meets on agency’s yearly assessment of safety for Entergy Corp.’s Vermont Yankee nuclear plant, 5:30pm
    • Financial Industry Regulatory Authority holds final day of annual conference 

WHAT TO WATCH:

  • Merkel faces Hollande pleas to shed “taboos” at summit
  • Morgan Stanley defended its role in Facebook’s IPO after a Massachusetts regulator subpoenaed the bank
  • Facebook investor sues Nasdaq over “mishandled” stock offering
  • PetroChina looking at American, Caribbean assets, Jiang says
  • U.S. April new home purchases forecast to rise 2.1% from March to 335k annual rate
  • Barclays to raise $5.5b from sale of BlackRock stake
  • U.K. retail sales fall most in two years as rain hits demand
  • Japan’s April exports rise less-than-forecast 7.9% Y/y
  • ECB’s Lipstok says no need for additional ECB stimulus at the  moment, “no guarantee” Greece will keep euro
  • BofA to buy back $330m of mortgages from Freddie Mac
  • RailAmerica reviewing alternatives including possible sale
  • SEC Chairman Schapiro says SEC’s JPMorgan review focused on VAR models
  • U.S. consumer bureau seeks comments on prepaid debit card rules
  • More CFOs willing to pay bribes, global survey finds 

EARNINGS:

    • Suntech Power (STP) 6am, $(0.49)
    • Big Lots (BIG) 6am, $0.69
    • Canaccord Financial (CF CN) 6:30am, C$0.09
    • Hormel Foods (HRL) 7am, $0.41
    • Trina Solar (TSL) 7am, $(0.27)
    • Bank of Montreal (BMO CN) 7:30am, C$1.35
    • Zale (ZLC) 7:30am, $(0.20)
    • Apollo Investment (AINV) 7:30am, $0.21
    • Genesco (GCO) 7:35am, $0.74
    • American Eagle Outfitters (AEO) 8am, $0.20
    • CAE (CAE CN) 8am, C$0.20
    • Eaton Vance (EV) 8:30am, $0.48
    • NetApp (NTAP) 4pm, $0.63
    • Pandora Media (P) 4:02pm, $(0.18)
    • PVH (PVH) 4:03pm, $1.26
    • Hewlett-Packard (HPQ) 4:05pm, $0.91
    • Synopsys (SNPS) 4:05pm, $0.55
    • Semtech (SMTC) 4:30pm, $0.31
    • Bristow Group (BRS) 5pm, $1.03

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

GOLD – plain ugly since the February top (down -12.7%) and this remains one of our top Global Macro short ideas that we’ll be discussing on our Best Ideas call at 11AM. Get the US Dollar right, and you’ll get a lot of big beta in macro right. 

  • Mining Slump Feeds M&A as Projects Overrun Budgets: Commodities
  • Wheat Drops for Second Day as Price Surge Prompts Farmer Selling
  • Rubber Set for Glut on Weaker China Growth Hurting Prices
  • Copper Slumps as Euro-Area Crisis May Threaten Chinese Growth
  • FreePort Founder Sells Diamonds as Investment Bet on China
  • Oil Drops a Second Day on Iran Agreement, Rising U.S. Stockpiles
  • Gold Declines in London as European Crisis Concern Boosts Dollar
  • Cocoa Falls to Three-Week Low in New York After African Rains
  • New Robusta Harvest in Indonesia’s Sumatra Seen Boosting Exports
  • Iron Ore Heads for Worst Run Since October as China Demand Slows
  • EU Farm Income May Drop for First Time Since 2009 as Prices Fall
  • Rubber Retreats to Lowest Level in a Week on Greek Exit Concern
  • Commodities to Gain on China’s Stimulus Pledge: Chart of the Day
  • Oil Falls for Second Day on Iran Agreement
  • Cotton Extends Slump to Lowest in More Than Two Years on Demand
  • Palm Oil Drops to Lowest This Year on European Crisis Concerns
  • Commodities Drop to Five-Month Low as Greece Concern Cuts Demand 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


ITALY – getting powdered again this morning (down -2.5%, crashing since March = -23.4%) after reporting the worst consumer confidence reading in Italy since 1996 (pre-Euro). Germany/France draw-downs chasing the Spanish and Italian ones; DAX and CAC down -11.5% and -15.5% from March. Nothing is going to happen at their 3hr dinner tonight.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


JAPAN – finally seeing consensus walk our way on the massive interconnected global macro risk associated with Japan’s fiscal and debt problems. This is an Export economy that just missed another export number – that’s bad. Japanese stocks down for 23 of the last 33 days (draw-down = -16.6%). Japan matters to Global Demand.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


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