“The first thing you have to know is yourself.”
-George Goodman, The Money Game
Chapter 2 of The Money Game is about ‘You: Identity, Anxiety, and Money.’ It walks through some very basic training leadership lessons from “Mister Johnson” (as in Ned Johnson, the Founder of Fidelity Investments) on how to make it in this business.
“A man who knows himself can step outside of himself and watch his own reactions like an observer… With the good men, you can see the learning juices churning around every mistake. You learn from mistakes. When I look back, my life seems to be an endless chain of mistakes.” (pages 26-27)
If only America’s economic pundits and politicians had the humility to reflect upon all of the forecasting and policy mistakes we have been making in this country for the last 6 years… if only we had the kind of accountable leadership that The People could trust…
Back to the Global Macro Grind…
At the end of the day, you need to know yourself and your process, or your time in this profession will be relatively short. This is a profession that is in the middle of a revolution. We all need to Re-Think and Re-do what has not been working.
What is it that you do? Why did you do it that way? Is your risk management process malleable and repeatable?
Credible Sources and Accountable Leadership – find both and you’ll weather this Globally Interconnected economic storm just fine. Today is not a day to be freaking out and selling low. Friday was a Shorting Covering Opportunity. Today is a wait and watch day.
Know yourself; know your position:
- Cash = 82%
- International Currencies = 9% (US Dollar – UUP)
- US Equities = 9% (Utilities and Apple – XLU and AAPL)
- Fixed Income = 0%
- International Equities = 0%
- Commodities = 0%
That’s the Hedgeye Asset Allocation Model that we #TimeStamp each and every day. We update these positions daily because we believe strongly that there should be responsibility in recommendation.
Not being long anything Commodities in Q2 has been a choice. Not being long anything big beta (Basic Materials, Energy, or Financial stocks) was also a choice. So was not chasing Treasuries higher on Friday.
While Growth Slowing and Deflating The Inflation of Bernanke’s Bubbles (Commodities) remains our Q2 Global Macro Theme, that doesn’t mean we short-and-hold. From a time and price, almost everything that ticks is interesting.
So is the ongoing Macro Catalyst Calendar – here’s how that looks to us this week:
- Monday – capitulation selling on Asia’s Equity market open (despite Asian Equities being red since Feb-Mar)
- Tuesday – ISM non-Manufacturing data in the US, where #GrowthSlowing will remain a consensus concern
- Wednesday – ECB decision on rates, money printings, bailouts, etc.
- Thursday – Fed musings about whatever it is that they can/cannot do as Bernanke gives his economic “outlook”
- Friday – Chinese inflation data for May (CPI and PPI), which should slow as we see continued Deflating of The Inflation
Overall, the news-flow will get more policy-centric as we move into the belly of the week. Begging for Bernanke was already the focus of this weekend’s media coverage. So expect more of that – i.e. more of the same that slowed growth to begin with after Bernanke independently opted to debauch the Dollar on January 25thwith another Policy To Inflate.
A perpetual policy to inflate is only as good as its economic outcomes. Most people are figuring this out. In addition to their policy mistakes, The Fed has failed miserably on the two scores that matter most within their mandate:
- Price Stability
- Full Employment
So, rather than hoping for him to do more of the same, I think the best scenario for the 71% (i.e. US Consumption as a % of US GDP) is to fire Ben Bernanke.
Either Obama figures this out and shows that he is an executive leader who makes mistakes, understands them, and has the mental flexibility to change – or, Romney will run on it and state plainly that he’ll fire Bernanke himself.
Fire Bernanke? Yes. Just like you would any other Coach or Executive who is failing. If we fire Bernanke, I think whatever is left of Oil’s iQe4 upgrade speculation would go away, Gold would crash, and the US Dollar would remind the world who is going to wear the pants in this fiat world of European and Japanese policy makers threatening to blow us all up.
I know myself. And I know real people who will celebrate the only way out of this – and that’s by growing the 71% of US GDP by giving this country a monster $2/gallon tax cut at the pump. If you want that, you want a Strong Dollar. If you want a Strong Dollar, you want to get rid of Ben Bernanke too.
My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar, EUR/USD, and the SP500 are now $1, $81.29-89.43, $82.42-83.19, $1.22-1.25, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – June 4, 2012
As we look at today’s set up for the S&P 500, the range is 32 points or -0.79% downside to 1268 and 1.72% upside to 1300.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: on 6/01NYSE -2193
- Down from the prior day’s trading of -124
- VOLUME: on 6/01 NYSE 999.49
- Decrease versus prior day’s trading of -24.72%
- VIX: as of 6/01 was at 26.66
- Increase versus most recent day’s trading of 10.81%
- Year-to-date increase of 13.93%
- SPX PUT/CALL RATIO: as of 6/01 closed at 2.64
- Up from the day prior at 1.74
CREDIT/ECONOMIC MARKET LOOK:
USA – futures have gone from down 10 to down 3 and, more importantly, bond yields stopped falling – the 10yr is already up 5bps this morning vs Friday’s smack-down close; yield spread 5bps wider on that, which this market direly needs.
- TED SPREAD: as of this morning 41
- 3-MONTH T-BILL YIELD: as of this morning 0.06%
- 10-Year: as of this morning 1.49
- Increase from prior day’s trading at 1.45
- YIELD CURVE: as of this morning 1.24
- Up from prior day’s trading at 1.21
MACRO DATA POINTS (Bloomberg Estimates):
- 9:45am: ISM New York, May (prior 61.2)
- 10am: Factory Orders, Apr. est. 0.2% (prior rev. -1.9%)
- Pres. Obama attends fundraisers in New York with Bill Clinton
- House, Senate in session
- CFTC adopts Swap Dealer and Major Swap Participant Recordkeeping, Reporting and Duty rules
WHAT TO WATCH:
- EU said to prepare start of perm. bailout fund for July 9
- ASCO conference continues; Conference preview
- Spain calls on Merkel to further protect banks
- Walgreen, Express Scripts agreed to dismiss contract claims
- China non-manufacturing industries expand at slowest pace since March 2011
- ISS recommends AOL shareholders vote for 2 Starboard Value nominees, 6 AOL nominees, as directors
- Wal-Mart to release vote totals after all 16 board members were re-elected on Fri.
- Yahoo, Facebook in talks to end patent disputes: AllThingsD
- EFG-Hermes rejects $1.1b bid to pursue QInvest venture
- Service industries probably kept growing: U.S. econ. preview
- Conn’s (CONN) 7am, $0.33
- Dollar General (DG) 4:05pm, $0.60
- Shuffle Master (SHFL) 4:05pm, $0.20
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Hedge Funds in Longest Rout Since Global Recession: Commodities
- Copper Drops to Five-Month Low in New York After Data From China
- Gold Drops as Investors Seek Cash on Equities, Commodities Slump
- Commodities Drop to 18-Month Low as Slowdown Concern Deepens
- China’s Gold Imports From Hong Kong Climb to Record in April
- Speculators Cut Bullish Oil Wagers Before Plunge: Energy Markets
- Natural Gas Rebounds in New York After Drop on Cooler Weather
- Palm Oil Slumps to Seven-Month Low Over Global Growth Concern
- Waterway Petroleum Said to Buy ONGC Naphtha for Loading in June
- Burundi in Talks With Foreign Investors to Boost Power Output
- BP Exit From Russia Venture Seen Risking Investor Return: Energy
- Commodities Slumping as China Sees Weaker Yuan: Chart of the Day
- Nickel May Drop 3.7 Percent on Retracement: Technical Analysis
- Funds in Longest Rout Since World Recession
- Cotton Falls to 31-Month Low on Concern Global Glut Set to Swell
- China’s Easing Grip on Gas Opening Door to North America Exports
- Vitol Said to Buy July-Loading Gasoil From Mangalore Refiners
EUROPE – shorting Spain and Italy on Friday didn’t work – both are green this morning; again, markets discount reality and these markets have been crashing for months, so be careful on the short side until we get the bounces; then study those. IBEX +1.7% this morning and the Euro actually has not moved at 1.24.
ASIA – Asian stocks have been going down since Feb/Mar, so last night was more of an immediate-term capitulation more than anything else (Japan down -1.7% = down -19.1% from its March top); interesting that India almost closed flat (given that it was the 1st market to stop going up, it was the 1st to stop going down – for a day).
The Hedgeye Macro Team
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No Current European Positions in the Hedgeye Virtual Portfolio
Asset Class Performance:
- Equities: The STOXX Europe 600 closed down -3.05% week-over-week vs +1.5% last week. Bottom performers: Spain -7.3%; Romania -6.4%; Finland -5.0%; Germany -4.6%; Denmark -4.6%; Portugal -4.1%; Austria -3.7%. Top performers: Greece +3.4%; MICEX +1.4%; Poland +1.2%; Hungary +0.3%.
- FX: The EUR/USD is down -0.83% week-over-week vs -2.01% last week. W/W Divergences: RUB/EUR -4.12%, HUF/EUR -1.74%, CZK/EUR -1.56%, GBP/EUR -1.24%, NOK/EUR -1.06%, PLN/EUR -0.93%.
- Fixed Income: Another crazy week of swings in yields. Germany hit record lows on the 10YR at 1.17%!!! Greece’s 10YR climbed for yet another week (big surprise!), gaining +17bps week-over-week to 30.69%. Portugal gained +5bps to 11.98%. Belgium saw the biggest weekly decline at -17bps to 2.82%, followed by France -12bps to 2.26% and Italy -12bps to 5.74%, as Germany dropped -11bps. On a month-over-month basis, the Greek 10YR yield is up a monster +1038bps!, while France fell -71bps and Germany fell -49bps over the period.
He said, She said:
In recent weeks we’ve worked hard to contextualize the ever-changing and moving parts in Europe under the assumption that to size up potential outcomes for Europe one must recognize that what Eurocrats “should” do (from a economic policy perspective) may be very different from what they “will” do. We’d direct you to our recent European Monitors titled “On Why Greeks Shouldn’t Leave the Eurozone/EU” on 5/18 and “Hold Your Horses on Greek Exit” on 5/25 for our thinking on the larger issues surrounding a Greek exit. [Email me at if you need a copy].
Our main update for this week is to stress that we believe much hinges on the Greek elections on June 17th. [Note that our EUR/USD is updated below]. Given the runway until then, we expect more stoking of the rumor mill, plenty of political foot in mouth syndrome, and market swings over even the slightest of comments from key Eurocrats. We see—short of an overnight Greek bank-run—a strong likelihood that no concrete proposals (either Eurobonds, a Pan-European Deposit Guarantee facility, and/or another LTRO) will be issued before elections. We expect Eurocrats, directed by German Chancellor Merkel, to play the card that while fiscal consolidation targets may be grossly ambitious, an all-out rejection of austerity from a government is an unacceptable position, especially for a country like Greece that is receiving bailout money conditional to its austerity program. Therefore, the call is being put to the Greeks to vote in a pro-austerity party (likely a coalition of New Democracy) versus the anti-austerity camp of Syriza.
The latest collection of Greek party polls show a mixed picture, largely showing a single digit spread with both Syriza and New Democracy receiving the favor based on the poll. This mismatch is maybe best demonstrated by a poll out today from Kathimerini showing Syriza garnering 31.5% of the vote if held today versus 25.5% for New Democracy; however the poll also noted that 58% believe New Democracy will come in first and only 34% see Syriza winning. Go figure!
Importantly, it’s worth noting that the last Greek opinion poll will be this Sunday, June 3rd, and therefore we’ll largely be in the dark from a sentiment polling perspective ahead of June 17th.
As Greece remains in the crosshairs over the next weeks, we expect talks to heat up on the ESM, the €500B bailout packages expected to come online on July 1stand work in concert with the remaining EFSF, and in particular to discuss adding clauses that explicitly define how it can be used to recapitalize European banks.
Meanwhile, we saw quite a week of weak data, namely in mostly bombed out PMI Manufacturing figures in MAY vs APR; weaker confidence figures across the region; Eurozone unemployment elevating to a 17 year high of 11.0%. One bright spot was CPI, which came in 20bps lower at 2.4% in May Y/Y versus 2.6% in April. (See the Data Dump section below for more).
Below is an updated EUR/USD price level chart. Our immediate term TRADE and intermediate term TREND levels of support are both at $1.22. Our TRADE resistance level is $1.25. Our call remains that if $1.22 breaks, look out below! We’re not EUR parity folks because we see Eurocrats stepping in to prevent it, however the runway of uncertainty until June 17thelections puts significant downside risk in play. However, we’re well cognizant that the pair could see a bounce on any optimism around discussions concerning any number of proposals on the table, including: Eurobonds, a Pan-European Deposit Guarantee facility, another LTRO, and the ESM.
Finland anti Eurobonds - Finnish Prime Minister Jyrki Katainen said in a speech that he was against taking on a bigger financial burden to help address the sovereign debt crisis in Europe. He noted that the government's stance on Eurobonds has been "extremely critical or negative".
Irish say Yes - Ireland approves the Fiscal Compact by a vote of 60.2% to 39.8%.
ECB and LTRO - ECB Governing Council member Ignazio Visco said that the central bank has not ruled out a third longer-term refinancing operation. However, he added that another LTRO is not necessary at the moment given that there is no liquidity problem. Visco, like ECB President Draghi, also argued that the ESM should be allowed to directly recapitalize troubled banks.
Greece - Euler Hermes, the world’s biggest credit insurer, said it will no longer cover new shipments of goods to Greece due to concerns about the country leaving the euro and customers defaulting on payments, which raises the prospect that certain goods will no longer reach Greek companies and stores. Recall Austria’s OeKB Versicherung said earlier this week that it will also drop coverage of new shipments to Greece, while Coface of France said it is only doing business with “the healthiest Greek companies.”
Rehn and Eurobonds - EU Economic and Monetary Affairs Commissioner Olli Rehn told a conference that the euro needs to be underpinned by closer cooperation between member countries to survive and prosper. However, he added that going straight to a discussion about Eurobonds would be a "false debate", as countries first need to bring budgetary policies more into line and move towards a fiscal union.
Draghi on the Eurozone - ECB President Mario Draghi urged Eurozone leaders to intensify their efforts to combat the crisis, noting that the central bank cannot fill the vacuum of the lack of action by national governments on fiscal growth, nor can it fill the vacuum of their lack of action on structural problems. On the banking front, Draghi said a banking union would need to be supervised centrally and require the introduction of a European deposit scheme and resolution fund. He also said that when it comes to recapitalizations, "it is better to err by too much in the very beginning rather than by too little
Eurozone Club Membership - The European Central Bank (ECB) has said that none of the eight countries that are supposed to join the euro are ready yet. The countries include: Bulgaria, the Czech Republic, Latvia, Lithuania, Hungary, Poland, Romania, and Sweden.
CDS Risk Monitor:
Week-over-week CDS were largely up. Spain saw the largest gain in CDS w/w at +70bps to 606bps, followed by Italy +63bps to 571bps, France +15bps to 219bps. Portugal was the sole decliner of the countries we track at -18bps to 1177bps.
Eurozone Unemployment Rate 11% APR [17 year high] vs 10.9% MAR revised to 11%
Eurozone Business Climate Indicator -0.77 MAY (exp. -0.67) vs -0.51 APR
Eurozone Consumer Confidence -19.3 MAY Final (-19.3 initial) vs -19.9 APR
Eurozone Economic Confidence 90.6 MAY (exp. 91.9) vs 92.9 APR
Eurozone Industrial Confidence -11.3 MAY (exp. -10.2) vs -9.0 APR
Eurozone Services Confidence -4.9 MAY (exp. -2.8) vs -2.4 APR
Eurozone CPI 2.4% MAY Y/Y (exp. 2.5%) vs 2.6% APR
Eurozone M3 2.5% APR Y/Y vs 3.1% MAR
Germany CPI 2.1% MAY Prelim. Y/Y (exp. 2.2%) vs 2.2% APR [-0.3% MAY Prelim. M/M (exp. 0.0%) vs 0.1%]
Germany Unemployment Rate 6.7% MAY vs 6.8% APR
Germany Unemployment Chg 0K MAY vs 18K APR
Germany Retail Sales -3.8% APR Y/Y (exp. 0.3%) vs 3.2% MAR [0.6% APR M/M (exp. 0.2%) vs 1.6% MAR [sales increased for second straight month]
Germany Import Price Index 2.3% APR Y/Y (exp. 2.6%) vs 3.1% MAR [-0.5% APR M/M vs 0.7% MAR]
France Producer Prices 2.7% APR Y/Y vs 3.7% MAR
France Consumer Spending 0.4% APR Y/Y vs -1.7% MAR
UK Nationwide House Prices -0.7% MAY Y/Y vs -0.9% APR [0.3% MAY M/M (exp. 0.1%) vs -0.3% APR (1st rise in 3 months)]
UK GfK Consumer Confidence -29 MAY (exp. -32) vs -31 APR (1st positive number in 4 months)
UK M4 Money Supply -3.8% APR Y/Y vs -4.8% MAR
Italy CPI 3.5% MAY Prelim. Y/Y vs 3.7% APR
Italy Unemployment Rate 10.2% APR Prelim (highest in 12 years!!) vs 10.1% MAR
Italy PPI 2.5% APR Y/Y vs 2.8% MAR
Italy Business Confidence 86.2 MAY vs 89.1 APR
Spain Total Housing Permits -27.8% MAR Y/Y vs -36.2% FEB
Spain CPI 1.9% MAY Prelim Y/Y vs 2.0% APR
Spain Retail Sales -11.3% APR Y/Y vs -4% MAR
Switzerland Retail Sales 0.1% APR Y/Y vs 4.7% MAR
Switzerland KOF Swiss Leading Indicator 0.81 MAY (exp. 0.40) vs 0.43 APR
Switzerland Q1 GDP 0.7% Q/Q (exp. 0.0%) vs 0.5% in Q4 [2.0% Y/Y (exp. 0.7%) vs 2.0% in Q4]
Sweden Q1 GDP 1.5% Y/Y (exp. 0.9%) vs 1.0% in Q4 [0.8% Q/Q vs -1.0% in Q4]
Sweden Consumer Confidence 5.9 MAY vs 4.7 APR
Sweden Manufacturing Confidence 0 MAY vs -1 APR
Sweden Economic Tendency Survey 100.9 MAY vs 101.5 APR
Sweden Household Lending 4.8% APR Y/Y vs
Sweden Retail Sales NSA 0.8% APR Y/Y vs 4.2% MAR
Norway Manufacturing Wage Index 0.7% in Q1 Q/Q vs 1.4% in Q4
Norway Unemployment Rate 2.3% MAY vs 2.6% APR
Norway Retail Sales -3.7% APR Y/Y vs 9.6% MAR
Norway Consumer Confidence 22.4 in Q2 vs 17 in Q1
Norway Unemployment Rate 3% MAR vs 3.2% FEB
Finland Business Confidence -12 MAY vs -2 APR
Finland Consumer Confidence 12 MAY vs 10.4 APR
Denmark Q1 GDP 0.3% Q/Q (exp. 0.0%0 vs -0.2% in Q4 [0.2% Y/Y (exp. 0.2%) vs 0.4% in Q4]
Austria PPI 1.1% APR Y/Y vs 1.4% MAR
Belgium Unemployment Rate 7.4% APR vs 7.3% MAR
Belgium CPI 2.81% MAY Y/Y vs 3.18% APR
Greece Retail Sales -15.1% MAR Y/Y vs -11% FEB
Ireland Retail Sales -2.7% APR Y/Y vs -0.9% MAR
Ireland Unemployment Rate 14.3% MAY vs 14.3% APR
Portugal Retail Sales -9.0% APR Y/Y vs -4.5% MAR
Portugal Industrial Production -7.4% APR Y/Y vs -4.7% MAR
Portugal Consumer Confidence -52.6 MAY vs -53.3 APR
Portugal Economic Climate Indicator -4.6 MAY vs -4.7 APR
Hungary Economic Sentiment -24.9 MAY vs -19.3 APR
Hungary Business Confidence -14 MAY vs -9 APR
Hungary Consumer Confidence -55.9 MAY vs -48.8 APR
Interest Rate Decisions:
(5/29) Turkey Benchmark Repo Rate UNCH at 5.75%
(5/29) Hungary Base Rate UNCH at 7.00%
The Week Ahead:
Sunday: Final Opinion Polls for the Greek Election
Monday: Apr. Eurozone PPI
Tuesday: May Eurozone PMI Composite and Services - Final; Apr. Eurozone Retail Sales; May Germany PMI Services - Final; Apr. Germany Factory Orders; May UK BRC Shop Price Index, Lloyds Business Barometer; May France PMI Services – Final; Spain PMI; Italy PMI Services;1Q Finland GDP
Wednesday: ECB Interest Rate Decision; 1Q Eurozone GDP, Household Consumption, Gross Fix Cap, Government Expenditure – Preliminary; Apr. Germany Industrial Production; May UK PMI Construction, BRC Sales Like-For-Like, Halifax House Prices (June 6-8); Apr. Spain Industrial Output
Thursday: UK BoE Asset Purchase Target and Announces Rate; May UK PMI Services, Official Reserves; 1Q France Unemployment Rate; Mar. Greece Unemployment Rate
Friday: Apr. Germany Exports, Imports, Current Account, Trade Balance; May UK BoE/GfK Inflation Expectation Survey, PPI Input and Output, New Car Registrations, Consumer Price Index; 1Q UK GDP – Final; Apr. France Central Government Balance, Trade Balance; Apr. Italy Industrial Production; Apr. Greece Industrial Production
Extended Calendar Call-Outs:
JUNE: Greece to Identify 5.5% of GDP in Austerity Measures
10 June: France – first round of parliamentary elections
14 June: Eurogroup Meeting
15 June: G20 Summit of Finance Ministers
17 June: Greece – probable date for next general election, France – second round of parliamentary election
18-19 June: G20 Summit in Los Cabos, Mexico
20-21 June: Eurogroup Meeting; Ecofin Meeting in Luxembourg
22 June: Greek T-Bill Redemption for 1.3 Billion EUR
28-29 June: EU Summit in Brussels, aim to formally sign off on growth proposals; EC meets to discuss Institutional Affairs
30 June: Deadline for EU Banks to meet €106B capital target/the 9% Tier 1 capital ratio, Iceland – Presidential election
JULY: France – extraordinary session of parliament in July is due to re-draft the 2013 budget
1 July: ESM to come into force
5 July: ECB governing council meeting
19 July: ECB governing council meeting
18-19 October: Summit of EU Leaders
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