“Go ahead, yank.”
So, I’m bearish. And I really want to know why the bulls are still bullish. If the bull case at the Q1 top was ‘growth is back, earnings are good, and stocks are cheap’, their entire thesis has to have changed.
Sadly, with Growth Slowing, earnings at risk (73 of the S&P’s 500 companies have already guided lower), and “cheap” getting cheaper, we all know what the bull case is now – bailouts. When centrally planned, those are bearish long-term, too.
If you are like me, publically admitting you are bearish on both the immediate and long-term durations, why wouldn’t you have a big Cash position here? Even for central planners in the post 49BC era, economic gravity has proven to be hard to stop.
Back to the Global Macro Grind…
On the morning of the 19th European Bailout Summit, Global Equity and Commodity markets are red and the Euro is getting yanked right back to $1.24.
Imagine that, after 18 attempts these people think we are all dumb enough to believe that this is going to be resolved. *Long-term Risk Manager Note: piling more debt and leverage on top of this sick puppy is only going to prolong the pain.
That’s what she said.
Corporal Margaret Hastings is one of the American heroes in the book I am finishing this week, Lost in Shangri-La – “The True Story of Survival, Adventure, and The Most Incredible Rescue Mission of World War II.”
The aforementioned quote comes from the point in the story where she was down to weighing about 90lbs, badly burned, and dealing with life threatening gangrene. The paratrooper medic was babying her wounds and she promptly reminded him that “If I were back at Fee-Ask, the GI medic would yank the bandages off and then scrub my legs with a brush.”
God Bless America’s bravest.
The world can learn a lot from realists who aren’t trying to prolong the inevitable. If you can’t handle the idea of letting free-market prices clear, the market’s underlying wounds do not care. Eventually, they need to be addressed. At this point, doing more of the same to perpetuate debt mounting and Growth Slowing has reached the height of political cowardice.
Stock, Commodity, Currency, and Fixed Income markets get that. That’s why, when I take a step back and look at the context of these no-volume rallies like we had yesterday, I get more concerned, not less.
Looking at the internals of the SP500 yesterday, here are the key points:
- PRICE – both TRADE (1336) and TREND (1365) lines of resistance remained intact
- VOLATILITY – both TREND (18.22) and TAIL (14.26) lines of support remained intact
- VOLUME – yesterday’s volume was one of the worst (on up days) of the year
On that last point, I have been measuring average down day volume versus up day volume in Q2 as a proxy for both conviction and money flows. Yesterday’s volume was down a shocking -28% versus the average down day volume of the last 6 weeks.
The other obvious point about yesterday’s rally was that the nasty stuff was up the most. In other words, the worst performing Sector (Energy is down -7.4% YTD) led low-volume gainers, whereas one of the best performing Sectors (Consumer Discretionary is +10.5% YTD) led decliners.
This daily observation is very short-term, but it certainly rhymes with my basic long-term conclusion that bailouts will only structurally slow growth at an accelerating rate. Up Energy/Food price days slow real (inflation adjusted) economic growth.
Whether central planners targeting “asset price inflation” get that or not yet remains the most obvious question Romney should be asking Obama, repeatedly, during the Presidential Debate. If I were Romney, I’d label Bernanke as Obama (and Bush’s) guy. I’d also constantly pound on the point that the Europeans are now behaving like Hank Paulson and Bernanke did.
What happens when the Europeans eventually release their Paulson/Geithner “bazooka” anyway?
- The Euro could easily snap $1.22 and put “parity” back in play
- On that, the US Dollar is going to rip – say $84-85 on the US Dollar Index
- Commodity prices (and the equity markets priced off their top-line assumptions) will keep getting rocked
Maybe we get that at the 23rd Summit?
This folks is what Paulson/Geithner/Bush didn’t understand about free market prices in 2008, so don’t expect Geithner/Hollande/Obama to get it now. After the 2008 $800B Bazooka was deployed, that’s why Paulson yanked himself towards a garbage can for immediate-term relief.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1, $88.16-93.39, $82.23-82.91, $1.24-1.26, 6085-6259, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
The Macau Metro Monitor, June 28, 2012
NO CHANGES ON VISA RULES: MACAU GOV'T Macau Business
The Macau Government Tourist Office says it has received no notice of any changes on visa issuing by mainland authorities. The comment came after a report over the weekend by Macau Daily News suggesting that mainland authorities were tightening Individual Visit Scheme visas. “We have not received any notice on China tightening visa issuance to visitors traveling to Macau,” said Gigi Chiu, spokeswoman for the Macau Government Tourist Office.
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Given recent acquisitions by Starbucks, it seems that management sees baked goods and pre-prepared cold drinks as being significant drivers of Starbucks stores’ comparable sales growth going forward.
We have had reservations about the La Boulange acquisition from the day the news was released. Our view then was that expanding the La Boulange brand throughout the Starbucks stores' national footprint would be a capital intensive venture with less-than-certain results. Our stance has not changed in the interim. A post published on Monday by reputed baker Maury Rubin on his blog, City Bakery Daily, described the Starbucks-La Boulange deal as being “one for the ages” for those “on the ground in bakery land”.
Starbucks’ rationalization of the acquisition centered on the following points:
- We see an incredible opportunity to bring the artistry of the best French bakery product to the U.S. marketplace in a similar way that Starbucks bought the romance of the Italian espresso bar to many American coffee consumers for the first time.
- With this acquisition, we will make an investment in our core part of our business, while also building and romancing the La Boulange brand into the nation's best premium retail bakery cafe experience.
- Our key strategic goal will be to introduce artisan bakery products under the La Boulange brand into our stores in the U.S., giving customers more reasons to frequent and enjoy their experience during multiple day parts and as a result, drive incrementality within existing and new stores.
Mr. Rubin’s post on City Bakery Daily makes several assertions that seem to bring many of the underpinnings of Starbucks’ above statements into doubt. His writing suggests that there could be some logistical impediments to Starbucks’ realizing its vision of La Boulange being the nation’s best premium retail bakery café brand. Here is one paragraph that highlights one important issue facing Starbucks’ vision for the bakery brand.
“Many years ago, when Starbucks first moved into New York City, they asked if City Bakery would consider being a supplier of baked goods. I was completely interested, until I learned the required delivery schedule: orders needed to ship to a central location by 6pm to be sold the next day. In our bakery, then as now, we bake every thirty minutes all morning long. The goal is to have pastry on our counter that was in the oven within the hour when bought. For Starbucks, we would need to have baked 15-18 hours before the fact.”
Clearly, the implication is that for the La Boulange brand to become synonymous with quality, distinguished from other brands of baked goods offered in cafe settings, significant investment will be required. Mr. Rubin calls it a “Marshall Plan-like approach” in terms of investment in operations. Our view is that Starbucks is not going to retrofit its stores to bake on site; Mr. Rubin notes that he recently read that the average operating profit margin for bakeries nationally is 3.5%. The final sentence of Mr. Rubin’s post asks the question all investors in Starbucks need to be focused on; “with $100 million already spent [on La Boulange], will it cost Starbucks tens of millions more to actually get the quality they seek into customer's hands?”
Conclusion: The ECB has massively increased its balance sheet over the last six months relative to the Federal Reserve. This trend is likely to continue, which is bearish for the Euro.
In the race to the bottom of the world’s currency markets, the actions of both the Federal Reserve and the ECB are central (no pun intended) to determining the relative value of currencies. In the charts below, we show the increase in the balance sheets of both central banks starting from 2003 to the most recently released data from this week.
In aggregate, both charts show the massive amount of stimulus that central banks have injected into the global economies over the past nine years with the vast majority coming in the last three years with the onset of the “Great Recession”. In aggregate, since 2008 the two central banks have added more than $4 trillion to their balance sheets.
Over recent quarters, the Federal Reserve has halted the expansion of its balance sheet. In fact, from the start of the year to the most recent data reported on June 20th, 2012, the Federal Reserve has actually seen its balance sheet decline marginally by about $43 billion, or just under 2%.
In the same period, the balance sheet of the ECB has expanded by an estimated $410 billion. This is an increase of just under 12% for the ECB’s own balance sheet, a dramatic relative increase versus the Federal Reserve’s decline of 2%.
The primary driver of this relative acceleration in the size of the ECB balance sheet has been the ECB’s LTRO 1 and LTRO 2. In aggregate, these two programs have handed out more than $1.3 trillion to more than 1,000 European banks. Collectively, this is larger than the Federal Reserve’s much ballyhooed TARP program and quantified easing (albeit QE is a different policy tool, as well).
As the ECB has taken a much more aggressive stance with its balance sheet, it should be no surprise then that the Euro has had a serious correction versus the U.S. dollar in the year-to-date. This decline has been accelerated over the past three months as the FXE, the CurrencyShares Euro Trust etf, is down 6.3%. (Incidentally, we’ve had some solid success trading the FXE, being correct 13 of 16 times in the Virtual Portfolio with the aggregate gains substantially larger than the aggregate losses.)
Since 2010 the relative size and relative growth of the Federal Reserve’s balance sheet versus the ECB’s has had a direct correlation with the value of the Euro versus the U.S. dollar. Even as the Euro has weakened versus the U.S. dollar in 2012, it does seem as if some of this lock step relationship has alleviated, which may imply further downside in the Euro versus the U.S. dollar.
If we accept that the future direction of the size of the central bank’s balance sheet is a decent proxy for either more hawkish or more dovish monetary policy, then there are a couple of scenarios:
- QE3 is imminent – In effect, the currency market is pricing in incremental quantitative easing from the Federal Reserve. Based on the most recent commentary from the Federal Reserve, this seems to be an unlikely scenario in the intermediate term as they did nothing last week but extend Operation Twist. In effect, this action is merely equivalent to not tightening.
- QE3 is not imminent and intervention in Europe continues – If the monetization of debt / lender of last resort continues to be an ECB led activity, the balance sheet of the ECB should continue to expand. Given the situation in the European banking system, this seems a very likely scenario. In fact, as we’ve highlighted, Italy and Italian banks are the next potential shoes to fall in Europe with massive pending maturities and accelerating credit default swaps. It is highly likely that the ECB will continue to have to step up and support its banking system.
The growth in size of the respective balance sheets of the ECB versus the Federal Reserve is a key factor in determining the direction of the currencies. The recent expansion of the ECB balance sheet and likely continued expansion portend negatively for the Euro versus the USD.
Daryl G. Jones
Director of Research
When you think of Las Vegas, you don’t just think of gambling – you think of shows, concerts, debauchery, nightclubs and a slew of other entertainment options. When you think of Macau, you strictly think in terms of gambling and numbers. Despite Macau’s meteoric rise over the last decade, it appears that the amount of VIP high rollers is tapering off and has been since last September. Growth slowing is not something new and abrupt – we have been banging our fist against the table, noting how slowing growth is a global phenomenon not limited to the US and Europe.
Based on the prior two months of data, we’ve estimated projected Junket VIP volume growth for the rest of FY2012. Decellerating macro factors combined with an sluggish global economy has led slower growth and declining volumes in Macau’s VIP market. When the VIPs begin to drop out, both the hitters and regulars will also begin to take flight. This leads to another factor that keeps investors worried: gross gaming revenue growth (GGR). If GGR goes negative, returning to growth will be a long, dragged out journey.
For active traders, names like LVS and MPEL may be attractive at lower levels, but we caution about hopping into them over a short-term TRADE duration. It will take some time for these names to appreciate and build their growth and revenue back up, so we favor the longer-term TREND and TAIL durations.
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