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RACE TO THE BOTTOM: The Fed vs The ECB

Once upon a time someone remarked “bigger is better.” A lot of people would kindly disagree with the originator of that statement. Since 2007, the Federal Reserve and the European Central Bank (ECB) have been in a race of sorts to add as many assets to their balance sheet as humanly possible. Looking at the chart of the Federal Reserve’s balance sheet fluctuations below, you can see the original “bazooka” of $800 million that former Treasury Secretary Hank Paulson used in mid-2008. 

 


RACE TO THE BOTTOM: The Fed vs The ECB - FED balancesheet1

 

 

From there, when we have gone one direction: up. When things go wrong and the US doesn’t like it, we slap it on the Fed’s balance sheet. And despite constant asset sales, including the Maiden Lane portfolios that we built from the sewers of AIG, we have yet to reduce the Fed’s balance sheet in earnest.

 

The same goes for the ECB, save for the huge 2008 spike. It has been a gradual climb into 2011 upon which everyone else in the world realized that Greece, Spain, Italy, etc. were all corrupt, out of money and needed bailouts. So now the ECB has a bigger balance sheet from the Fed and Italy has yet to official default or come begging for a bailout yet. Expect the pain to keep coming as the balance sheet continues to rise at the ECB.

 

 

RACE TO THE BOTTOM: The Fed vs The ECB - ECB balancesheet

 

 

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:

 

1. 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.

 

2. 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.

 

Welcome to 2012: the year of the bailout. 


REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND

Initial Claims Are Actually Rising

Initial claims fell 1k last week to 386k. Incorporating the 5k upward revision to the prior week's data, claims fell 6k. Rolling claims fell 0.75k WoW to 387k. On a non-seasonally adjusted basis, claims rose 4k. NSA rolling claims are improving at a rate of ~8% YoY. 

 

Our Thoughts

There is a serial upward revision bias to this data driven by its calculation methodology, but upward revisions normally average 2-3k per week. The prior week's 5k upward revision paints a misleading picture of improving claims. In reality, claims continue to drift higher. This is consistent with our thesis regarding seasonal distortions in the data. We expect seasonally adjusted claims to rise through August before reversing.

 

REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND - Raw

 

REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND - Rolling

 

REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND - NSA

 

REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND - NSA rolling

 

REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND - S P

 

REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND - Fed

 

REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND - YoY

 

The 2-10 Spread

The 2-10 spread tightened 3 bps versus last week to 131 bps as of yesterday.  The ten-year bond yield fell 3 bps to 162 bps. 

 

REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND - 2 10 spread

 

REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND - 2 10 spread QOQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

 REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND - Subsector performance monitor

 

REVISIONS MASK SEASONALLY ADJUSTED INITIAL CLAIMS TREND - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 

 


Cheap Talk

This note was originally published at 8am on June 14, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“My own view is that he will speak eloquently, but that words are cheap, and that the record of an individual is the basis upon which you determine whether they should continue to hold on to their job.”

-Presidential candidate Mitt Romney

 

Since starting Hedgeye almost four years ago, many of our readers have a hard time discerning the political leanings of the firm.  At times we’ve been accused of being Democrats and in other instances we’ve been accused of being Republicans.   In reality, while individuals at Hedgeye have personal political leanings, and we encourage them to get involved in the process, as analysts we are completely objective about politics.  Our job is to analyze the economic policies of politicians and come up with a view of their ultimate impact on asset classes and prices.

 

I highlight the quote above not because I necessarily agree with Romney, but rather because I want to highlight that the political debate is going to only accelerate in the coming months heading into the nominating conventions and ultimately the general election in November.  Romney’s statement above is very accurate in one sense, this election, as they usually are, will be about the performance of the incumbent and the economy under the incumbent.

 

Later today President Obama will be giving a speech that will be the beginning of his campaign’s attempt at taking back the economic debate.  Based on early previews, Obama is likely to focus less on the last three years, a time in which he will claim he shored up the economy, and more on the future prospects for the U.S. economy.  As it relates to the future, Obama will attempt to juxtapose Romney, a wealthy private equity investor, with middle class Americans.   The insinuation being that Romney’s policies will only enrich the wealthy, while Obama will help the middle class.

 

The challenge that Obama faces, especially if he uses only rhetoric and has no new tangible plans, is that the middle class has very much struggled under his Presidency.   The two statistics that the Romney camp repeatedly cites, which are largely accurate, are that no net new jobs have been created under Obama and that median household incomes have declined somewhere in the range of $4,000 per annum under Obama.

 

In the Chart of the Day, we highlight our proprietary Hedgeye Election Indicator (HEI).  The HEI is driven by real time economic price data that correlates closely with polls and ultimately establishes a probability of an Obama re-election.  In line with Romney’s statement that talk is cheap as it relates to economic performance, the HEI bears this out as it has declined to its lowest level in five months at 54%.  As the economy goes, so goes Obama’s re-election chances.

 

In Europe this morning, we are getting increasing evidence that not only is talk cheap, but action itself is cheap.  Specifically, Spanish 10-year yields touched 7.0% overnight.  This is a 91 basis point increase from Monday morning’s bailout lows.  It seems the attempt at containing European sovereign debt issues by adding more debt, without long term structural reform, is actually now being perceived as mere talk by the market, even if the Eurocrats see it as action.

 

Later today we will be publishing a note on Italy.  As much of the media attention is rightfully focused on the pressure points of Spain and Greece, Italy is the third largest economy in the Eurozone , so a much bigger problem than Spain, and its yields and CDS are starting to trade in line with Spain at 6.3% on the 10-year and 554 basis points on 5-year CDS.  With a 120% debt-to-GDP, it should be no surprise that adding more debt in Europe to bail out Spain is not a positive catalyst for Italy.

 

The unintended consequences of failed European bailouts are not only being seen in Italy’s sovereign debt markets, but also broadly in European companies.  This morning the Swiss banks are getting punished.  Credit Suisse is down -8.0% after the Swiss National Bank said they need a “marked increase” in capital this year to prepare for possible escalation of Euro-zone risks.  The Swiss National Bank also recommended that UBS boost capital. 

 

On a more micro level, our Restaurant team led by Howard Penney will be hosting a call on the restaurant industry’s franchise model, and its latent risks, with restaurant finance expert John Hamburger (yes, that is his real name). The crux of the debate is as follows:

 

“The interests of franchisees and franchisors do not always align; in fact, in today’s environment of tight capital supply for small businesses and increasing competitiveness among restaurant companies, they can sometimes diverge.  Through franchising, franchisors gain more stable cash flow, protection from swings in variable costs, and lower expenses.  In turn, franchisees, ideally, gain operational expertise from companies and brand recognition while assuming much of the operational risk of the business.  Most of the decision-making authority pertaining to the business remains with the company and, in difficult business conditions, this can be a source of contention.

 

As franchisors seek to grow royalty fees, decisions made by corporate restaurant executives in the past few years have tended to focus on promotional strategies and capital-intensive store and process alterations.  Of course, as long as the consumer and financing environments cooperate, this behavior may not meaningfully impact the franchisee’s bottom line.  However, with the backdrop of a fragile economy, volatile commodity costs, tight access to capital, and increasing labor costs, there is a potential for friction.  The addition of any controversial business decisions that magnify franchisees’ difficulties all but guarantees disharmony between management and the franchise community.  Examples over the past few years are numerous, from Kentucky Grilled Chicken at KFC to bun toasters at Wendy’s to 99 cent double cheeseburgers at Burger King.”

 

So, in effect are the perceived benefits to the franchisee really just talk?  If you are an institutional investors and would like to join the call and trial our restaurant vertical please email sales@hedgeye.com.

 

As it relates to talk and action, I will leave you with one last quote from President Roosevelt:

 

“The man who really counts in the world is the doer, not the mere critic-the man who actually does the work, even if roughly and imperfectly, not the man who only talks or writes about how it ought to be done.”

 

Indeed.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1586-1633, $96.11-98.85, $81.91-82.46, $1.24-1.26, and 1305-1322, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Cheap Talk - Chart of the Day

 

Cheap Talk - Virtual Portfolio


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 28, 2012


As we look at today’s set up for the S&P 500, the range is 16 points or -0.89% downside to 1320 and 0.31% upside to 1336. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 6/27 NYSE 1589
    • Up from the prior day’s trading of 833
  • VOLUME: on 6/27 NYSE 684.49
    • Decrease versus prior day’s trading of -3.90%
  • VIX:  as of 6/27 was at 19.45
    • Decrease versus most recent day’s trading of -1.37%
    • Year-to-date decrease of -16.88%
  • SPX PUT/CALL RATIO: as of 6/27 closed at 1.56
    • Up from the day prior at 1.55 

CREDIT/ECONOMIC MARKET LOOK:


USA – got “de-coupling”, c’mon already. The Bond market has had this right for a long time, and the 10yr has it right again this morning, looking to break 1.60% again as the Yield Spread (10s-2s) threatens to break-down to new YTD lows. Yield Spread is down -7bps wk-over-wk. Bank earnings (cash, not trading condors) going lower. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.60
    • Decrease from prior day’s trading at 1.62
  • YIELD CURVE: as of this morning 1.30
    • Down from prior day’s trading at 1.31 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP Q/q, 1Q revised, est. 1.9% (prior 1.9%)
  • 8:30am: Personal Consumption, 1Q rev., est. 2.7% (prior 2.7%)
  • 8:30am: GDP Price Index, 1Q revised, est. 1.7% (prior 1.7%)
  • 8:30am: Core PCE QoQ, 1Q revised, est. 2.1% (prior 2.1%)
  • 8:30am: Initial Jobless Claims, June 23, est. 385k (prior 387k)
  • 8:30am: Continuing Claims, June 16, est. 3280k (prior 3299k)
  • 9:45am: Bloomberg Consumer Comfort, June 23 (prior -37.9)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas change
  • 11am: Kansas City Fed Manf. Act., June, est. 4 (prior 9)
  • 11am: Fed to sell $8-8.75b notes in 11/15/2014-6/15/2015 range
  • 11:30am: Fed’s Pianalto speaks in Cleveland
  • 1pm: Treasury to sell $29b 7-yr notes
  • 7pm: Fed’s Fisher speaks in Aspen, Colorado, on U.S. economy 

GOVERNMENT:

    • U.S. Supreme Court will issue its health-care ruling, 10am
    • House, Senate in session
    • Senate Commerce Committee holds a hearing examining whether online advertising industry self-regulation of consumer privacy is providing adequate protections, 10am
    • House Financial Services subcommittee holds hearing, “Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money” 2pm
    • The American Enterprise Institute for Public Policy Research
    • holds a discussion on “Do Money Market Funds Create Systemic Risk?” 2pm
    • SEC Chairman Mary Schapiro to testify before House Oversight subcommittee hearing on Jobs act, 9:30am
    • Interior Dept to announce final 5-year program for offshore oil, gas dev.; Secretary Ken Salazar holding conf. call at 3pm
    • CFPB releases report on reverse mortgages 

WHAT TO WATCH:  

  • News Corp. board said to approve plan to split up company
  • Google unveils $199 tablet in bid to vie with Apple, Amazon
  • Apple said to prepare iTunes changes to improve storage, sharing
  • Watch suppliers, rivals as GOOG unveils ASUS-designed tablet
  • Europe’s leaders today cap their latest effort to check the financial crisis that claimed Cyprus this wk as its 5th victim
  • Nine of the biggest banks are set to deliver plans this wk for how their businesses could be unwound after a collapse
  • Peter Madoff to plead guilty to fraud in brother Bernard Madoff’s Ponzi scheme
  • Amazon.com said to add social features to digital games for tablet
  • T-Mobile USA CEO Philipp Humm will quit, leaving Deutsche Telekom’s U.S. division in search of a replacement as it tries to recover from a failed sale to AT&T last yr
  • AMR says ruling on voiding union contracts delayed by pilot vote
  • Veolia sells U.K. water unit for $1.9b to reduce debt
  • Fed to boost Operation Twist with QE3 jolt: Bank of America
  • Euro-area June eco. confidence falls to 89.9, est. 89.6, is lowest since Oct. 2009
  • Italy sells 2022 bonds to yield 6.19% vs 6.03% on May 30; sells 2017 bonds to yield 5.84% vs 5.66% on May 30
  • U.K. 1Q GDP falls 0.3% in line with previous estimate
  • South Korea cut growth est. for this yr to GDP may expand 3.3% vs Dec. est. +3.7%, announced 8.5t won ($7.4b) of spending
  • Lending to Europe puts U.S. home loan banks at risk, says audit 

EARNINGS:

    • Family Dollar Stores (FDO) 7am, $1.07
    • MSC Industrial Direct (MSM) 7:30am, $1.11
    • Shaw Communications (SJR/B CN) 8am, $0.43
    • Worthington Industries (WOR) 8:15am, $0.52
    • Empire (EMP/A CN) 8:50am, $1.16
    • Accenture (ACN) 4pm, $0.99
    • TIBCO Software Inc (TIBX) 4:04pm, $0.23
    • Research In Motion (RIM CN) 4:15pm, $(0.07)
    • Nike (NKE) 4:15, $1.37

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • Glencore Courts Qatar as Xstrata Tweaks Merger Pay: Commodities
  • Corn Extends Biggest 4-Day Rally in 14 Months as U.S. Crops Wilt
  • Oil Drops in London on Speculation Europe’s Outlook Will Worsen
  • Sugar Ends Rally as Surplus Overwhelms Demand; Coffee Declines
  • Copper Seen Falling as German Unemployment Fans Crisis Concern
  • Gold Erases Gains in London as Dollar’s Strength Erodes Demand
  • Oil Over $100 Seen After Worst Quarter Since ‘08: Energy Markets
  • Koreans Await Monsoon Rains to Break Worst Drought in a Century
  • Corn Peak in 1988 Drought Hints Rally May End: Chart of the Day
  • Hog-Herd Expansion Signaling Losses After Corn Surge Boosts Cost
  • World’s Largest Atomic Plant to Be Started, Tepco Says: Energy
  • Chinese Steel Prices Drop to Two-Year Low on Weakening Demand
  • Thailand Seeks Rubber-Export Limits With Indonesia, Malaysia
  • Monsoon Worst Since 2009 Threatening Crop Prospects in India
  • Indian Exchange Seeks to End Guar Futures Ban Before Sowing 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


GERMANY – been calling this out this week, and it’s really obvious this morning – Germany has more risk now (to the downside) than Spain on our TRADE/TREND equity market signal. After failing at its TRADE line yesterday (6259), the DAX is back into a Bearish Formation, down -1.3%, leading European losers this morning.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – someone needs to tell the Chinese that the Italians are on it, because the dudes in Shanghai are freaking right out at this pt, pounding the Shanghai Comp to fresh new lows (down another 1% last night; down 10.5% since May 4th). *Reminder – any reactionary Chinese stimulus only amplifies #GrowthSlowing.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

 

The Hedgeye Macro Team


WEEKLY COMMODITY CHARTBOOK

Corn and wheat prices increased sharply week-over-week as hot and dry conditions persist across the corn belt fueled speculation that crop yield estimates for the United States would be revised lower when the next USDA WASDE report is released on July 11th. 

 

General Overview


A government meteorologist was quoted in the press today as having said that this year’s weather pattern, which settled into the Great Plains and the Southwest last year and has spread into the Corn Belt, resembles those of 1988.  With corn stockpiles already low, grain prices could have room to run.  Overall over the past week, despite the dollar gaining slightly versus a week ago, commodity prices we follow that pertain to the restaurant space moved higher.  The standouts on a year-over-year basis are chicken wings and wheat on the upside and coffee and dairy, on the downside.

 

WEEKLY COMMODITY CHARTBOOK - commod table

 

Commodity News

 

Beef prices are likely to find support this summer from the dry and hot conditions and the derivative impact on feed costs and herd sizes.  Consumer prices for beef at retail continue to move higher than overall food costs.

 

Chicken supplies remain tight but, on a year-over-year basis, USDA data released today shows that the supply of egg sets is declining by 2% compared to 6% declines seen as recently as April. 

 

WEEKLY COMMODITY CHARTBOOK - egg sets wing prices

 

 

Correlation Table

 

WEEKLY COMMODITY CHARTBOOK - correl

 

 

Charts

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

WEEKLY COMMODITY CHARTBOOK - corn11

 

WEEKLY COMMODITY CHARTBOOK - wheat1

 

WEEKLY COMMODITY CHARTBOOK - soybeans

 

WEEKLY COMMODITY CHARTBOOK - live cattle

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

 

WEEKLY COMMODITY CHARTBOOK - chicken wings

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

WEEKLY COMMODITY CHARTBOOK - milk

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst



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