July ECB Presser YouTubed

--Below we’ve dictated the major highlights from the ECB’s Q&A press conference this morning. A few key take-ways include that President Mario Draghi gave little color on the size, shape, or scope of a European banking authority (as discussed at last week’s EU Summit), including if the ECB would be a backstop for the future facility.  He continued to highlight that the pass-through effects of the LTROs have not been fully realized and gave no further detail on future measures such as another LTRO or the re-engagement of the SMP down the road. Speaking less to the duty of individual governments to stay the course of fiscal consolidation, Draghi’s comments suggested that there’s still a long road to sorting out a banking supervisory mechanism in this highly “fragmented” environment for banks and sovereigns, as lending from either the EFSF and future ESM could have different consequences for the banks and sovereigns. Draghi did not rule out future interest rate cutting, and noted that economic growth remains weak, with “heightened uncertainty weighing on confidence and sentiment.”  In our assessment, today’s 25bps cut leaves the door open for future cuts into year-end.


At the Governing Council of the ECB meeting today the ECB cut the interest rate on the main refinancing operations by 25bps to 0.75%; cut the interest rates on the marginal lending facility by 25bps to 1.50%; and cut the deposit facility 25bps to 0.00%.


You can find Mario Draghi’s Introductory Statements to the press conference related to inflation, growth and monetary outlook here. We have no major changes in language versus June's script to highlight. 



Highlights from the Q&A:


-We see a divergence in bank lending across Europe, and heightened risks in Spain and Italy. What can be done to mitigate these risks?   MD: The idea that the ECB could channel funds via a bank lending channel to a specific category of firms or households is as wrong as those that say the ECB shouldn’t buy government bonds. Both ideas are very hard to implement. What the ECB has done is broadened collateral standards to be more inclusive of all banks.


-What if Italy needs aid? Is the structure of EFSF/ESM large enough?   MD: No answer.


-Will all banks be included in a pan-European banking supervisory?   MD: It’s too early to answer these questions. A few general messages: (1.) The EU council has made important steps towards a financial market union. Leaders committed substantial political capital towards a union. (2.) Whatever the proposal will be, the ECB should be placed in a task to carry it out in an independent way without risk of its reputation. (3.) Any new task should be separated from monetary policy tasks. (4.) The ECB should remain independent to carry out this work. (5.) We will work with national supervisors (National Central Banks). ( 6.) New tasks will be given a higher level of democratic accountability.


-Is the ESM big enough, large enough in scope?  MD: How big is enough? We know what we have. We have to make it work. I think that the ESM and EFSF with their new modalities are adequate to cope with the risks/contingencies that we can envisage now.


-Should the ECB back the ESM and give it a banking license?   MD: We believe the institution should hold up to its mandate. As we speak the details of this issue are still being discussed. [ = non answer]


-Was the decision to cut 25bps unanimous?   MD: Unanimous.


-With your decision to cut the deposit rate to 0%, what’s your response that banks are still not using the money to pump it into the economy?   MD: We still need time to see the impact of two LTROs.


-Will we see additional LTROs or temporary measures?   MD: We never pre-commit.


-How much coordination today, with Bank of China and BOE?   MD: No coordination beyond normal exchange between central banks.


-There has been talk that ECB staff feels overworked given the environment over the last two years. Is this an operational risk and are there plans to hire more staff?  MD: We’ve taken some measures to alleviate this stress and we may increase resources. 


Matthew Hedrick

Senior Analyst


Claims Strength Attributable to Ford Not Idling Plants - A Healthy Sign

This morning's jobless claims number was better than expected primarily because of a decision by Ford to idle 13 plants for just one week this summer instead of two. Factory workers are allowed to collect unemployment insurance during these idling periods. As the chart below shows, weeks 27 and 28 normally reflect large increases in NSA claims while the plants are closed. This reverses in weeks 29 and 30 as the plant resume production. The average WoW rise in NSA claims in the comparable week over the last five years has been 42k compared to the decline in NSA claims of 3k in this morning's print. 


Initial jobless claims fell 12k last week to 374k. Incorporating the 2k upward revision to the prior week's data, claims fell 14k. Rolling claims fell 1.5k WoW to 386k. On a non-seasonally adjusted basis, claims fell 3k. NSA rolling claims are improving at a rate of ~7% YoY, which is a further decline in the rate of YoY improvement - a worrisome sign. 


















The 2-10 Spread

The 2-10 spread widened 1 bp WoW to 132 bps, while the ten-year treasury yield rose 1 bp to 163 bps. 






Financial Subsector Performance

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






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. 


TODAY’S S&P 500 SET-UP – July 5, 2012


As we look at today’s set up for the S&P 500, the range is 15 points or -0.66% downside to 1365 and 0.44% upside to 1380.








THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: on 7/3 NYSE: +1773
    • Versus prior  trading day +1255
  • VOLUME: on 7/3 NYSE 466.46
    • Versus prior trading day 736.11
  • VIX:  on 7/5 closed at 16.66
    • Change versus most recent trading -0.8%
    • Year-to-date change of -28.8%
  • SPX PUT/CALL RATIO: as of 7/3 closed at 1.40
    • Versus prior trading day 1.68                     




TREASURIES – if you asked the bond market for US Growth’s slope for the last 5 yrs, she’d have given you all you need to know over the intermediate-term TREND. Breaking down to 1.59% this morning, the 10yr is already down -5bps this wk and the Yield Spread (10s minus 2s) is hitting a new low of +129bps wide. Very bearish for the financials (and US growth assumptions).


  • TED SPREAD: as of this morning: 37.85
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year yield: as of this morning 1.62
    • Versus prior trading day 1.63
  • YIELD CURVE: as of this morning 1.33
    • Versus prior trading day 1.33



  • 7am: MBA Mortgage Applications, June 29 (prior -7.1%)
  • 7am: Bank of England announces interest rates
  • 7:30am: Challenger Job Cuts Y/y, June (prior 66.7%)
  • 7:45am: ECB announces interest rates
  • 8am: RBC Consumer Outlook Index, July (prior 46.1)
  • 8:15am: ADP Employment Change, June, est. 100k (prior 133k)
  • 8:30am: Initial Jobless Claims, June 30, est. 385k (prior 386k)
  • 9:45am: Bloomberg Consumer Comfort, July 1 (prior -36.1)
  • 10am: ISM Non-Manf. Composite, June, est. 53 (prior 53.7)
  • 10am: Freddie Mac mortgage rates
  • 11am: Fed to purchase $4.5b-$5.5b notes in 8/15/2020 to 5/15/2022 range
  • 11am: U.S. Treasury to announce 3-, 10-, 30-yr auction sizes
  • 11am: DoE Inventories
  • TBA: ICSC Chain Store Sales Y/y, June (prior 1.7%)



  • President Obama begins 2-day bus trip through Penn., Ohio
  • House, Senate in recess



  • Volkswagen to buy remaining stake in Porsche for $5.6b
  • Retailers issue monthly sales reports
  • Bank of England, European Central Bank announce rates
  • Euro fell yday as German svcs dropped bef. ECB; copper slid
  • Canada Competition Bureau approves Maple’s TMX purchase
  • Japan regulator OKs merger of nation’s 2 biggest bourses
  • Exxon Mobil said to explore sale of German Esso gas stations
  • ‘Spider-Man’ generated $35m in ticket sales in opening day
  • Service Industries in U.S. Probably Expanded at Slower Pace
  • China Seen Entering Deflation, Credit Suisse Says
  • France Sells EU7.8b at Bond Auction, Yields Rise



  • Milk Rallying as New Zealand-to-U.S. Weather Sours: Commodities
  • Copper Gains as Chinese, European Central Banks Reduce Rates
  • Brent Oil Rallies to 1-Month High as Statoil Set to Halt Output
  • Paris Wheat Jumps as Dry Weather Cuts Supply From U.S. to Russia
  • Food Prices Seen Climbing This Month by FAO After June Decline
  • Biggest Wheat Sale From India Since 2004 Seen Halting Rally
  • Gold Futures Drop in New York After ECB Cuts Interest Rates
  • Putin Gains From Iran Pain as Russian Oil Surges: Energy Markets
  • Baltic Exchange Seeks to Double Asian Membership as Trade Shifts
  • Japan Reduces Spot LNG Purchases as Prices Soar to Near a Record
  • Palm Oil Climbs as Much as 0.9% to a One-Month High
  • Ukraine Lowers Corn Crop Forecast 8% as Fields Scorched by Heat
  • Commodities Seen Advancing as Much as 10%: Technical Analysis
  • Oil Drops in New York on Europe, U.S. Data
  • Repsol Junk Prospect Risks Alaska to Angola Expansion: Energy
  • Ghana Expects to Invest $20 Billion in Oil With Tullow, Anadarko
  • Rubber Declines From Five-Week High as Oil’s Drop Reduces Appea











SPAIN – the IBEX rallied from its crashing lows to -20% here from its YTD high; failing here would be a very bearish signal; the intermediate-term TREND line for the IBEX = 7141, so watch that and Germany’s (6567 DAX) closely today/tomorrow.


THE HEDGEYE DAILY OUTLOOK - euro performance




CHINA – Shanghai Comp down another -1.2% overnight, so it looks like American and European central planners are going to need a bigger bailout. Don’t forget China’s GDP slowdown report for July is on the 17th. By that time Global Growth and company earnings slowing will be what drives this market’s decision (volume should be real then too)


THE HEDGEYE DAILY OUTLOOK - asia performance




  • Dubai’s Stocks Complete Biggest Weekly Gain Since March on Emaar
  • GCC Bank Yields Drop as Capital Can Withstand Risks: Arab Credit
  • REITs at Records on Payouts Set to Beat Stocks: Islamic Finance
  • Dubai Duty Free Gets $1.75 Billion in 6-Year Syndicated Loan
  • Qatar National Bank Is Set for Highest Close Since May on Profit
  • Emaar Posts Biggest Weekly Gain in Five Months: Dubai Mover
  • Qatar Said to Start Investor Meetings July 9 for Sukuk Sale
  • Iran Oil Tankers Signal China in Sign Storage May Be Concluding
  • No Apology Needed as Contraction Boosts Bonds: Turkey Credit
  • Egypt Pound Set for First Weekly Gain in Five; Dollar Bonds Gain
  • Brent Oil Exceeding $100 a Barrel ‘Sustainable,’ Mirae Says
  • Wall Street Bank Investors in Dark on Liability of Libor Probes





The Hedgeye Macro Team

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Baby Bust

“Every child begins the world again.

-Henry David Thoreau


Deciding to start a family is an incredibly hopeful act and one that reflects in part the national mood.  It should be no surprise then that birth trends in the United States peaked in 2007 and then began a long period of deceleration and decline over the subsequent 5 years.  Births were still declining in 2011 and look likely to continue to slow in 2012, reflecting the shifting landscape of global economic concerns.  There are glimmers of hope, however, and a recovery bodes well for many stocks in Healthcare, but in particular Hosptials.


There is a large body of academic work that describes how individuals and families consume, save, and plan over their lifetime.  The broad name of the field is Life-Cycle Hypothesis (   In the simplest terms,  an individual  behaves in predictable ways over their lifetime.  They buy a home, invest in stocks, have children, reach their peak income, among many things,  in predictable ways over their lifetimes.  For Healthcare, they also age, which begins an accelerating cycle of doctor visits, medications, and hospital stays.  The key point though is that theses consumption patterns are distinct at discrete age groups.   Looking then at the historic pattern of peaks and troughs of births tells a story of predictable consumption in the future.


What makes understanding these consumption patterns worth thinking about is the wide variation in birth trends over the last 100 years, including the last five years of declines in the United States.  Birth trends fell in the 1920s and 1930s, which has been a present day problem for Nursing Homes and Senior Living in recent years as the growth in their key customer base has slowed.   The Baby Boom following WWII led to the great healthcare boom of the 1990s and early 2000s as Boomers aged through the period in their life when healthcare consumption begins to accelerate in earnest.  It helped too that they had reached peak earnings (late 40s) and peak disposable income (50s).


For Hosptial companies birth trends play a major role in admission trends, making up over 20% of the total hospital admissions.  While there have been many issues facing hospitals including reimbursement pressure from states cutting Medicaid, cuts to Medicare writen into the Affordable Care Act, and pressure from private insurers through rates and rising out of pocket expenses for their enrollees, the slowdown in births has been the least discussed. 


Our analysis shows that over the last 5 years, the differnece between the predicted number of births, based on per capita birth rates by age and the number of women entering child bearing years, and actual births has created a cummulative deficit of between 530,000 and 1,600,000 babies not being born.  Considering that there were 4.3M births in 2007, the magnitude is indeed relevent.  Further, uncovering where the inflection point of a recovery lay in the furture will be a meaningful catalyst for admission trends for Hosptials.  In addition to slowing birth related admissions, Hosptials have experienced pressure on admissions from everything from Knee Replacements to Cardiovascular surgeries.


Our best forecast about the timing of a recovery in births in the United States is that we will see them turn positive in Q412.  However, over the next two quarters, trends will remain soft and in fact appear to be weakening further sequentially.  This will have a negative impact on Hospital admission trends, revenues, and earnings.  Weighing the short term weakness against the longer term acceleration will be our key focus over the next few quarters. 


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1, $97.47-101.71, $81.59-82.39, $1.24-1.26, 6, and 1, respectively.


Tom Tobin

Managing Director Healthcare


Baby Bust  - EL 7 5


Baby Bust  - VP 7 5


This note was originally published at 8am on June 21, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible."

- John Maynard Keynes


That’s a quote from Chapter 12 of Keynes’ General Theory, “The State of Long-Term Expectation.”  Much of Keynes’ work was marginalized by the economists that were influential shortly after him – namely John Hicks – particularly the existence and importance of uncertainty in investment.  As a result, what is today considered Keyensian Economics is hardly the economics of Keynes (Steve Keen, 2011).  Hyman Minsky – the preeminent economist on fragility in financial markets – wrote in 1975 that, “Keynes without uncertainty is something like Hamlet without the Prince.”


This Early Look is not on Keynes – you’re welcome – but on uncertainty and oil prices.


As an energy analyst, I read a lot about oil markets.  One of the latest topics #trending on the subject is the price of oil approaching the marginal cost (MC) of production; this one always seems to get popular when oil prices drop precipitously, as it’s a go-to reason to ‘buy-de-dip,’ say the perma-bulls.


The MC of production is the change in total cost that comes from producing one additional unit of a good – a bicycle, a bushel of corn, a barrel of oil.  It is an important economic concept that determines the price of that good for a given level of demand.  On a long enough duration, the price of oil will converge around the MC because should price fall below the MC, the MC producers will not put incremental capital to work to arrest natural production declines, leading to a shortage and rising prices; and should price rise above the MC, it incentivizes production above what is demanded, leading to a surplus and falling prices.


Yes, MC matters, and yes, oil prices will track it over the long-term.  But the idea that the MC of oil production, and with it the oil price, is permanently headed higher – a popular opinion – is a fallacy.  Consensus is comfortable, and after a decade-long rise in the MC from $25/bbl in 2001 to $90/bbl in 2011 why would the next ten years be any different?  But the future is, of course, unknowable, and to deal with that inherent uncertainty “the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations” (Keynes, 1937).  In other words, only after oil prices have increased 15% p.a. since 2001 does a deflating oil price seem implausible. 


In general, though, commodities – even non-renewables (fossil fuels) – do not tend to hold their real value over the long-term, proving poor investments.  New technologies, greater efficiency in extraction and production, and the substitution of one commodity for another (at one time our primary fuel was wood, then it was coal, today it is oil) drive the MC of production lower, and with it real prices.  After adjusting for inflation, major industrial commodity prices fell 80% between 1845 and 2002, though regained some of that lost ground over the last decade in a fantastic commodities bull market (The Economist, 2011).   Only gold and oil have held their value in real terms, and, indeed, oil has been a spectacular investment over the last decade, gaining 300%.  It is easy to forget, though, that the real price of oil in 2000 was no higher than it was in 1950.


We can point to a number of reasons why the MC of oil supply and the nominal price of oil have meaningfully outpaced inflation over the last decade, though easy money and China’s incredible investment boom top our list.  Others point to the decline in easily accessible oil reserves and rising social costs of Middle East nations, but we see less validity in those theses.  New technologies and greater efficiencies can counter harder-to-reach reserves; and oil exporters’ government budgets are pro-cyclical. 


In fact, most costs are pro-cyclical.  The relationship between the MC of oil production and the oil price is a classic example of mutual causality.  Is the price of oil higher because rig rates, steel pipe prices, production taxes, and labor costs are higher?  Or is it that rig rates, steel pipe prices, taxes, and wages are increasing because the oil price is?  Both occur simultaneously and as a result, the MC of oil production is just as much a moving target as the price is – not some Rock of Gibraltar level of support.


We’ve seen this movie before.  In constant dollars (year 2000) the price of US coal decreased from $31.40/short ton to $16.84/short ton between 1950 and 2003; in other words, after adjusting for inflation, coal prices have fallen more than 1% p.a. since 1950.  This trend is due to a decline in the MC, or “marked shifts in coal production to regions with high levels of productivity, the exit of less productive mines, and productivity improvements in each region resulting from improved technology, better planning and management, and improved labor relations” (Edward J. Flynn, 2000).  Those trends persist today, and the high cost coal producers are gasping for air (pull up a 5Y chart of PCX or JRCC).


And of course, we have US natural gas, which has fallen in nominal terms from $12/Mcf in 2008 to $2.50/Mcf today in a stunning display of how technology and innovation can lower the marginal cost and price of a fossil fuel.  Visions of permanently high natural gas prices prompted a build-out of LNG import facilities in the mid 2000’s.  Alan Greenspan (clearly an expert on the subject!) said in 2003 that, “high gas prices projected in the American distant futures market have made us a potential very large importer.”  With impeccable timing, Cheniere’s Sabine Pass received its first cargo of imported gas in April 2008, and now that same visionary company will spend $6.5B to export gas by 2017 (nat gas bottom?).  And this wasn’t the first time the gas bulls were fooled.  After years of rising natural gas prices in the 1970’s, four major LNG receiving terminals were constructed only to see gas prices peak in 1983 and decline for the next 15 years; three of those plants were eventually mothballed.


Is the rapid increase of the MC of oil production and oil prices any more “secular” than it was for natural gas in the 2000’s?  Will Chinese demand for commodities grow at the same pace over the next ten years as it did for the last ten?  What would sustained US dollar strength do to commodity prices, oil in particular? 


The confidence one can have in answering such questions is limited, perhaps even “negligible” (Keynes), but few in this Game accept that.  It’s funny – you don’t often hear investors or analysts say, “I don’t know,” but when consensus is proven really wrong, the all-too-common excuse is, “How could I have seen this coming?”


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1590-1614, $91.20-96.79, $81.21-82.02, $1.24-1.27, and 1333-1362, respectively.


Kevin Kaiser



CRUDE QUESTIONS - oil v usd 20



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