The Economic Data calendar for the week of the 16th of July through the 20th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
TODAY’S S&P 500 SET-UP – July 13, 2012
As we look at today’s set up for the S&P 500, the range is 25 points or -0.43% downside to 1329 and 1.44% upside to 1354.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
The Macau Metro Monitor, July 13, 2012
SINGAPORE GDP UNEXPECTEDLY CONTRACTS IN 2Q WSJ
According to advance estimates released by the Ministry of Trade and Industry, Singapore 2Q GDP unexpectedly contracted mainly due to a sequential contraction in the manufacturing sector. 2Q GDP fell 1.1% QoQ on a seasonally adjusted and annualized basis, missing estimates of 0.8% growth. On a YoY basis, 2Q GDP grew 1.9%, missing consensus of +2.4%.
PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR MAY 2012 DSEC
Visitor arrivals in package tours increased by 11.7% YoY to 669,460 in May 2012. Visitors from Mainland China (465,923) went up by 4.9%, with 166,292 coming from Guangdong Province; Taiwan (52,839), Hong Kong (33,485), and the Republic of Korea (24,941) increased by 63.2%, 28.0% and 18.5% respectively.
There were 24,117 guest rooms available at the 97 hotels and guest-houses at end-May 2012, an increase of 2,599 rooms (+12.1%) YoY, with those of the 5-star hotels accounting for 61.1% of the total. The average length of stay decreased by 0.11 night to 1.4 nights.
GOKNOGWEI IN TALKS TO JOIN OKADA FOR VEGAS STYLE, $2BN CASINO BY BAY Philippine Daily Inquirer
Filipino billionaire, John Gokongwei Jr., is reportedly in talks to join Kazuo Okada in the development of his Manila Bay Casino project. According to sources, Gokongwei’s property arm, Robinson Land Corp., has offered to run the gaming and retail operations of Okada’s Tiger Resorts project, worth $2 billion, in Entertainment City, a 100-hectare property on the edge of Manila Bay. Gokongwei, who owns a shopping mall chain, hotel resorts and the country’s biggest budget airline, Cebu Pacific, would be joined in the project by another Filipino billionaire, Andrew Tan, whose property group would handle the land development side of Okada’s casino project.
MGM CHINA LOOKING FOR HK$12 BILLION LOAN Reuters
MGM China Holdings is seeking a HK$12-billion (US$1.55 billion) refinancing loan.
“I get no respect. The way my luck is running, if I was a politician I would be honest.”
I’ve been handed the Early Look pen this morning and thought starting with Dangerfield’s humor was in order. After all, I cover Europe for the macro team and there’s nothing funny about what’s going on in the region. Frankly stated, we don’t see a “bazooka” in Europe over the intermediate term as Eurocrats remain politically divided and in a slow and reactive mode to address sovereign and banking imbalances, slapping band-aids on peripheral woes at every corner, but failing to craft a real “path” forward.
Unfortunately, now the stakes are much higher as Italy is Too Big to Bail. For reference, Italy’s total sovereign debt alone is €1.9 Trillion with €372 Billion in debt coming due in the next 12 months versus the combined EFSF and ESM bailout facilities worth around €700-800 Billion. To boot, markets continued to shake this week on statements from Italian PM and technocrat-in-Chief Mario Monti that Italy may want to tap the Eurozone bailout mechanism to help lower its borrowing costs (the 10YR is currently at 5.99%); that he has no plans to seek another term when elections are called next spring; and on Moody’s downgrade of the Italian sovereign yesterday to Baa2 from A3. And if the political state wasn’t fractured enough, rumors also flew of a Berlusconi comeback. Can you say Bunga Bunga increased risk premium Party!
Interestingly enough, much hangs on the Eurozone’s ability to craft a fiscal union (compact) alongside its monetary union. It is firmer ground on this step that we think is critical before real action can be delivered on such proposed plans as: a banking authority; pan-European deposit insurance; European Redemption Fund; European Financial Transaction Tax; and Eurobonds.
That said, we see the passage of a fiscal compact many months to years out, if ever, as countries will be slow to give up their sovereignty to Brussels/Frankfurt. Further, we’d expect the aforementioned facilities to receive approval after much foot-dragging and politicking as the ECB is likely to be wary of extending its balance sheet as a backstop for the programs while strong fiscal nations like Germany will likely balk at signing off on lower creditworthiness in exchange for the region’s risk (Eurobonds).
However, as these programs stew, the most pressing issue right now is that the European Stability Mechanism (ESM), originally targeted to be operational by July 1 with firepower of €600 Billion, is in limbo given that Germany’s Constitutional Court passed on making a decision on it this week; already German Finance Minister Wolfgang Schaeuble warned that a ruling (in conjunction with the fiscal compact) could be pushed to this Fall!
We mention this indecision on the ESM and fiscal compact from the Germans for a number of reasons:
In the Balance
If the political landscape and potential direction of the Eurozone sounds convoluted, it is! We return to our fundamental view that neither bailouts nor encouraging more borrowing through cheaper money is the solution to Europe's problem of over-indebtedness. That said, we fully realize that when assessing Europe one must recognize that what Eurocrats “should” do (from an economic policy perspective) may be very different from what they “will” do.
Given the runway on a ruling from the German Court and the fact that there are no planned Summits (i.e. catalysts) around which markets could rally over the intermediate term, we expect Crumble Cake Europe to continue to trade on headline risk, and the EUR/USD cross to remain a relative loser until more decisive action is taken from Eurocrats. As we show in the chart below, the cross broke our intermediate term TREND Line of $1.22 this week and is nearing 2010 lows, back when Greece received its first bailout in May.
Should Europe play out as we expect – continued slower growth beyond consensus and Eurocrats socializing weaker members and changing the goalposts along the way– we fear that the next two years across the Eurozone could look a lot like the last two years – short of a default from Italy or more expedient action on such measures as Eurobonds.
I suppose I misspoke at the beginning of this missive when I said there was nothing humorous in Europe. Yesterday, Italy's national statistics office threatened to stop issuing data on the economy, saying that it has been crippled by government spending cuts aimed at reducing national debt.
Whether or not Italy has an agency to report its economic data reminds me of the old philosophical question: “If a tree falls in a forest and no one is around to hear it, does it make a sound?” Unfortunately for the Eurozone, the whole is only as strong as its weakest parts and everyone is forced to listen!
Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $96.76-103.01, $82.81-84.06, $1.20-1.23, and 1, respectively.
Have a great weekend!
This note was originally published at 8am on June 29, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“… part of the Game is the anticipation of how the other players will behave.”
-George Goodman, The Money Game
It’s both fascinating and frightening that central planners will be emboldened by the market’s reaction to their latest plan. Europe is fixed again, and everything is back to being fine until people report their month and quarter end. The duration on that trade = 3 days.
Price Stability Update: At 230PM EST yesterday, the SP500 was tanking, down -1.3% on the day to 1314. An hour and a half later, it was +1.1% higher at 1329. This morning it’s trading up another 16 handles higher than that. This is really starting to rhyme with 2008.
This is one of the many reasons why I am in 94% Cash this morning (up from 91% yesterday and down from 100% last week). Part of The Game is understanding that there are times when the game becomes so volatile and arbitrary that it’s best to get out of the way.
Back to the Global Macro Grind…
If I haven’t been crystal clear on this since March, let me write it one more time – I am bearish on growth. Doing more of what has not worked is only going to slow economic growth further. Central planners do not get that; markets do.
Yesterday’s rip into the close and this morning’s melt-up in the US equity futures only amplifies my greatest fear about markets that are trading purely on the anticipation of the next Big Government Intervention catalysts – government itself.
If you disagree with me, that’s fine. If you think governments do a good job creating jobs, innovation, and confidence, you’re probably thinking they are going to do a great job running our stock markets too.
That’s the long-term TAIL risk. All long-term investors need to acknowledge this and raise Cash on all rallies to lower-no-volume-highs. Since the March top, you’ve had (and, evidently, will continue to have) plenty of opportunities to get out.
Enough about the long-term implications of this market gong show. Since not many people are allowed to invest or manage risk on that long-term duration anymore, here’s how the immediate-term TRADE setup looks for US Equities:
In other words, I’ll cover/buy at 1320 and short/sell at 1365, and let these government people deal with themselves everywhere in between. If 1320 snaps like it did intraday yesterday again, I’ll be recommending prayer.
In Europe, all 3 of our risk management durations (TRADE, TREND, and TAIL) were signaling bearish up until the minute of this morning’s European market open. Now, all immediate-term TRADE lines that were resistance become support:
All the while, the Euro (versus the USD) is having one of its biggest short squeeze days of what was an awful Q2. Trading +1.1% this morning to $1.25, it would have to close > $1.26 to recapture its immediate-term TRADE line of support. So watch that closely.
Again, get the EUR/USD right, and you get a lot of other things right. US Dollar down hard this morning is also why everything from the price of Copper (+2.2%) to almost anything that ticks in US Equities is up. Enjoy your 4th of July tax hike at the pump.
Just don’t confuse government sponsored immediate-term TRADEs with long-term economic prosperity. It’s perverse, but what these people are doing is managing their short-term political career risk for the sake of short-term market pops, to lower highs.
Each lower-high in stock and commodity markets is met with lower and lower market volume. That’s Part of The Game. When The People no longer trust it, they just get out of the way too.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, Spain’s IBEX, and the SP500 are now $1537-1586, $88.36-96.89, $82.19-83.08, $1.24-1.26, 6251-6438, 6698-6913, and 1320-1342, respectively.
Best of luck out there today and enjoy your weekend,
Keith R. McCullough
Chief Executive Officer
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.