“Comanches adapted to the horse earlier and more completely than any other plains tribe.”
Man is competitive. So am I. As a team, we wake up to this world every risk management morning looking for a better way. That’s progressive. That’s how we evolve as a people. Anyone in this profession who does not get this will be left behind.
The aforementioned quote comes from the American Indian history book I have recently cited, Empire of The Summer Moon. It’s a stiff reminder of how harsh life has been. Not every man who attempted to settle in 18th century Texas was given a sticker.
Since launching our Q3 Global Macro Themes in early July, we’ve been riding the same horse that has had us calling for #GrowthSlowing since March. Our horse uses modern day math and machines. We don’t ask the Old Wall for permission to make calls on the direction of Growth Slowing’s Slope. We let Mr. Macro Market tell us which way our horse needs to ride next.
Back to the Global Macro Grind…
Evidently, shorting the SP500 at its 1375 TREND level was a better than bad risk management decision to make. Friday’s -1% selloff in the US stock market came on the heels of both Spain and Italy closing down -6.3% and -4.7%, respectively, week-over-week.
Not to be confused with the fictional storytelling that global growth is “decoupling”, one of our most stealth front-running horses of Global Economic Growth, South Korea’s KOSPI index, told us the same story as structurally impaired Western Europe did. The KOSPI was down -4.3% week-over-week, testing its YTD lows.
This morning, neither Asian nor European Equities are telling you that anything about #GrowthSlowing has changed. Neither is the US bond market. Nor are corporate revenues. Neither are the prices of oil and copper.
Before I come back to touching dogmatic taboo of “growth is fine and earnings are great”, let’s grind through some of the aforementioned risk management signals:
- US Equity Futures down 14 handles
- Japanese Stocks (Nikkei 225) = -1.9% (down -17% since March, remaining in a Bearish Formation)
- Chinese Stocks (Shanghai Comp) = -1.3% (down -13% since May, remaining in a Bearish Formation)
- Hang Seng -3.0%, KOSPI -1.8%, and India’s Sensex -1.4% (all Bearish Formations)
- European Stocks (EuroStoxx50) = -2.2% (down -16% since March, breaking TREND again)
- Spanish Stocks (IBEX) = -4.3% (crashing, down -33% since March)
- Italian Stocks (MIB) = -3.3% (crashing, down -26% since March)
- Russian Stocks (RTSI) = -3.2% (crashing, down -23% since March)
- Oil (Brent) = -3.2% (backing off hard from where we shorted it on Thursday)
- Copper = -2.7% (backing off at its intermediate-term TREND line of 3.64/lb, much like the SP500 did)
- Treasuries (UST 10yr) = down another -5bps this morning to 1.41% (new lows)
- Yield Spread (10s minus 2s) = down another -6bps this morning to 120bps wide (narrowest YTD)
- Euro (vs USD) = down, again, testing $1.20 (after snapping its 2010 lows last week and now confirming)
I’ll stop there, at lucky thirteen.
How about that beloved “earnings season”? With almost 200 of 500 companies in the SP500 having reported, at least 50% of them have already missed on revenue expectations (worst quarter since 2008). Two of the key Sectors in the SP500 (Financials and Industrials) look nothing like the “SP500 is flat for July” as they are down -1.8% (XLF) and -1.4% (XLI) for the month-to-date.
Oh, but never mind the revenues, ‘earnings are good.’ Really?
- Earnings are lagging indicator (not a leading one) anyway
- Revenues are leading indicators for Growth Slowing’s Slope
As our everything Financials guru, Josh Steiner, wrote in his research note to clients on Friday afternoon, the expectations mismatch between “reported” earnings and revenues is widening to the bearish side of Growth’s Slope:
1. EPS: 17 out of 33 companies (52%) have beat consensus EPS estimates, while 11 were in line, and 5 have missed. Keep in mind that we are looking at the optical (unadjusted) numbers.
2. Revenues: 6 out of 33 companies (18%) have beat consensus revenue estimates, while 20 were in line and 7 missed. For reference, we consider 2% or greater above the estimate a beat.
In other words, whether it’s GDP in Spain or the top line revenues of a company, get Growth’s Slope right, and you’ll get a lot of other things less wrong.
Oh, and if you’re in a performance foot race and want to be right instead of less wrong, ride a Global Macro horse.
My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $103.01-108.16, $83.18-83.99, $1.20-1.22, 5, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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40% of people intend to shop on-line for this back-to-school, per the NRF’s annual survey. This compares to 32% last year, and 21% in 2007. In other words, 42% of the 5-year increase in on-line intent has taken place over the past 12 months. If this survey is accurate, this is big.
Flying in the face of a deceleration in sales out of eBay’s GSI Commerce yesterday, the NRF released its back-to-school survey with surprising results. We usually take many of the National Retail Federation’s surveys and statistics with a grain of salt, but this one is tough to ignore. Per its latest survey, 39.6% of consumers intend to shop online for back-to-school supplies and clothes. While that’s a big number in itself, it is nearly an 800bp acceleration from the 31.7% ‘intent to purchase online’ surveyed exactly one year ago. The rate was 21.4% back in 2007. Translation – ecommerce is accelerating meaningfully. This is why we like companies who are moving forward with a strategy to get 40-50% of sales online. They might not ever get there, but these draconian moves are necessary. Companies that target just 8-10% will be left in the dust.
Chart of the Day: CAT in 70s Resource Investment Bubble
- Investment in mining and resources in the US and globally at cyclical highs, which has helped capital equipment producers like CAT.
- Below, we can see what happened to CAT when the 1970s resource investment boom gave way
- CAT upped its exposure to these markets with the acquisition of Bucyrus last year, at what looks like the peak of resource investment spending
- If history rhymes in this investment cycle, CAT holders may be looking at years of relative underperformance
No Current Positions in Europe
Asset Class Performance:
- Equities: The STOXX Europe 600 closed up +0.7% week-over-week vs +0.6% last week. Top performers: Denmark +2.6%; Hungary +2.0%; Norway +1.8%; Switzerland +1.7%; Netherlands +1.6%; Greece +1.5%; Germany +1.1%. Bottom performers: Spain -6.3%; Cyprus -5.4%; Italy -4.7%; Finland -0.9%.
- FX: The EUR/USD is down -0.74% week-over-week vs -0.50% last week. W/W Divergences:RUB/EUR +2.46%; SEK/EUR +2.11%; NOK/EUR +1.12%; PLN/EUR +0.49%; CHF/EUR +0.00%; DKK/EUR -0.01%; CZK/EUR -0.51%; RON/EUR -0.79%.
- Fixed Income: There was a notable break-out in the Spanish 10YR Yield this week to 7.27%!, or +61bps week-over-week. Greece rose +28bps to 25.50%, and Italy rose +9bps to 6.08%. France was a notable decliner on the week, falling -19bps to 2.03%.
There was an interesting article from Bloomberg.com yesterday discussing how Ireland’s National Asset Management Agency, the state agency set up in 2009 to “purge banks of their most toxic commercial property loans, started the destruction of an apartment block for the first time.”
According to the article, Ireland has some 1,850 housing developments that have remained unfinished since the housing bubble popped in 2008. Approximately 553,000 houses were built in the ten years through 2005, for a country of 4.5MM, and now an estimated 294,000 homes lie empty.
The bulldozing of this block and many more like it is an important step for Ireland and shows a willingness to start over. Getting an economy to a “start-over” spot includes in some cases destroying excess housing supply, but also embracing a level of austerity to reduce fiscal imbalances to healthier levels off which economies can begin to grow again. We’re not saying this process is easy or short, clearly the drag could have generational impacts, but the markets need to clear. It appears, it’s the European politicians, in particular, that don’t want to let this happen.
Today’s conference call of Eurozone finance ministers is a prime example. The group of 17 approved an initial €30 Billion (of the total €100 Billion originally proposed) to recapitalize Spanish lenders, following key parliamentary approvals this week by Germany and Finland. Once again Eurocrats showed their willingness to issue yet another bailout band-aid, to deflect near-term pressures (and save their jobs) but neglect construction of a longer term roadmap. Spain’s banking loans will come initially from the remaining EFSF, with support by the ESM if Germany signs off on its terms in September, and will be directed at Spain’s Fund for Orderly Bank Restructuring (FOBR) by the end of the month.
Socialist policy makers of the world unite!? Well if today’s European equity market performance is any indication – indices were down between -1 and -5% on the day and the EUR/USD cross is trading down -1% at $1.2160 – it’s a reflection of investors’ fears that Europe does not have a credible path forward to grow GDP and eventually exit the years of this sovereign debt and banking crisis.
The cross broke through out intermediate term TREND line of $1.22. We’ll be monitoring this cross acutely. Our immediate term TRADE range is $1.21 to $1.23.
Spain - German Finance Minister Schaeuble told the Rheinische Post newspaper that Spain's government, not its banks, will be liable for the bailout of up to €100B of the Spanish banking sector.
Spain - May revise its GDP estimate for 2013 to reflect a contraction of 0.2% to 0.4% vs its previous forecast for growth of 0.2%.
Italy - Italian Prime Minister Monti expressed serious concern over a potential default by Sicily, which accounts for ~5.5% of Italy's GDP. Monti said in a statement that there were "grave concerns" that the autonomous region could default and noted that he had written to the governor Raffaele Lombardo seeking confirmation that he would resign by the end of the month.
Germany - A monthly survey of funds by Bank of America Merrill Lynch showed that a net 32% of money managers expect trouble in Germany, a sharp reversal since May. Worries may be linked to the Bundesbank's soaring claims (which now stand at €729B) on Eurozone central banks under the ECB’s “Target2” payment system.
Eurobonds/bills - Sharon Bowles, chairwoman of the European Parliament's Committee on Economic and Monetary Affairs, said that Eurobills have a better political chance than Eurobonds. She noted that "They are the most likely," adding that "There are a lot of people who believe they are possible and they would also pass muster under the German constitutional court," a major stumbling block for EU legislation.
Pan-European deposit protection scheme - Sharon Bowles, chairwoman of the European Parliament's Committee on Economic and Monetary Affairs, said that a pan-European deposit protection scheme is unlikely to gain political traction over the near-term due to limited funding availability. She noted that many member-state deposit guarantee funds are only funded after they are needed, adding that most are bankrupt due to recent bailout activity. She also pointed out that more than €10T in total deposits that would have to be insured dwarfs the €700B in ESM firepower.
Italy - The Italian lower house voted on Thursday to approve the ESM, the euro zone's new bailout fund, giving final parliamentary clearance after a vote in the Senate last week.
Sovereign CDS rose across the peripheral countries this week. On a week-over-week basis Spain rose the most, up +26bps to 594bps, followed by Ireland +11bps to 562bps and Italy (+10bps) to 515bps. Germany saw the largest decline (-12bps) to 75bps, followed by Portugal (-8bps) to 827bps. Both France and the UK fell -5bps on the week, to 168bps and 61bps, respectively.
Eurozone ZEW Economic Sentiment -22.3 JUL vs -20.1 JUN
EU-27 New Car Registrations -2.8% JUN Y/Y vs -8.7% MAY
Eurozone CPI 2.4% JUN Y/Y vs 2.4% MAY
Eurozone May Current Account +€10.9B vs prior revised +€5.5B from +€4.6B
Eurozone Construction Output -8.4% MAY Y/Y vs -6.3% APR [0.1% MAY M/M vs -3.7% APR]
Germany ZEW Current Situation 21.1 JUL (exp. 30) vs 33.2 JUN
Germany ZEW Economic Sentiment -19.6 JUL (exp. -20) vs -16.9 JUN
Germany Producer Prices 1.6% JUN Y/Y (exp. 1.8%) vs 2.1% MAY
UK CPI 2.4% JUN Y/Y = lowest level in 2.5 years (exp. 2.8%) vs 2.8% MAY [-0.4% JUN M/M (exp. -0.1%) vs -0.1% MAY]
UK Retail Price Index 2.8% JUN Y/Y (exp. 3%) vs 3.1% MAY
UK Bank of England votes 7-2 to increase Asset Purchases
UK ILO Unemployment Rate 8.1% MAY vs 8.2% APR
UK Jobless Claims Change 6.1K JUN (exp. 5K) vs 6.9K MAY
UK Retail Sales w/ Auto Fuel 1.6% JUN Y/Y (exp. 2.3%) vs 2.1% MAY
UK Public Sector Net Borrowing 12.1B GBP JUN (exp. 11.2B) vs 16.1B GBP MAY
Italy Industrial Orders -9.4% MAY Y/Y vs -12.3% APR
Spain House Price Index -8.3% in Q2 Y/Y vs -7.2% in Q1 [-2.5% in Q2 Q/Q vs -3.0%]
Portugal Producer Prices 2.7% JUN Y/Y vs 3.2% MAY
Switzerland Credit Suisse ZEW Survey of Economic Sentiment -42.5 JUL vs -43.4 JUN
Switzerland Industrial Production 1.4% in Q1 Y/Y vs 3.6% in Q4
Switzerland Exports -2.6% JUN Y/Y (exp. -1.5%) vs 1.3% MAY
Switzerland Imports -3.1% JUN Y/Y vs 0.9% MAY
Netherlands Consumer Confidence -32 JUL vs -40 JUN
Netherlands Unemployment Rate 6.3% JUN vs 6.2% MAY
Netherlands Consumer Spending -1.9% MAY Y/Y vs -2.1% APR
Ireland PPI 3.2% JUN Y/Y vs 2.0% MAY
Slovenia Unemployment Rate 11.6% MAY vs 11.8% APR
Slovakia CPI 3.7% JUN Y/Y vs 3.4% MAY
Slovakia Unemployment Rate 13.3% JUN vs 13.2 MAY
Turkey Consumer Confidence 91.8 JUN vs 92.1 MAY
Turkey Unemployment Rate 9.0% APR vs 9.9% MAR
ZEW Eastern Europe Economic Survey:
Interest Rate Decisions:
(7/19) Turkey Benchmark Repo Rate UNCH at 5.75%
The Week Ahead:
Monday: Jul. Eurozone Consumer Confidence – Advance; May Mortgages - Capital Loaned; Mortgages on Houses
Tuesday: Jul. Eurozone PMI Composite, Services, and Manufacturing – Advance; Jul. Germany PMI Services and Manufacturing - Advance; Jun. Germany Import Price Index (Jul. 24-30); Jun. UK BBA Loans for House Purchase; Jul. France PMI Services and Manufacturing – Preliminary, Own-Company Production Outlook, Production Outlook Indicator, Business Confidence Indicator; Jun. Spain Producer Prices
Wednesday: Germany IFO Business Climate, Current Assessment, and Expectations; Jul. UK CBI Trends of Total Selling, Trends of Selling Prices, and Business Optimism; 2Q UK GDP – Advance; May UK Index of Services; Jul. France Business Survey Overall Demand; Jun. France Jobseekers; Jul. Italy Consumer Confidence Indicator
Thursday: Jun. Eurozone Money Supply 3; Aug. Germany GfK Consumer Confidence Survey; Jun. Italy Hourly Wages; May Italy Retail Sales
Friday: Jul. Germany CPI; Jul. France Consumer Confidence Indicator; 2Q Spain Unemployment Rate; Jul. Italy Business Confidence
Extended Calendar Call-Outs:
18-19 October: Summit of EU Leaders
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