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AXP: More Signs That Growth Is Slowing

It should come as no surprise that our call on Growth Slowing has come into fruition over the first half of the year. More and more companies are putting up numbers, metrics and comments that reflect the state of today’s economy. The latest company to own up to this theme is American Express (AXP).

 

American Express hosted its semi-annual Investor Day this week and the commentary from management was not positive to say the least. July billing numbers have slowed sequentially versus Q2 and only provided updates on an FX-adjusted basis, saying that global billed business grew 6% year-over-year in July, 2012 vs. 9% in 2Q12 and 13% in 1Q12. In other words, there’s a -7% of slowing growth in only four months.

 

 

AXP: More Signs That Growth Is Slowing  - AXP billing

 

 

While 93% of Street analysts have a buy/hold call on AXP, Hedgeye Financials Sector Head Josh Steiner has taken the contrarian route and remains bearish on the stock. The comment below from AXP CEO Ken Chenault backs up Steiner’s thesis:

 

“…there is no one specific driver of the recent trend; the Company’s billed business in July appears to reflect a weak overall economic environment, which shows up in a number of areas, including small business and corporate spending.”

 

The problem is obvious at this point to most people. Consumers are still worried about the economy and until we get some form or indicator that things have stabilized and are improving, they are more hesitant to go out and use their charge card for purchases. Some merchants are hoping that they’ll enjoy strong Back To School numbers for August but as we’ve said before: hope is not a risk management process.

 

The next quarter and back half of 2012 does not look good for AXP. When the time and price is right, we’ll be shorting it.


CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER

Real Employment Improvements Continue to Slow

Non-seasonally adjusted claims, on a 4-week rolling average, were down 6% this week vs. last year. That's consistent with the trend over the past few weeks. Importantly, this is a significant change from where we were 14 weeks ago. Going back roughly 3 months, the rolling NSA claims series was improving at ~12% on a YoY basis. Six hundred basis points of improvement deceleration in 3 months is notable. Extrapolating that trend, the positive economic tailwind from claims will have run its course by the end of October.

 

As a reminder, YoY changes in rolling NSA claims are our preferred measure of the true underlying health in employment as there are substantial errors in the seasonal adjustment factors making them unreliable.

 

The headline initial jobless claims print fell 4k to 361k last week. Incorporating the 2k upward revision to the previous week's data, claims fell by 6k. On a rolling basis, initial claims rose by 2.25k to 368k. We're not aware of any distortions to last week's print, making it largely uneventful.

 

That Said, An Illusory Tailwind Is Coming Soon

As a reminder, August should represent the peak for the seasonal adjustment factor headwind, and should begin turning into a tailwind beginning in September, i.e. on the fourth anniversary of Lehman's bankruptcy. Since the market tends to focus on the SA data's week to week change, the perception of the jobs environment should turn increasingly more favorable in the coming months. This comes with the obvious caveat that this is solely the seasonal adjustment factor we're describing. The real underlying data, as we pointed out above, is showing signs of decelerating improvement. 

 

It's also worth noting that with last week's print and the recent market rally, the market is now back in equilibrium with claims, as we show in our fifth chart below.

 

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - Raw

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - Rolling

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - NSA

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - NSA rolling

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - S P

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - Fed

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - YoY NSA change

 

The 2-10 Spread

The 2-10 spread widened 9 bps WoW to 138 bps. The ten-year treasury yield rose 12 bps to 165 bps.

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - 2 10

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - 2 10 QoQ

 

Financial Subsector Performance

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

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - Subsector Performance

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 

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Quit Chasing Beta

Quit Chasing Beta

 

 

CLIENT TALKING POINTS

 

CHINA’S INFLATION

These days, when a leading economic indicator comes out of China, you have to approach any number with a bit of caution. China saw its July inflation rise +1.8% year-over-year, more than the consensus expectation of +1.7%.Considering that the Chinese are still experiencing pain at the pump, this number is likely to be revised at some random point in time. As for the media, they hopped all over this number, declaring it an arbiter for a bailout. As a result (get your golf claps ready), stocks are up +0.6%.

 

In May, not only Chinese growth, but global growth really started to accelerate on the downside. That’s why almost every major stock market in the world stopped going up in March-April. Markets discount future events.

 

 

FOLLOW THE PLAN

“It’s all part of the plan,” a wise man once said. We’re inclined to reason that if you’re trading these markets, you’ve got a plan. For us, it’s about using the range and the numbers. We are not chasing beta like a couple kids running after an ice cream truck. That’s how you get smoked.

 

Jesse Jackson really wasn’t kidding when he said to “keep hope alive” - that’s exactly what market participants are doing right now. The bulls are trying to do all they can to save this 1400 S&P 500 level alive. Have fun with that. We’re moving into fixed-income via Treasuries. Our next move is to get long the US Dollar when the timing and price is right.

 

 

PAY ATTENTION

We’ve got our levels and our durations. We use this process, along with consideration for time and price, to make trading decisions. Seeing as how we’re in an election year, this is what we have ahead of us. It should sound familiar to you at this point:

 

A)                  The long-term (TAIL) of lower-highs on lower volume (bearish)

B)                   The immediate-term (TRADE) short squeeze (bullish)

C)                   The ongoing hope that bailouts will earn everyone a year-end bonus sticker

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  DOWN

 

U.S. Equities:    Flat   

 

Int'l Equities:   Flat   

 

Commodities:    Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat   

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“JPM SEES UP TO $5.3B 'REASONABLY POSSIBLE' LEGAL LOSSES, HAD SEEN POSSIBLE BUYBACK LOSSES UP TO $2B 3 MONTHS EARLIER” -@zerohedge

 

 

QUOTE OF THE DAY

“A lie told often enough becomes the truth.” – Vladimir Lenin

 

 

STAT OF THE DAY

Greece Unemployment Rate 23.1% MAY vs 22.5% APR


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This note was originally published at 8am on July 26, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“… modern finance has changed the world, and not in a way that we should celebrate.”

-Roger Lowenstein

 

That’s what one of my favorite economic historians, Roger Lowenstein, wrote in a provocative Bloomberg article in May titled “Banks’ Hyper Hedging Adds To Risk of Market Meltdown.”

 

Market meltdown? Shh, keep that on the down low. That only happens in other people’s markets. With the almighty American “but earnings are great” season showing the worst beat-miss spread for US corporate revenues since Q3 of 2008, everything in the US stock market is going to be fine, provided that Bernanke does more of what has not worked.

 

The sad reality of the culture of short-termism that we have perpetuated in both our politics and banking system is that when the revenue misses ramp, the pressure to cheat does too. Whether it’s guys marking up their books into month and quarter end, or gals rolling the bones on black into a central planning event, it’s all one and the same thing – unsustainable.

 

Back to the Global Macro Grind

 

That probably all made less sense to you with the SP500 at 1376 last Thursday or at 1419 last quarter. But, after 4 consecutive down days (-2.8% correction) in US stocks and The #GrowthSlowing risk management signal (10 year Treasury Yield) hitting a freshly squeezed morning YTD low of 1.40%, that darn Canadian hockey player is going to show up on the score sheet again.

 

If you peel back the onion to when this whole thing started to unravel (2007), it’s a lot easier to agree with me that we are not only behaving Japanese from a policy perspective, but that both our stock and bond markets are too.

 

Lower long-term highs on lower and lower stock market volumes became the norm in Japan inasmuch as people piling into “expensive” Japanese Government Bonds did. That’s been going on for 20 years. Bernanke has only been at this for six.

 

To review, what Bernanke is doing by attempting to maintain a 0% return on fixed income savings accounts in perpetuity is superimposing what we have coined as “3D Risk” on all macro markets:

  1. The Dare – he’s daring you to chase yield (make sure you get those high dividend stocks as the companies miss revenues!)
  2. The Disguise – he’s distorting the long-term asset allocation “opportunity” in financially liquid assets like Gold and Oil
  3. The Delay – he’s inspiring companies to delay financial restructuring under the assumption that cost of capital will never go up

All the while, he’s failing miserably to achieve either of his 2 “mandates” (full employment and price stability). Five years into this mess, we have an unemployment disaster and the highest levels of market price volatility ever.

 

Did I mention ever is a long time?

 

The best news we’ve had this week is that Ron Paul had a big win getting his “Audit The Fed” bill passed in the House by a rock solid margin of 327-98. In response to the victory, Dr. Paul said “it is up to us to re-assert ourselves.” Amen to that.

 

Bernanke’s response: “this is a nightmare scenario.”

 

Yes it is Ben, for you.

 

I like to fight. I really like Fighting The Fed (Q2 2012 Hedgeye Global Macro Theme). But I also like timing – as in what a lot of people say they cannot do (take their word for it, they can’t). And once again, with Johnny Hilsenrath at the WSJ floating another Fed rumor ahead of next week’s FOMC decision, the timing game is on.

 

The manic media is as complicit in this entire gong show of Expectations Mismatch as anyone else. One of the top economic headlines on Bloomberg this morning is “Central Banks Search Tool Kit for Untried Ideas Amid World Slowdown.”

 

#Tools

 

Bernanke talked about “tools” in his latest testimony. While it should scare the hell out of you at this point to hear about more “untried ideas” coming out of the government, allow me to define the 2 main tools Bernanke is talking about:

  1. Printing Money, Monetizing Debt, Bailing Out Losers, etc.
  2. Whispering through Fed mouth-pieces

Bernanke’s boys at the Fed and Treasury will be whispering about my calling them whispers (they call them “communication tools”). Whatever you want to call them, they are what they are – they drive the biggest risks to bank prop trading and asset management hedges that markets have seen since WWII – #expectations.

 

Shakespeare said expectations are the root of all heartache. With the SP500 down -1.8% for July and Q312 to-date, Bernanke’s mouthpieces may be creating the biggest risk of them all. If Lowenstein’s “market meltdown” happens from here, the central planners will see that this time is different. They’ll have no one to blame but themselves.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, German DAX, and the SP500 are now $1586-1612, $100.73-103.91, $83.35-84.14, $1.20-1.22, 6311-6433, and 1331-1348, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

#Tools - Chart of the Day

 

#Tools - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 9, 2012


As we look at today’s set up for the S&P 500, the range is 22 points or -1.16% downside to 1386 and 0.41% upside to 1408. 

                                            

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 08/08 NYSE 62
    • Down versus the prior day’s trading of 888
  • VOLUME: on 08/08 NYSE 636.63
    • Decrease versus prior day’s trading of -12.54%
  • VIX:  as of 08/08 was at 15.32
    • Decrease versus most recent day’s trading of -4.19%
    • Year-to-date decrease of -34.53%
  • SPX PUT/CALL RATIO: as of 08/08 closed at 1.52
    • Up from the day prior at 1.33 

CREDIT/ECONOMIC MARKET LOOK:


10YR – this has happened plenty of times in 2012 – bonds down hard in 1-2wk moves, presenting you w/ a buying opp in bonds or 1 more chance to tell yourself this time is different and growth is not slowing. There’s a TREND wall of resistance for the 10yr at 1.71%. 

  • TED SPREAD: as of this morning 33
  • 3-MONTH T-BILL YIELD: as of this morning 0.11%
  • 10-Year: as of this morning 1.68%
    • Increase from prior day’s trading of 1.65%
  • YIELD CURVE: as of this morning 1.40
    • Up from prior day’s trading at 1.38 

MACRO DATA POINTS (Bloomberg Estimates) 

  • 8:30am: Trade Balance, June, est. -$47.5b (prior -$48.7b)
  • 8:30am: Initial Jobless Claims, week Aug. 4, est. 370k (prior 365k)
  • 9:45am: Bloomberg Consumer Comfort, week Aug. 5 (prior -39.7)
  • 10am: Wholesale Inventories, June, est. 0.3% (prior 0.3%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas change
  • 11am: U.S. Fed to purchase $1b-$1.5b TIPS in 1/15/2019 to 2/15/2042 range
  • 1pm: U.S. to sell $16b 30-year bonds 

GOVERNMENT/POLITICS:

    • House, Senate not in session
    • NOAA updates hurricane forecast. In May agency predicted near-normal season with from nine to 15 named storms, 11am
    • Board of governors of U.S. Postal Service, which on Aug. 1 skipped a required $5.5b payment to U.S. Treasury, meets to discuss third-quarter financial results, 8:30am
    • CFTC meets on customer protection requirements for futures commission merchants, 9:30am
    • Commerce Dept. panel meets on technical questions that affect materials, technology export controls, 10am

WHAT TO WATCH: 

  • Trade Deficit in U.S. Probably Narrowed in June on Cheaper Oil
  • Goldman Sachs Tops Corporate Split With Obama, GE Jilts Him Too
  • Apple Patent Faceoff With HTC Pivots on Dueling Pinch Videos
  • Profits at Fannie Mae, Freddie Mac May Ease Wind-Down Pressure
  • Standard Chartered CEO Says ‘No Grounds’ to Revoke License
  • Nokia to Sell App Unit Amid Increasing Microsoft Dependence
  • U.S. foreclosure filings in July fell 10%: RealtyTrac
  • Restaurant operator CKE expected to price IPO after close
  • Amgen Halts Pancreatic Cancer Study After Drug Fails to Work
  • Manchester United seeks to raise $333m in IPO
  • U.K. Goods-Trade Deficit Widens to Record as Exports Decline
  • World Food Prices Jump as U.S., Russia Droughts Spark Crop Rally
  • China Adds Scope to Cut Rates as Japan, S. Korea Hold

EARNINGS:

    • Bombardier (BBD/B CN) 6am, $0.10
    • Manulife Financial (MFC CN) 6am, C$(0.49)
    • Quebecor (QBR/B CN) 6am, C$0.97
    • Kohl’s (KSS) 7am, $0.96
    • Metro (MRU CN) 7am, C$1.36
    • Elizabeth Arden (RDEN) 7am, $0.20
    • Wendy’s (WEN) 7am, $0.05
    • Windstream (WIN) 7am, $0.12
    • Brinker International (EAT) 7:15am, $0.58
    • Tim Hortons (THI CN) 7:30am, $0.69
    • Hillshire Brands Co (HSH) 7:30am, $0.38
    • AMC Networks (AMCX) 8am, $0.58
    • Magna International (MG CN) 8am, $1.28
    • Royal Gold (RGLD) 8am, $0.44
    • Canadian Tire (CTC/A CN) 8:05am, C$1.52
    • Advance Auto Parts (AAP) 8:30am, $1.39
    • Teekay (TK) 8:30am, $(0.45)
    • Teekay Offshore Partners (TOO) 8:30am, $0.37
    • Crescent Point Energy (CPG CN) 9am, C$0.07
    • Kronos Worldwide (KRO) Premkt, $0.44
    • ViroPharma Inc (VPHM) Premkt, $0.21
    • CI Financial (CIX CN) 11:17am, $0.32
    • CareFusion (CFN) 4pm, $0.49
    • DeVry (DV) 4:01pm, $0.44
    • Open Text (OTC CN) 4:01pm, $1.16
    • Nordstrom (JWN) 4:05pm, $0.74
    • Fusion-io (FIO) 4:05pm, $0.04
    • NVIDIA (NVDA) 4:19pm, $0.22
    • Osisko Mining (OSK CN) 4:19pm, C$0.07
    • Pembina Pipeline (PPL CN) 4:30pm, C$0.31
    • ShawCor (SCL/A CN) 5:01pm, C$0.35
    • Silver Wheaton (SLW CN) After-mkt, $0.37
    • Lions Gate Entertainment (LGF) After-mkt, $0.18
    • Assured Guaranty (AGO) After-mkt, $0.52
    • Arena Pharmaceuticals Inc (ARNA) After-mkt, $(0.11)
    • Scotts Miracle-Gro (SMG) After-Mkt, $1.99 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Global Food Reserves Falling as Drought Wilts Crops: Commodities
  • Iraq Oil Tops 3 Million Barrels for First Time Since 2002
  • Rubber Poised for Third Surplus in 2013, Helping Bridgestone
  • Oil May Retreat on Fastest Stockpiling Since ’98: Energy Markets
  • World Food Prices Jump as U.S., Russia Droughts Spark Crop Rally
  • Corn Advances to Record as Drought Spurs Surge in Food Costs
  • Gold Seen Advancing as Slowing Growth Fuels Stimulus Optimism
  • Oil Trades Near Three-Month High Amid China Stimulus Speculation
  • Sugar Rises on Speculation Prices Fell Too Far; Coffee Gains
  • Copper Seen Falling on Weaker-Than-Estimated Chinese Production
  • Rubber Near Lowest Level in Three Years Amid Supply Surplus
  • Rusal Sees Aluminum Premiums Rising for 12-18 Months on Rates
  • Europe’s Sugar Producers Set to Gain as EU Faces Third Shortage
  • Palladium May Stall Near $608 Before Falling: Technical Analysis
  • Food Prices Surge as Droughts Spark Rally
  • Palm Oil Rallies From Seven-Week Low as U.S. Set to Cut Soy Crop
  • Billionaire Fredriksen’s Golar Gets Record to Store LNG at Sea 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


GERMANY – again, news headlines running w/ “Europe up on China stimulus” (even though Europe is flat and Germany is down); watch the DAX here – German industrials hurting when Chinese demand continues to slow; lower-highs in the DAX from the 7154 high established in March. To get above that would require Draghi walking on water.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – good thing pig prices collapsed in July, helping the Chinese print a completely random inflation reading in the face of slowing growth – bailout media took that as “another sign for stimulus”; China up a whopping +0.6%, India down on the day after missing industrial production growth too.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team



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