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The Paul Ryan Trade

Takeaway: With the announcement of Paul Ryan as Mitt's VP, we examine if he has what it takes to turn this economy and country around.

THE PAUL RYAN TRADE

 

 

CLIENT TALKING POINTS

 

THE PAUL RYAN TRADE

Ryan is all about Hayekian economics – that’s the Austrian breed you know. Romney’s pick for vice president is going to change the game with the level at which he is a fiscal conservative. He is bullish on the US dollar and anti-Bernanke. Regarding the central planner, he will likely keep a close eye on the Fed and will delay any sort of QE before the election in November. Ryan will also bring a focus on the debt ceiling debate, an issue of which Congress desperately needs to take care of. Ryan is going to change the market dynamic – no doubt about it. Let’s see how he pulls it off.

 

FIXING THE DOLLAR

Monetary policy and fiscal policy are the two main drivers of our currency. When Ryan is pounding the table over an issue and Ben Bernanke is lowering rates, it moves the dollar. This is the only thing that has been certain over the last 100 years. According to our numbers, it looks like a Reagan-era surge is about to occur, particularly if Romney wins. The dollar has been down for about three weeks now and a reversal is coming. I mean, show us one person who’s a big fan of these prices of crude oil. Go for it. Consumers are proponents of a strong dollar. They are tired and sick of inflation and expensive fuel and food.

 

 

ALL THAT DEBT

Getting our ducks in order with regard to America’s debt problem is paramount. This country is being driven apart over issues that really need to be addressed at this point. Too bad no one in Congress can agree on anything. We’re not cheerleading for any particular side, but Paul Ryan is the closest thing we have to fixing our debt problem. Our President apparently would rather focus on his career rather than pushing Congress to get things done. Whatever the outcome, we better come out of this election with jobs and a better economy or heads are going to roll.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:               Flat   

 

U.S. Equities:   Flat   

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat   

 

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

“Zambia has banned dollar-denominated transactions. Offenders can face 10 year jail term. WSJ       ” -@insidegame

 

 

QUOTE OF THE DAY

“Every composer knows the anguish and despair occasioned by forgetting ideas which one had no time to write down.” – Hector Berlioz

 

 

STAT OF THE DAY

$114. The price of Brent crude oil, which is now at a 3-month high.

 

 


THE M3: MELCO RUSSIA; SMOKING BAN; MACAU HAND-OUTS;FOREIGN MACAU POPULATION

The Macau Metro Monitor, August 13, 2012

 

 

MELCO CROWN INTERESTED IN RUSSIA PLAY Macau Business

According to the August issue of Macau Business Magazine, Marina Lomakina, the general director of Nash Dom Primorye, a state-owned company that will manage the Vladivostok entertainment zone, confirmed Melco expressed interest in investing in a new gaming and entertainment facility in the area along with Malaysia’s Genting Group.  Nash Dom Primorye issued a request for concepts last month; an invitation for gaming companies to submit ideas for the first phase of the development of the zone. As of mid August, no proposals have been submitted; the deadline for submission is September 21.

 

RULES FOR SMOKING AREAS IN CASINOS "ALMOST" READY Macau Business

In response to an enquiry by Legislative Assembly member Lee Chong Cheng, “The government will publicise the requirements for setting up a smoking area in casinos within a short-time period,” wrote Manuel Joaquim das Neves, director of the bureau. The smoking ban was implemented earlier this year with enforcement beginning in early 2013. When the grace period expire, casinos will be able to set up dedicated smoking areas.

 

CHUI SAI ON SHOWERS MORE CASH Macau Business

On Friday, Chief Executive Fernando Chui Sai announced that the government will increase a series of subsidies to help people deal with raising inflation and continue the cash hand-out policy in 2013

  • Increase the monthly electricity subsidy it gives all households from MOP180 (US$22.5) to MOP200
  • Increase the income ceiling to qualify for subsidized housing units to MOP19,355 for one-member households, up from MOP17,000, and to MOP38,710 for two-member families, up from MOP34,018. The increase should cover 80% of households in Macau
  • Increase the temporary cash allowance to households waiting for public housing by 8%

 

NON-LOCAL WORKERS RAISE POPULATION TO NEARLY 570,000 Macau News

At June 30, 2012, Macau’s population rose to 568,700, increasing 5,800 March 31rst. The number of non-local workers (blue-card holders) was 102,557, up by 3,893 1Q12 and accounting for 18% percent city’s population at the end of June.


MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST

Takeaway: While China's steel prices break still lower, U.S. Financials bailout speculation-driven momentum wanes. We're getting down to crunch time.

* The U.S. financials rallied further last week, but in much more subdued fashion with the XLF up 0.4%. The XLF remains the only sector still broken from a TREND standpoint (intermediate term) on our macro team's quantitative setup. 

 

* European financials acted a lot like European sovereigns, both tightening week over week. The Draghi rally continues for now.

 

* Meanwhile, on the other side of Earth, steel prices in China fell another 1.2% last week, or 44 yuan/ton, to 3,622 yuan/ton. In the last few months, Chinese construction steel prices have fallen ~10%. This index is reflecting significant weakness in China's construction market.

 

* Last week the 2-10 spread widened 8 bps last week to 140 bps, and is now up more than 20 bps from its late July lows. After the battering net interest margins took in 2Q, this is a positive development, on the margin. That said, the 2-10 spread averaged 151 bps in 2Q12, so even with the rally of the last few weeks it is still trending down 20 bps QoQ thus far in 3Q. 

 

* Our Macro team’s quantitative setup in the XLF shows 0.7% upside to TREND resistance of  $14.90 and 0.9% downside to TRADE support of $14.57.

 

Financial Risk Monitor Summary  

• Short-term(WoW): Positive / 7 of 12 improved / 1 out of 12 worsened / 5 of 12 unchanged  

• Intermediate-term(WoW): Positive / 8 of 12 improved / 2 out of 12 worsened / 3 of 12 unchanged  

• Long-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - Summary

 

1. US Financials CDS Monitor – Credit default swaps across U.S. financials were tighter week over week. Overall, 25 out 27 reference entities that we track saw credit default swaps tighten last week.

  

Tightened the most WoW:  MTG, RDN, LNC

Widened the most/ tightened the least WoW: GS, UNM, MBI

Tightened the most MoM: MMC, AIG, ALL

Widened the most MoM: GNW, UNM, MTG

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - American 

 

2. European Financial CDS - French and Italian banks tightened, alongside the sovereigns. Spanish banks were mixed, with a few of them posting sizable widening. Overall, however, swaps throughout Europe's financial system were notably tighter. 

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - Europe

 

3. Asian Financial CDS - 10 of 12 reference entities we track across Asia had tighter credit default swaps week over week. 

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - Asia 

 

4. Sovereign CDS – Sovereign swaps were tighter around the globe last week. Portugal, Spain and Italy all saw their sovereign swaps tighten by more than 9%.

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - Sov Table

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - Sov 1

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - Sov 2

 

5. High Yield (YTM) Monitor – High Yield continues to tighten, as rates fell another 2 bps last week, ending the week at 7.07% versus 7.09% the prior week.

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.6 points last week, ending at 1693.

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - LLI

 

7. TED Spread Monitor – The TED spread fell 3 bps last week, ending the week at 33.3 bps this week versus last week’s print of 36.08.

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 4.2 points, ending the week at -5.59 versus -9.8 the prior week.

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - JOC

 

9. Euribor-OIS spread –  The Euribor-OIS spread tightened by 3 bps to 28 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - ECB

 

11. Markit MCDX Index Monitor – Last week spreads tightened 10 bps, ending at 141 bps versus last Friday's print of 151 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - MCDX

 

12. Chinese Steel – Steel prices in China fell 1.2% last week, or 44 yuan/ton, to 3,622 yuan/ton. In the last few months, Chinese construction steel prices have fallen ~10%. This index is reflecting significant weakness in China's construction market. Chinese steel rebar prices have been generally moving lower since August of last year. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.   

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - CHIS

 

13. 2-10 Spread –  Last week the 2-10 spread widened 8 bps last week to 140 bps, and is now up more than 20 bps from its late July lows. We track the 2-10 spread as an indicator of bank margin pressure. 

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - 2 10

 

14. Our Macro team’s quantitative setup in the XLF shows 0.7% upside to TREND resistance of  $14.90 and 0.9% downside to TRADE support of $14.57.

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - XLF

 

Margin Debt - June: +0.72 standard deviations 

NYSE Margin debt rose in June to $285 billion from $279 billion in May. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at it margin debt levels in standard deviation terms over the period 1. Our analysis shows that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of extreme risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value. Overall this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.  The chart shows data through June. 

 

MONDAY MORNING RISK MONITOR: RALLY MOMENTUM FADING, TROUBLE BREWS IN THE EAST - NYSE margin debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

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Great Inflations

This note was originally published at 8am on July 30, 2012 for Hedgeye subscribers.

“Asset price inflation is not growth.”

-me

 

I know. You probably need something more profound than a quote from me to kick off your morning. As Bernanke and Draghi unite this week, how about we all take a deep breath and channel our inner Shakespeare? Since in neither the short nor the long run we aren’t all yet dead, we’re best served to always remember that “expectations are the root of all heartache.”

 

When it comes to performing day-to-day in our centrally planned markets, those expectations obviously go both ways – and fast. On Thursday morning at 5AM EST, US Equity Futures were down 5 handles and Spain’s IBEX was crashing (-33% from its YTD top). This morning, the SP500 is +4% (53 points) higher, and Spain is still crashing (now only down -25%).

 

Great short-term inflations of asset prices are awesome, right? So is pretending the Fed and ECB can “smooth” and suspend economic gravity. As we continue to make a series of lower long-term highs versus those established when #GrowthSlowing started, globally, again in March 2012, our governments continue to A) shorten economic cycles and B) amplify market volatility.

 

Back to the Global Macro Grind

 

First, let’s go through that ‘inflation slows growth’ thing again with a real life example, US GDP:

  1. Q4 2011 US GDP Growth = 4.10%
  2. Q1 2012 US GDP Growth = 1.97%
  3. Q2 2012 US GDP Growth = 1.54%

So, let’s do more of what has not worked (whatever it takes really), to make sure we keep that asset price speculation (stocks and commodities) in play. Just so that we end up with no real (inflation adjusted) economic growth at all!

 

Look on the bright side, even though your run of the mill sell-side anchoring “economist” has been off by 33-57% so far with their 2012 US GDP Growth estimates, the stock market went up for the last 48 hours, so they can say they were right on the bull case anyway.

 

That line of storytelling is as ridiculous as the assumption that begging for Bernanke to give you $1700 Gold and $100 Oil is a “growth” policy for the economy.

 

That doesn’t mean I can’t be completely wrong here.  Evidently this market isn’t short-able, until it is. Meanwhile the Correlation Risk signals are starting to go hog wild (again), doing exactly what they did in February/March.

 

Got Great Expectations? Here’s last week’s CFTC data on commodity contracts leaning to the long side:

  1. Oil +6% wk-over-wk to 140,636 contracts
  2. Sugar +17% wk-over-wk to 128,093 contracts
  3. Ag (farm goods basket) +4% wk-over-wk to 856,446 contracts

All in, we’ve crossed the proverbial Rubicon again of > 1.0 million CFTC contracts (1.17M this past week), where the entire Street is expecting Great Inflations from Bernanke and Draghi. *Note: these are all time highs in contracts outstanding.

 

As most of these perma-commodity bulls learned in April/May, what is expected to keep going up, comes down – and hard. Maybe this time is different though? Maybe this is going to be like Venezuela where a centrally planned stock market (up +109% YTD) is governed by explicit currency debauchery?

 

I am hearing the Venezuelan commoner’s life is mint these days. Also hearing that if Bernanke goes all-in Obama with Qe3, life for the 71% is going to be just rosy too.

 

Who knows. All we know is that the biggest loser in all of this is what were our “free” markets. Sadly, some still think the stock market is the real-time economy. All the while, these Great inflations continue to deflate both growth and The People’s trust.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1590-1624, $105.18-108.26, $82.40-83.26, $1.20-1.23, 6351-6852, and 1360-1392, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Great Inflations - Chart of the Day


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 13, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -1.13% downside to 1390 and 0.08% upside to 1407. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1a

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT: 

  • ADVANCE/DECLINE LINE: on 08/10 NYSE 195
    • Down versus the prior day’s trading of 300
  • VOLUME: on 08/10 NYSE 566.08
    • Decrease versus prior day’s trading of -1.68%
  • VIX:  as of 08/10 was at 14.74
    • Decrease versus most recent day’s trading of -3.53%
    • Year-to-date decrease of -37.01%
  • SPX PUT/CALL RATIO: as of 08/10 closed at 1.64
    • Down from the day prior at 1.82 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 33
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.66%
    • Unchanged from prior day’s trading
  • YIELD CURVE: as of this morning 1.40
    • Unchanged from prior day’s trading 

MACRO DATA POINTS (Bloomberg Estimates)

  • 11am: Fed to purchase $1.5b-2b notes due 2/15/36-5/14/42
  • 11am: U.S. Treasury announces plans for auction of 4-wk bills
  • 11:30 am: U.S. to sell $32b 3-mo. bills, $28b 6-mo. bills
  • 4pm: USDA weekly crop condition 

GOVERNMENT/POLITICS:

    • House, Senate in recess
    • President Obama begins three-day bus tour through Iowa
    • State primary elections in Minn., Conn., Fla., Wis.
    • EPA advisory panel meets on methods for estimating emissions from animal feeding operations. 1pm

WHAT TO WATCH: 

  • Google said to cut ~4k employees in its Motorola unit
  • Standard Chartered said to work on New York’s monitor demand
  • Julius Baer agreed to pay $880m for Bank of Americas Merrill wealth management business outside U.S.
  • Electronic Arts sees new Windows as central mobile game platform
  • Peltz said to win board seat at Ingersoll-Rand, WSJ says
  • Japan 2Q GDP rose annaulized 1.4%, less than median forecast 2.3% growth and 5.5% in 1Q
  • Greece 2Q GDP contracted 6.2%
  • “Bourne Legacy” tops weekend NA box office with $40.3m
  • Quarterly mutual fund/hedge fund disclosure deadline this week
  • Mitt Romney picks Paul Ryan as running mate for Republican ticket
  • NBC says weekday daytime Olympic viewership a record, Up 31%
  • Guggenheim Partners in talks to buy Aviva stake: Telegraph
  • Kodak is scheduled to disclose in bankruptcy court the winners of an auction of >1k patents
  • Tech cos. spend more on fewer acquisitions: PwC
  • Egypt President Mursi removes military aides
  • Europe GDP, Standard Chartered, Wal-Mart: Week Ahead Aug. 13-18

EARNINGS:

    • Sysco (SYY) 8am, $0.54
    • AuRico Gold (AUQ CN) Pre-Mkt, $0.09
    • Groupon (GRPN) 4:01pm, $0.03
    • Wuxi PharmaTech (WX) 4:30pm, $0.32
    • Uranium One (UUU CN) 4:37pm, $0.02
    • InterOil (IOC) 4:45pm, $0.06
    • SouthGobi (SGQ CN) 5pm, $(0.04)
    • Iamgold (IMG CN) 5:40pm, $0.20
    • B2Gold (BTO CN) Post-Mkt, $0.04

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • Hedge Funds Reduce Wagers After Longest-Ever Rally: Commodities
  • Oil Bulls Boost Bets Most in More Than 17 Months: Energy Markets
  • Copper Declines in New York as Japanese Growth Misses Estimates
  • Oil Advances Amid Concern Middle East Tensions May Curb Supply
  • Corn, Soybeans Fall as Rain May Aid U.S. Crop Amid Demand Threat
  • Iron Ore Drops to Lowest Since 2009 as Chinese Purchases Decline
  • Gold Gains on Stimulus Bets as Holdings Climb to All-Time High
  • Robusta Coffee Rises as Stockpiles Decline Further; Cocoa Climbs
  • China Daily Steel Output Falls in July as Prices at 33-Month Low
  • Cooking-Oil Imports by India to Decline on Record Stockpiles
  • Rubber Drops to Lowest in Almost Three Years on Slowing Growth
  • Noble Profit Rises 39 Percent on Record Metals, Energy Sales
  • Japan’s Utilities Lose $46 Billion as End of Era Nears: Energy
  • Obama to Urge Agriculture Bill as USDA Buys $170 Million of Meat
  • Palm Oil Declines on Increasing Output, Weak El Nino Forecasts 

THE HEDGEYE DAILY OUTLOOK - 4f

 

 

CURRENCIES


USD – on the margin, Paul Ryan is USD bullish – not only will he likely keep Bernanke in a box through September (no Qe), but he’ll bring some much needed focus to the fiscal debate pre debt-ceiling. If intermediate-term TREND support of $81.79 on the USD holds, a whole whack of correlation risk comes back online 2H AUG and into September.

 

THE HEDGEYE DAILY OUTLOOK - 5f

 

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 6

 


ASIAN MARKETS


JAPAN – another big country w/ another big miss on the #1 factor that we think will continue to surprise these Keynesian quacks on the downside in the coming months and years – GROWTH; in other Asian Equity news, Chinese stocks fell another 1.5% after not delivering any said stimuli that the media was calling for last wk.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


ISRAEL – something is going on; not sure what it is – but the TelAviv25 just snapped its only line of TRADE support, down 1% this morning and Oil is ripping (+1% to $114 Brent), despite the Dollar not being down a bunch. Geopolitical risk is hard to put our finger on, so we let markets tell us when someone might know something.

 

THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team



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