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Brave Bears

This note was originally published at 8am on August 06, 2012 for Hedgeye subscribers.

“Your father doesn’t believe in magic.”

-Elinor

 

This weekend I took my son Jack to Pixar’s latest animation, “Brave.” The original story, set in the 10th century Scottish highlands, was called “The Bear and The Bow.” Since the McCullough Clan genuinely loves bears, we thoroughly enjoyed the movie.

 

Brave’s King Fergus doesn’t like bears anymore than modern day Eurocrats do. In fact, the King’s entire life is centered around fighting one demon bear in particular by the name of “Mor’du.”  

 

I won’t ruin this European short squeeze (or the rest of the movie for you), but having gone to French Canadian school until the 5th grade, I must give you a hint – “mordu”, en Francais, is the past participle of “death.”

 

Back to the Global Macro Grind

 

No worries, no short sellers from New Haven, CT actually died in Friday’s latest no-volume squeeze (we cut the SHORTS in the Hedgeye Portfolio to only 5 by Friday morning). Evidently, neither did as many people perish in the government’s now infamous “birth/death adjustment” for US payrolls.

 

In today’s Chart of the Day, Darius Dale contextualizes the July 2012 Jobs Report with a picture that nets out the effects of the NSA’s “birth/death adjustment” from the NSA Non-Farm Payroll month-over-month figure.

 

In addition to that picture telling you 1,000 words, here are some other quick hits on the jobs report:

  1. For June (last month’s report), the government revised non-farm payrolls down to 64,000 vs 80,000 prior
  2. For July, the “birth/death adjustment” of +52,000 jobs was the highest “adjustment” on record (since July 2000)
  3. For July, the actual unemployment rate ticked up +10bps (month-over-month) vs June to a very elevated 8.3%

But, but… provided that you believe in magic during an Election Year, America’s jobs crisis is over and it’s time to buy stocks with both hands at VIX 15, again. *Note, every time you’ve bought US Equities at VIX 14-15, in the last 5 years, you’ve been killed.

 

Killing the shorts is cool, until it isn’t. Don’t forget that short covering is one of the only ways left for these markets to go up. Inflows into US Equities remain dead. So is trust.

 

While it was funny to see the perma-bulls of the manic media blame Europe for the April-June US stock market declines, I don’t see too many of these cats championing Europe as the reason for a US stock market rally. #weird

 

Looking at the short squeezes we’ve seen off the June 2012 lows, here are some noteworthy ones:

  1. Oil (Brent) = +23%
  2. EuroStoxx50 Index = +15%
  3. SP500 = +8.7%

Centrally planned black magic or not, Americans of the 30th Olympiad better be thanking Europe for hosting one mother of a short squeeze in commodity and stock prices, even if the volume of fans is low.

 

The commodity side of this Reflation Rally to lower-highs is worth wasting a few more bullets on:

  1. CFTC (US Commodities Futures Trading Commission) contracts ripped another +5% wk-over-wk to 1.22 million contracts
  2. Agricultural bets (net long contracts) were up another +3% wk-over-wk at a new high of 884,477 contracts
  3. Gold bets put on their biggest wk-over-wk move (+36%) since November of 2008 (96,200 contracts)

Got Inflation Expectations? Brooksley Born, do you hear her now?

 

How about causality (central planning policies) and correlation (US Dollar Correlation Risk to stock and commodity prices)? Yep, Obama and Axelrod understand this full well. So did Bush and Bernanke. If you want commodity and stock market inflations to re-flate those political chances, you just need to spend like mad and debauch that US Dollar.

 

With the US Dollar down another -0.4% last week (down for 2 consecutive weeks), this keeps Oil (and Energy stocks) leading the latest charge. Oh, wait. The US stock market is down 8 of the last 11 days,  and the Russell2000 was down another 1% last week…  

 

So you better be either a Brave Bear when covering those shorts on Thursdays, or just get right loaded to the gills in commodity leverage and, at the same time, say there’s no inflation at the pump. Jack’s Dad tells him magical fairy tales at bedtime too.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and the SP500 are now $1591-1624, $106.05-110.84, $82.06-82.95, $1.20-1.23, 779-791, and 1368-1406, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Brave Bears - Chart of the Day

 

Brave Bears - Virtual Portfolio


MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY

Takeaway: U.S. banks and EU sovereigns were tighter last week, while EU banks were wider. Will Europe's promises be different this time?

Key Takeaways 

* European sovereign swaps tightened further last week on positive commentary from Angela Merkel, while European bank swaps were generally wider (particularly Greek, German, Spanish and Italian banks). Unfortunately, there is a somewhat mixed track record of late with respect to whether it's the banks or the sovereigns that are the appropriate leading indicator.  

 

* Large cap U.S. banks are definitely taking their cues from Europe's sovereigns and Merkel's commentary. Large-cap bank swaps were tighter again this week. 

 

* The 2-10 spread widened another 13 bps, leaving it 20 bps higher on a MoM basis. This week's positive data gets the yield environment one step closer to being flat sequentially vs. 2Q12. While yield spreads are now effectively flat, the 3Q12-to-date sequential change is still meaningfully negative.   

 

Financial Risk Monitor Summary  

• Short-term(WoW): Positive / 6 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged  

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

• Long-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - Summary

 

1. US Financials CDS Monitor –  The money center banks (JPM, BAC, C, WFC) and the large U.S brokers (GS, MS) all saw credit default swaps tighten week-over-week. The large-caps continue to tighten on perception of diminished risk across Europe. Interestingly, Euro banks were less enthusiastic last week, as most major EU banks widened. 

 

Tightened the most WoW: MTG, RDN, AGO

Widened the most WoW: MET, TRV, CB

Tightened the most WoW: RDN, MMC, XL

Widened the most MoM: GNW, MTG, UNM

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - American CDS

 

2. European Financial CDS -  Unlike the sovereigns, the Euro banks were much more mixed last week. While French bank swaps tightened slightly, German, Italian and Spanish bank swaps were mostly wider. Greek bank swaps, meanwhile, widened considerably. 

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - European CDS

 

3. Asian Financial CDS - Chinese banks were notably tighter week-over-week with all three reference entities we track tightening by 10-20 bps. Meanwhile, Indian banks continue to move in the wrong direction. Japanese banks were generally tighter week-over-week, though just nominally.  

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - Asian CDS

 

4. Sovereign CDS – European sovereign swaps moved still tighter last week with Italy, Spain and Portugal contracting the most. In response, Germany and France tightened as well.  

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - Sovereign cds Table

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - Sovereign CDS

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - Sovereign CDS 2

 

5. High Yield (YTM) Monitor – High yield rates rose 13 bps last week, ending the week at 7.16% versus 7.03% the prior week.

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.8 points last week, ending at 1697. This series continues to move up and to the right.

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - LLI

 

7. TED Spread Monitor – The TED spread rose 3 bps last week, ending the week at 35 bps.

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index fell 1.6 points, ending the week at -6.93 versus -5.4 the prior week.

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - JOC index

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by 3 bps to 26 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: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - 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: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - ECB 2

 

11. Markit MCDX Index Monitor – Last week spreads tightened 3 bps, ending the week at 139 bps versus 142 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: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - MCDX

 

12. Chinese Steel - Steel prices in China rose 0.3% last week, or 12 yuan/ton, to 3633 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: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - CHIS

 

13. 2-10 Spread – The reflation in the 2-10 spread has been dramatic. Last week it tacked on another 13 bps, rising to 154 bps. Currently, the yield spread is back in line with the average for 2Q12 (151 bps), though the 3Q12-to-date average remains meaningfully down sequentially.  

 

MONDAY MORNING RISK MONITOR: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - 2 10

 

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: MERKEL COMMENTS SUSTAIN DRAGHI RALLY - NYSE margin debt

 

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.

 

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 20, 2012


As we look at today’s set up for the S&P 500, the range is 13 points or -0.86% downside to 1406 and 0.06% upside to 1419. 

                                            

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 08/17 NYSE 706
    • Decrease versus the prior day’s trading of 1327
  • VOLUME: on 08/17 NYSE 675.67
    • Increase versus prior day’s trading of 13.41%
  • VIX:  as of 08/17 was at 13.45
    • Decrease versus most recent day’s trading of -5.88%
    • Year-to-date decrease of -42.52%
  • SPX PUT/CALL RATIO: as of 08/17 closed at 1.77
    • Up from the day prior at 1.07 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 35
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.84%
    • Increase from prior day’s trading of 1.81%
  • YIELD CURVE: as of this morning 1.55
    • Up from prior day’s trading of 1.52 

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Chicago Fed Nat Activity Index, July (prior -0.15)
  • 11am: Fed to purchase $4.25b-5b notes 8/31/2018-8/15/2020
  • 11:30am: U.S. Treasury to sell $32b 3-mo., $28b 6-mo. bills
  • 4pm: Weekly crop report 

GOVERNMENT:

    • House, Senate not in session
    • U.S. presidential election fundraising deadline
    • FERC meets on natural gas, electricity market coordination in U.S. Northeast, 9am
    • AICPA holds 2012 National Governmental Accounting & Auditing Update Conference
    • ITC judge hears testimony in LG’s patent case against Osram over light-emitting diodes, 9am
    • ITC announces whether it will review judge’s findings that VirnetX couldn’t file a complaint against Apple because it lacked ownership control of a patent, 5pm
    • Samsung Electronics asks U.S. appeals court to let it continue selling Galaxy Nexus smartphone while waiting outcome of Apple patent-infringement trial next year, 2pm

WHAT TO WATCH: 

  • Aetna said to have agreed to buy Coventry for $5.7b: WSJ
  • Best Buy said founder Richard Schulze declined board offer to conduct due diligence; WSJ, NYT report BBY has picked Carlson CEO Hubert Joly as new CEO
  • Prudential Financial said to emerge as lead bidder for Hartford’s indiv. life insurance unit, which may fetch ~$1b
  • Home sales, durable-goods orders probably climbed in July
  • American Airlines flight attendants’ voted yesterday to approve new contract with cost cuts
  • Apple, Samsung made no progress toward narrowing dispute over smartphone, computer tablet patents, in report to court Aug. 18, increasing chances jury will decide matter starting Aug. 21
  • Berkshire Hathaway unit agreed to acquire U.S. unit of Clal Insurance Enterprise Holdings for $221m
  • Moody’s, S&P lost bid for dismissal of fraud claims in suit by investors
  • Google’s Motorola Mobility unit said Aug. 17 filed new patent-infringement case against Apple at ITC
  • EU leaders plan talks to bolster Greece, sovereign bonds
  • China new-home prices rise in more cities after rate cuts
  • CME said planning Europe exchange to compete w/ Eurex, Liffe
  • Facebook failed to persude judge to approve $20m settlement on lawsuit over “sponsored stories”
  • Netflix CEO plans to take on BSkyB’s dominance in streaming films by outbidding Sky for Hollywood studio movie rights: Sunday Telegraph
  • BOK Financial said it bought Milestone; terms undisclosed
  • GM recalling ~249,260 vehicles over concern fluid may enter driver’s door; Fisker Automotive plans to recall all its $103k Karma sedans to fix flawed cooling fan linked to Calif. fire
  • “The Expendables 2,” distributed by Lions Gate, led U.S., Canadian box offices with sales of $28.8m
  • U.S. sector previews: Energy, Finance, Industrials, Tech, Rates, Real Estate, Media/Entertainment, Health, Consumer, Transports

EARNINGS:

    • Lowe’s Cos (LOW) 6am, $0.70
    • Corinthian Colleges (COCO), 7:45am, $0.11
    • Urban Outfitters (URBN) 4pm, $0.33
    • Nordson (NDSN) 4:30pm, $0.99

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Speculators Hold Wagers at 11-Month High Amid Rally: Commodities
  • Merkel’s Green Shift Forces Germany to Burn More Coal: Energy
  • Oil Trades Near Three-Month High as Euro Leaders Ready for Talks
  • Rubber Set to Drop 25% on Bearish Momentum: Technical Analysis
  • Crop Outlook Seen Eroding as July Heat Compounded Drought Damage
  • U.K. Natural Gas Surges as Demand Increases on Belgian Exports
  • Copper Declines on Speculation China Will Hold Off From Easing
  • Corn Gains as U.S. Rain Too Late to Boost Drought-Damaged Yields
  • Rubber Drops for First Day in Four as Chinese Demand May Slow
  • Gold Seen Rising on Speculation a Weaker Dollar Will Spur Demand
  • Hedge Funds Slash Gas Bets as Bullish Party Ends: Energy Markets
  • Lonmin Says 30% of Workers Return After Ultimatum Issued
  • CME Planning Europe Exchange to Compete With Eurex, Liffe
  • Swine Fever’s Spread Threatens EU, According to Russian Watchdog
  • Speculators Hold Wagers at 11-Month High
  • Rubber Seen Dropping as Chinese Inventories Set to Equal Record
  • Sugar Rebounds on Speculation Prices Fell Too Far; Cocoa Rises

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


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CHART DU JOUR: SEQUENTIAL LIFT

Takeaway: We expect sequential improvement in monthly Macau trends

Macau GGR monthly projections

 

  • We think July was the near-term bottom with only 1.5% YoY growth
  • September and October should be bang up months with the opening of the 2,500 Sheraton rooms at Sands Cotai Central and the associated marketing
  • Investor sentiment should improve around the market and LVS as its share should continue to rise.

 

CHART DU JOUR: SEQUENTIAL LIFT - macau projections


THE WEEK AHEAD

The Economic Data calendar for the week of the 20th of August through the 24th 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.

 

THE WEEK AHEAD - WeekAhead

 


IL VLT UPDATE

Takeaway: IL soon to be a big market for IGT

IL ESTABLISHMENT LICENSING PROGRESSING IN-LINE WITH OUR RECENTLY RAISED EXPECTATIONS

 

 

Yesterday, the Illinois Gaming Board released a list of all licensees as of August 16th.  The list included 180 licensed establishments, implying approval of an incremental 92 establishments in August.  This implies an acceleration over the 70 licenses granted in July.  To date there have been no established licenses revoked and only 8 establishment have been denied licenses. Currently there are 1,770 pending establishment approvals. 

 

Starting in September, the authorities will actively pursue enforcement against locations operating “grey” machines with locations found in violation of the law charged with Felony action.  Therefore, the increased number of locations licensed in August was in line with our expectation of an acceleration of approvals for legal machines. 
 

Each location can have a maximum of 5 machines so 180 approved locations implies a current maximum market size of 900. We expect that about 1,000 VLT's will get shipped to IL in the September quarter with IGT shipping the majority of those machines. Our best guess is that 3,000 VLTs will be shipped to IL in 2H2012, and by the end of 2013, the market should comprise of about 10,000 units.  Given that we are just in the 3rd month of establishments approvals, its too early to say whether these estimates will come to fruition. We expect that the majority of VLTs will be for sale, with manufacturers providing financing to the route operators.  We are hearing that ASP's should be in the mid to high $12k range. 

 

DETAILS ON PENDING APPLICATIONS: 

  • Distributor: 4 (Cadillac Jack IL, Gametech International, Golden Route, PDS Gaming-IL)
  • Manufacturer: 3 (Cadillac Jack, Gametech, Golden Route)
  • Supplier: 7 
  • Technicians: 35 
  • Terminal handlers: 159 
  • Terminal operators: 17
  • Establishments: 1,770 pending 



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