“The fact that this policy failed spectacularly in 1973 did not deter the weak-dollar crowd.”
If my sell-side competition thinks I am going to back down on how Dollar Debauchery has perpetuated the US and Global Economic slowdown via commodity inflation in 2012, they better think again.
The Weak Dollar Crowd’s case for “strong exports” and an “up market” (on no volume or fund flows) is weakening. The Strong Dollar, Strong America solution I introduced in December 2011 (when I was bullish on US growth and stocks) is strengthening.
Make no mistake, I am at war with the Keynesians – it’s what Jim Rickards has coined the Currency War, “The Making of The Next Global Crisis.” Jim will be doing a conference call with our Global Macro Team today at 11AM EST (email for access).
Back to the Global Macro Grind…
With a Navajo chant, shots were fired from New Haven on August 16th, 2012. That’s when we said sell stocks and buy bonds. If the Weak Dollar Crowd bought stocks at 1426 SPX and sold bonds with the 10yr US Treasury yield at 1.89%, they should feel shame.
But they don’t. In fact, some of these strategists and economists from the Old Wall are shameless. That’s not being rude – that’s the truth. How else should I describe their March 2012 consensus US and Global GDP estimates being off by 45-70%?
Oh, but “stocks are up” for the YTD, so you don’t have to get anything fundamental right about growth or how money printing infects it to take a half-baked victory lap in this business at short-term tops, right?
That’s ending folks. The People don’t trust broken sources. Market volumes speak louder than their words.
Got data to support the Weak Dollar Crowd weakening?
- GROWTH: this morning you’ll get Q2 2012 US GDP growth reported down at least 60% from where it was in Q4 2011 (4.10%)
- INFLATION: real-time inflation that drives down real (inflation adjusted) Consumption Growth is ripping, sequentially, in August
- CONFIDENCE: yesterday’s US Consumer Confidence number for August was down -8% month-over-month vs July’s 65.9 reading
That’s right “stocks are up” fans, the US stock market is up over +2% for August… and the American People don’t care. That’s because of the math – when Growth Slows and Inflation Accelerates, real consumers get squeezed.
Pardon? What happened? Why didn’t people forget about needing to be up +13% (from here in the SP500) to get their 401k super stock market allocations back to break-even? Didn’t they make a 100% equity allocation to the AAPL ETF?
This isn’t funny anymore. Neither were the 1970s.
In the 1970s you had a less politicized version of Ben Bernanke (Fed Chief Arthur Burns, who didn’t do the TV and print thing) work towards Dollar Debauchery and Debt Monetization under both a Republican and Democrat boss (Nixon and Carter).
Today, it’s worse – and not because Bernanke did the same for Bush/Obama – more so because the Europeans have their own currency this time and are trying to do precisely what the Japanese did.
Overlay those conflicted and compromised political policy “plans” driving the Dollar, Yen, and Euro with what #BailoutBeggars are asking the Chinese to do next (“PRINT LOTS OF MONEY” – Paul Krugman to Japan 1997), and the weakness of the weak is looking weaker.
It’s not different this time. Currency Wars have always been global. Rickards will expand on that with us today.
In other news this morning:
- Chinese stocks fell another -1% last night, right back down to their YTD lows (-16.5% since May)
- Indian and Indonesian stocks both snapped their immediate-term TRADE lines of support, down -0.6% and -1.4%, respectively
- EuroStoxx50 finally broke its immediate-term TRADE (squeeze) line of 2466
- Germany’s DAX and Spain’s IBEX sliced through their respective TRADE lines of 7016 and 7416 as well
- Russian stocks lead decliners, down -1% this morning (down -19% from the March #GrowthSlowing top), with Oil down
- Spain’s 5yr CDS just peeked its head back over the 500 line (1st time since August 13th)
- Gold failed at its long-term TAIL risk line of 1679 resistance, again, and continues to make lower-highs
- 10yr US Treasury Yields have effectively collapsed (-14% in less than 2wks) back down to 1.62%
- US Treasury Yield Spread (10yr – 2yr) is down 18bps since our call on August 16th to buy bonds (that’s a lot)
- Draghi wrote an Op-Ed about something I can’t understand
This globally interconnected gong show of central planning rumors still looks Too Big To Bail to me. Weak (failed) policy makers are looking weaker. Strong real-time risk management processes are getting stronger.
My immediate-term risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, 10yr UST yield, and the SP500 are now $1, $111.54-113.98, $81.11-81.96, $1.24-1.26, 1.58-1.65%, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – August 29, 2012
As we look at today’s set up for the S&P 500, the range is 17 points or -0.52% downside to 1402 and 0.69% upside to 1419.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: on 08/28 NYSE 386
- Increase versus the prior day’s trading of -149
- VOLUME: on 08/28 NYSE 516.47
- Increase versus prior day’s trading of 2.41%
- VIX: as of 08/28 was at 16.49
- Increase versus most recent day’s trading of 0.86%
- Year-to-date decrease of -29.53%
- SPX PUT/CALL RATIO: as of 08/28 closed at 1.49
- Down from the day prior at 1.80
CREDIT/ECONOMIC MARKET LOOK:
BONDS – hoowah! what a move in the US Treasury market – the 10yr yield looks like the Chinese synchro diving team here, dropping straight back down to 1.62%, snapping TRADE support of 1.65% like a knife through water – today’s US GDP report will remind the March 2012 “growth is back” bulls that stocks may have rallied for 6wks, but not for the growth reasons they called for back then.
- TED SPREAD: as of this morning 32.65
- 3-MONTH T-BILL YIELD: as of this morning 0.10%
- 10-Year: as of this morning 1.64%
- Increase from prior day’s trading of 1.63%
- YIELD CURVE: as of this morning 1.37
- Unchanged from prior day’s trading
MACRO DATA POINTS (Bloomberg Estimates)
- 7am: MBA Mortgage Applications, Aug. 24 (prior -7.4%)
- 8:30am: GDP Q/q (Annualized), 2Q, est. 1.7% (prior 1.5%)
- 8:30am: Personal Consumption, 2Q, est. 1.5% (prior 1.5%)
- 8:30am: GDP Price Index, 2Q, est. 1.6% (prior 1.60%)
- 8:30am: Core PCE Q/q, 2Q, est. 1.8% (prior 1.8%)
- 10am: Pending Home Sales M/m, July, est. 1% (prior -1.4%)
- 10:30am: DoE Inventories
- 11am: Fed to purchase $4.25b-$5b notes 8/31/2018-8/15/2020
- 1pm: U.S. to sell $35b 5-yr notes
- 2pm: Fed’s Beige Book
- Republican National Convention, Day 3: Speakers include Paul Ryan; John McCain; Mitch McConnell; Jeb Bush; Tim Pawlenty; Condoleezza Rice
- House, Senate not in session
- SEC meets to consider eliminating prohibition against general solicitation, advertising in securities offerings, 10am
- CMS holds semi-annual meeting of advisory panel on outpatient payments for hospitals, 9am
- International Society of Air Safety Investigators holds annual seminar, with NTSB Vice Chairman Christopher Hart, 8am
WHAT TO WATCH:
- Daikin buys Goodman Global for $3.7b to expand in Nth. America
- Hurricane Isaac beginning to move into Louisiana, NHC says
- G-7 countries call for increased oil output to meet demand
- KKR said to be in talks to buy Renesas for $1.2b: Nikkei
- Italy borrowing costs fall at 6m bill auction
- Republican convention continues in Tampa; Paul Ryan speaks
- Morgan Stanley, Citigroup delay valuation of brokerage JV
- Wellpoint searches for new CEO as Angela Braly resigns
- Apple’s request for Samsung ban to be heard Dec. 6
- Swedish FSA says banks can lend more amid tougher rules
- Joy Global (JOY) 6am, $1.89 - Preview
- Fresh Market (TFM) 6am, $0.27
- Jos A Bank (JOSB) 6am, $0.73
- HJ Heinz (HNZ) 7am, $0.81
- JA Solar (JASO) 7am, ($0.96)
- Zale (ZLC) 7:30am, ($0.83)
- Genesco (GCO) 7:31am, $0.26
- Brown-Forman (BF/B) 8am, $0.63
- Tivo (TIVO) 4pm, ($0.24)
- Oxford Industries (OXM) 4pm, $0.63
- Pandora Media (P) 4:02pm, ($0.03)
- Vera Bradley (VRA) 4:02pm, $0.35
- Greif (GEF) 4:07pm, $0.71
- Canadian Western Bank (CWB CN) 6:48pm, $C$0.57
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- No Return to Dirty ’30s as Farmer Sees Drought Relieved by U.S.
- Oil Falls From One-Week High on Isaac, G-7 as Gasoline Declines
- Timah Restarts Tin Spot Sales After Advances, Sukrisno Says
- Big Coal Faces Steel Slowdown Amid Shale-Gas Pain: Commodities
- Southeast Asian Buyers Seek Cheaper Soybean Meal, Corn Supplies
- Soybeans Rise for Second Day on Signs of Increasing World Demand
- Monsoon Revival Brightens Prospects for India Rice, Cane Crops
- Gold Seen Falling in London Before Bernanke Speech This Week
- Aluminum Premiums in Japan Set for Record High as Supply Limited
- Cocoa Rises as West Africa May Have Little to Sell; Sugar Gains
- Gold ETP Assets Jump to Record to Overtake Italy’s Reserves
- Lingerie Delayed as $517 Billion India Jam Idles Trucks: Freight
- Platinum ‘Correction’ a Buying Opportunity: Technical Analysis
- Gold Calls at 2008 High on Jackson Hole Bet
- Tin Declines as Restart of Producer Sales Eases Supply Concern
- Palm Oil Drops on Speculation Stockpiles to Increase in Malaysia
- Gold Calls at 2008 High on Easing Bets for Jackson Hole: Options
EUROPE – lower-highs on lower volumes across the board in all of the major Eurocrat markets; finally, the apex of the short squeeze looks to be over as my most immediate-term TRADE lines of price momentum are all snapping (for the IBEX that line = 7416).
CHINA – it’s not just U.S. consumers who couldn’t care less about 6 wk U.S. stock market rallies to lower highs; Chinese and Indian consumers do not like food/energy prices up here and neither do their stock markets; Shanghai Comp -1%, back to YTD lows.
The Hedgeye Macro Team
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Takeaway: Solid pricing better than expected
Despite investor fears, ASPs remain stable
Investor concerns surrounding pricing pressure have weighed on the equipment stocks. At least for the for-sale slot market we can confirm our suspicion that pricing held steady through Q2. Following Aristocrat’s report today and combined with the other three large public suppliers (the public 4), the data indicates that ASPs actually increased in 1H2012.
On an as-reported basis, pricing for 1H12 increased 1.3% YoY. Based on our estimates, 1Q pricing was up 2.0% YoY and 2Q pricing was up 0.3% YoY.
One of the factors that dragged down pricing in 1H12 was a higher than normal level of used unit sales. IGT’s NA product sales included 1,700 used unit sales in the June quarter versus a normal quarterly run rate of 500. Aristocrat also blamed an elevated number of refurbished units in their mix as a culprit for lower pricing. If we assume that the used/refurbished units are priced at $8,000 and factor out the used units in 1H12 and 1H11 (500/Q for IGT), then ASPs for the public 4 look like they increased by 3.2% YoY. Based on our estimates, 1Q and 2Q pricing was up 2.3% and 3.7% YoY, respectively.
This Wednesday (August 29th) at 11:00AM EST, we’ll be holding an expert call with Hedgeye CEO Keith McCullough and the one and only Jim Rickards, author of the book Currency Wars and a leading economist, lawyer and investment banker with over 35 years of experience on the Street.
Topics during the call will include the ongoing global currency wars at hand, correlation risk, examining the repercussions of abandoning the gold standard and monetary policy. The call will be made available for our Macro vertical subscribers in full but for those of you in the Twitterverse, we’ll also be live tweeting the call. If you’d like access to the call, please email firstname.lastname@example.org for more information.
Please follow @Hedgeye on Twitter and tune in at 11:00AM sharp for a tweet-a-thon of Keith and Jim’s discussion.
Takeaway: Companies that are struggling from a top line perspective are unlikely to find much relief from commodity costs other than coffee.
During the most recent earnings season, as we wrote in our recent post titled, “BEAT & MISS TRENDS SHOW TOP LINE IMPORTANCE”, the top line is the key focus for investors in the restaurant space. As we know, the commodity outlook and/or pricing power of restaurant companies are not unrelated. The ability of restaurant companies to raise prices this year is limited given the relationship between CPI for food at home and food away from home. Companies like Darden that are posting decelerating traffic numbers are likely to struggle from a top line perspective and any commodity-related headwinds will only add to the bottom-line impact.
Summary View (charts below)
Coffee prices have been the outlier to the upside over the last week, largely due to gains posted yesterday as speculators wagered that Tropical Storm Isaac will “damage beans stored in warehouses in New Orleans”. Robusta coffee is expected to become more expensive in 2012/2013 as demand for the cheaper cousin of Arabica is forecasted to rise roughly 6%, according to Volcafe. All in all, we see the outlook as favorable for Starbucks and other coffee retailers from a coffee cost perspective. (SBUX, DNKN, GMCR, PEET, CBOU, THI)
Whole bird chicken prices gained modestly week-over-week. Wing prices did decline somewhat but elevated corn prices spurring food processors (SAFM) to cut back egg production means that BWLD will remain in a difficult position for some time. BWLD CEO Sally Smith said in late July, “This year highest wing prices we've ever seen at a sustained level. Now, there's nothing to indicate that wing prices are going to change.”
Dairy prices (milk and cheese) seem to be moving steadily higher as concerns mount over shrinking herd sizes in the United States. This could be a potential headwind for CAKE which, during the first half of 2012, experienced better-than-anticipated favorability due in part to the price of non-contracted dairy ingredients.
Corn and wheat prices have declined over the past week as speculation mounted that Isaac will bring rains this week to the southern United States, helping to ease drought conditions.
Beef prices have been moving lower recently as the drought has accelerated herd sell-off. Longer-term, inventory numbers suggest continued elevated prices for beef. TXRH, WEN, and JACK all have exposure to spot market beef prices.
The drought is having an impact on commodity costs in many different ways. This article from Bloomberg describes the difficulty shippers are having moving petroleum, commodities, and goods around inland waterways in the U.S.
“More than 566 million tons of freight valued at $180 billion moved through inland waterways in 2010, including 60 percent of U.S. grain exports, 22 percent of domestic petroleum and 20 percent of the coal used to generate electricity, according to the Waterways Foundation in Arlington, Virginia.”
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