The spread between Chinese Steel Rebar and Brent Crude Oil is narrowing. Essentially, the chart illustrates how overbought crude oil is right now with respect to demand for rebar.
Keith added BYI to our Real-Time Positions at $48.34. BYI has a bullish formation with TRADE support of $46.91 and can trade up to $51.31 in the TRADE immediate-term.
After our meetings in Vegas last week and touring the the G2E show this week, we are positive about BYI's existing content and impact and its development pipeline. Management was very bullish about their new content and also about the outlook for all segments of their business.
This historically reel spinning slot supplier displayed mostly video content at G2E that has apparently been getting great feedback from customers. Remember that approximately 80% of units shipped in North America are video and unbeknownst to most investors, BYI’s recent video slot shipments have also been around 80% of its total. So their video content is already driving higher share recently, and this will likely increase their high teens overall share. This is not your father’s Bally Gaming.
The stock has done well, certainly relative to its competitors. However, the valuation is not excessive and forward estimates look like they may need to go higher. We are not making a call on the September quarter – we’re essentially in-line. However, we think 2013 estimates might be too low. Consensus for BYI’s FY2013 is $3.17 and company guidance is $2.95 to $3.30. Shipments to Western Canada and Illinois in 2013 could exceed expectations and combine with continued market share gains to push earnings toward the higher end of management's guidance and maybe above.
Takeaway: ECB on hold and Draghi is über confident that he can control risk with the OMTs. We think this attitude is misplaced.
Positions in Europe: Long German Bonds (BUNL)
After ECB President Mario Draghi made his big central bank splash last month the Outright Monetary Transactions (OMTs) programs to buy “unlimited” sovereign bonds of Eurozone members at the bank’s discretion, little was said in today’s press conference in the form of an updated outlook on the economic conditions of the region. There was no clarification to when the OMTs may be activated, on the scope and conditions for the ESM to recapitalize banks, or on the oversight structure of a discussed banking union (that is if the ECB will head a supervisory board or not).
You can find Draghi’s Introductory Statements to the press conference related to inflation, growth and monetary outlook here.
With a unanimous decision the ECB governing council decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively.
On the OMTs, Draghi’s Q&A language seemed to suggest that the program will not be issued in the next weeks, and once again underlined the importance that for the ECB to acquiesce to buying a country’s bonds it must first reach any number of pre conditions (mostly fiscal consolidation) with the country. In so many words he stated that most European countries that would be eligible for the OMTs have both a reasonable debt maturity schedule and debt load, so they’ll not have to use the OMTs given their “open” market access. Further, Draghi said that the OMTs are not a replacement for open market access, meaning that a country that cannot freely issue its own debt is also not a country that the OMT will consider. So here Draghi is giving a nod to Portugal and Ireland. [Note: this week Portugal did complete a bond swap of 3.76B EUR, purchasing bonds maturing in 2013 and selling bonds maturing in October 2015. This was the country’s first buying since it took a bailout last year].
We believe that Draghi’s OMTs comments present too cavalier of an attitude towards the brewing risks across the peripheral. While we don’t think he’s unaware of the broader risks, he seems to believe that he can blanket the risk so long as he has the OMTs in his back pocket.
Our call remains that there are great risk across the Eurozone ahead, especially in an environment of growth slowing, inflation rising, and economic misses on the back of completely compromised and incorrect economic assumptions from governments. To this last point just last week the Spanish government stated that its GDP would be -0.5% in 2013, while just today Bank of Spain Governor Luis Maria Linde told parliament that GDP would contract -1.5% in 2013, and added that the deficit may be missed. You think!
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Los Angeles and other California cities are running out of gasoline due to a shortage of supply in the area, driving prices 45 cents higher to $5/gallon at some stations. It doesn’t help that some major refineries at Chevron (CVX) and ExxonMobile (XOM) are under both planned and unplanned maintenance.
Tesoro (TSO) stands to benefit from the shortage in the near-term as the ANS/USWC 3-2-1 crack is at $50/bbl (see below). The massive spike that took it from under $30/bbl to $50/bbl is where the money is. Short-term bonuses aside, the pain at the pump could lead to negative backlash from the press for TSO at a time when the company is trying to acquire a California-based BP refinery. Should the FTC block the deal, TSO’s stock will likely take a meaningful hit.
Takeaway: #EarningsSlowing is bearish. Potential for political change (was with Obama in 2009 too) is bullish.
POSITIONS: 9 LONGS, 5 SHORTS
I leaned longer again on the open, covering CAT and buying some of our favorite long ideas. The signal is the signal. I think I’ve been as flexible adhering to leaning long or short in the last 3 weeks as I have all year.
Across risk management durations, here are the lines that matter to me most:
In other words, what was resistance yesterday (1448) is now support. That changed, so I did. And there are no rules against selling some at 1463 ahead of tomorrow’s employment report either. That’s the market we are in. Romney just changed the probabilities of Obama winning too.
#EarningsSlowing is bearish. Potential for political change (was with Obama in 2009 too) is bullish.
Keep managing the risk of this 1 (Bernanke Top) range.
Keith R. McCullough
Chief Executive Officer
Takeaway: Claims retrace some of the prior week's improvement. Meanwhile, the market continues to look frothy based on the current labor market.
***The following note comes from our Financials team led by Managing Director Josh Steiner. If you aren't yet receiving their work on the space, including their seminal work on the U.S. housing market, please email if you're interested in setting up a trial.***
Jobless Claims - Small Step Backward
Initial claims rose 8k last week to 367k but after incorporating the upward revision to the prior week's data, rose only 4k. Rolling claims were unchanged at 375k. On a non-seasonally adjusted basis, claim were 5k lower than the prior week, ending at 299k. Last week, the rolling NSA YoY series weakened from -7.7% YoY to -7.3% YoY. The rate of improvement in claims has been slowing since early 2010. We like to look at the rolling NSA series on a YoY basis because it removes the effects of seasonality. For reference, this morning's print was slightly lower than consensus expectations for 370k.
Over the coming months we expect jobless claims to benefit from distortive seasonality tailwinds. In the first chart below we show how the claims series trends lower from September to February and goes sideways or higher March through August. We expect that 2012 will play out similarly to the last three years. That said, it will be important to monitor the YoY change in the rolling NSA series going forward. If we continue to see the rate of improvement slow, this could offset some of the effects of the positive seasonal distortion.
Another important relationship to monitor is that of the S&P and claims. These two series move together over the long-term but tend to see short-tern divergences. The current level of claims now implies an S&P level of 1348, which is 7.1% lower than the most recent S&P print.
Joshua Steiner, CFA
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