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Trade Of The Day: JPM

Today we bought JP Morgan (JPM) at $41.41 a share at 3:27 PM EDT in our Real Time Alerts. The company put up a solid quarter and Hedgeye Financials Sector Head Josh Steiner wants to be net long financials if Romney momentum continues to build. A Romney win would be a positive for banks and other financial institutions as he plans on toning down regulation. 

 

Trade Of The Day: JPM - image001


GDP Report: Accelerating The Recession

Takeaway: Growth and earnings are slowing. The current recession is likely to get worse before it gets better.

Net-net, the 3Q12 GDP report suggests weak imports may be leading a sequential slowdown in both “C” and “I”  in the upcoming quarter(s). Additionally, an demonstrable and unsustainable acceleration  in “G” was all that stood in the way of a -35% deceleration to +0.9% QoQ SAAR, allowing the headline figure to come in at +2% QoQ SAAR. This means that growth is trending along a +0.9% QoQ SAAR run rate and potentially headed lower if “C” and “I” exhibits signs of slowing.

 

 

GDP Report: Accelerating The Recession  - GDPGrowthpic

 

 

Unfortunately, dual slowing of “C” and “I” is indeed a probable scenario, given the uncertainty surrounding the election, fiscal cliff and debt ceiling breach. Moreover, each catalyst may actually be contributing to a noteworthy acceleration in corporate cost-cutting initiatives (layoffs?), as highlighted on 3Q earnings calls. Recessions happen when baseline GROWTH is weak, the corporate earnings cycle slows and companies start trying to cut their way into meeting peak-cycle, peak-margin forward EPS estimates. In this respect, 4Q12 is very much like its 2007 counterpart.

 

Our updated US GIP model is included in the chart above.

 


Weekly European Monitor: Some Optimism for the Bailout Union

Takeaway: Wage reduction and deposits gains in the periphery are positive signs, however a united Eurozone under growth is far off.

-- For specific questions on anything Europe, please contact me at to set up a call.

 

Positions in Europe: Long German Bonds (BUNL)

 

Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -1.3% week-over-week vs +1.7% last week. Bottom performers: Austria -3.7%; Russia (RTSI) -3.7%; Ukraine -3.3%; Denmark -2.6%; Czech Republic -2.4%; Switzerland -2.3%; Germany -2.0%; France -2.0%; Hungary -2.0%.  Top performers:  Cyprus +11.7%; Slovakia +0.5%; Greece +0.4%. [Other: UK -1.5%].
  • FX:  The EUR/USD is down -0.68% week-over-week.  W/W Divergences: GBP/EUR +1.24%; DKK/EUR -0.00%; CHF/EUR -0.03; CZK/EUR -0.26%; PLN/EUR -0.78%; RUB/EUR -0.89%; HUF/EUR -1.08%; SEK/EUR -1.15%; NOK/EUR -1.19%.
  • Fixed Income:  The 10YR yield for sovereigns were mostly higher on the week across the core and periphery.  Greece rose the most week-over-week at +43bps to 17.21% (but is down -2% over the last month), followed by Portugal +37bps to 8.04%, Spain +33bps to 5.67% and Italy +16bps to 4.93%. Germany was a main outlier, falling -8bps to 1.52%.

Weekly European Monitor: Some Optimism for the Bailout Union - aa. yields

 

Weekly European Monitor: Some Optimism for the Bailout Union - aa. eur

 

Weekly European Monitor: Some Optimism for the Bailout Union - aa. cftc eur

 

 

Some Optimism for the Bailout Union:

 

“But let me tell you, if you are sick and you do not go to the doctor just because you are afraid that somebody will think that you are very sick, you will not get healthier.”

-Jacob Frenkel (Chairman of JPMorgan Chase International) with Tom Keene on 10/24/12

 

Frenkel really gets to the heart of the matter here with this quote. In assessing the fiscal condition of Eurozone sovereigns and banks there’s both an unwillingness of governments and banks to admit their imbalances, but also uneven or impractical expectations for minimizing these imbalances and/or asking for a bailout. Interestingly, and in response to missing their fiscal and economic targets, many governments, Eurocrats and central bankers alike have moved in recent weeks towards agreement (or acquiescence) that fiscal consolidation is not the answer to long-term health economically. This is flawed thinking in our view and as Frenkel points out will not return the sick patients to health. What’s key is to set realistic expectations and promote a balance between fiscal consolidation and growth.

 

As depressing and mindboggling as it can be following the conflicted action of Eurocrats to fix the region’s deep cracks, we came across a couple positive charts and data points this week to highlight.

 

The chart below comes from The Economist and shows changes in nominal compensation across Eurozone countries from the inception of the Eurozone until 2009 and 2009-12.

 

Weekly European Monitor: Some Optimism for the Bailout Union - EURO WAGE CHANGES

 

Clearly a couple key steps to getting the Eurozone back on track include dropping wages and prices to make companies and countries more competitive. As the chart points out, Germany was early (pre global downturn) in taking the pain through job reforms and limiting wage inflation. Consequently (among other factors), Germany has been in a stronger position since 2008. While the chart shows the compensation cuts taken across the periphery in the period 2009-12, clearly there’s more room to go on the downside, particularly from Spain and Portugal, while some progress has already taken place.

 

Another positive data point comes from bank deposits. ECB data showed this week that consumers and businesses put money back into Spanish and Greek banks in September. Private sector deposits at Spanish banks rose to €1.505T at the end of September from €1.492T a month earlier, reversing an August decline. In addition, Greek bank deposits rose to €160.1B from €158.7B, and of note is that Greek deposits have been relatively stable since the repeat elections in June.

 

We continue to expect Eurocrats to pull out all stops to maintain the Eurozone’s current fabric to maintain their jobs, live up to the promises of a united Europe, and prevent the domino risk from a country leaving or being forced out of the Union. While the data points above are encouraging signs, and throw in a willingness of the ECB to leverage its balance sheet, we still believe that the path towards a highly functional monetary and fiscal union is years away and that growth expectations for much of the region are too optimistic.

 

One fact to keep in mind when assessing the Eurozone is the black or shadow economy. It is in fact sizable (and significantly larger in the periphery) and worth consideration as you work through GDP expectations versus “health” on the ground.  The chart below from Bloomberg Briefs, is an estimate and a starting place for sizing this economic activity off the books.

 

Weekly European Monitor: Some Optimism for the Bailout Union - Europe Shadow Economy

 


The European Week Ahead:


Monday: Oct. Germany Consumer Price Index – Preliminary; Sep. UK Net Consumer Spending, Mortgage Approvals, M4 Money Supply; Sep. Spain Retail Sales

 

Tuesday: Angela Merkel meeting with Christine Lagarde; Oct. Eurozone Consumer Confidence – Final, Business Climate Indicator, Economic Confidence, Services Confidence; Oct. Germany Unemployment Data Released by Federal Labor Agency, Unemployment Change, Unemployment Rate; Oct. UK CBI Reported Sales, GfK Consumer Confidence Survey; Oct. Spain Consumer Price Index – Preliminary, Budget Balance; Sep. Spain Producer Price Index; 3Q Spain GDP – Preliminary

 

Wednesday: Spanish short-selling ban expires (expected to be extended until Feb), New EU short selling regulation takes effect; Oct. Eurozone CPI Estimate; Sep. Eurozone Unemployment Rate; Sep. Germany Retail Sales; Sep. France Producers Prices, Consumer Spending; Aug. Spain Total Housing Permits, Current Account; Oct. Italy CPI Preliminary; Sep. Italy Unemployment Rate – Preliminary, PPI; Aug. Greece Retail Sales

 

Thursday: Oct. UK Nationwide House Prices, PMI Manufacturing; Oct. Spain Manufacturing PMI; Greece Manufacturing PMI

 

Friday: Oct. Eurozone PMI Manufacturing – Final; Oct. Germany PMI Manufacturing – Final; Oct. UK PMI Construction; Oct. France, PMI Manufacturing – Final; Oct. Italy PMI Manufacturing, Budget Balance

 

Saturday/Sunday: G20 Fin Min Meeting in Mexico

 

 

Extended Calendar:


NOV 8  -              ECB Governing Council Meeting

NOV 8-9 -            AFME 7th Annual European Government Bond Conference in Brussels

NOV 12 –             Eurogroup Meeting in Brussels

NOV 15 –             Catalonia regional election in Spain

NOV 22 –             ECB Governing Council Meeting

NOV 27 –             AFME 4th Annual Spanish Funding Conference in Madrid

DEC 1 –               Beginning of the Russian Presidency of G20

DEC 3 –                Eurogroup Meeting in Brussels

DEC 6 –                ECB Governing Council Meeting

DEC 12-13 –          First public consultation between the Russian government, B20 Coalition and international civil society representatives on G20 agenda for 2013 (in Moscow)

DEC 20 –               ECB Governing and General Council Meeting

APR 2013 –            Parliamentary elections in Italy

MAY 2013 –           Presidential elections in Italy

 

 

Call Outs:


Eurozone - Govt. debt as % GDP rose to 90% in Q2, a new record high.

 

Italy - Former Italian Prime Minister Berlusconi has decided not to stand as a candidate for prime minister in next spring's elections. He said in a statement on Wednesday that his People of Liberty Party (PDL) plans to hold elections in December to choose his successor.

 

Germany/Greece - German Finance Minister Schaeuble said that his country may be willing to show some flexibility when it comes to Greece's fulfillment of its bailout terms if there are obstacles that are beyond the control of Athens. He noted that "If the troika should come to the conclusion that there are objective things that the Greeks cannot change on their own and if it makes suggestions for how to solve this, then we will consult on that in the German Bundestag and decide on them accordingly."

 

Spain - The Spanish government has reported to Eurostat that the deficit is going to come in worse than forecast at 7.2% - 7.4% of GDP versus agreed limit of 6.3% of GDP. 

 

Spain - Moody’s downgraded by one to two notches the ratings assigned to five Spanish regions. It said the decision to downgrade the ratings of the four Spanish regions of Andalucia (to Ba2 from Baa3), Castilla-La Mancha (to Ba3 from Ba2), Catalonia (to Ba3 from Ba1) and Murcia (to Ba3 from Ba1) was driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs. It added that Catalonia, Andalucia and Murcia face large debt redemptions in Q4 2012 when retail bonds issued in 2011 are due to mature.

 

Spain - Spanish lenders will transfer newly constructed housing assets into Spain's bad bank at an average discount of 52.2% of original book value, and used homes at an average discount of 47.5% (a report in Expansion was said to have put the haircuts at 54% and 48%, respectively, along with an 86% haircut for land).

 

Spain - Expansion, citing sources at the Economy Ministry, reported that the Spanish government will formally ask the EU for a bailout package of up to €60B to recapitalize its banking sector. The EU has agreed to make up to €100B available to Spain for the restructuring. The sources said that while Madrid believes that recapitalization needs are really in the ~€40B range, it wants to take a conservative approach.

 

Spain - Bloomberg, citing people familiar with the talks, reported that European authorities are pushing Bankia to impose losses on junior bondholders. The ECB and European Commission want investors, including preference shareholders, to swap their securities for new shares to reduce the cost to taxpayers. It added that forcing the retail investors who purchased preferred shares as part of publicity drives by banks makes it harder for the government to rebuild Bankia, which was nationalized in June.

 

 

Data Dump:

 

Eurozone Government Debt/GDP Ratio 87.3% in 2011 vs 85.4% in 2010

Eurozone M3 2.7% SEPT Y/Y vs 2.8% AUG

Eurozone PMI Manufacturing 45.3 OCT Prelim (exp. 46.5) vs 46.1 SEPT

Eurozone PMI Services 46.2 OCT Prelim (exp. 46.4) vs 46.1 SEPT

Eurozone Composite 45.8 OCT Prelim (exp. 46.5) vs 46.1 SEPT

 

Germany PMI Manufacturing 45.7 OCT Prelim (exp. 48) vs 47.4 SEPT

Germany PMI Services 49.3 OCT Prelim (exp. 50) vs 49.7 SEPT

 

Weekly European Monitor: Some Optimism for the Bailout Union - aa. pmi

 

Germany IFO Business Climate 100 OCT (exp. 101.6) vs 101.4 SEPT

Germany IFO Current Assessment 107.3 OCT (exp. 110) vs 110.3 SEPT

Germany IFO Expectations 93.2 OCT (exp. 93.6) vs 93.2 SEPT

 

Weekly European Monitor: Some Optimism for the Bailout Union - aa. ifo

 

Germany GfK Consumer Confidence 6.3 NOV vs 6.1 OCT

Germany Import Price Index 1.8% SEPT Y/Y vs 0.9% AUG

 

France PMI Manufacturing 43.5 OCT Prelim (exp. 44) vs 42.7 SEPT

France PMI Services 46.2 OCT Prelim (exp. 45.4) vs 45 SEPT

France Consumer Confidence 84 OCT (inline) vs 85 SEPT

France Business Survey -21 OCT vs -25 SEPT

France Own-Company Production Outlook -8 OCT vs -5 SEPT

France Production Outlook -56 OCT vs -52 SEPT
France Business Confidence 85 OCT vs 90 September

 

UK Q3 GDP Prelim 1.0% Q/Q (exp. +0.6%)  vs -0.4% in Q2 (officially ends double dip recession)   [0.0% Y/Y (exp. -0.5%) vs -0.5% in Q2]

UK CBI Business Optimism -12 OCT (exp. -2) vs -6 SEPT

 

Italy Business Confidence 87.6 OCT vs 88.3 September

Italy Economic Confidence 76.6 OCT vs 76 September

Italy Consumer Confidence 86.4 OCT (exp. 86.4) vs 86.2 SEPT

Italy Retail Sales -1.0% AUG Y/Y vs -3.2% JUL

Italy Hourly Wages 1.4% SEPT Y/Y vs 1.6% AUG

 

Spain Unemployment Rate 25.02% in Q3 vs 24.63 in Q2

Spain Mortgages on Houses -28.5% AUG Y/Y vs -17.5% JUL

Spain Mortgages-capital Loaned -33.2% AUG Y/Y vs -27.4% JUL

Spain Producer Prices 3.8% SEPT Y/Y vs 4.1% AUG

 

Switzerland KOF Swiss Leading Indicator 1.67 OCT vs 1.68 SEPT

Switzerland Money Supply M3 8.9% SEPT Y/Y vs 8.3% AUG

 

Sweden Consumer Confidence -2.9 OCT (exp. 1.7) vs 2.0 SEPT

Sweden Manufacturing Confidence -16 OCT (exp. -12) vs -11 September

Sweden Economic Tendency 92.3 OCT (exp 95) vs 95.6 SEPT

Sweden Household Lending 4.5% SEPT Y/Y vs 4.6% AUG

Sweden PPI -1.9% SEPT Y/Y vs -1.9% AUG

 

Finland Unemployment Rate 7.1% SEPT vs 7.3% AUG

Finland House Prices 1.8% in Q3 Y/Y vs 0.9% in Q2

Denmark Consumer Confidence -5.5 OCT vs -2.2 September

 

Netherlands Producer Confidence -7.7 OCT vs -6.7 SEPT

Netherlands Consumer Spending -2.0% AUG Y/Y vs -1.5% JUL

Netherlands House Price Index -7.9% SEPT Y/Y vs -8.0% AUG

 

Austria Industrial Production 3.5% AUG Y/Y vs 3.0% JUL

Ireland Property Prices -9.6% SEPT Y/Y vs -11.8% AUG

 

Czech Republic Business Confidence 2.6 OCT vs 2.7 SEPT

Czech Republic Consumer and Business Confidence -3.3 OCT vs -3.8 SEPT

Czech Republic Consumer Confidence -27 OCT vs -29.8 SEPT

 

Poland Retail Sales 3.1% SEPT Y/Y vs 5.8% AUG

Poland Unemployment Rate 12.4% SEPT vs 12.4% AUG

Slovakia Unemployment Rate 13.4% SEPT vs 13.2% AUG

Croatia Unemployment Rate 18.3% SEPT vs 17.7% AUG

 

Turkey Foreign Tourist Arrivals 1.7% SEPT Y/Y vs 9.7% AUG

 

 

Interest Rate Decisions:

 

(10/25) Sweden Riksbank Interest Rate UNCH at 1.25%

 

Matthew Hedrick

Senior Analyst


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%

IDEA ALERT: RE-SHORTING THE YEN, OUR FAVORITE CURRENCY SHORT ACROSS ASIA

Takeaway: We remain bearish on the JPY relative to the USD across our TRADE, TREND and TAIL durations.

SUMMARY BULLETS:

 

  • Earlier today, Keith re-shorted the Japanese yen in our Real-Time Alerts signaling product. This is not a new thesis to clients of Hedgeye Macro, so we’ll keep it tight (email us if you’d like to dialogue further on anything you see below):
  • We see downside risk in the JPY relative to the USD across our TRADE, TREND and TAIL durations, driven largely by our expectations for the BOJ to dramatically accelerate their monetary easing measures amid heightening political pressure, a rapidly-deteriorating domestic GROWTH outlook and a potential upward revision(s) to their long-term inflation target over the intermediate term.
  • Regarding the aforementioned point on political pressure, we think Japan’s looming debt ceiling showdown is likely to pull forward the timing of parliamentary elections from AUG ’13 to some point between now and the late NOV/early DEC breach.
  • If that catalyst occurs, we expect the LDP to regain control of the Diet based on the latest polls which show them taking a dramatic amount of share from the DPJ in recent months. The LDP has been openly in favor of a less independent central bank, incrementally-dovish monetary policy and incrementally-hawkish foreign policy towards China regarding the disputed islands. Judging by Japanese automakers’ SEP sales figures, the latter would be incrementally bearish for Japanese GROWTH – particularly from the BOJ’s perspective.
  • On the USD side of the trade, we think a Romney/Ryan victory is explicitly dollar-bullish. We have access to arguably the most accurate US presidential forecasting model in existence; that model suggests they’ll win in a landslide from an electoral college perspective.  John Taylor following Bernanke as Fed Chairman is a potentially positive tail risk for the USD if such a move were to be telegraphed in the context of the aforementioned scenario.

 

ECONOMIC CATALYSTS: Next week, we have the BOJ monetary policy meeting – which may be attended by new Economy Minister Seiji Maehara who is likely to seek to exert political pressure upon the board to ease – as well as a number of other economic data points that are likely to show Japanese GROWTH accelerating to the downside. That would be on the heels of yesterday’s dovish INFLATION report.

 

  • 10/28: SEP Retail Sales
  • 10/29: SEP Jobs Report; SEP Industrial Production; SEP Overall Household Spending
  • 10/30: BOJ Rate Decision; OCT Manufacturing PMI
  • 10/31: SEP Housing Starts; SEP Construction Orders
  • 11/1: OCT Vehicle Sales; OCT Monetary Base

 

RELEVANT RESEARCH: As previously mentioned, this is not a new thesis for our clients; if, however, you have not seen the relevant research notes, we encourage you to review the following reports:

 

  • 9/27: IDEA ALERT: SHORTING THE YEN AS SINO-JAPANESE TENSIONS ESCALATE
    • We are now short the Japanese yen (via the CurrencyShares Japanese Yen Trust etf “FXY”) in our Real-Time Positions product as a way to communicate our bearish TRADE and TREND thesis on the JPY relative to the USD.
    • The key catalyst in support of our bearish bias is a likely acceleration of the BOJ’s balance sheet expansion, which may include a potential implementation of a foreign asset purchase program as Japan’s economic outlook deteriorates on the margin due to slowing commerce with China and recent yen strength.
    • From a TAIL duration perspective, any sustained weakness in the yen risks Japanese banks and asset managers clearing out of the JGB market en masse in search of higher yields abroad (which they couldn’t do previously due to structural yen appreciation), as well as imposing the threat of structurally higher rates of inflation – a risk the JGB market hasn’t had to price in for over a decade.
  • 9/19: ARE CHINA AND JAPAN HEADING FOR WAR?
    • While we view the threat of military intervention as highly improbable, we do think the heightened tension over the Senkaku (Japan)/Diaoyu (China) islands risks facilitating a string of international protectionism – which is already poised to accelerate due to recent political promises out of the Obama and Romney camps.
    • Such protectionism would have dire economic effects globally, with Japanese industrial production and US/EU consumption getting hurt the most – the former due to lower Chinese demand; the latter due to higher import price inflation.
    • Retaliatory measures, while not an acute risk, could beget broader financial market and economic contagion globally. This is a meaningful TAIL risk, given the recent rhetoric and maneuvers of international policymakers.
  •  8/28: THE RAMIFICATIONS OF JAPAN’S LOOMING GOVERNMENT SHUTDOWN
    • The political calendar poses a great deal of risk to the Japanese economy, JGBs and Japanese financial institutions over the next ~2 months.
    • The ramifications of a potential/actual Japanese government shutdown are three-fold: a potential sovereign default; a potential sovereign credit rating downgrade(s); and an associated $75-80 billion capital call across the Japanese banking system in the event JGBs are downgraded to single-A level by Moody’s and/or Standard and Poor’s, where the outlook is already “negative”.
  •  7/27: ARE JAPANESE GOVERNMENT BONDS POISED TO MAKE SOME NOISE?
    • By authorizing BOJ purchases of foreign currency assets, Japanese policymakers risk materially elevating the risk of sustained yen depreciation and inflation within the JGB market.
    • Though we have yet to receive anything concrete on the policy front, we will be paying close attention to the next two BOJ monetary policy board meetings for signs of official movement in this direction. 
    • We are now short the Japanese yen (via the CurrencyShares Japanese Yen Trust etf “FXY”) in our Real-Time Positions product as a way to communicate our bearish TRADE and TREND thesis on the JPY relative to the USD.
    • The key catalyst in support of our bearish bias is a likely acceleration of the BOJ’s balance sheet expansion, which may include a potential implementation of a foreign asset purchase program as Japan’s economic outlook deteriorates on the margin due to slowing commerce with China and recent yen strength.
    • From a TAIL duration perspective, any sustained weakness in the yen risks Japanese banks and asset managers clearing out of the JGB market en masse in search of higher yields abroad (which they couldn’t do previously due to structural yen appreciation), as well as imposing the threat of structurally higher rates of inflation – a risk the JGB market hasn’t had to price in for over a decade.

  

Our updated levels on the CurrencyShares Japanese Yen Trust etf (FXY) are included in the chart below. Email us if you’d like our quantitative risk management levels for the USD/JPY cross as well.

 

Darius Dale

Senior Analyst

 

IDEA ALERT: RE-SHORTING THE YEN, OUR FAVORITE CURRENCY SHORT ACROSS ASIA - 1


Bearish TREND: SP500 Levels, Refreshed

Takeaway: Our top Hedgeye Global Macro Theme for Q4 of #EarningsSlowing continues to play out at an accelerating rate.

This note was originally published October 26, 2012 at 11:09 in Macro

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)

 

Our top Hedgeye Global Macro Theme for Q4 of #EarningsSlowing continues to play out at an accelerating rate. Half way through Earnings Season, we see no reason to back off that fundamental research view.

 

From a quantitative perspective (different from the research view), the bearish TREND signal remains. Across our core risk management durations, here are the lines that matter to me most:

 

  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE support = 1391
  3. Long-term TAIL support = 1354

 

In other words, now that the SP500 is slicing through its April 2012 highs (and there’s no Fed put), long-term TAIL support is back in play.

 

On growth, 1/3 of this morning’s GDP print came from a Government Spending (contributing +0.71% out of nowhere, after 8 consecutive quarters of declines!). That’s going to matter as the legacy media figures it out.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bearish TREND: SP500 Levels, Refreshed - SPX


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