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Hot & Cold

This note was originally published at 8am on November 02, 2012 for Hedgeye subscribers.

“I will have naught to do with a man who can blow hot and cold with the same breath.”

-Aesop

 

This is the coldest morning the East Coast has had to deal with since Sandy. My prayers go out to the children, sick, and elderly who have to go through this with no power or heat.

 

Back to the Global Macro Grind

 

Get’em while they are h-h-ot! That’s what the perma-bull marketers said yesterday as US stocks were having their 1st legitimate up day in the last 7 trading sessions. It’s been a long 1.5 month drought. Literally everything that didn’t work in October went straight up. All the pundits nailed it. Welcome to November.

 

In other “recovery rally” news – the headlines from the manic media changed, suddenly, this morning:

  1. “Anger As Fuel Shortage Hampers Recovery” –BBC World News
  2. “Scope of Sandy’s Devastation Widens, Death Toll Spirals” –Reuters
  3. “Power Restoration May Take Longer Than Expected” –New York Times

But don’t worry – there a plenty of Keynesians who still believe in Broken-Window Economics who will be out peddling stories this morning about how America is seeing a jobs and hurricane recovery.

 

We have no idea what this morning’s US Employment Report will bring. Only a moron would have a “forecast” for a number that the government makes up. China gets that – so they are going to start making up their numbers a little faster too.

 

China Daily noted that the National Bureau of Statistics said China will “revise its GDP accounting methods” in line with international standards. Perfect. So the China recovery is going to get really h-h-ot now!

 

As our hawk-eyed Asia analyst Darius Dale wrote to our Institutional Clients yesterday, this is the “most bullish data point emanating from China today – inclusive of the sequential acceleration in Manufacturing PMI and the PBOC’s record $6B injection into Chinese money markets this week.”

 

“From what we’ve noticed, international standards for GDP accounting = shoot first; ask questions later (i.e. report the most positive headline figure you can and subsequently revise it down 1-3 times in the coming months/years). This bodes well for a sequential uptick in China’s YoY GDP growth in 4Q12E!”

 

In other economic “recovery” news out of Europe:

  1. Spain printed a PMI reading of 43.5 for OCT vs 44.6 in SEP
  2. Germany’s slowdown stayed the same in OCT with a PMI reading of 46.0
  3. Italy’s PMI remained well below the “50 recovery” line at 45.5 OCT vs 45.7 SEP

No worries there. Markets in Europe were relatively hot this week (other than in Greece). These poor Greek guys are having a heck of a time reconciling the media’s “recovery” rumors with economic reality. Greek stocks dropped -15% from October 22nd’s YTD high to yesterday’s close, leaving this -11% down week as the worst week for the Athex Index in 4 years.

 

Across asset classes, as always, there are plenty of Hot & Cold risk management signals to consider this morning:

  1. SP500 climbed back above its 1419 TREND line of support; but remains below its TRADE line of 1432 resistance
  2. US Equity Volatility (VIX) closing at 16.69 remains in a Bullish Formation; could go to 20 if this jobs report is bad
  3. US Dollar Index continues higher this morning, +0.35% to $80.32; bullish on both our TRADE and TAIL durations
  4. EUR/USD trades down to the low-end of our immediate-term $1.28-1.30 risk range (bearish TAIL remains)
  5. Hang Seng +1.24% last night makes it the 1st major index in Asia to make higher-highs
  6. KOSPI, Nikkei, Sensex were all up > 1% too, but are all making lower-highs, not confirming the Hang Seng
  7. Germany’s DAX and France’s CAC making lower-highs versus September, again
  8. Russia’s RTSI Index remains under crash-test assault, -0.3% this morning (-18% from #GrowthSlowing’s to in MAR)
  9. CRB Commodities Index remains in a Bearish Formation at 296 (Bernanke’s Bubble)
  10. Copper, down -0.5% this morning to $3.47/lb remains in a Bearish Formation as well
  11. US Treasury 10yr Bond Yield of 1.73% remains bearish TRADE and TAIL w/ resistance at 1.75% and 1.91% respectively

And, finally, US Equity Fund outflows (ex-ETFs) continued last week with another -$1.4B yanked. So, was yesterday’s 1-day move a head-fake? Are you feeling hot or cold?

 

I’ll let the market answer the 1st question for me today. If we confirm 1419 in the SP500 and the VIX snaps 15.54, that would be bullish. On the second question, my arthritic hockey knuckles are officially numb as I sign off from a chilly Westport, CT.

 

Out immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1691-1728, $107.49-109.96, $79.68-80.47, $1.28-1.30, 1.70-1.75%, and 1391-1432, respectively.

 

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Hot & Cold - EL

 

Hot & Cold - ELVP


Idea Alert: Shorting FXE

Takeaway: Fundamentals and the challenges inherent in the Union of uneven states suggest our $1.31 EUR/USD resistance level will hold.

Positions in Europe: Short EUR/USD (FXE); Short Spain (EWP) 

 

Keith added FXE to our Real-Time Positions at $127.06. FXE’s TRADE range is $126 – 128 with a TREND resistance of $131.

 

With regard to the trade Keith said: “The Euro bounced right where it should have, off the low-end of our immediate-term Risk Range, but remains bearish TREND.”

 

Idea Alert: Shorting FXE - 11. eur usd

 

Our call is that the EUR/USD will trade within our quantitative levels and reflect much of the daily headline risk (from Spain, Greece, and Italy in particular), however ECB President Mario Draghi’s September announcement that “the ECB is ready to do whatever it takes to preserve the euro” and the resolve of Eurocrats to maintain the Union will prevent levels falling anywhere near parity.

 

POLITICS

 

There is still great political uncertainty in Europe right now, which lends support that the EUR/USD will not cross our quantitative long term TAIL line of resistance at $1.31. Further, we believe there is a high likelihood that no significant policy action comes in the remaining weeks of 2012.  As a reminder, some of the main topics that Eurocrats are wrestling with are:

  • Setting up a Banking Union (with Pan-European Deposit Insurance)
  • Setting up a Fiscal Union
  • If and when Spain will request another bailout (and will it come from the IMF or ESM, or both?)

In terms of setting up a Banking Union and Fiscal Union, we believe the two are dependent on each other.  While more attention has been given to a Banking Union recently, we believe Eurocrats reaching an agreement on a fiscal union over the near term is incredibly unlikely as countries are unwilling to part with their fiscal sovereignty. This could be one factor to put downside pressure in the cross.

 

On Spain, we think the sovereign asking for a bailout is a question of when and not if. The recent rumor that Spain may look to the IMF for a loan would reflect the likelihood of more favorable terms versus the European Commission and ECB’s ‘conditionality’ for aid via the ESM or OMT.

 

FUNDAMENTALS

 

European fundamentals continue to show a down to ugly trend, looking across PMIs, confidence readings, inflation, retail sales and unemployment rates across much of the region. It’s important to note that even the perceived pocket of strength are revealing weakness, with Germany, France, and the Netherlands notable call-outs.

 

Manufacturing and Services PMIs for October have shown little to no improvement over the last 8-9 straight months, stuck below the 50 line indicating contraction.

 

Idea Alert: Shorting FXE - 11. PMIs

 

Below is notable data out this week:

 

Eurozone CPI 2.5% in OCT Y/Y (above the 2% mandate and should remain so over the intermediate term)

 

Eurozone Industrial Production -2.3% SEPT Y/Y (exp. -2.2%) vs -1.3% AUG  

Eurozone Industrial Production -2.5% M/M vs 0.9% AUG = biggest drop in more than three years

 

Idea Alert: Shorting FXE - 11. industrial prod and retail

 

Eurozone ZEW Economic Sentiment -2.6 NOV vs -1.4 OCT

 

 

Preliminary Q3 GDPwhile many of the core countries beat expectations, growth levels contracted versus the previous quarter and the Eurozone officially slipped into recession:

 

Eurozone -0.6% Y/Y (inline) vs -0.4% in Q2    [-0.1% Q/Q (inline) vs -0.2% in Q2]

Germany 0.9% Y/Y (exp. 0.8%) vs 1.0% in Q2   [0.2% Q/Q (exp. 0.1%) vs 0.3% in Q2]

France 0.2% Y/Y (exp. 0.0%) vs 0.1% in Q2   [0.2% Q/Q (exp. 0.0%) vs -0.1% in Q2]

Italy -2.4% Y/Y (exp. -2.9%) vs -2.4% in Q2   [-0.2% Q/Q (exp. -0.5%) vs -0.7% in Q2]

Netherlands -1.6% Y/Y (exp. -0.5%) vs -0.4% in Q2   [-1.1% Q/Q (exp. -0.2%) vs 0.1% in Q2]

 

Idea Alert: Shorting FXE - 11. eurozone gdp

 

Germany ZEW Current Situation 5.4 NOV (exp. 8) vs 10 OCT

Germany ZEW Economic Sentiment -15.7 NOV (exp. -10) vs -11.5 OCT

 

Idea Alert: Shorting FXE - 11. zew germany

 

UK CPI 2.7% OCT Y/Y (exp. 2.4%) vs 2.2% SEPT  [0.5% OCT M/M vs 0.4% SEPT] – stagflation, continued.

 

Idea Alert: Shorting FXE - 11. uk cpi

 

We think slowing growth, sticky inflation, and the structural flaws inherent in creating a Eurozone will continue to present challenges that should prevent appreciation of the EUR/USD above our TAIL line of resistance at $1.31.  

 

Matthew Hedrick

Senior Analyst


CHART DU JOUR: SINGAPORE FX TAILWIND

LVS’s MBS should get an FX boost in Q4.

 

  • If the current S$/US$ rate of 1.224 stands, it will result in almost a 5% favorable EBITDA impact for LVS’s MBS.
  • Expectations remain low in Singapore.  Q4 MBS estimates were lowered by another 3% following Q3 earnings.
  • After a drop in gaming market share in Q3 mostly due to hold, MBS should see a sequential comeback in Q4.  While both IRs held high in 4Q11, which will no doubt make YoY comparisons challenging, MBS has an easier hold comparison of 3.3% (4Q11) vs. RWS’s hold of 3.9%.

 CHART DU JOUR: SINGAPORE FX TAILWIND - fx2


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Trading Off Inventories for Margins

This note was originally published November 15, 2012 at 14:28 in Retail


Apparel retailers are reverting to a margin mean this quarter to an extent that we have not seen in years. As our SIGMA analysis shows, we’re seeing margins revert to zero barrier for many of the larger players oferall, with resulting in flex in the level of inventory relative to sales. The ups the ante for the level of sell-through that is necessary headed into the holiday season.


Our SIGMA charts below will look familiar to most, but for those new to this representation of fundamentals it triangulates the sales/inventory spread (i.e. sales growth minus inventory growth) on the x-axis as well as the year-over-year change in operating margin on the y-axis. Company’s want to be in the upper right (sales outpacing inventory growth with expanding margins) not the bottom right though directional moves within the same quadrant are often more important indicators for future outcomes and when stocks often have the most meaningful moves.


Consider the following:

  1. Mid-tier companies are at a collective inflection point re margins headed into 4Q. In fact, with all but JCP posting less than a +/- 40bps delta, variation in the yy change in margins is the tightest we’ve seen in over 4-years suggesting the likelihood for increased EPS volatility this holiday season particularly in light of top-line compression, or margin give up to support the sales gain.
  2. Our thesis on GPS and M is that the second JCP stops hemorrhaging sales at its current run-rate, it will put incremental pressure on these companies that have been gaining share. If JCP fails to recover – ever (which we think is unlikely) – then that’s bullish for M and GPS. We think in 1-2 quarters JCP’s delta will improve on the margin, and while still bad for JCP, will hurt its peers.

In light of this setup within this mid-tier(ish) space, we like M, GPS, and KSS (post 4Q) on the short-side and WMT long. In other segments of retail, we continue to favor the athletic space (NKE, FINL, FL) as it has such a positive tailwind in the form of a company R&D driven product and marketing cycle.


Trading Off Inventories for Margins - MidTier EPS Surprise History

 

Trading Off Inventories for Margins - MidTier SIGMAs

 

Trading Off Inventories for Margins - MidTier wJCP SIGMAs

 


 

 


Trading Off Inventories for Margins

Apparel retailers are reverting to a margin mean this quarter to an extent that we have not seen in years. As our SIGMA analysis shows, we’re seeing margins revert to zero barrier for many of the larger players oferall, with resulting in flex in the level of inventory relative to sales. The ups the ante for the level of sell-through that is necessary headed into the holiday season.


Our SIGMA charts below will look familiar to most, but for those new to this representation of fundamentals it triangulates the sales/inventory spread (i.e. sales growth minus inventory growth) on the x-axis as well as the year-over-year change in operating margin on the y-axis. Company’s want to be in the upper right (sales outpacing inventory growth with expanding margins) not the bottom right though directional moves within the same quadrant are often more important indicators for future outcomes and when stocks often have the most meaningful moves.


Consider the following:

  1. Mid-tier companies are at a collective inflection point re margins headed into 4Q. In fact, with all but JCP posting less than a +/- 40bps delta, variation in the yy change in margins is the tightest we’ve seen in over 4-years suggesting the likelihood for increased EPS volatility this holiday season particularly in light of top-line compression, or margin give up to support the sales gain.
  2. Our thesis on GPS and M is that the second JCP stops hemorrhaging sales at its current run-rate, it will put incremental pressure on these companies that have been gaining share. If JCP fails to recover – ever (which we think is unlikely) – then that’s bullish for M and GPS. We think in 1-2 quarters JCP’s delta will improve on the margin, and while still bad for JCP, will hurt its peers.

In light of this setup within this mid-tier(ish) space, we like M, GPS, and KSS (post 4Q) on the short-side and WMT long. In other segments of retail, we continue to favor the athletic space (NKE, FINL, FL) as it has such a positive tailwind in the form of a company R&D driven product and marketing cycle.


Trading Off Inventories for Margins - MidTier EPS Surprise History

 

Trading Off Inventories for Margins - MidTier SIGMAs

 

Trading Off Inventories for Margins - MidTier wJCP SIGMAs

 


 

 


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