“Time in truth, discovers everything.”
Bertrand Russell once claimed that, “Western philosophy begins with Thales.” And while I am not so sure about that being the truth, Thales was closer to getting to my definition of the truth than most Greek philosophers – he used math.
“Thales used geometry to solve problems such as calculating the height of pyramids and the distance of ships from the shore. He is credited with the first use of deductive reasoning applied to geometry… he has been hailed as the first true mathematician.” (Wikipedia)
The aforementioned quote comes from a book I started reading this past weekend titled Pythagoras The Mathemagician (pg 87). Since we’re in the midst of a bull market in Old Media storytelling, I needed to suspend disbelief and consider magic too.
Back to the Global Macro Grind…
Yesterday was a hoot. On no-volume (21% below the average US stock market down day volume in November), the SP500 melted up +1.99% to 1386. That was the biggest up day since September 6th (+2.04%). Back above my TAIL risk line of 1364. Hoowah!
Let’s not talk about September though. That was a time when The Bernank’s stock market magic stopped. As a friendly reminder, inclusive of yesterday’s squeezage, the SP500 is still down -6% from the September 14th YTD high.
But why? What is the truth? Have stock and commodity markets been going down for 2 months only because of the #KeynesianCliff? Or did a few things related to economic gravity (growth and earnings) have something to do with it?
To review, our Top 3 Global Macro Themes for Q4 are as follows:
- Earnings Slowing
- Bubble #3 (Commodities)
- Keynesian Cliff
So, I’m not saying that Theme #3 doesn’t matter. I’m not saying that Bubble #3 doesn’t either (we re-shorted Oil on yesterday’s ramp, and bought Natural Gas). I’m simply saying what I always say – embrace uncertainty, because the global marketplace’s interconnected risks are much more encompassing than a manic media sound-bite about timing the cliff.
Back to reality. Now that Q312 Earning’s Season is winding down, per Darius Dale’s scorecard, what has Time & Truth told us about #EarningsSlowing?
1. Roughly 96% of the way through the Q3 earnings season, 58.7% of SP500 companies have missed on the top line and 30.7% have missed on the bottom line (478 total). That compares with 57.8% and 26.8%, respectively, in 2Q12. If the season wraps up as things currently stand, 3Q12 will have reported the lowest percentage of companies beating on the top line since 1Q09.
2. 72% of companies that have issued 4Q12 EPS guidance have issued projections below the mean EPS estimate. That compares with a ratio of 80% on the negative side at this time during the previous earnings season. Despite this improvement, we continue to warn that consensus estimates for 4Q12 and 2013 remain dramatically inflated relative to any reasonable economic GROWTH scenario.
3. Bloomberg consensus still has SP500 constituent EPS growing an average of +7.1% YoY per quarter over the NTM vs. +0.9% YoY in 3Q12 and a trailing four quarter average of +3.1% YoY. While down from a projected quarterly average NTM EPS growth rate of +9.9% YoY when we first called out consensus’ poor modeling technique back on OCT 8, we still contend these estimates remain out to lunch.
Out to lunch? Yes. As in no soup fo you Mr. Sell-Side consensus. It’s been a long year for you on GDP growth and earnings forecasts. Maybe we should just pretend those 2012 predictions didn’t happen. Long live Hyman’s 569 “global easings” instead.
Money printing, of course, is not magic. The slope of growth in money supply is just math. If Bernanke doesn’t double or triple his monthly debt monetization soon, the slope of the Fed’s balance sheet will continue to slow. That’s bullish, on the margin, for the Dollar.
Perversely, in the immediate-term what’s good for the Dollar is bad for stocks. Part of yesterday’s fun times at no-volume high was that the US Dollar was having its biggest down day in 3 weeks. A -0.45% down day on the USD Index = a +2.8% up day for Basic Materials (XLB) stocks. Hooray.
Just a quick update on the Correlation Risk math (using 30-day correlations versus the US Dollar Index):
- SP500 = -0.90
- EuroStoxx600 = -0.85
- MSCI World Index = -0.89
- CRB Commodities Index = -0.84
- CRB Food Index = -0.79
- VIX = +0.44
In other words, yesterday’s rally to lower-highs (SP500 still down -1.8% for November after the +1.99% move) has nothing to do with what I called bullish in Monday’s Early Look (Food Deflation and Commodity Speculation Imploding). It had everything to do with the same old playbook the bulls who have confused stocks with the real-economic growth have been using all year.
Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Natural Gas, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.96-111.35, $3.56-3.88, $80.69-81.39, $1.26-1.28, 1.49-1.64%, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – November 20, 2012
As we look at today's setup for the S&P 500, the range is 37 points or 1.65% downside to 1364 and 1.02% upside to 1401.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.38 from 1.37
- BONDS – neither US or German bonds seem to care about whatever yesterday was; closing > 1364 (TAIL support) matters for US stocks as much as closing below it would, but the 10yr dropping to 1.57% this morning (Yield Spread compresses to 133bps wide on 10s/2s) is bearish for the Financials (and growth); will be interesting to watch that Sector today.
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am/8:55am: ICSC/Redbook weekly retail sales
- 8:30am: Housing Starts, Oct., est. 840k (prior 872k)
- 8:30am: Building Permits, Oct., est. 864k (prior 894k, 890k)
- 9am: Fed’s Lacker speaks in New York
- 11:00am: Fed to purchase $1.75b-2.25b notes due 2/15/36-11/15/42
- 11:30am: U.S. Treasury to sell $40b 4-wk bills, $20b cash management bills
- 12:15pm: Fed’s Bernanke speaks in New York
- 4:30pm: API inventories
- House, Senate not in session
- Patent office Director David Kappos discusses tech innovation Center for American Progress. 10am.
- FERC Chairman Jon Wellinghoff outlines energy market rules at Bloomberg Government breakfast. 10am
- FCC Chair Julius Genachowski, IBM VP Daniel Prieto III speak at Council on Foreign Relations on intl telecom policy. 12:30pm
- Defense Secretary Leon Panetta speaks at Center for a New American Security in Washington. 6:45pm
WHAT TO WATCH
- France lost its top credit rating at Moody’s
- Housing starts probably posted best 2 mos. since 2008
- Best Buy founder Richard Schulze said to enlist 3 private-equity firms as he seeks to takeover chain
- Fed’s Bernanke to speak at Economic Club of New York
- Credit Suisse to reorganize its investment bank
- Samsung able to renew patent claims against Apple
- European finance ministers will try to plug a EU15b ($19b) hole in Greece’s finances, win over IMF
- Xstrata holders seen backing bid as Glencore votes in favor
- Spain sells EU4.94b bills vs maximum target EU4.5b
- Hostess, bakers union urged to accept mediation of strike
- Olam slumps after short-seller Muddy Waters’ Carson Block questions accounting methods
- JPMorgan named Marianne Lake to succeed CFO Doug Braunstein
- Bain Capital sued over acquisition by ex-software executive
- Stanford’s accountants convicted of hiding $7b fraud
- Tech Data (TECD) 6am, $1.35
- Trina Solar (TSL) 6:28am, $(0.65)
- Hormel Foods (HRL) 6:30am, $0.50
- American Woodmark (AMWD) 6:30am, $0.04
- Patterson (PDCO) 7am, $0.49
- HJ Heinz (HNZ) 7am, $0.88 Preview
- DSW (DSW) 7am, $0.89
- Jinko Solar (JKS) 7:03am, $(4.84)
- Medtronic (MDT) 7:15am, $0.88
- Chico’s FAS (CHS) 7:15am, $0.23
- Hewlett-Packard (HPQ) 7:30am, $1.14 Preview
- Campbell Soup (CPB) 7:30am, $0.85 Preview
- Signet Jewelers (SIG) 7:30am, $0.37
- Inergy LP (NRGY) 7:45am, $(0.05)
- Inergy Midstream (NRGM) 7:45am, $0.23
- George Weston (WN CN) 8am, C$1.40
- Best Buy (BBY) 8am, $0.12
- Barnes & Noble (BKS) 8:30am, $(0.01)
- Eaton Vance (EV) 8:40am, $0.48
- Valspar (VAL) 8:42am, $0.85
- Raven Industries (RAVN) 9am, $0.34
- Salesforce.com (CRM) 4:05pm, $0.32
- Zale (ZLC) 4:05pm, $(0.69)
- China Digital (STV) 5pm, NA
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Oil Drops From One-Month High Amid Speculation U.S. Supply Rose
- Soros Buying Gold as Record Prices Seen on Stimulus: Commodities
- Ex-Merrill Banker Starts Japan Hedge Fund Seeking 20% Return
- Codelco Said to Reduce Japan, Korea Copper Surcharge in 2013
- Gold Trades Near One-Week High on Europe, Middle East Concern
- Wheat Swings Between Gains and Losses on Impact of U.S. Drought
- Austrian Mint’s Gold Sales Through Bars, Coins Retreat in 2012
- Iron-Ore Exports From India Seen at 10-Year Low by Macquarie
- Cocoa Gains on Signs Demand Outstrips Supply; Coffee, Sugar Drop
- Oil Supplies Climb to Four-Month High in Survey: Energy Markets
- Xstrata Investors Seen Backing Glencore Takeover in Biggest Deal
- Italy Truffle Prices Rise on Russians, Drought: Chart of the Day
- VTB Turns Alchemist as Bond Ties Return to Gold: Russia Credit
- Olam Slumps After Muddy Waters’ Block Questions Accounts
FRANCE – downgraded by Moodys which is just a preview of the pending US downgrade in 2013 if politicians don’t deliver said bacon; CAC40 -0.5% after European stocks melted up yest, but remains bearish TREND: German DAX TREND line of 7116 is one of the most important macro lines on our screen; Russia -20.2% since March remains in crash mode.
CHINA – Shanghai Comp -0.4% re-testing YTD lows (-18.4% from the March #GrowthSlowing top) after meeting w/ Obama and Chinese leaders suggesting no more rate cuts in 2012; Foreign Direct Investment in China remains -3.5% y/y through OCT.
The Hedgeye Macro Team
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Today we shorted the CurrencyShares Euro Trust ETF (FXE) at $127.13 a share at 3:12 PM EDT in our Real Time Alerts. We'll continue to short the Euro when our levels and methods say we should; today was a day where we felt comfortable doing so. The Euro remains in bearish TREND formation while the US dollar bullish formation remains in tact.
Takeaway: Lew is most likely to replace Geithner at Treasury, which is an improvement, but will likely lead to a continuation of weak dollar policy.
President Obama kicked off negotiations on the fiscal cliff last week before heading to Asia for his first international trip since his re-election. Interestingly, Obama indirectly made Tim Geithner, outgoing Secretary of the Treasury, as the administration’s lead negotiator. This is somewhat surprising as it appears to displace Jack Lew, White House Chief of Staff, in his role from the prior negotiations.
There are likely a couple of reasons for Geither to take more of a lead role. Firstly, Geithner has close ties to Wall Street given his time as the President of the Federal Reserve Bank of New York, so may help settle the markets (or so the argument goes). Secondly, according to various accounts, including from Bob Woodward’s “The Price of Politics”, Lew developed an adversarial relationship with Republicans in the first round of negotiations. Finally, and perhaps most importantly, this may well be a signal that Lew is focused on preparing for his next role as Secretary of Treasury.
The role of Secretary of the Treasury is defined on the Treasury department website as follows:
“The Secretary of the Treasury is the principal economic advisor to the President and plays a critical role in policy-making by bringing an economic and government financial policy perspective to issues facing the government. The Secretary is responsible for formulating and recommending domestic and international financial, economic, and tax policy, participating in the formulation of broad fiscal policies that have general significance for the economy, and managing the public debt.”
In effect, the Secretary of the Treasury manages the finances of the United States. More importantly, as Chairman Bernanke has recently noted, the Treasury Secretary is the key spokesman on the U.S. dollar. So assuming the rumor mill is on the correct track, and anecdotal evidence suggests it is, who is Jack Lew?
On an education level, Jack Lew bears a pretty similar resemblance to his predecessors at Treasury with an undergraduate degree from Harvard and law degree from Georgetown. Conversely, unlike recent Secretaries, Geithner, Paulson, Snow and O’Neill as examples, Jack Lew is not a former prominent CEO and does not have, at least currently, the same kind of star power. In fact, Lew has spent most of career as a numbers and operations guy within the beltway. As Lew’s former roommate Ari Weiss noted in a National Journal article when describing one of Lew’s first jobs working as an Aid to former Speaker of the House Tip O’Neill:
“Budgets are places with details. Inescapably, you can’t put a budget together on slogans. It appealed to Jack and his nature and his talents because it is something that is essential.”
Thus, very quickly Lew’s government career became focused on the budget and he would go on to have two tours of duty as the Director of the Office of Management and Budget. The first was as President Clinton’s last OMB Director from May 1998 to January 2001. He then succeeded former Hedgeye guest speaker Peter Orzag as President Obama’s Director of the OMB from November 2010 to January 2012. In between these roles, Lew was the Executive Vice President of Operations at New York University and also took a spin on Wall Street as the Chief Operating Officer at Citigroup’s now defunct Alternative Investments unit.
As it relates to his candidacy for Treasury Secretary, there are a few things we like about Lew:
- Budget knowledge – There is no question that Lew understands the federal budget and its levers better than almost anyone in Washington, if not the nation. He has led the OMB twice and before that was a key staffer at OMB. He understands the long term deficit issues facing the U.S., which will be critical for any incoming Treasury Secretary.
- Clinton era tenure – The last time the U.S. federal budget was balanced was under President Clinton, with the Balanced Budget Act of 1997 being a catalyst. Prior to leaving for his first tour at OMB, Lew coordinated the Clinton administration’s budget and appropriations strategies. He was also a member of the negotiating team that put together the aforementioned Balanced Budget Act by working across party lines. In the chart below, we highlight the budget surpluses while Lew was in his role as Director of OMB.
- Not an attention seeker – Almost to a fault, Lew is known as someone who attempts to stay out of the lime light. By most accounts, his life is balanced by work, family and faith (he is an Orthodox Jew). He is certainly lower profile versus many of his predecessors and has a history of largely not commenting in, or on, articles that are written about him or related government negotiations.
By and large the attributes outlined about bode well in describing a potential Treasury Secretary that will be focused on the correct issues relating to reducing the deficit, and in turn advocating for a strong dollar. Unfortunately, there are a number of countervailing pots to consider as well, specifically:
- Long time Washington insider – Lew is what he is - a long term Washington insider. On our recent call with Neil Barofksy, a gentleman who was brought in from the outside to run TARP, he made his thoughts pretty clear on the idea that it would be difficult to change the Treasury from the inside and Lew is certainly an insider choice.
- Policy continuity seems likely – On many levels, Lew is a choice that best conveys continuation of prior policy. He’s been a mainstay in the Obama administration and is certainly not representative of a new voice, or new set of ideas. On one hand, this will create stability, which is important for the financial markets. On the other hand, it will also signal to the markets a continuation of a Treasury Department that is not going to adequately defend the U.S. dollar.
- Naïve related to markets – In his confirmation hearing to be President Obama’s Director of OMB, Lew was asked by Senator Sanders as to whether he thought de-regulation played a critical role in the to the collapse on Wall Street. His response was as follows:
“Senator, I don’t consider myself an expert in some of these aspects of the financial industry. My experience in the financial industry has been as a manager, not as an investment adviser. My sense, as someone who has generally been familiar with these trends, is that the problems in the financial industry preceded deregulation.”
The primary concern with the statement above, and admittedly it is a cherry picked statement, is that it implies a somewhat superfluous understanding of Wall Street and the banking industry.
We think that Lew has an experiential history that suggests that he may be a more effective Treasury Secretary than Tim Geithner. That reality is, though, Washington, DC is rarely changed from the inside.
Daryl G. Jones
Director of Research
Takeaway: Bank swaps widen alongside the Eurozone’s official push into recession.
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email .
*European Bank CDS: The Eurozone officially moved into recession last week. Preliminary Q3 GDP contracted by 0.1% QoQ following a 0.2% contraction in Q2. In response, EU bank swaps widened WoW on concern around deteriorating fundamentals in Europe. Despite Draghi's pledge to do "Whatever It Takes", it seems that risk is creeping back into the markets. Along with swaps widening at the bank and sovereign levels, both Euribor-OIS and the TED spread have stopped their march downward and are now slowly pushing higher. For reference, this is the third consecutive week that the Euribor-OIS has risen WoW.
On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated to date.
If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.
European Financials CDS Monitor – French banks continue to widen on the news that Europe is officially back in recession. BNP and Credit Agricole were wider WoW, bringing their MoM changes to +44 and +35 bps. Soc Gen was flat WoW, but is up a similar +42 bps MoM. Italian banks are also notably wider MoM.
Euribor-OIS spread – The Euribor-OIS spread widened by less than a basis point to 12 bps. This series has been moving essentially sideways for the last month. 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.
ECB Liquidity Recourse to the Deposit Facility – In a positive sign for the stability of the EU Banking System, the ECB Liquidity Deposits continued to decline in the latest week. 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.
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