The Economic Data calendar for the week of the 17th of December through the 21st is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Takeaway: Europe mostly melts higher as government intervention continues.
Asset Class Performance:
EUR/USD: Our TRADE range is $1.29 – 1.31 with a TREND resistance of $1.31.
Noisy Berlusconi as Grexit Fades:
This week European peripheral equity and credit markets melted higher, taking share from the core. In today’s Early Look we hit on how collectively global data and real-time prices “are signaling a shift from #SlowingGrowth to #StabilizingGrowth.” This is a switch to a marginally more bullish market tone, however the question remains whether governments can stay out of the way of economic stability.
Unfortunately, what we continue to see from Eurocrats is a suspension of economic reality; and bond and equity players have largely cheered on the workings of Draghi, Merkel, and van Rompuy since the early Fall. The latest hope rally is that Draghi will release the OMT to the likes of Spain or Italy, should either country request it.
As we touched on in last week’s note, we continue to call out that growth will remain weak throughout the Eurozone for a protracted period and that estimate revisions are just now coming closer to this reality. Remember, last week the ECB revised Eurozone growth for 2012 and 2013 growth to the ranges of -0.6% and -0.4% and -0.9% and +0.3%, respectively. This week Germany’s IFO Institute cut Germany’s 2013 GDP forecast to +0.7% from +1.3% previously, while the Bundesbank last week revised Germany’s 2013 GDP projections to +0.4% versus +1.6% predicted in June.
Yet one signal of data improvement came this week from German PMI Services, which came in at 52.1 in December versus 49.7 in November, showing expansion (above 50) and improvement over two straight months. However, Eurozone and French Manufacturing and Services PMIs registered below 50 (contraction) and saw little improvement month-over-month.
On the dealings of Eurocrats this week there were two main fronts: 1. Eurozone Finance Ministers set in motion a common bank supervisor by agreeing to terms to allow the ECB to begin direct supervision of up to 200 lenders by March 2014. (The deal still needs to be signed off on by European Parliament and ratified by National Parliaments). 2. Greece received its disbursement of a €34.4B tranche of bailout funding.
While the latter was widely expected and solidifies our call that a Greek exit (Grexit) or expulsion from the Eurozone is an extremely unlikely event in the medium term, this latest bailout gives Greece good cover going into 2013. On a Banking Union, our call now as before is that while the actions may be a step in the right direction, the key to shoring up the risk loop between banks and sovereigns is setting in place a Fiscal Union in addition to a Banking Union. Of note is that the 200 banks expected to fall under the ECB’s Banking Union is a far cry from the ECB’s original hope of all 6,000 in the region.
Finally, Berlusconi made broad headlines for a second straight week. The week started with PM Monti announcing his intention to resign once Parliament passes the 2013 budget law (expected to pass before Christmas with early elections likely following on February 17th or 24th) and Berlusconi saying he will take another run at it. Then in mid-week Berlusconi said that he would consider stepping down as a candidate for PM if Monti agreed to run in the upcoming elections as the head of a broad centre-right coalition.
What’s clear is that Berlusconi and his PDL are trailing badly in the opinion polls. Per Luigi Bersani of the Democratic Party (PD) is the current front-runner and despite Berlusconi’s comeback barks he realizes that he personally has no shot to be PM. Further, because a coalition government will have to be formed, Berlusconi may be thinking that the continuity of a Monti victory could bode well for the country’s health. While Berlusconi’s positioning and utterance may not be clear, expect the risk spotlight to turn up as elections are pushed forward and for Berlusconi's political gravitas to be less than it was in the past.
The European Week Ahead:
Sunday: Dec. UK releases Dec. Rightmove House Prices
Monday: Oct. Eurozone Trade Balance; 3Q Eurozone Labour Costs; Oct. Italy Trade Balance
Tuesday: Nov. UK PPI Input, PPI Output, CPI, RPI; Oct. UK ONS House Price; Oct. Italy Current Account
Wednesday: Oct. Eurozone Current Account, Construction Output; Dec. Germany IFO Business Climate, Current Assessment, and Expectations; UK BoE Minutes; Dec. UK CBI Reported Sales; Oct. Italy Industrial Orders and Sales
Thursday: ECB Governing and General Council Meeting; Dec. Eurozone Consumer Confidence – Advance; Nov. Germany Producer Prices; Dec. UK GfK Consumer Confidence Survey; Nov. UK Retail Sales; Nov. Spain Budget Balance; Oct. Spain Total Housing Permits; Oct. Italy Retail Sales; Oct. Greece Current Account
Friday: Jan. Germany GfK Consumer Confidence Survey; Nov. Germany Import Price Index; Nov. UK Public Finances, Public Sector Net Borrowing; Oct. UK Index of Services; 3Q UK GDP – Final, Current Account, Total Business Investment – Final; Dec. France Own-Company Production Outlook, Production Outlook Indicator, Business Confidence Indicator; Nov. Spain Producer Prices; Oct. Spain Trade Balance; Dec. Italy Consumer Confidence Indicator; Nov. Italy Hourly Wages
Eurozone ZEW Economic Sentiment 7.6 DEC vs -2.6 NOV
Eurozone Industrial Production -3.6% OCT Y/Y vs -2.8% September [-1.4% OCT M/M vs -2.3% SEPT]
Eurozone Sentix Investor Confidence -16.8 DEC (exp. -16.9) vs -18.8 NOV
Eurozone CPI 2.2% NOV Y/Y vs 2.2% OCT
EU27 New Car Registrations -10.3% NOV Y/Y vs -4.8% OCT
Eurozone PMI Manufacturing 46.3 DEC Prelim vs 46.2 NOV
Eurozone PMI Services 47.8 DEC Prelim vs 46.7 NOV
Germany PMI Manufacturing 46.3 DEC Prelim vs 46.8 NOV
Germany PMI Services 52.1 DEC Prelim vs 49.7 NOV
Germany CPI 1.9% NOV Final Y/Y vs 2.0% initial
Germany ZEW Current Sentiment 5.7 DEC (exp. 6.0) vs 5.4 NOV
Germany ZEW Economic Sentiment 6.9 DEC (exp. -11.5) vs -15.7 NOV
Germany Exports 0.3% OCT M/M (exp. -0.3%) vs -2.4% September
Germany Imports 2.5% OCT M/M (exp. 0.4%) vs -1.4% SEPT
UK ILO Unemployment Rate 7.8% OCT vs 7.8% SEPT
UK Jobless Claims Change -3K NOV vs 6K OCT
France PMI Manufacturing 44.6 DEC Prelim vs 44.5 NOV
France PMI Services 46.0 DEC Prelim vs 45.8 NOV
France CPI 1.6% NOV Y/Y vs 2.1% in OCT
France Non-Farm Payrolls -0.3% in Q3 Q/Q
France Bank of France Business Sentiment 91 NOV vs 92 OCT
France Industrial Production -3.6% OCT Y/Y (exp. -2.3%) vs -2.5% September
France Manufacturing Production -4.0% OCT Y/Y (exp. -2.4%) vs -2.6% SEPT
Italy Q3 GDP Final -0.2% Q/Q (unch) [-2.4% Y/Y (unch)]
Italy CPI 2.6% NOV Final Y/Y [unch vs initial]
Italy Industrial Production -6.2% OCT Y/Y (exp. -4.3%) vs -5.0% September
Spain CPI 3.0% NOV Final Y/Y [unch vs initial]
Spain House Prices for Total Homes -15.2% in Q3 Y/Y vs -14.4% in Q2
Spain Labor Costs -0.1% in Q3 Y/Y vs -0.3% in Q2
Portugal Construction Works Index 55 OCT vs 52 SEPT
Portugal CPI 1.9% NOV Y/Y vs 2.1% OCT
Sweden Industrial Production -4.4% OCT Y/Y (exp. -5.2%) vs -5.0% SEPT
Sweden Unemployment Rate 8.1% NOV vs 7.7% OCT
Sweden CPI -0.1% NOV Y/Y vs 0.4% OCT
Denmark CPI 2.2% NOV Y/Y [inline] vs 2.3% OCT
Finland Industrial Production -0.7% OCT Y/Y vs -2.7% SEPT
Finland CPI 2.2% NOV Y/Y vs 2.6% OCT
Norway CPI 1.1% NOV Y/Y vs 1.1% OCT
Ireland CPI 1.6% NOV Y/Y vs 2.1% OCT
Switzerland Credit Suisse ZEW Survey of Expectations -15.5 DEC vs -27.9 NOV
Switzerland Producer and Import Prices 1.2% NOV Y/Y vs 0.4% OCT [0.0% NOV M/M vs -0.1% OCT]
Switzerland 3M Libor Target Rate UNCH at 0.00%
Austria CPI 2.8% NOV Y/Y vs 2.8% OCT
Greece Industrial Production 2.0% OCT Y/Y vs -7.3% SEPT
Greece CPI 0.4% NOV Y/Y vs 0.9% OCT
Greece Unemployment Rate 24.8% in Q3 vs 23.6% in Q2
Russia Q3 GDP Preliminary 2.9% Y/Y vs 4.0% in Q2
Russia Light Vehicle and Car Sales 0% NOV Y/Y vs 5% OCT
Czech Republic Unemployment Rate 8.7% NOV vs 8.5% OCT
Czech Republic Industrial Output 4.1% OCT Y/Y vs -6.8% September
Czech Republic CPI 2.7% NOV Y/Y vs 3.4% OCT
Slovenia Industrial Production 2.0% OCT Y/Y vs -0.2% September
Slovakia CPI 3.4% NOV Y/Y vs 3.8% OCT
Romania Consumer Prices 4.6% NOV Y/Y vs 5.0% OCT
Romania Industrial Output -0.1% OCT Y/Y vs -0.1% SEPT
Hungary Consumer Prices 5.2% NOV Y/Y vs 6.0% OCT
Hungary Industrial Production -3.8% OCT Final Y/Y [unch]
Estonia Q3 GDP Final 1.6% Q/Q vs 1.7% initial [3.5% Y/Y vs 3.4% initial]
Estonia Unemployment Rate 6.0% NOV vs 5.8% OCT
Turkey Q3 GDP 1.6% Y/Y vs 3.0% in Q2 [0.2% Q/Q vs 1.7% in Q2]
Turkey Industrial Production -0.9% OCT Y/Y vs 6.2% SEPT
Interest Rate Decisions:
(12/10) Russia Refinancing Rate UNCH at 8.25%
(12/10) Russia Overnight Deposit Rate HIKED 25bps to 4.50%
(12/10) Russia Overnight Auction-Based Repo UNCH at 5.50%
Last year, Apple (AAPL) was THE stock to own. Everyone from portfolio managers to grandparents were loading up on the stock as it continued to make new highs week-after-week. Then, in September of 2012, Apple peaked at $702.10 a share and has since begun a descent of epic proportion as people realize that the stock is overvalued and tech continues to get killed. Since September, AAPL has fallen -27.62% to $508.21 and ended up closing today at $509.82 a share. We're looking to buy soon, but only when our signals indicate the time is right; there's a process for everything and you need to stick to it.
Takeaway: We update our bearish bias on gold with a contrarian analysis of the fundamental drivers of this asset class.
Gold is widely loved and probably over-owned – at both the institutional and sovereign level. Having appreciated in value for 12 consecutive years with a CAGR of 16.4%, the bull case on gold is well understood by just about every market participant.
This is true from traditional L/S equity hedge fund managers all the way down to retail investors, as ETF volumes have been the only thing mitigating the precipitous decline in physical gold demand. The latest data from the World Gold Council (3Q12) showed overall demand had declined -11% YoY from the all-time peak in 3Q11, with every category posting a contraction except “ETF & similar”:
It’s not surprising to see demand for physical gold peaked when the price of hit an all-time peak of ~$1,900 early in the quarter.
We’ll hold off on the discussion on gold supply, as we firmly believe PRICE eventually leads supply in most, if not all commodity markets. For example, if the price of gold rips to the upside, gold miners will likely follow the move by instituting aggressive E&P plans. If the gold price were to plummet, many producers will struggle to operate their mines above the cost of capital and will eventually curb production. Anything in between probably equates to a status quo level of supply growth.
Going back to the point we made earlier about the bull case being deeply penetrated, we thought we’d take a stab at how a core component of the bull case (i.e. central bank diversification) can come unwound over the long-term TAIL. It’s very important to note that we’re not positing this as the only factor driving the market price of gold; nor are we necessarily suggesting that this is a thesis to run out and short gold today with. Rather, we are offering intellectual ammunition to understand what’s likely going on behind the scenes in the event gold continues to make lower-highs over the intermediate-to-long term.
Gold has ripped for over a decade as central banks increasingly diversified out of the primary world reserve currency and into other, more credible currencies, as well as other assets like SDRs and Gold.
We hold the view that credibility within the FX market is 100% relative and ever-changing. The management of foreign exchange is a 24-hour-per-day phenomenon that is consistently anchors on incremental data. Below, we focus specifically on the US because gold and other internationally traded commodities are priced in and settled in USD.
For 10+ years, the stream of incremental data has been a general headwind for the credibility of America’s currency, largely in the form of loose fiscal POLICY and dovish monetary POLICY. That confluence of weak POLICY has created an egregious amount of international money supply that has inflated international reserve assets across both the developed world and non-developed world. Initially, the price of gold appreciated w/o much of a shift in global central bank demand. That changed in 2004 when the confluence of the world’s reserve mangers started to accumulate gold at a rate commensurate with the rate of incremental foreign exchange accumulation. Since 2008 (not ironically when QE1 was introduced), however, they’ve been accumulating gold at a faster rate than incremental FX.
THE LESS-KNOWN KNOWNS
The first major run-up in gold (2004-2008) was occurred as DM central banks began favoring gold over incremental foreign exchange, at the margins. The second major leg up in gold prices came as EM central banks began to do the same (2008-present). This is where the real “juice” likely came from, as EM central banks have increasingly held the lion share of international reserve assets.
The latter point is super intuitive, given that EM economies, on balance, have tended to be more manufacturing and export-oriented in nature (think: China). Additionally, EM central banks have likely aggressively accumulated large amounts of foreign exchange (in lieu of gold, at the margins) over the last 10+ years to resist appreciation pressure on their currencies (think: Chinese yuan and Brazilian Finance Minister Guido Mantega’s “Currency War”).
For reference, Switzerland has been doing exactly this (i.e. accumulating foreign exchange at a rate faster than gold) for the better part of 30 years, as the SNB has semi-perpetually combated the specter of a secular loss of competitiveness – which is a real threat given the country’s +42.9% real exchange rate appreciation over that duration. The CHF’s de-facto ceiling vs. the EUR is yet another example of the Swizz central bank being forced to accumulate incremental FX, lest the country suffer the perceived consequences of having a strong currency amid the international “race to zero” in today’s “Beggar Thy Neighbor” global economy.
That brings us to our final point, which is really a question:
Can EM central banks ever really accumulate that much gold – especially relative to consensus expectations that they are poised to be big players in that market in perpetuity?
There seems to be little political will across the developing world to allow for any dramatic currency appreciation – especially with global GROWTH likely tracking in the +2-3% range for the foreseeable future. This means EM central bankers will continue to be forced to daub up large amounts of fiat currency over the long-term, absent a phase change in the global monetary POLICY landscape.
In light of this, it’s important to note that the People’s Bank of China (a key player in the FX reserve accumulation sphere) now views the yuan at/near an “equilibrium level” and they have been using their USD/CNY reference rate as a tool to temper appreciation pressure emanating from the market for several months now. Incremental Polices To Inflate out of DM central banks will force them to accelerate their pace of foreign exchange accumulation if they are going to resist upward pressure on CNY exchange rates from current levels.
What’s new across developed markets is the political will for the Europeans and the Japanese to pursue incrementally aggressive currency devaluation strategies over the intermediate-to-long term. Keep in mind that we haven’t even seen the ECB really go to town w/ unsterilized bond purchases and that the BOJ’s balance sheet is poised to expand to new heights in a variety of experimental manners under the pending LDP regime.
In short, we think Japan faces the risk of a currency crash (peak-to-trough decline > 20%) over the next 12-18 months. Moreover, unless Europe has been magically fixed (are the Greek and Spanish unemployment situations even “fixable”??), the EUR is likely to continue making lower-highs over the long term. In the eyes of the world’s central bankers, the perceived credibility of the JPY and EUR are likely to be materially eroded over the long term, which, on the margin, is positive for other countries’ currencies to the extent they are credible candidates for international reserve management.
In the aforementioned Global Macro scenario, could we see the USD grind higher against a broad basket of currencies over the intermediate-to-long term? Absolutely – especially if US fiscal POLICY starts to get hawkish on the margin (think: Fiscal Cliff). Perhaps that’s why the US Dollar Index is down less than 100bps YoY, despite the Federal Reserve kicking the ZIRP can down the road 3x in the YTD and instituting perpetual QE – twice in the last three months!
If one is bearish on the US Dollar from here, we can’t even begin to fathom what their next catalyst is, given the USD’s resilience in the face of all that…
In the past, strong USD has been really bad for gold (early-to-mid 1980’s and late 1990’s). The most recent period of sustained USD appreciation came on the strength of the Balanced Budget Act of 1997, so it’s critically important to avoid underweighting fiscal POLICY as a factor for the market price of America’s currency. If Congress and the White House can figure out a way to resolve the Fiscal Cliff in a sustainable and effective manner (a really big “if”), we could see the US Dollar Index approach the high 80s/low 90s level over the intermediate term. That would not be good for gold.
Our quantitative risk management levels for Gold are included in the chart below. If $1,669 breaks, there’s no true support to the prior closing lows. That’s something to think about as you ponder, “Who’s the incremental buyer of gold from here?” For some, that question sounds more like, “Who can I offload my gold to if and when I want to head for the exits before the crowd does?”.
Gold remains a crowded long for a variety of very obvious reasons – one of which could become less supportive, at the margins, on a sustainable basis.
Restoration Hardware (RH) took a hit yesterday despite a solid quarter. The Street is not happy about the lack of guidance on the stock and short-term events that cause disruption a la Hurricane Sandy and the West Coast Port Strike. Nonetheless, we believe the company is executing well on its growth strategy and have confidence that the stock could be at $62 a share in two years, $51 in one-year out. We’ll be a buyer of RH on down days.
On today’s morning investment call held for Hedgeye subscribers, we discussed how markets are shifting to a bullish sentiment now that growth is beginning to stabilize. Commodities will continue to drop, as economic recovery doesn’t occur when oil is at $150 a barrel. More importantly, global markets are up across the board and the S&P 500 is holding its key line of support at 1419. That decision to hold at support signals that the market is keen to go higher.
You can listen to Hedgeye CEO Keith McCullough address our Q&A session in the call in the audio we've posted below.
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.