“An intelligent man is sometimes forced to be drunk to spend time with his fools.”
In my homeland of the vast plains of Alberta, the drink of choice for many is Rye Whiskey and Coke. Now normally, I wouldn’t start the Early Look discussing beverages of choices, but given what has been going on in Washington, D.C. over the last few months, what choice do any of us really have but to have a few cocktails to make ourselves feel better? Or, to Hemingway’s point, to enable us to at least suffer this political foolishness.
Now on one hand, I do give President Obama some credit for leaving the golf links early and coming back to work. In reality, though, does anyone really believe that a last minute meeting tonight with Congressional leaders is going to solve either the fiscal cliff or the coming debt ceiling violation? Personally, I hate to be consensus on this, but I sure don’t. Currently InTrade has the probability of the debt ceiling being raised before December 31st, 2012 at 17%.
The issue currently in Washington is that Democrats and Republicans don’t agree with each other. Ok, that’s not really a new issue, but heading into the deadline of December 31st neither side is acting like they want to work together and get a deal done. This excerpt from a news article quoting House Minority Whip Steny Hoyer about sums up how divisive things are in the nation’s capital:
“In a sign of just how charged and hyperbolic this year-end debate has become, House Minority Whip Steny H. Hoyer, D-Md., used an unfortunately timed comparison that likened Republicans trying to use the debt limit for leverage on spending cuts to people threatening to shoot their own children.
It is somewhat like taking your child hostage and saying to somebody else, ‘I’m going to shoot my child unless you do what I want done.’ You don’t want to shoot your child,” Hoyer said at a press conference following a brief 10-minute pro forma session for the House.”
Obviously the timing of this quip was bad on many levels, but the reality is that this is obviously no way to set the table for some sort of grand bargain in today’s meeting with President Obama and the Congressional leadership.
So unfortunately heading into 2013, I hate to report but it is likely that politicians and policy continue to inform much of our investment decision making. That is not to say that everything is negative of course. In fact, in the Chart of the Day today I’ve borrowed a chart from our Financials Sector Head on the recently released Case-Schiller Housing Price Index. As the chart shows, the last five months (ending with October 2012) have seen consistent year-over-year national home price increases. In the last couple of Early Looks I’ve been beating this like a dead horse, but this is a real positive for the U.S. economy and consumer.
Unfortunately, a home price recovery will only get us so far as yesterday’s consumer confidence number tells us. This reading for December came in at 65.1 versus the 70.0 that was expected and the 71.5 reading in November. So it seems that the uncertainty relating to the fiscal outlook in the United States has likely had an impact, as expected, on consumer confidence.
Given that, the looming Longshoreman strike that looks likely to occur could not be happening at a more inopportune time. This looming strike will impact 14 major East Coast and Gulf Coast ports. In aggregate, these ports move more than 100 million tones of goods every year, which is about 40% of the nation’s containerized cargo. So even a shut down of a few days is likely to have a meaningful effect on the economy.
In cheerier news, it is starting to look like the bottoming process in China is taking place. In terms of commodities, both rebar and iron ore have had very strong quarters of price appreciation. On the back of this, the Shanghai composite was up more than 1% over night to close at its highest level since the summer. Once again, this plays into our theme of global growth stabilizing.
In lieu of regularly scheduled macro call this morning, we are going to have our Financials, Industrials and Consumer Staples Sector Heads join the morning call and discuss their top ideas and themes heading into 2013 (if you are not subscribing to receive the morning call service, email for details on how to gain access). Since I’m the Director of Research at Hedgeye, I’ll take some liberty and highlight what I think are each sector’s top idea long ideas. In my view, they are as follows:
1. Financials – TCF Financial (ticker: TCB) is a play on housing which is improving, is growing both loans and deposits at a healthy clip, and has a CEO who is older than average which may make it ripe for a takeout. On a reasonable multiple of price-to-tangible-book, we think the stock has 25% upside over the next twelve months.
2. Industrials – Paccar (ticker: PCAR) has been one of our key names since launching Industrials coverage earlier this year. A key tenet of the thesis is struggles at key competitor Navistar, which were reaffirmed to us this week (over the last year Navistar’s class 8 market share has been cut in half).
3. Consumer Staples – Archer Daniels Midland (ticker: ADM) is a name that we highlighted in our Consumers Staples launch a few weeks back. High corn price negatively impacted ADM in 2012, but an increase in corn plantings in 2013 should be a beneficial tailwind to ADM. At just around 1.0x price-to-tangible-book, ADM is trading at a serious discount to its 1.2 average on this metric.
On a closing note, please enjoy the New Year with your friends and loved ones.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.42-111.48, $3.51-3.61, $79.21-79.99, $1.31-1.33, 1.70-1.78%, and 1, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
The Macau Metro Monitor, December 28, 2012
GUANGZHOU-ZHUHAI RAILWAY TO OPEN ON NEW YEAR'S DAY Macau Daily Times
The Guangzhou-Zhuhai Intercity Railway will operate on January 1. The Railway connects Border Gate to the city of Guangzhou in just 80 minutes, where passengers can transit to the Beijing-Guangzhou high-speed railway inaugurated on Wednesday. The Intercity Railway will cut the journey between Border Gate and Guangzhou by at least 40 minutes as the current coaches take more than two hours for the trip even when there is no major congestion.
TOURIST ARRIVALS DURING CHRISTMAS ROSE SLIGHTLY Macau Daily Times
Macau had 793,343 visitors during the week-long holiday from 20th to 26th December, which is 0.68% higher than last year. According to the government’s figures, the Border Gate remained the largest crossing-point for foreign visitors, recording some 910,243 arrivals and 951,615 departures during the period. The Outer Harbor Ferry Terminal remained the second-busiest port, recorded 198,998 arrivals and 176,796 departures; Pac On has 103,930 and 73,831 respectively.
VISITOR ARRIVALS FOR NOVEMBER 2012 DSEC
Visitor arrivals decreased by 1.8% YoY to 2,374,110 in November 2012. The average length of stay of visitors stood at 1.0 day, up by 0.1 day YoY. Visitors from Mainland China increased by 2.9% from November 2011 to 1,503,158, coming mostly from Guangdong Province (654,625) and Fujian Province (68,307); Mainland visitors traveling under the Individual Visit Scheme increased by 12.8% to 632,640. Visitor arrivals from the Republic of Korea (34,686) increased by 14.2%; however, those coming from Hong Kong (529,911); Taiwan (79,884); and Malaysia (34,318) decreased by 10.0%, 11.0% and 3.3% respectively. Long-haul visitors from Europe (28,763) increased by 7.7%, while those from the Americas (29,847) and Oceania (10,359) decreased by 3.0% and 7.3% respectively.
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This note was originally published at 8am on December 14, 2012 for Hedgeye subscribers.
“A man who carries a cat by the tail learns something that he can learn in no other way.”
In money management, like many professions, the act of doing is probably the best training available. There is nothing like a mistake to change your process or habits, and when you manage money professionally the mistakes come frequently. The key, of course, is what you do with the mistakes and how you adjust to them.
This is certainly an interesting time in the money management business. In the last few years, we’ve seen a number of long time and highly successful portfolio managers decide to get out of the game. In fact, earlier this week Keith and I had coffee with a Hedgeye subscriber who will be converting his highly successful hedge fund into a family office at the end of the year.
This gentleman, like many of his peers, didn’t have one specific reason for returning outside capital, but rather was more generally concerned about the ability to generate returns that justified the fees. On some level, that is a high class problem. But the truth of it is, in our view, monetary policy and policy makers have taken us to a place where the risk / reward in many asset classes is simply not all that compelling. Simply put, if you are going to carry the proverbial cat by the tail, you want to believe that the reward of that action equates to the risk.
Of course, this is not to say that all is necessarily negative. In fact, this morning is one of the more bullish runs of economic factors that we’ve seen for some time. A few things to consider this morning:
1. China – The Shanghai Composite was up +4.3% overnight to cap off a two week run of +9.6%. As a consumer of commodities, China will have its best moves when input prices are deflating, so to see a breakout above our key resistance line of 2,905 on the Shanghai Composite, we will likely need to see Bernanke and Company get out of the way for this rally to be sustainable. It also doesn’t hurt that the HSBC Flash PMI came in a little better than expected at a stable 50.9, which implies an economic recovery may be taking hold in China.
2. Germany – As the old adage goes, there is always a bull market somewhere. Going into yesterday, the DAX was up 29% in the year-to-date, which makes it one of the top ten performing equity markets globally. This move in Germany equities is supported by the high frequency economic data, such as the services PMI from this morning which came in at 52.1 versus its 49.7 reading in November.
3. Commodities – Many of the story tellers have suggested that commodity prices go up purely because of supply / demand or tight economies and while at times this is true, the reality remains that monetary policy is a big driver. To the extent that global central bankers get even marginally more hawkish, it will negatively impact commodity prices. As we all know, economic recoveries don’t occur at $150 per barrel crude oil and getting oil lower sustainably will be a key factor supporting any sustained economic recovery.
Collectively, this data and these real-time prices are signaling a shift from #SlowingGrowth to #StabilizingGrowth. This is potentially very positive for equity markets. The question from here is whether the government can stay out of the way of economic stability.
To dig into this last point in more detail, we are going to be hosting Stanford Economics Professor John Taylor this coming Tuesday at 1pm EST for a conference call (if you are not an institutional macro subscriber and would like information on attending please email firstname.lastname@example.org ). Bloomberg Markets recently named Professor Taylor to their 50 Most Influential List and he was on the short list to replace Chairman Bernanke under a Romney administration, but he is probably most known for the creation of the Taylor rule.
The Taylor rule is a monetary-policy rule that stipulates the degree to which central banks should change nominal interest rates in response to measures of economic output, specifically inflation. The theory behind the Taylor rule is that it increases the credibility of the central bank by reducing uncertainty in monetary policy actions. In effect, the rule reduces the need for arbitrary decisions by central banks.
Generally speaking, while Taylor believes that government has a role in managing the economy, the role should be limited and predictable. As such, he has been highly critical of both Democratic economists like Paul Krugman and Republican economists like Alan Greenspan. In fact, Professor Taylor wrote the following in the Wall Street Journal about the financial crisis in 2008:
“Government actions and interventions, not any inherent failure or instability of the private economy, caused, prolonged, and worsened the crisis."
That’s a statement we couldn’t agree with more.
The big topic we will be discussing with Taylor is the upcoming fiscal cliff and the potential outcomes. Currently, it seems that a resolution between now and the end of the year is unlikely. President Obama and Speaker Boehner met for an hour last night and, shockingly, there was apparent movement to a resolution. So as things stand today, in just over two weeks taxes are set to increase dramatically and government spending is set to decline.
As we’ve stated, this will have an impact on economic growth in the short run, though the positive implication may well be dollar strength as the United States takes some fiscal medicine. The other looming issue, which we highlight in the Chart of the Day, is that in Q1 2013 the federal government is likely to hit another debt ceiling.
So, it seems our politicians have a few cats by their tails . . . it will be interesting to see what they learn.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1684-1706, $105.61-108.98, $3.63-3.71, $79.51-80.31, $1.29-1.31, 1.66-1.74%, and 1410-1435, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
With the year's end fast approaching, let's review how banks and the Financial Select Sector SPDR ETF (XLF) have performed year-to-date. The XLF is up an impressive +25% year-to-date compared to the S&P 500, which is up +12.3% during the same time period. As far as the banks go, here's a breakdown:
- Goldman Sachs (GS): +39.41%
- JP Morgan (JPM): +30.53%
- Citigroup (C): +48.46%
- Bank of America (BAC): +105.58%
- Morgan Stanley (MS): +23.73%
Takeaway: Holiday sales are right in line with last yr. That’s not terrible, but the cadence needs to pick up as we comp a weak Jan 2012.
The trajectory of holiday sales seems to be coming in right in line with last year. That’s not terrible, but the cadence needs to pick up over the next week, because January 2012 was weak.
In looking at the weekly ICSC sales index – which we think is increasingly important given the shrinking size of companies participating in the monthly same store sales game – we think it is uncanny how closely 2012 tracked 2011 in the four weeks leading up to Christmas.
We’ve heard forever that ‘consumers are buying closer to need’ but when you look at the weekly change by year from ’08 through ’12, it’s clear as day that this purchasing pattern is more the case today than ever before. In fact, in each of the past two years, we saw an increasing decline in sales 3-4 weeks before the Christmas holiday, but then ‘catch up’ in the 1-2 weeks prior to the big day.
Sales trends in 2011 and 2012 vs previous 5-year average are too close to call. To date, you can hardly tell one from the other. But as noted, last year we saw a precipitous decline in the early part of January – something that we need to successfully lap this year to keep the channel as clean as it was throughout the bulk of 2H12.
We’ll have more details on Wed January 2.
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