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Crude Mood

#GrowthStabilizing will continue to work until it doesn't. What can put an end to global growth? High oil prices. Over the last three months, we've seen Brent crude oil work its way to above $116 a barrel while the US dollar falls in strength. $130 a barrel oil and higher gas prices will slow down consumption which in turn slows growth. Keep your eye on oil over the next month; we'll see where this takes us.

 

Crude Mood - OIL


Retail Sales: Discretionary Lagging

Takeaway: Expectations are upbeat for SSS. That makes sense to us w Discount Stores and weather-sensitive apparel. Otherwise data is underwhelming.

Here’s a nugget for you in advance of Same Store Sales on Thursday. The spread in the growth rate between Discount stores and Department stores jumped by a full point in the final week of January to 3.3%. That marks only the fourth time since October 2011 where this spread was greater than 3 points. For the latest week, Discount Stores grew 2.6% per the Redbook Index, while Department Stores contracted by 0.7%.

 

Expectations for same store sales in January seem to be universally upbeat.  That makes sense to us on the Discount Store side, and perhaps in areas that were helped by the cold weather snap in January. But otherwise, the data is hardly overwhelming.

 

Johnson Redbook Index: Discount Store Sales vs. Department Stores

Retail Sales: Discretionary Lagging - red


Dovish Setup - ECB & BOE and EU Summit

There’s been much noise on the Euro in recent days, perhaps the loudest from France’s President, Francois Hollande, who said that “a monetary zone must have an exchange rate policy or else it ends up being subjected to a rate that does not fit with the true state of the economy.” How do you say currency manipulation in French? As the global currency wars heat up we note our currency outlook below going into this Thursday’s ECB and BOE policy rate decisions and the beginning of the European Union Summit.

  • ECB Meets: Thursday the ECB’s governing council convenes. We expect no change to the main interest rates. This position is grounded in recent data that is supportive of an “accommodative” hands off approach from Draghi – CPI came down 20bps to 2.0% Y/Y in JAN, exactly at the ECB’s targeted level; PMIs across the region looked broadly better, and importantly showed improvement in the Eurozone average and in Germany; and while the unemployment rate remains nominally high (10.7%), it saw no increase in the DEC reading. We think investors are beginning to price in much of the bad ‘crisis’ news, in that case what’s left in play is a long runway of slow, low growth and unexpected sovereign/banking flair-ups across the periphery.

We see a heavy immediate TERM resistance level in the EUR/USD around $1.36/7 and intermediate term TREND support at $1.31. 

 

As we continue to show in our research, CFTC data shows decidedly that market participants have anchored on Draghi’s all hands on deck approach to save the common currency via the introduction of the OMT bond purchasing program in early August 2012. While we don’t expect this momentum to erode materially, we do think that the cross will fade at our resistance level as the underlying data in the region is still coming off very low levels of improvement and a muted outlook.

 

Dovish Setup - ECB & BOE and EU Summit  - bb. eurusd

 

Dovish Setup - ECB & BOE and EU Summit  - bb.cftc

 

  • BOE Meets: Thursday the BOE convenes. The BOE is widely expected to keep its current policy stance, however former MPC member John Gieve suggested that he sees a “substantial chance” that the Bank will expand monetary policy further due to weakness in the economy. Remember that the final UK Q4 GDP came in lower than expectations on a Q/Q basis -0.3% (exp. -0.1%) and a Y/Y basis 0.0% (exp. +0.2%), which could encourage a step-up in action. However, with CPI currently running at 2.7% Y/Y (above the 2% target) the Bank must also be careful to not stoke more inflation pressures through monetary financing. Should we see even a hint of acceleration in asset purchases we’d expect perversely for the GBP/USD and GBP/EUR to run higher.

 

  • EU Summit: European politician meet this Thursday and Friday to agree on the EU's 2014-2020 budget, the so-called multi-annual financial framework (MFF). We’d suggest you don’t hold your breath that leaders will reach a unanimous agreement. Talks were suspended at the last summit on 22-23 November and will now pick up from that point. The agenda is to find a budget for growth, however this time, we’re following UK PM Cameron’s call for a referendum on the country staying or leaving the EU – this in and of itself should bring more disunity to the table. Herman van Rompuy has said that the budget should focus on jobs, innovation, and research and would like to see that spending on competitiveness and jobs represent more than a 50% increase from the previous budget period of 2007-2013. While we do not expect a unanimous decision, one crafted to throw heavy funding at job creating could put further support in the cross as the region slowly repairs growth.  As always, the devil is in the details.

Matthew Hedrick

Senior Analyst


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Still Bullish: SP500 Levels, Refreshed

Takeaway: We’re not blindly buying on the overbought signals (1515), but we aren’t freaking out on controlled corrections either.

POSITIONS: 13 LONGS, 6 SHORTS @Hedgeye

 

Higher-lows and higher-highs as the economic data continues to stabilize. This morning’s employment component of the ISM non-manufacturing survey was the best print since 2006.

 

That’s bearish for Treasuries and bullish for stocks. Don’t fight the data.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1515
  2. Immediate-term TRADE support = 1490
  3. Intermediate-term TREND support = 1442

 

In other words, if you bought/covered yesterday’s close, you are smiling. We’re not blindly buying on the overbought signals (1515), but we aren’t freaking out on controlled corrections either.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Still Bullish: SP500 Levels, Refreshed - SPX


Golden Days Are Over?

As growth continues to stabilize in the United States, stocks are ripping to the upside while bonds and gold are getting creamed. Gold has taken quite a beating over the last six months as you can see in the chart below. Furthermore, with the US dollar starting to strengthen, gold will likely see further downside. Strong dollar = Strong America. The goldbugs can't always be right.

 

Golden Days Are Over? - GOLDUSD


1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE

Takeaway: C&I loan demand picks up sharply in 1Q13 while prime resi loan standards ease. Auto loan demand rises while card demand falls.

Loan Underwriting Standards Continue to Ease. Demand is Heating Up.

The Fed released its 1Q13 Senior Loan Officer Survey yesterday afternoon. The survey, which contains data on lending standards and loan demand across asset classes, was conducted between December 27th, 2012 and January 15th, 2013. Overall, the results were positive again this quarter with a few categories showed significant sequential improvement. We look at the results for each loan category below.

 

C&I Loans - Posting a Strong Sequential Improvement

Demand for C&I loans surged in the latest Senior Loan Officer Survey. Banks reporting an increase in C&I loan demand from large and mid-size firms rose to +19.1% from -6.2% in 4Q12. C&I loan demand among small firms was reported to have risen to +15.4% from +4.5% last quarter. Underwriting standards for C&I loans continued to ease at a rate comparable with what we saw in 4Q12. The same can be said for banks spreads: spreads are flat to down at a net 54.4% of banks on large firm C&I loans and 50.8% for small borrowers.

 

C&I lending remains the strongest area of growth for banks since the recovery began. In fact, C&I loans outstanding recently eclipsed their pre-crisis high. As such, this sharp increase in demand in the first quarter is a positive sign. 


1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 1

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 2

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 3

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 4

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 5

 

Commercial Real Estate - Demand Remains Strong As Standards Are Relaxed Further

Commercial real estate loan demand continues to heat up as debt maturities remain very high again this year, following a record year last year. Interestingly, you would think that all that demand would lead banks to be more choosey, but in fact the opposite has happened. CRE lending standards have eased each quarter since 2Q11 and this quarter was no exception.

 

Commercial real estate loans outstanding have finally begun to increase after posting years of decline following the bust of the real estate market. This is a significant inflection point, and should become a material driver of bank loan growth going forward. 

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 6

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 7

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 8

 

Residential Mortgage Loans - Prime Standards Easing

Banks reported a modest further net easing of standards on prime mortgage loans. On balance, 4.6% of banks reported flat to lower standards on prime resi loans. That is up from 1.6% last quarter. While not a huge change sequentially, the emerging trend of banks easing prime resi standards is a very important development that will continue to reinforce the recovery in residential real estate as additional cohorts of buyers find their way into the market.

 

It's also notable that Nontraditional resi loans saw standards tighten modestly (+2.9%), and that subprime loan standards were reported again. Bear in mind that the Fed hasn't reported a response on subprime resi loans since Q1 of 2009, so the fact that banks are even commenting on it is an indication that subprime loans are starting to re-emerge. That said, on the margin, 20% of banks reported tightening standards on subprime loans, likely in response to the recently issued new QM rules.

 

On the demand front, however, borrowers continue to show greater interest. 1Q13 marked the sixth consecutive quarter of banks reporting QoQ growth in prime residential mortgage demand. Naturally, much of this is refinancing demand.

 

Two other noteworthy callouts are that demand for credit card loans took abrupt downturn in 1Q13 falling to -4% from +8.5% in the prior quarter. This is notable in that the prior six quarters were all positive. On the auto finance front, standards continue to ease while demand accelerated.

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 9

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 10

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 11

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 12

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 13

 

 

Joshua Steiner, CFA

 


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