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Reviewing Italian Election Results

This note was originally published February 25, 2013 at 17:32 in Macro

Yesterday's results (which are still being tabulated) suggest a hung parliament in Italy, with Berlusconi taking the upper house and Bersani winning the lower house. Given that both houses have equal powers, the stalemate suggests that today’s results will force Italy’s President to call for an interim government and another round of voting.

 

The results show that Italians voted against the fiscal reforms under Monti. The Italian 10YR yield increased 12bps versus to 4.49% and the spread versus German bunds increased 14bps as the EUR/USD fell -0.89% to $1.3076 on the day.

 

Broadly, today’s results show that economic uncertainty breeds political uncertainty, a case we seen time and time again across the Eurozone. We think this power vacuum should put upward pressure on Italian sovereign and bank spreads, a drag on the country's already weak economic fundamentals.

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While final votes are still being tabulated, the key take-aways of today’s results are:

  • Strong support for Peppe Grillo and his anti-austerity party (The Five Star Movement, M5S) and increased support for Silvio Berlusconi’s center-right People of Liberty Party (particularly in the upper house) took needed support from Pier Lugi Bersani and his center-left Democratic Party alliance to led to a mixed upper and lower house result.
  • Since Grillo’s party is not looking to form a coalition with anyone, his support is simply creating a wedge in coalition building

In the Lower House (630 seats) -

  • Bersani took majority control, gaining some 340 seats, on 29.2% of the vote, according to projections
  • Berlusconi got 28.7% and 121 seats
  • Grillo received around 111 seats on 26.1%
  • Monti took a mere 8.4%

 

In the Upper House (315 seats) -

  • Berlusconi may have "won" the Senate race with 113 seats, according to RAI forecasts by gaining the key swing regions of Sicily, Campania and Lombardy
  • Bersani – 105 seats
  • Grillo – 63 seats
  • Monti – 20 seats

 

Matthew Hedrick

Senior Analyst


Housing: Rapid Growth

Since #GrowthStabilizing began in late November of last year, housing has been one of the leading drivers of recovery in the US economy. Today’s housing data is indicative that the recovery is still on fire and has no signs of letting up anytime soon. New home sales rose 15.6% month-over-month in January to 437,000; December data was revised up from 369k to 378k making the comp more impressive. On a year-over-year basis, new home sales in January are up 28.9%, which is the fastest rate of growth in the last 12 months. Impressive by all means.

 

Housing: Rapid Growth - nhs 1

 

The inventory of new homes for sale was flat at 150k. When looking at inventory on a months supply basis, January stood at 4.1 months, down from 4.8 months in December and the lowest level of inventory since March, 2005. For perspective, months supply floated between 4-5 months from 1997-2005. We would expect to see inventory levels rise, as this reflects a strengthening market. We continue to believe that home prices are heading meaningfully higher in 2013. This morning's New Home Sales data, showing a rising sales rate and falling months supply of inventory, supports our thesis.

 

Housing: Rapid Growth - nhs 2

 

Housing: Rapid Growth - nhs 3

 

Housing: Rapid Growth - nhs 4

 

Housing: Rapid Growth - nhs 6


Proper Risk Management

Client Talking Points

Who Could Have Known?

Sometimes the market just likes to throw in a mid-day switch for good measure. In the case of yesterday, it looked like the S&P 500 was going to test YTD highs (1530) and instead, volatility cranked up and boom: the marker "tanked." We did some smart planning, like selling our short Yen (FXY) position and sold Utilities (XLU) on the high. No one could have predicted that the Italian election would have caused as much global chaos as it did yesterday. The Euro took a nosedive south and now our risk management signals are flashing bearish for the first time since a long time.

Asset Allocation

CASH 40% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

"Yesterday's 1-day move (up) in the VIX was the biggest since AUG2011" -@KeithMcCullough

QUOTE OF THE DAY

"A cynic is a man who, when he smells flowers, looks around for a coffin." -H.L. Mencken

STAT OF THE DAY

U.S. home prices rose in December, and saw the largest year-over-year gain since 2006. The S&P/Case-Shiller 20-city composite posted a nonseasonally adjusted 0.2% increase in December, following a 0.1% decline in November.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

THE M3: VISITOR ARRIVALS; FOREIGN WORKER LEVY

The Macau Metro Monitor, February 26, 2013

 

 

MACAU VISITOR ARRIVALS DSEC

Visitor arrivals totaled 2,312,321, down by 6.1% YoY.  Mainland visitors totaled 1,473,785, with 616,066 travelling to Macau under the Individual Visit Scheme.  The average length of stay of visitors stood at 1.0 day, up by 0.1 day YoY.

 

THE M3: VISITOR ARRIVALS; FOREIGN WORKER LEVY - Macau123

 

EMPLOYERS TO PAY S$70 TO S$400 MORE IN FOREIGN WORKER LEVY Channel News Asia

Employers will have pay between S$70 and S$400 more in foreign worker levy within the next two years.  For work permit holders, the increase is steepest for the construction sector, of S$400 per worker.  





Risk Sees Me

“The tiger will see you a hundred times before you see him once.”

-John Vaillant

 

I’ve never been hunted down by a Siberian Tiger, but I’ll take John Vaillant’s word for it on how that might feel. On page 51 of The Tiger, he partly explains how I felt in very short order yesterday. Risk happens fast. Feelings aren’t what you want to be managing in your portfolio.

 

How could you not feel this? At 10AM EST yesterday, the SP500 was at 1524, and the Volatility Index (VIX) was at 13.63. I thought we were going to test the YTD high (1530 SPX) and volatility would continue to collapse. I thought wrong.

 

Actually, if you told me the reason why we were going to have a violent reversal (as in a +39% six-hour energy move in the VIX and the worst US stock market down day since November 7th) was the Italian election, I wouldn’t have changed my position either. I should have.

 

Back to the Global Macro Grind

 

Should have, could have, would have – they are all loser excuses people make, so don’t expect me to make them this morning.

 

We made some good moves yesterday (covered our Yen short at the YTD low, shorted Utilities at the YTD high), but my overall net long position in US Equities was dead wrong. There is no excuse making in my books. The score doesn’t lie; people do.

 

Whether I think Italy should matter doesn’t matter. It’s what the market says matters that matters. So let’s get on with our day and focus on not making more mistakes.

 

As I wrote yesterday, I don’t start with the Research View (it actually improved again yesterday with Strong Dollar taking Oil prices down to a 7wk low), I start with the Risk Management Signals – here they are in the USA, across durations (TRADE, TREND, and TAIL):

  1. SP500 broke immediate-term TRADE support of 1502; remains bullish TREND and TAIL with 1463 TREND support
  2. Russell2000 broke immediate-term TRADE support of 901; remains bullish TREND and TAIL with 869 TREND support
  3. VIX ripped through all lines of resistance and moves to bullish TREND provided that 17.18 holds (watch this closely)
  4. US Dollar Index remains in a Bullish Formation (bullish TRADE, TREND, and TAIL)
  5. CRB Commodities Index remains in a Bearish Formation (bearish TRADE, TREND, and TAIL)
  6. US Treasury 10yr Yield broke immediate-term TRADE support of 1.96%; remains bullish TREND and TAIL with 1.84% TAIL support

Then, if I dig inside that 1st factor (SP500) and break it into Sector Style Exposures (dividing the pie into 9 S&P Sectors):

  1. 5 of 9 Sectors are still in Bullish Formations: Healthcare, Financials, Industrials, Utilities, and Consume Staples
  2. 2 of 9 are bearish on both TRADE and TREND durations: Basic Materials and Tech (AAPL = 14.9% of the Tech ETF)
  3. We bought Financials (XLF) into the close yesterday and shorted Utilities (XLU) on the open – both on signals

So, net net net – not a lot has changed here from a Research View perspective. The only S&P Sector that is down YTD is the one we’d expect to be down (Basic Materials), as we expect to see a Strong Dollar perpetuate A) commodity deflation and B) consumption #GrowthStabilizing.

 

However, that doesn’t mean the Risk Management Signals are going to let us out of The Tiger’s grasp right here and now. Immediate-term TRADE breakdowns force people to make decisions on intermediate-term TREND positioning. And that’s what we need to do next.

 

Looking at Global Macro risk more broadly, across Global Equity markets:

  1. Japan was down -2.26% last night (after being up +2.4% the day prior) and remains in a Bullish Formation (no TRADE breakdown)
  2. China’s Shanghai Composite was down -1.4% (broke TRADE support of 2321, but held TREND support of 2209)
  3. South Korea’s KOSPI was only down -0.47% overnight and is holding last week’s bullish TRADE/TREND breakout
  4. Brazil’s Bovespa remains bearish TRADE and TREND (that’s not new, and largely because of the Commodity exposure)
  5. Germany’s DAX broke TRADE support of 7670 again this morning; remains bullish TREND and TAIL with TREND support of 7528
  6. Italy’s MIB Index is a bloody mess, down -4.5% this morning and back into a Bearish Formation

So, do we give up on the Research View? Or do we acknowledge that short-term (TRADE) durations breakdown, breakout, and whip around - always stressing our ability to navigate the markets intermediate-term TRENDs?

 

Italy and France are dysfunctional economies being managed by a socialist #PoliticalClass (not new news – this is the 62nd Italian government since WWII). Brazil is going down for the reasons we think are bullish for the #1 research factor in our model (commodity deflation is a global tax cut for consumers).

 

Risk Sees my position. It sees yours too. It’s never “off.” It’s always on, and whether it was a SP500 price of 1524 (10AM EST) or 1487 (4PM EST), evidently it goes both ways, fast. I’ll be doing a lot of waiting and watching for the next few days, to make sure yesterday’s 6hr move wasn’t an emotional head-fake.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, and the SP500 are now $1, $112.61-116.38, $80.72-81.98, 91.65-94.41, 1.84-1.96%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Risk Sees Me - Chart of the Day

 

Risk Sees Me - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.49%
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