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Copper and the Dollar

Takeaway: Get the US dollar right, you'll get a lot of other things right - like copper, for example.

What's good for the US dollar is bad for commodities these days. We see that correlation across many different commodities, but copper prices are showing a particularly strong correlation as you can see in the chart below. The chart shows high grade copper prices versus the the US dollar index for the past 30 days.

 

Copper and the Dollar - Copper vs USD

 


MACAU GROWTH SLOWS - BUT NOT MUCH

Macau put up another strong week and while ADTR failed to keep up with the torrid pace of the first two and half weeks, revenues were still very good.  ADTR grew 33% YoY this past week to HK$886 million.  Our full month projection is higher once again, to HK$29.5-30.5 million which would represent YoY growth of 22-26%.  We are hearing that high VIP hold is only partly responsible for the March strength as volumes in both Mass and VIP have been very healthy.

 

Market shares thus far in March are consistent with recent trends for the most part.  The slight exceptions are SJM higher and MGM lower.  We continue to like MPEL and LVS as the best Macau long ideas.

 

MACAU GROWTH SLOWS - BUT NOT MUCH - mmm

 

MACAU GROWTH SLOWS - BUT NOT MUCH - fff


Dollar General: On the Margin

Takeaway: The key margin driver for Dollar General might not have much more room to run.

Dollar General (DG) reported earnings earlier this morning, which showed sales growth but also improving margins. But, the key margin driver for DG is slowing as you'll see from the chart below.

 

Consumables, items like food or other perishables that have consumers returning frequently to the stores, now account for 74% of total sales, up from 69% and about has high as they can really go. This high percentage of consumables creates more frequent visits to the stores, improves comparable sales and ultimately makes margins higher.

 

As such, the rate of margin improvement will slow, and that will hamper the pace of appreciation in DG's stock price, too.

 

Dollar General: On the Margin - Dollar General 032513


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MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE

Takeaway: Morgan Stanley looks like an obvious short-term reflation catalyst as well as GS. Citi ranks third.

Key Takeaways

 

* Systemic Risk vs. Local Risk. The most interesting callout in this week's risk monitor is the divergence between Euribor-OIS and EU bank swaps. Euribor-OIS was tighter week-over-week, moving from 12.70 bps to 12.20 bps. Meanwhile, bank swaps across Europe were meaningfully wider. This speaks to Cyprus not being a systemic risk to the banking system in spite of the media's best efforts at making it one, or at least the markets didn't see it that way. The obvious long play here is Morgan Stanley, which was down 6% last week, the worst of the U.S. global banks. Close behind MS is GS, down 5.3%.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Negative / 5 of 12 improved / 5 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Positive / 11 of 12 improved / 1 out of 12 worsened / 1 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 15

 

1. American Financial CDS -  The global U.S. banks widened as expected in response to Cyprus. Bank of America and Morgan Stanley were hardest hit, widening by 18 and 15 bps, respectively. 

 

Tightened the most WoW: ALL, UNM, XL

Widened the most WoW: BAC, JPM, C

Tightened the most WoW: MTG, MBI, RDN

Widened the most MoM: MMC, AON, BAC

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 1

 

2. European Financial CDS - Not surprisingly, EU bank swaps widened sharply last week. French banks were among the hardest hit with BNP wider by 26 bps, Credit Agricole wider by 35 bps and Soc Gen wider by 39 bps. German, Italian and Spanish banks followed suit.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 2

 

3. Asian Financial CDS - Swaps across China and Japan were tighter last week, while India saw swaps widen.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 17

 

4. Sovereign CDS – Despite the turmoil, global sovereign swaps were only modestly wider last week. Portugal was teh worst performer, widening by 18 bps WoW. The U.S. was flat. 

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 18

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 3

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 0.6 bps last week, ending the week at 5.80% versus 5.79% the prior week.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.2 points last week, ending at 1783.92.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 6

 

7. TED Spread Monitor – The TED spread rose 2.1 basis points last week, ending the week at 21.66 bps this week versus last week’s print of 19.61 bps.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 0.5 points, ending the week at 9.58 versus 9.1 the prior week.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 12 bps. 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. 

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – In spite of the turmoil in Cyprus, ECB overnight deposits were unchanged last 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.  

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 4 bps, ending the week at 84 bps versus 88 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 11

 

12. Chinese Steel – Steel prices in China rose 0.9% last week, or 32 yuan/ton, to 3686 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 166 bps, 10 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.7% upside to TRADE resistance and 1.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 14

 

Joshua Steiner, CFA


U.S. Dollar Strength

Client Talking Points

Good for the Dollar, Bad for Commodities

The US Dollar Index is now up for six of the last seven weeks, and , in turn, the CRB Commodities Index is down for six of the last seven weeks. The dollar and commodities, then are inversely correlated. Oil, copper and rice have have very high inverse correlations, for example.

Emerging Markets Impact

Watch the emerging markets, too, to gauge the strengthening US dollar’s impact. In those emerging markets that do not have a peg to the dollar, we are seeing localized inflation. In those countries whose equity markets are commodity-linked, like Brazil for example, we are seeing declines. Brazil is down 9.4% for the year.

Asset Allocation

CASH 32% US EQUITIES 24%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
DRI

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.

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.

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.

Three for the Road

TWEET OF THE DAY

“Love that #OldWall mentality – everyone else had it wrong. So it’s ok (pay us).” – @KeithMcCullough

 

QUOTE OF THE DAY

“Be yourself; everyone else is already taken.” – Oscar Wilde

STAT OF THE DAY

15, the seed of Florida Gulf Coast, which became the first 15th seed in NCAA men’s basketball tournament history to make the round of 16.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 25, 2013


As we look at today's setup for the S&P 500, the range is 22 points or 0.89% downside to 1543 and 0.52% upside to 1565.          

                                                                                                                     

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.70 from 1.68
  • VIX  closed at 13.57 1 day percent change of -3.00%

MACRO DATA POINTS (Bloomberg Estimates):

  • U.S. Rates Weekly Agenda
  • 8:30am: Chicago Fed Natl Activity Index, Feb (prior -0.32)
  • 10:30am: Dallas Fed Manuf., March, est. 3.5 (prior 2.2)
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: U.S. to sell $35b 3-mo. bills, $30b 6-mo. bills
  • 12:15pm: Fed’s Dudley speaks at Economic Club of New York
  • 1:15pm: Fed’s Bernanke, BoE’s King, IMF’s Blanchard speak

GOVERNMENT:

    • Washington Week Ahead
    • House meets in pro forma session, Senate not in session
    • Fed’s Bernanke, IMF’s Olivier Blanchard join public discussion chaired by BoE Gov. Mervyn King, 1:15pm
    • Supreme Court hears arguments on whether drugmakers, would-be rivals who make generic versions are engaged in what U.S. calls anti-competitive “pay for delay” practices when they sign deals to delay introduction of lower-cost medicines, 11am
    • U.S. Chamber of Commerce holds discussion on regional trade agreements, w/ New Zealand Minister of Trade Tim Groser, 8:30am
    • ITC announces whether to review finding that Chinese manufacturer wasn’t infringing patents owned by closely held Standard Innovations for the We-Vibe sex toy, 5pm

WHAT TO WATCH

  • Dell said to get Blackstone, Icahn bids rivaling founder’s
  • Michael Dell likely to sweeten buyout bid to save legacy
  • Cyprus salvaged after deal with EU shuts bank to get $13b bailout
  • Apple buys indoor location-services startup WiFiSLAM
  • U.S. regulators should apply domestic derivatives rules to overseas firms when foreign laws don’t demand comparable requirements: SEC Chairman Walter
  • Sinopec said would form JV w/parent to buy overseas oil, gas assets
  • Italian 10-yr govt. bonds erase post-election decline
  • Westfield raises $700m from sale of Florida mall stakes
  • “The Croods” tops N.A. box office w/ $44.7m in sales
  • Vodafone may withdraw from U.S. with $135b sale: Sunday Times
  • Former Morgan Keegan directors in settlement talks with SEC: WSJ
  • U.S. has asked Liechtenstein to hand over data on foundations that may have been used to hide untaxed American money from IRS
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • Weekly Eco Preview: Consumer-spend gains help drive orders
  • Cyprus, U.S. Data, Supreme Court, BRICS: Week Ahead March 25-30

EARNINGS:

    • JA Solar (JASO), 6am, ($1.36)
    • Apollo Group (APOL) 7am, $0.19
    • Dollar General (DG) 7am, $0.90
    • Sonic (SONC) 4:01pm, $0.05
    • AuRico Gold (AUQ) After-mkt, $0.06
    • China Gold International (JINFF), $0.21 (FY12)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Oil Rises to One-Month High on Cyprus; Brent Spread Narrows
  • Hedge Funds Most Bearish Ever on Copper, Favor Gold: Commodities
  • Copper Falls in London as China’s Usage May Slow; Lead Advances
  • Gold Falls in London as Equities Climb After Cyprus Agreement
  • Corn, Soybeans Decline as Feed Use Slows, Farmers Boost Sowing
  • Zhengzhou Bourse Said to Plan Adding U.S. Cotton for Deliveries
  • Palm Oil Drops as Rally to One-Month High Seen Reducing Demand
  • Rebar Gains After Inventory Declines From Record, Cyprus Bailout
  • NRG Skirts Utilities Going Straight to Power Consumers: Energy
  • Sugar Declines in New York on Ample World Supplies; Coffee Gains
  • Central African Rebel Leader Vows to Maintain Unity Government
  • Paris Wheat May Climb on Fibonacci Breach: Technical Analysis
  • Bullish Natural Gas Bets Surge as Fuel Hits $4: Energy Markets
  • Rubber Gains as Yen Weakens After Euro Chiefs Reach Cyprus Deal

THE HEDGEYE DAILY OUTLOOK - comm

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - global

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 


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