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Draghi’s Two Forecasting Heads

Continuing with our call since June that Draghi and the ECB would be on hold with changes to the main interest rate until at least the Fall, today’s decision by the ECB to keep rates unchanged was no surprise. Interesting, what has faded over recent months is a call for additional non-standard measures like increased lending facilities to small and medium-sized enterprises (SMEs) or talk of cutting the deposit rate to negative. We continue to think that policy measures of the ECB will continue to propel most Eurozone capital markets higher as underlying fundamentals remain challenged with only slight improvement in year-end.

 

Draghi’s Two Forecasting Heads  - vv. interest rates

 

Today’s mantra on the ECB conference call was a continuation of previous expectations, namely a gradual recovery in the back half of 2013, and Draghi reiterated more recent “forward guidance” that interest rates will remain at present or lower levels for “an extended period of time”.

 

Yet Draghi’s optimism around any great improvement in the economic outlook remains clouded. He lists underlying indicators of this recovery as export growth, recent gains in real income due to lower levels of inflation, improvement in confidence figures and PMIs, and deposit rates at levels last seen in 2007. Yet in the same breath he mentions at least equal downsides risks to this improvement: deterioration of global money and financing conditions, low credit growth, rigid labor markets, and the slow pace of economic reform at the country level. 

 

Taken together, we expect economic performance to be challenged over the intermediate term, despite selective gains, and believe capital markets will continue to act favorably in response to the ECB’s interventionist policy stance (a continuation of the OMT policy announced a year ago) rather than in response to significant real improvements in the underlying health, which we do not expect in 2013. Our Eurozone growth forecast for 2013 is -0.8% to -0.6%.  We expect credit conditions to remain clogged for a protracted period (more below), fiscal and labor reformers to be ignored or have little impact, and confidence and consumer spending to return only gradually in a backdrop of political uncertainty in Spain, Italy, and Portugal.

 

Draghi’s Two Forecasting Heads  - vv. equities

 

On the ECB adding minutes to its communication tools, Draghi signaled that there will be a proposal on minutes in the Fall.

 

 

Credit

  • One cause for concern remains credit conditions across Europe. In the chart below we show ECB Loans to Non-Financial Corporations and Households. The former is near all-time lows at -2.3% and the latter has held at the low level of +0.3% for the past three months.  We’re also hearing of more Eurozone banks (particularly in the periphery) report increasing non-performing loans, which will diminish credit quality and with it boost rates, further clogging the credit channel. S&P cut the ratings of 18 Italian banks just last week.
  • Non-performing loans for Italian banks surged +22% in May from the same month of 2012 to €135.5 billion and lending by Italian banks to the private sector dropped -3.3% in June from a year ago to €1.6 trillion, according to the Italian Banking Association.

Draghi’s Two Forecasting Heads  - vv. loans

 

 

PMIs

  • Today’s Manufacturing PMIs proved mostly better in the July reading versus June. The Eurozone aggregate was 50.3 JUL (exp. 50.1) vs 48.8 JUN, which represented the first expansionary reading since July 2011. We expect some improvement in these levels into year-end.
  • Eurozone Confidence Figures (Economic, Consumer, Business, Services, Industrial) for July were also stronger versus the previous month and have trended higher over the last three months.

Draghi’s Two Forecasting Heads  - vv. pmis

 

Draghi’s Two Forecasting Heads  - vv. manu and service confid

 


EUR/USD


Our critical immediate term TRADE lines of support and resistance are $1.31 and $1.33, respectively.  Our intermediate term TREND Line is at $1.31, and we expect the cross to be range bound in August barring any political events that could shake the range.

 

Draghi’s Two Forecasting Heads  - vv. eur new

 

Draghi’s Two Forecasting Heads  - vv. cftc

 

Matthew Hedrick

Senior Analyst


Overbought: SP500 Levels, Refreshed

Takeaway: Employment #GrowthAccelerating (best jobless claims print since 2007) and #RatesRising are driving both the US Dollar and US Stocks higher.

POSITION: 6 LONGS, 4 SHORTS

 

Overbought, but a very bullish overbought at that!

 

Today’s new all-time high is sponsored by confirming evidence that both employment #GrowthAccelerating (best jobless claims print since 2007) and #RatesRising can drive both the US Dollar and US Stocks higher.

 

Sell Gold and Treasuries yet? They are being appropriately tapered. That’s not new as of today – that’s the TREND.

 

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

 

  1. Immediate-term TRADE resistance = 1705
  2. Immediate-term TRADE support = 1690
  3. Intermediate-term TREND support = 1621

 

In other words, everyone and their brother will be waiting for the next “correction”, but now almost everyone has to chase.

 

I’m not a fan of chasing, but I’m not a fan of the end of the world trade either. Stay with what’s been working - long growth as #GrowthSlowing expectations continue to be misplaced.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Overbought: SP500 Levels, Refreshed - SPX

 

 


#ASIANCONTAGION: SO FAR, SO GOOD*

Takeaway: July growth and inflation data out of emerging Asia lends overwhelming support to our #AsianContagion theme.

SUMMARY BULLETS:

 

  • On balance, economic growth across emerging Asia continues to slow, while various metrics of inflation are broadly accelerating across the region per this morning’s releases of the most recent (JUL) data.
  • As outlined in our #AsianContagion macro theme, the confluence of China’s cyclical and secular slowdown and #RatesRising should weigh on the growth rates of the Chinese demand-levered, capital intensive economies across emerging Asia, while #StrongDollar’s continued punishment of overvalued Asian exchange rates should auger positively for Asian CPI readings over the intermediate-to-long term.
  • All told, as it relates to our bearish bias on Asian equities, currencies and fixed income, when the facts (i.e. fundamentals) change, we’ll change. For now, however, we continue to see little-to-no signs of that occurring in the near term.
  • Akin to the conclusion from our China note from yesterday, investors should avoid the act of robotically parking client capital in Asian asset classes because they appear “cheap” (which they aren’t, BTW). Anyone who’s done the required work on #EmergingOutflows cycles knows full well that we are likely in the early innings of long-term relative underperformance and/or absolute declines for emerging Asia’s capital and currency markets. Email us if you’d like to review said work or would like to talk shop on a country-by-country basis; as always, we’re around to help.

 

On balance, economic growth across emerging Asia continues to slow, while various metrics of inflation are broadly accelerating across the region per this morning’s releases of the most recent (JUL) data:

 

  • Asian Growth (PMI) Data (sequential acceleration/deceleration, expansion/contraction):
    • China (+,+): JUL Manufacturing PMI: 50.3 from 50.1 vs. Bloomberg consensus estimate of 49.8
    • China (-,-): JUL HSBC Manufacturing PMI: 47.7 from 48.2 vs. Bloomberg consensus estimate of 47.7… The headline reading was the lowest reading since AUG ’12… The New Orders index fell to 46.6, which was the lowest since AUG ’12… The New Export Orders index contracted for a fourth-consecutive month… The Employment index slowed to the lowest level since MAR ’09.
    • India (-,+): JUL Manufacturing PMI: 50.1 from 50.3
    • Korea (-,-): JUL Manufacturing PMI: 47.2 from 49.4
    • Taiwan (-,-): JUL Manufacturing PMI: 48.6 from 49.5
    • Indonesia (-,+): JUL Manufacturing PMI: 50.7 from 51.0
    • Vietnam (+,-): JUL Manufacturing PMI: 48.5 from 46.4
  • Asian Inflation Data (sequential acceleration/deceleration):
    • China (+): JUL Input Prices: 50.3 from 50.1; a 4M-high
    • China (+): JUL China Real Estate Index System House Price Index (100 cities): +7.9% YoY from +7.4%; +0.9% MoM from +0.8%
    • Korea (+): JUL CPI: +1.4% YoY from +1%
    • Indonesia (+): JUL CPI: +8.6% YoY from +5.9%; a 4Y-high… effects of the JUN 22 fuel price hike (via removal of subsidies) filtering through the economy
    • Thailand (-): JUL CPI: +2% YoY from +2.3%

 

As outlined in our #AsianContagion macro theme, the confluence of China’s cyclical and secular slowdown and #RatesRising should weigh on the growth rates of the Chinese demand-levered, capital intensive economies across emerging Asia, while #StrongDollar’s continued punishment of overvalued Asian exchange rates should auger positively for Asian CPI readings over the intermediate-to-long term.

 

#ASIANCONTAGION: SO FAR, SO GOOD* - Economic Sensitivity to China

 

#ASIANCONTAGION: SO FAR, SO GOOD* - 10Y Rates

 

#ASIANCONTAGION: SO FAR, SO GOOD* - Investment as a   of GDP

 

#ASIANCONTAGION: SO FAR, SO GOOD* - REER

 

#ASIANCONTAGION: SO FAR, SO GOOD* - Asia CPI YoY

 

And while we don’t expect it to persist, Brent Crude Oil’s bullish TREND and TAIL setup only augments the latter view for the time being. While Bloomberg consensus expectations appear a bit frothy (Nonfarm Payrolls at +185k; Private Payrolls at +195k), a positive surprise in tomorrow’s US employment report (JUL) could cement the recent dead-cat bounces across Asia ex-Japan equities (AAXJ up +8.5% vs. its 6/24 cycle-trough) and, to a much smaller degree, Asian currencies as rear-view events.

 

#ASIANCONTAGION: SO FAR, SO GOOD* - AAXJ

 

#ASIANCONTAGION: SO FAR, SO GOOD* - OIL

 

Turing to China specifically, China’s official PMI data showed stabilization via a slight uptick on the headline reading. This is in line with the bevy of recent rhetoric out of Beijing which has promised to put a floor under current growth rates for the remainder of 2013.

 

#ASIANCONTAGION: SO FAR, SO GOOD* - China PMI Table

 

The latest on this front is this morning’s statement out of the State Council Information Office, which reiterated the official pledge to prevent growth from slipping below existing targets while also pledging to avoid artificially reflating economic growth: “The nation cant blindly stimulate economic growth, nor can it allow economic growth to decelerate to a level out of the reasonable zone.”

 

Interestingly, the HSBC PMI reading showed a pretty sharp deceleration in Chinese economic growth in the month of JUL, which is moderately confounding given the MoM easing of monetary conditions. While we generally overweight the official data in our analysis of Chinese growth trends, it can be strongly argued that the Politburo has a vested interest in showcasing economic stabilization. This certainly wouldn’t be the first time the Chinese government has been accused of making up the numbers!

 

At best, Chinese growth is trending sideways though 2H13 and structural growth headwinds remain for 2014 and beyond. We would not be surprised… in fact, we expect the Chinese government to take down their (not-yet-announced) 2014 and 2015 real GDP growth targets by -50bps and -100bps vs. 2013’s targeted +7.5% YoY rate.

 

#ASIANCONTAGION: SO FAR, SO GOOD* - China GDP Expectations

 

All told, as it relates to our bearish bias on Asian equities, currencies and fixed income, when the facts (i.e. fundamentals) change, we’ll change. For now, however, we continue to see little-to-no signs of that occurring in the near term.

 

Akin to the conclusion from our China note from yesterday, investors should avoid the act of robotically parking client capital in Asian asset classes because they appear “cheap” (which they aren’t, BTW). Anyone who’s done the required work on #EmergingOutflows cycles knows full well that we are likely in the early innings of long-term relative underperformance and/or absolute declines for emerging Asia’s capital and currency markets. Email us if you’d like to review said work or would like to talk shop on a country-by-country basis; as always, we’re around to help.

 

Darius Dale

Senior Analyst

 

#ASIANCONTAGION: SO FAR, SO GOOD* - EV to EBITDA


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MAR 2Q 2013 CONFERENCE CALL NOTES

Weakest quarter/guidance of the bunch

 

 

"We were pleased with our second quarter results and believe they reflect the core strength of our business model.  Modest economic growth combined with historically low supply increases in the industry helped us post 5.2 percent systemwide REVPAR growth in North America.  Both business and leisure transient demand were strong in the quarter, more than offsetting weak short-term group business.  As occupancy rates reach 2007 peak levels for many brands, room rates are moving higher, improving hotel profitability and incentive fees.

 

- Arne M. Sorenson, president and chief executive officer of Marriott International

 

 

CONF CALL NOTES

  • Transient REVPAR: +6%, remains strong; rose 7% in March/April, 6% in May, 7% in June
  • Leisure business was hot
  • Group REVPAR: +17% in April, -1% in May, -5% June
  • Large convention hotels were particularly impacted by weak group demand
    • Bookings for rest of 2013: up 17%
  • Encouraged by long-term bookings
  • Corporations are cautious on discretionary spending
  • DC/Boston - group bookings very weak
  • Ex DC, NA REVPAR would have been +6.5%
  • Boston REVPAR 1%
  • Increases in meeting space supply
  • 2% group will come from DC
  • Don't believe group dynamics is a systemic issue
  • Adding resources to large meeting sales force
  • Encouraged by improvements in Europe; France/Russia led the way; 3Q comps in London will be difficult - but seeing signs of improvement in 4Q (also easier comps in 4Q)
  • Greater China - REVPAR +1% - gained 6% in market share
  • Middle East:  REVPAR +11% 
  • North America/Europe outlook:  steady as she goes
  • Tightened REVPAR forecast
  • Already have two 2 dozen AC hotels under discussion - look to sell assets when timing is right
  • 2Q - signed 16,000 new rooms
  • Beginning in June 2014, expect royalty fees for new and relicensed Fairfields to increase from 4.5%-5% of room revenue to 5.5%-6% of room revenue
  • Development environment for full-service remains challenging
  • Owned/leaser: 2 cents of higher than expected termination fees
  • JV impairment cost 1 cent
  • US incentive fees increased +35%
  • 100-150bps of margin improvement for 2013
  • Termination fees: $13MM vs $14MM
  • Shift in calendar will add $26MM in operating income; -$64MM in operating income impact in 4Q
  • 3Q 2012 -  $5MM positive litigation settlement
  • Group bookings flattish; 6% group bookings pace for 4Q 2013; 95% booked for 2013
  • Will have renovation disrutpions in leased hotels in 2H 2013
  • 4Q G&A guidance will decline significantly

Q & A

  • 2014 group pace:  revenues +2% 
  • Govt:  hopefully it's the worst; group and transient in decline; about 2% of business
  • No decisions made on bringing Moxy to US; 1Q 2014 brand launch
  • Spain getting worse and worse
  • 2013 guidance SG&A:  mostly due to noise in 2Q; 'steady state 5% SG&A increase'
  • Affordable Care Act delay - high single digit increases for healthcare costs for 2014. Double that rate in 2015
  • China:  tough 1H 2013 comps but comps will ease in 2H 2013; affected by austerity, some softening of economy, China/Korea/Japan island disputes; supply growth will be fairly high
    • Gained 6% in market share
  • Change in room opening guidance was due to pipeline timing
  • To get to 7% 2013 REVPAR guidance would require a spectuaclar 4Q
    • expect 5%ish REVPAR for rest of year
  • London asset:  open in 1st half of Sept - may sell it a year after opening
  • $1-1.5MM adverse FX effect in 2Q; FX more onerous in 4Q; 2013 FX headwind will be $6MM
  • 2013 incentive fees:  US 48%: 52% international
  • International incentive fees flat in 2Q
  • Diluted Share count at end of Q2:  310MM
  • Leisure/higher end have been doing well; occu and REVPAR at peak levels
  • 2014 Marriot brands booked 50%
  • AC hotel opportunity in US is 'substantial' - more urban feel; new additions are all mgmt contracts

 


INITIAL CLAIMS: PROFOUND

Takeaway: Following last week's deceleration hiccup, its back to full speed ahead for the labor market.

Keeping with our Forest vs. Tree theme of the last couple weeks (U.S. Growth - #TRENDing2Q13 GDP: Hurry Up & Wait, Separating the Forest from the Trees in EM) - from a broad, top down perspective, remember how this whole economic reflexivity thing works:   

 

Rising demand/spending drives income and employment higher which then drives consumption and confidence higher in a virtuous, self-reinforcing cycle.  Credit serves to amplify the cycle with credit expansion following pro-cyclically as loan demand and creditworthiness both increase alongside rising incomes and a re-flation in household net wealth.   

 

At present, the TREND slope of improvement across the Labor Market data (inclusive of today’s initial claims release), Confidence, Consumption & Credit are all positive.  We aren’t buyers of all things, pro-growth U.S. equities at every price, but we likely will continue to not be buyers of Bonds, Gold, or broader EM at any price in the immediate/intermediate term.  In fact, our 0% allocation to commodities turned 100 days old today. 

 

Below is the breakdown of this morning's claims data, along with some sector specific takeaways, from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact .

 

- Hedgeye Macro 

 

---------------------------------------------------------------------------------

 

Full Sails

Last week we flagged the deceleration in trendline improvement on a one week basis. It was notable in that it was a deviation vs the preceding 9 weeks of data. That inflection proved short-lived, however, as this week's print resumes the trend of accelerating improvement in the labor market that had been in place prior to last week.

 

This past week, rolling NSA initial claims were 8.9% lower than the prior year. This marks a modest acceleration in the rate of improvement vs the prior week, when rolling NSA claims were better by 8.7%, but remains down vs the two weeks ago rate of -10.6%. On a single week basis, NSA claims were 10.6% lower than the previous year, a sharp acceleration vs the prior 1-week print of -0.2%, and back in-line with the previous 9 prints of -9.9%, -13.3%, -9.4%, -9.2%, -7.7%, -11.7%, -9.4%, -7.6% and -8.0%. 

 

To reiterate what we've been saying for 9 of the last 10 weeks, this trend of accelerating improvement in the labor market is profound. We saw it across the board in 2Q earnings as credit metrics, namely new delinquency trends, came in better than expectations and bottom line beats were largely catalyzed by larger than expected reserve release predicated on this accelerating labor market dynamic. The data we've seen thus far in 3Q, now one month along, suggests a continuation of the trend we saw in 2Q, at least on the credit front.

 

The Data

Prior to revision, initial jobless claims fell 17k to 326k from 343k WoW, as the prior week's number was revised up by 2k to 345k.

 

The headline (unrevised) number shows claims were lower by 19k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.5k WoW to 341.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.9% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.7%

 

INITIAL CLAIMS: PROFOUND - JS 1

 

INITIAL CLAIMS: PROFOUND - JS 2

 

INITIAL CLAIMS: PROFOUND - JS 3

 

INITIAL CLAIMS: PROFOUND - JS 4

 

INITIAL CLAIMS: PROFOUND - JS 5

 

INITIAL CLAIMS: PROFOUND - JS 6

 

INITIAL CLAIMS: PROFOUND - JS 7

 

INITIAL CLAIMS: PROFOUND - JS 8

 

Yield Spreads

The 2-10 spread rose 4 basis points WoW to 227 bps. 3Q13TD, the 2-10 spread is averaging 223 bps, which is higher by 52 bps relative to 2Q13.

 

INITIAL CLAIMS: PROFOUND - JS 9

 

INITIAL CLAIMS: PROFOUND - JS 10 

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN

Takeaway: Credit was the biggest catalyst to 2Q earnings in FIG. The first month of 3Q is showing a comparable tailwind.

Full Sails

Last week we flagged the deceleration in trendline improvement on a one week basis. It was notable in that it was a deviation vs the preceding 9 weeks of data. That inflection proved short-lived, however, as this week's print resumes the trend of accelerating improvement in the labor market that had been in place prior to last week.

 

This past week, rolling NSA initial claims were 8.9% lower than the prior year. This marks a modest acceleration in the rate of improvement vs the prior week, when rolling NSA claims were better by 8.9%, but remains down vs the two weeks ago rate of -10.6%. On a single week basis, NSA claims were 10.6% lower than the previous year, a sharp acceleration vs the prior 1-week print of -0.2%, and back in-line with the previous 9 prints of -9.9%, -13.3%, -9.4%, -9.2%, -7.7%, -11.7%, -9.4%, -7.6% and -8.0%. 

 

To reiterate what we've been saying for 9 of the last 10 weeks, this trend of accelerating improvement in the labor market is profound. We saw it across the board in 2Q earnings as credit metrics, namely new delinquency trends, came in better than expectations and bottom line beats were largely catalyzed by larger than expected reserve release predicated on this accelerating labor market dynamic. The data we've seen thus far in 3Q, now one month along, suggests a continuation of the trend we saw in 2Q, at least on the credit front.

 

The Data

Prior to revision, initial jobless claims fell 17k to 326k from 343k WoW, as the prior week's number was revised up by 2k to 345k.

 

The headline (unrevised) number shows claims were lower by 19k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.5k WoW to 341.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.9% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.7%

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 1

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 2

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 3

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 4

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 5

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 6

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 7

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 8

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 9

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 10

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 11

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 12

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 13

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 19

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 14

 

Yield Spreads

The 2-10 spread rose 4 basis points WoW to 227 bps. 3Q13TD, the 2-10 spread is averaging 223 bps, which is higher by 52 bps relative to 2Q13.

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 15

 

INITIAL CLAIMS: FULL SPEED AHEAD, AGAIN - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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