Takeaway: "I haven’t been this bearish since the fall of 2007," Hedgeye CEO Keith McCullough wrote in today's Morning Newsletter.
Last Friday Keith added a short signal in Italy (via the etf EWI) to our Real-Time Alerts. We were tactically afforded the opportunity to short EWI as Italian stocks have bounced to lower-highs but remain bearish TREND (21,525 in the FTSE MIB Index).
Getting Short Persistent Italian Underperformance
Our thesis on Italy is relatively simple:
- GDP Underperformance – a 2H deceleration should lead to 2014 Italian GDP flat to -0.3% versus +0.6% to +0.8% in the Eurozone.
- Sticky Unemployment – we expect the unemployment rate to be grounded at 12-13% for the remainder of the year, versus Eurozone average of low to mid 11%. Italy’s monster Youth Unemployment of 42.9% will continue to present a real drag on confidence and extend the length of a “recovery” over the medium term TREND and pose a generational drag over the long term TAIL.
- Fiscal/Budget Squabbles – we continue to get mixed signals from the Renzi government. More fiscal consolidation or less? The lack of a definitive voice should only provide further uncertainty to the populous and dampen consumer confidence around an inflection: late last week undersecretary at the economy ministry Enrico Zanetti said that Italy may seek to delay bringing its structural budget deficit into balance until 2016 (versus the previous guidance of 2015).
- ECB is No Savior – despite cutting the main interest rates to near zero and deposit rates to negative first in June, the policy move to further cut last week will not lead to increased lending to businesses that are willing to invest in and grow the European economy. We expect investment to the region, and Italy in particular, to remain severely challenged over the medium term.
- Regional Partners Also Weak – we have monitored weeks and months of declining data across the region and our propriety GIP model (growth, inflation and policy) for assessing economies suggests the Eurozone economy will land in the ugly quads #3 and #4 in 2H, representing growth slowing as inflation decelerates/accelerates. With 54% of Italy’s exports heading to EU countries, we suspect that weaker demand from the EU in 2H will continue to put downward pressure on growth.
Below we show 4 charts that are representative of Italy’s underperformance.
- Italy’s PMI Services for the August reading ticked below the 50 line, indicating contraction
- Italy’s Unemployment Rate is poised to remain above the Eurozone average
- Italian Retail Sales have inflected back to the downside
- Italian Economic Sentiment inflected downward in the August reading – we expect further declines in 2H
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Takeaway: This is a complimentary look at our proprietary buy and sell levels on major markets, commodities and currencies.
This note was originally published September 08, 2014 at 07:45 in Daily Trading Ranges. Click here to learn how to subscribe.
Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.
1. CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “large speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.
The Sugar, Orange Juice, and Corn markets experienced the most BULLISH relative positioning change in the CRB week-over-week.
The bullish positioning changes in sugar and corn reflect the near-term expectation for prices increases:
- Sugar and Corn have the most bullish expectation for both near-term and longer-term price increases in the CRB Index as measured by the difference between spot prices and longer-dated futures contract prices--> “basis differential” (see below).
- Sugar and Corn prices both lower last week adding to the negative basis spread:
- Corn: -4.2%
- Sugar: -3.2%
The Cotton, Heating Oil, and Copper markets experienced the most BEARISH relative positioning change in the CRB week-over-week:
2. Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.
- The Sugar, Wheat, and Corn markets are positioned for HIGHER PRICES near-term
- The Lean Hogs, Soybeans, and Gasoline markets are positioned for LOWER PRICES near-term
3. Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.
- The Sugar, Wheat, and Corn markets are positioned for HIGHER PRICES in 1-year
- The Lean Hogs, Soybeans, and Gasoline markets are positioned for LOWER PRICES in 1-year
4. Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.
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