They are coming right after my Range Rover line of 1041 here intraday (Range Rover is one of our Q3 Macro Themes that states simply that, while everyone runs around trying to call crashes – the only one we’ll see is the one to the upside versus consensus expectations).
Almost 6 weeks ago, after having the topside of my Range Rover target penetrated, I moved to 1041. That line of resistance has held up, until now.
Now, with the Buck Burning again to fresh YTD lows, the SP500 is making YTD highs. Can the REFLATION traders hold this line and close it here? We’ll have to see. As the data changes, I will – the data that matters most is embedded in closing prices, not intraday ones.
For now, the next line of resistance above my 1041 is 1049. Beyond 1049 will make this market finally overbought. Beyond that line will make this generational short squeeze, on a percentage basis, as large a move as we saw (peak-to-trough) in the 2007-2008 crash on the downside.
Immediate term TRADE support bumps up to 1018.
While beer or castles may be your first association with Germany, its auto industry should be a close second. We’ve been following the rhetoric and dealings surrounding the fate of GM’s Opel division in Germany [and Vauxhall in the UK] and today’s decision by GM to recommend Magna International as a buyer of Opel has important implications for German federal elections approaching on September 27th.
It was Chancellor Angela Merkel who originally supported Magna, a Canadian auto-parts maker with the backing of Moscow-based Sberbank, over Brussels-based RHJ when the government offered $2.2 Billion in loans to keep Opel afloat in May of this year. Merkel’s support of Magna, which some called “stubborn” support, hinged on the company’s ability to “save” or maintain the estimated 25,000 jobs Opel provides in Germany. This is an important electoral theme since the industry lies so close to the hearts of Germans and a will no doubt serve as a rallying point for Germans concern about the country’s employment picture.
Weekly Forsa polls over the last months have teetered little, with Merkel’s Christian Democratic alliance (CDU-CSU) receiving the most favor, currently at 35% (down a percentage point from last week), a 14% spread over her rival Foreign Minister Frank-Walter Steinmeier of the Social Democrats. And despite a poor showing in the state of Thuringia in regional elections last week, in which the CDU conservatives lost absolute majority for the first time in 10 years, Merkel’s support looks intact and her political weight behind Magna appears well placed.
With Merkel’s preferred coalition partners the pro-business Free Democratic Party (FDP) maintaining its support at 14%, if elections were held today the coalition of Merkel’s CDU and the FDP would have a narrow parliamentary majority.
Certainly GM’s decision to support Magna as a buyer should boost Merkel’s credibility and provide a tailwind as elections approach towards the end of the month. Despite a 4% spike in support to the far-left Linke Party to 14% in the recent poll, the Left lacks a coalition partner should the center-left SPD pair with the Greens. With this set-up, Merkel’s conservative coalition looks to be in a favorable position as the election nears.
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Dusting off our PCE analysis from last year and it’s even scarier now. Could regression to the mean be playing out for national casino revenues?
Prior to the consumer downturn beginning in the fall 2008, personal consumption expenditures were on a steep twenty-year incline. The consumer accounts for roughly 70% of GDP, but gaming was even more levered to the upturn than other consumer sectors. The higher one goes, the more pertinent gravity becomes. While the downside for many gaming stocks has been swift, in terms of where the American consumer spends his/her cash, there could be more downside in store.
For the gaming industry, in our opinion, mean reversion is a highly relevant factor. As the chart below shows, gambling spend accounted for 0.8% of PCE in July 2009. The level peaked several times at around 0.85%, most recently in mid-2008. Mean reversion may already be occurring, as can be seen by the downward sloping blue line in the chart below. Why should 0.8% be the right number? Why couldn’t gambling expenditures fall to the 20 year mean of 0.55%? Or even go below that? After all, we are talking about discretionary spending that has proven to be highly tied to the economy, much to the surprise of many analysts.
Assuming mean reversion occurs, that would translate into a $23 billion annual loss for the industry or 30-35% from the current revenue level. I’m not making that prediction but I am saying that domestic gaming faces the potential double hurdle of a tight consumer and a smaller allocation of that consumer’s wallet.
This morning’s US jobless claims report was bullish on a few durations and bearish on another.
Pick your duration on the chart Andrew Barber and I put together below and you can debate other investors and their durations.
1. Immediate term – bullish (green line)
2. Intermediate term – bullish (green line)
3. Long term –bearish (red line)
The immediate of immediate terms is the weekly registering a 26,000 improvement on a week-over-week basis. This week’s number was 550,000 claims (last week’s was 576,000). On an intermediate term basis, the 550,000 print slid below the 4-week moving average of 570,000. No matter what your duration, those two are (on the margin) bullish.
From a longer term perspective, this is where the Stagflation call remains intact. Unless US jobless claims start to break down through the 500,000 level, sustainably, there is every reason to believe that, at best, whatever recovery the Depressionistas turned Hope Addicts see coming is going to be a jobless one…
Please see Mr. Barber’s longer term TAIL work on the demographic shifts that underpin this multiple duration US Employment debate. The US labor force is getting older and the “young people” have less and less of a probability of earning a paycheck.
Keith R. McCullough
Chief Executive Officer
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