On March 9th, Greece’s Prime Minister will be visiting the USA. In addition to meeting with Merkel in Germany on March 5th this, on the margin, is another bullish catalyst for Greek stocks (bearish for Greek CDS and bond yields) which look poised to make a series of higher-lows in the coming weeks.
Fashionable Fears are now locked in with yesterday’s fears associated with a Moody’s downgrade (see our Early Look note from this morning for a more detailed analysis of the same).
Everything that matters to our macro risk management process happens on the margin.
Keith R. McCullough
Chief Executive Officer
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We are cautious on the consumer and SHORT housing.
Over the last two weeks the incremental data points on jobs, housing and consumer sentiment have all been incrementally more negative. Ironically, the government reported the U.S. economy expanded at a 5.9% annual rate in 4Q09, more than what was reported last month. The improvement in the GDP number is reflecting stronger business investment and a greater contribution from inventories and not an improvement in consumer spending.
The University of Michigan final index of consumer sentiment for February fell to 73.6 from 74.4 in January. Breaking down the index, the measure of current conditions, which reflects Americans’ perceptions of their own finances, rose to 81.8 this month from 81.1 in January. The index of expectations six months from now, which projects the direction of consumer spending, dropped to 68.4 from 70.1 in January. The preliminary February reading was 66.9.
Putting in context the decline in the expectations component it’s not surprising that the last two data points on housing have been to the down side.
Earlier this week sales of new homes fell in January to the lowest level on record. New home purchases declined 11% to an annual pace of 309,000, as the median sales price dropped 2.4% from January 2009. The supply of unsold homes increased to 9.1 month’s worth, the highest since May 2009.
In isolation, the decline in new home sales can be explained away by the supply and favorable prices on “nearly new” homes that are being sold on foreclosure. The manufacturers of new homes can’t compete with a bank that does not want an ever growing supply of foreclosed homes on its balance sheet.
Unfortunately the news on resales is not looking much better. Today the NAR reported that resale of U.S. homes fell 7.2% in January to a seasonally adjusted annual rate of 5.05 million; the lowest in seven months. The sales of existing homes have now fallen for two consecutive months.
Seasonality issues are currently playing into the depressed numbers, and the spring selling season should add some lift to the current trends, but that will be the gasp of air.
We have enjoyed reading “This Time is Different” by Carmen Reinhart and Kenneth Rogoff. In fact, we have often quoted the astute historical studies in this book over the past quarter. That said, we were taken aback by some recent statements by Kenneth Rogoff. According to Bloomberg:
“China’s economic growth will plunge to as low as 2 percent following the collapse of a “debt- fueled bubble” within 10 years, sparking a regional recession, according to Harvard University Professor Kenneth Rogoff.”
In the hypothetical everything is of course possible, but what is concerning about this prognostication is that it does not seem to be based on any of Rogoff’s fine quantitative studies. By making this statement, Rogoff is suggesting that Chinese growth decelerating to a level of 2% is in the realm of real possibility.
Below we’ve charted Chinese GDP growth over the past 20-years. The story from this chart is actually quite simply that a deceleration to of GDP growth to 2% would be way out there on the tails of probability. While certainly not impossible, Rogoff’s statement reeks more of that of fear mongering than an accurate assessment of probability. Over this time period, China’s GDP has average 9.2% and the range has been between 3.8% and 13.5%. So 2% . . . possible, but probable? We aren’t so sure.
In terms of context, it is also critical that this period of Chinese growth includes a massive debt bubble. In fact, according to Reinhart and Rogoff, in the late 1990s:
"China's four large state owned banks, with 68% of banking system assets, were deemed insolvent. Banking system nonperforming loans were estimated at 50%."
So, despite the Chinese financial system basically being insolvent in the late 1990s, Chinese GDP never dipped below 6%!
We certainly mean no disrespect to Professor Rogoff, but as we have found, and not dissimilar to his analysis of rating agencies, when academics start to call the markets, it is more often than not a contrary indicator. Not a shot at Rogoff, but just a fact of reality. Timing is everything in this business.
Daryl G. Jones
As we discussed in our 2/24/10 post, “MCD – NEGATIVE $ MENU POINT”, MCD is using significant discounting to drive transaction counts during the breakfast day part. MCD comparable store sales trends have been in decline since October and, while it seemed that discounting initiatives would help stymie the decline in the company’s comps, it seems clear that this will be a difficult task until (at least) June or July.
The success of the current dollar menu at breakfast will not be enough to turn around the deceleration in top line trends in the USA.
In Europe, MCD is seeing slowing sales trends also. The most recent economic data points from Germany suggest that this trend is likely to continue for the immediate future. In addition, The China Daily reported today that MCD is now accepting some coupons issues by other fast-food chains at its China stores. The promotion began on February 24th and ends on March 23rd. McDonalds has also cut prices on some products in the midst of severe competition with QSR rivals, local, and street vendors. In 1H10, lower commodity costs will somewhat offset the top line pressure in margins. See below for charts on Europe and APMEA top line trends.