Position: Short the Euro via FXE
As we noted in our post “Politics vs. Pragmatism” last week, despite the decision by the EU and IMF on 3/25 to “safeguard financial stability” in Greece, sovereign debt imbalances (especially among the PIIGS) remain at large and continue to heighten investors’ fears. Regarding Greece, most recently credit markets are clearly indicating heightened risk via rising bond yields.
In the first chart (below) we highlight that since 3/25 the yield on the 10YR Greek Bond has jumped a hefty 25bps. And while 10YR yields for the other PIIGS have held pretty steady over the last weeks (chart 2), we’d expect to see them to push up in the coming weeks as Greece shares more of the “sovereign debt” spotlight. Note that Portugal’s credit rating was recently cut to AA- by Fitch Ratings; we’d expect to see a downgrade of Spain in the coming weeks. For reference on the total debt and budget deficit constraints afflicting the PIIGS, see chart 3.
Where else is this fear showing up?
- The equity markets of Spain, Greece, and Portugal are among the worst global performers YTD, down -7.3%, -4.6%, and -3.6% respectively.
- Moody’s downgraded five of the nine Greek banks it tracks yesterday, saying the “country’s weakening macroeconomic outlook and its expected impact on these banks’ asset quality and earnings-generating capacity.” (a lagging indicator, but representative of consensus).
As we’ve said before, the lack of policy from the European Community to address the sovereign debt issues of its member states will continue to shake markets. We’re currently short the Euro versus the US dollar via FXE in our model portfolio, trading a range of: buy/cover at $1.32 and sell/short at $1.36.
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The data is hawkish and bonds are getting smoked for a reason!
Since the beginning of the year we have been very constant with our criticism of the man we refer to as “He Who Sees No Bubbles” - Ben Bernanke. Not only is it his mandate to control “inflation”, he is also responsible for controlling “growth” too. Today’s ISM data shows he is failing on both counts. But then again, has the Fed ever been accurate with their forecasts for inflation? They’ve only changed the CPI calculation nine times since 1996 – but who’s counting?
Below, we have attached the latest readings on from the ISM: the Manufacturing Index and Prices Paid.
- ISM Manufacturing for March just made another higher-high at 59.6 (versus 56.5 in February).
- Prices Paid continue to ramp, coming in at 75.0 in March (versus 67 in February).
On the ISM Manufacturing reading - manufacturing expanded in March at the fastest pace since July 2004.
The Prices Paid survey is still below the 2008 highs, but those readings also carried $152/barrel oil prices!
Yields across the Treasury curve continue to breakout to the upside, as we are short High Yield and Municipal bonds. The US Dollar has been lower for the past two days but is still in a bullish formation and we believe it will continue to make higher-highs throughout the intermediate term. As usual, the equity market gets the memo last and will be the last to see an impending rate hike priced in. As such, we’ve just shorted the S&P via the SPY this morning and will continue to manage risk around the position.
Further progress on the jobs front this morning continues to augur well for lenders. Claims dropped 6k week over week to 439k from 445k (last week was revised up 3k), while the 4-week rolling average declined by 6.5k to 447k from 454k. This week's data came in 4k below consensus. The following chart shows the rolling average trend line. Below that we show the raw data.
It's worth mentioning that we're now within 6k of the lows set at the beginning of January on both a rolling and printed basis. We think breaking to new lows will be a positive development. With respect to where claims are tracking relative to our three standard deviation channel, they are back to knocking on the door of the high side of the channel. We continue to expect claims to move lower in coming months as we see the tailwind associated with Census hiring. This will create a positive environment for secured and unsecured lenders alike. We continue to favor credit card names heading into this environment.
The following chart shows census hiring from the 2000 and 1990 census by month, which should be a reasonable proxy for hiring this Spring.
Joshua Steiner, CFA
Some people say you can’t make market calls. I agree. Some people can’t.
There is actually a big difference between making a market call that’s based on math (probabilities, standard deviations, mean reversions, etc…), and combining that math with a repeatable global macro research process, versus licking one’s almighty finger to test the ferocity of a bull’s wind.
Ten years ago, I thought I was Captain Stock picker at a hedge fund that was changing its name from Dawson Samberg to Dawson Giammalva. The guys I worked with knew what they were doing. They still do.
Today, I realize that there is a huge difference between stock picking and managing global macro risk. That’s why I concentrate most of my incremental time to trying to evolve the risk management process that surrounds my investment team’s stock picking.
My macro model isn’t based on a 200-day moving average. Nor is it based on calling up Stan or Fibonacci for their reads. It’s my own. I build it; I break it; I call it names – but the one thing I love about it is that it’s flexible and able to change, dynamically, as market prices and the quantitative factors that drive them do.
One function of the model that I have recently learned a lot about is the high correlation between declining volatility and tightening ranges. What I mean by that is that the higher the SP500 (SPY) goes, and the lower Volatility (VIX) goes, the more proactively predictable the top ends of my immediate term TRADE ranges become. That’s why I am brave enough to put my daily range for the SP500 in my daily note.
The immediate term TRADE lines of support and resistance for the SP500 are now 1170 and 1180, respectively. The more significant lines of support below 1170 are outlined in the chart below. I shorted the SPY at $118.00 this morning. My position is on the board for everyone to see, and I am accountable to this view.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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