Positions in Europe: Long Germany (EWG); Short Spain (EWP)
Below we show a table of European Manufacturing PMI according to Markit’s survey. The key take-away that we’ve been noting over the last months is that both inflation and the risk of contagion is eating into both the Manufacturing and Services PMI figures across the continent. In fact, the Eurozone aggregate Manufacturing figure for June is down for the third straight month.
Other data released today shows that Eurozone unemployment remains sticky, at 9.9% in May, unchanged from April. We continue to highlight the longer term tail headwinds of unemployment in Spain (20.9%); Greece (16.2%) and Ireland (14.2%), in particular. [For more, see our post from 5/20 titled The Push and Pull of Europe’s Borders and Demographics].
Finally, Italy’s Cabinet late yesterday passed legislation to push through €47 Billion in deficit-cutting measures by 2014. This is a first step toward balancing the budget in the coming years as PM Berlusconi’s credibility to govern remains in check. Interesting, some €40 Billion of the plan is back-loaded to 2013 and 2014, a threat as sovereign debt contagion fears remain front and center. From a deficit perspective, Italy is in a better position than its peripheral neighbors, at -4.6% of GDP in 2010 (and -7.7% of GDP in Q1 2011), however its debt remains the second highest in Europe (after Greece) at 119% of GDP in 2010.
The Cabinet also approved measures to overhaul the tax system to combat tax evasion. A final vote on the package by the legislature is expected before the August recess.
The EUR-USD continues to hold up in our trade range of $1.42 to $1.45, a band we expect will hold as Troika (EU, ECB, IMF) is prepared to fund bailout packages and debt concessions to peripheral nations at all costs. Big brother backstop is a force we’ll be continuing to manage risk around.
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TODAY’S S&P 500 SET-UP - July 1, 2011
As we look at today’s set up for the S&P 500, the range is 27 points or -2.02% downside to 1294 and 0.03% upside to 1321.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: 1398 (+270)
- VOLUME: NYSE 996.05 (+9.10%)
- VIX: 16.52 -4.34% YTD PERFORMANCE: -6.93%
- SPX PUT/CALL RATIO: 1.38 from 1.40 (-1.77%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 23.05
- 3-MONTH T-BILL YIELD: 0.03%
- 10-Year: 3.18 from 3.14
- YIELD CURVE: 2.73 from 2.67
MACRO DATA POINTS:
- 9:55 a.m.: UMichigan Confidence, June F, est. 72.0, prior 71.8
- 10 a.m.: Construction spending, est. 0.1%, prior 0.4%
- 10 a.m.: ISM Manufacturing, est. 52.0, prior 53.5
- 1 p.m.: Baker Hughes Rig Count
- 2 p.m.: USDA cattle, hog slaughter
WHAT TO WATCH:
- Questions about credibility of accuser in ex-IMF chief Strauss-Kahn’s case said to place it in jeopardy
- NBA becomes second U.S. sports league to lock out players
- Treasury Secretary Geithner’s potential departure from the administration would force President Obama to assemble a new economic team as the 2012 election looms, with jobs a top voter concern.
- Senate in session, House in recess
COMMODITY HEADLINES FROM BLOOMBERG:
- China May Buy U.S. Corn as Price Slumps 11% on Acreage: Chart of the Day
- Corn Extends Worst Monthly Loss Since 2008, Wheat Drops as Food Costs Ease
- Commodity-Futures Trade in China Plunges 30% as Rules Restrain Speculation
- Oil Drops on Signs of China, U.S. Slowdown; IEA and OPEC Supplies Increase
- Gold Falls to Six-Week Low Amid Reduced Concern Greece May Default on Debt
- Coffee Falls on Signs of Limited Frost Damage in Brazil; Cocoa Retreats
- Copper Erases Drop on London Metal Exchange, Trades at $9,445 a Metric Ton
- U.K. Crop Losses Narrow as Rain Last Month Follows Driest Spring on Record
- Rice Output in Indonesia May Climb on Increased Planting, Reducing Imports
- Lead-Battery Production in China Seen Dropping by Half on Pollution Rules
- Muddy Waters Is Looking at More ‘Suspicious’ Chinese Companies, Block Says
- Brent to Recover From Decline as Supply Boost Seen Failing: Energy Markets
- Philippine Investment Push Lures Sumitomo as Aquino Plans Roads, Airports
- Gold May Gain Next Week as Slowing Economies Stoke Demand, Survey Shows
- European equity markets trade mixed.
- Jun final Manufacturing PMI; France 52.5 vs preliminary 52.5; Germany 54.6 vs preliminary 54.9
- EuroZone 52.0 vs preliminary 52.0
- UK Jun Manufacturing PMI 51.3 vs consensus 52.1, prior revised 52.0 from 52.1
- Asian market are generally higher..
This note was originally published July 01, 2011 at 08:25 in
An American myth?
And take my life
In my hands?
Where the great plains begin
At the hundredth meridian.”
- The Tragically Hip
There is no doubting American global dominance in both military and economic affairs. The United States is the world’s reigning superpower and has been really since before the end of the Cold War. While the Soviet Union was considered a rival to the United States for many years, this was primarily due to the nuclear arms race and MAD, or mutually assured destruction. In reality, the Soviet Union was never really on par with the United States from an economic perspective.
The term Pax Americana is used to describe the relative peace enjoyed by the Western World due to the preponderance of power held by the United States over the last century. Since World War II, the idea of Pax Americana has manifested itself in the many international institutions backed by American influence and finance. Initially, this began with the Marshall Plan and the rebuilding of Japan, and eventually transitioned to the UN, NATO, the IMF, and the World Bank.
Immediately following World War II, the United States was responsible for roughly half of the world’s industrial output, held 80% of the globe’s gold reserves, and was the sole nuclear power. Even if America has lost share over time, she remains the world’s dominant economic power at 25% of the world’s output, so it is with some jest that I use the term Pax Canadiana to characterize the growing role of Canada in the global economy. But today is July 1st, or Canada Day.
In his book, "The World in 2050: Four Forces Shaping Civilization's Northern Future", the UCLA Geographer Laurence C. Smith highlights some of the key forces driving economic share gains of the Northern Rim Countries, or as he calls them NORCs. Ironically, global warming will potentially be a major positive for the NORCs. Some of the key points that Smith highlights, which I’ve excerpted from the Globe and Mail, include:
- New shipping lanes will open during the summer in the Arctic, allowing Europe to realize its 500-year-old dream of direct trade between the Atlantic and the Far East, and resulting in new access to and economic development in the north;
- Oil resources in Canada will be second only to those in Saudi Arabia, and the country's population will swell by more than 30 percent, a growth rate rivalling India's and six times faster than China's;
- NORCs will be among the few place on Earth where crop production will likely increase due to climate change; NORCs collectively will constitute the fourth largest economy in the world, behind the BRIC countries (Brazil, Russia, India and China), the European Union and the United States; and
- NORCs will become the envy of the world for their reserves of fresh water, which may be sold and transported to other regions.
Keith has previously mentioned Smith’s work and the NORC theme is one you will likely see us revisiting in the coming years.
Interestingly, Canada is actually starting to show some subtle shifts in its economy versus the United States. Coming out of the depression of 2008 / 2009, Canada has had much more stable and even economic growth. A primary driver of this is the relative health of Canadian banks, which didn’t underwrite as many bad loans during the housing boom of the late 2000s and therefore still have the ability to broadly extend credit to consumers.
From a fiscal health perspective, Canada is in very strong shape versus its southern neighbor, and really much of the Western World. Canadian debt-to-GDP is estimated at 42%, which is roughly half of that of the United States. Further, Canada’s current budget, which was passed by the Conservatives in the fall of 2010, projects a balanced budget by 2015. Currently, not even in its long term projections, through 2035, does the Congressional Budget Office anticipate a balanced budget in the United States.
Finally, from a longer term perspective, the United States has literally always had a lower unemployment rate than Canada, or at least going back as far as World War II. In the chart of the day, attached below, we’ve charted relative unemployment rates comparing the United States and Canada. Currently, Canada’s unemployment rate is 7.4%, while the United States’ is 9.1%.
Much like the excerpt from the iconic Canadian band, The Tragically Hip, I’m not going to take “my life in my hands” and “debunk an American myth”, but I would advise keeping Canada and the rest of the NORCs front and center in the coming years as you and your colleagues scour the globe for investment ideas.
While Canadians are certainly excited about the economic prospects of their nation, all Canadians respect the long standing special relationship shared with the United States. President John F. Kennedy perhaps summarized this relationship up best when he said in an address to Canadian parliament in 1961:
“Geography has made us neighbors. History has made us friends. Economics has made us partners. And necessity has made us allies. Those whom nature hath so joined together, let no man put asunder. What unites us is far greater than what divides us.”
Both Canadian and Americans should be proud of this special relationship and the good it does in the world.
Happy Canada Day! Happy July 4th! And happy 100th birthday Bassano, Alberta!
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Notable news items and price action from the restaurant space, as well as our fundamental view on select names.
For the first time in six months, the National Restaurant Association’s restaurant performance index sunk last month to a level deemed unhealthy. The National Restaurant Association spent $613,000 (up 24%) in 1Q11, lobbying the federal government on issues including food safety and granting temporary visas to hire workers from outside of the U.S. The size of this year's corn crop will be 92.3 million acres (the U.S. Agriculture Department) 9% larger than the average annual corn crop over the past decade. The only crop bigger in the past 67 years was planted in 2007.
On Friday, July 8, Chick-fil-A restaurants nationwide will celebrate the annual Cow Appreciation Day event by offering a free meal to any customer who visits one of the chain’s mall or stand-alone restaurants fully dressed as a cow. TAST, CBOU and THI were all up on accelerating volume AFCE - By July 1, Popeye’s Lousiana Kitchen, known for its fried chicken and Southern fare, will complete the rollout of Coke and Dr Pepper products to all its roughly 1,500 restaurants, as part of a five-year deal for Coke and Dr Pepper products, signed in December.
DRI up on accelerating volume ahead of earnings
DRI Top 10 4Q11 EPS Takeaway:
- It’s nearly impossible to get all cylinders firing at the same time (just ask YUM)
- The after hours stock performance confirms our thesis that “top line” will be the key driver to the upcoming earnings season.
- The Olive Garden SSS disappoint, with the balance of the concepts outperforming consensus.
- 2-year trends slowed for all three concepts, with Red Lobster and Olive Garden down on a 2-year basis. (Red Lobster 2-year -0.4%; Olive Garden 2-year -0.8%). Long Horn’s 2-year number is +3.9%
- The Olive Garden is the biggest, most profitable concept the company operates. Part of the top line issues are structural, with the remedy (remodels) coming in late FY12.
- Red Lobster top line is strong, but the current trends in 1Q12 are being driven by a significant value promotion.
- FY4Q EPS met consensus, with FY12 guidance slightly ahead of consensus on sales and earnings.
- The cynic in me says the out-sized boost in the dividend is compensation (sending a positive financial message) for a slightly disappointing Olive Garden performance.
- Management did not take the annual 4Q price increase at the Olive Garden.
- The Specialty restaurant group is a drag on consolidated margins
CBRL - A woman got her order of fries with a side of human blood at a Cracker Barrel in Texas this week, prompting the restaurant to apologize and send the woman a $100 gift car.
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.51%
SHORT SIGNALS 78.32%