“I love playing ego and insecurity combined.”
There is a good article in this week’s The Economist titled “Return to Maastricht” where Charlamagne interviews locals in the Dutch town that gave birth to the Euro in 1991. Frans Timmermans has a concise quote on page 68 that summarizes the Eurozone today:
“Europe seems to be an agent of insecurity. The benefits are invisible; the downside is very visible indeed.”
The French know this. The Belgians know this. The Germans and the Dutch know it too – but the question remains as to whether or not they need to swallow Bear Stearns like exposures whole to the extent that the French and Belgians do.
On that score, this morning’s #1 Most Read Story on Bloomberg tells you all you need to know about what matters to interconnected Global Macro markets today:
“Merkel, Sarkozy Pledge Bank Recapitalization”
And while there are very different definitions of the size and scope of this “recapitalization” (coined first at Hedgeye as the Eurocrat Bazooka), this morning’s Global Macro market action tells you all you need to know about dominos.
Dexia, as we wrote last week, is the domino.
Dexia is a Belgian/French bank that is being bailed out this morning by, drum-roll, Belgium and France. Sure, the fine lads in Luxembourg appear to be throwing in some Europig Paper too – but, ultimately, this is a Belgian and French thing. A really big thing for those 2 countries in particular (relative to Germany and the Netherlands), because Belgium and France have marked their Pig Paper at par!
Qu’est ce qui se passe avec le marking of le Pig Paper at par?
Put simply, this is what Bear, Lehman, Morgan, etc. did in 2007-2008. They called it “level 3 asset pricing.” And Bailout Bankers around the world can call it whatever they want in Europe this morning, but there is one thing it is not – marked-to-market!
The most important move in all of Global Macro for the past 3 weeks has been that the US Dollar Index has been up for 3 consecutive weeks. In the end, I think this is the most bullish development there has been for the US economy. Strong Dollar = Strong America.
With the US Dollar Index up +7.8% since La Bernank tested Burning The Buck to a 30-year low in April of 2011, this has been good for the 71% of America that matters – Consumption (C) as a % of US GDP – and bad for dysfunctional debtors who are begging for bailouts.
This isn’t a consensus view. But I’m not really a consensus kind of a guy. And neither should you be. If the last 3 years has taught you anything about common sense, one is that Keynesianism is not for the commoner. If you are a debt laden aristocrat, sorry – can’t help.
Of course the US Dollar strengthening has nothing to do with Ben Bernanke or Tim Geithner changing their Keynesian policies (yes, It’s The Policy, Stupid). It has everything to do with the Europeans trying to do exactly what our Too Big To Perform financial system had Americans do in 2008 – bailout bad banks with tax payer backed fiat currency.
Perversely, with the “news” of the Dexia Domino in motion this morning, the Euro is rallying to another lower short-term and lower long-term high. This has more to do with the mechanics of the EUR/USD pair being the most widely held short position on planet hedge fund right now, so don’t let it stress you out.
Across all 3 of our risk management durations (TRADE, TREND, and TAIL), the Euro (versus the USD) remains bearish/broken:
- TRADE resistance = $1.36
- TREND resistance = $1.42
- TAIL resistance = $1.39
When all 3 of our risk management durations are bearish/broken, we call this a Bearish Formation. Those are not good.
And neither is Austria or Greece seeing their stock markets get hammered for -4.5% moves to the downside this morning. I guess that’s what you get when your Eurocrat Bazooka isn’t big enough, yet. Size matters. Insolvent European banks are seeing their marked-to-market stock prices fail. Insecurity’s Ego is going to have to have another European emergency bailout meeting about that…
My immediate-term support and resistance ranges for Gold, Oil, the German DAX, and the SP500 are now $1, $80.66-84.66, 5, and 1145-1169, respectively. My Cash position in the Hedgeye Asset Allocation Model dropped to 64% from 73% week-over-week.
Happy Canadian Thanksgiving and best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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THE HEDGEYE DAILY OUTLOOK
TODAY’S S&P 500 SET-UP - October 10, 2011
And so it begins… the Dexia Domino falls into a bailout package: BAILOUT – interestingly, but not surprisingly, Sarkozy is trying his best to nip gravity in the bud and stop Dexia becoming the European domino – this morning’s Dexia bailout is only 61% backstopped by Belgium – France is taking a big piece. Both the DAX and CAC are holding their immediate-term TRADE lines of support (5429 and 3004, respectively) on the news. As we look at today’s set up for the S&P 500, the range is 24 points or -0.91% downside to 1145 and 1.17% upside to 1169.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: -1218 (-3413)
- VOLUME: NYSE 1137.24 (+1.77%)
- VIX: 36.20 -0.19% YTD PERFORMANCE: +103.94%
- SPX PUT/CALL RATIO: 2.16 from 1.70 (-27.60%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 38.60
- 3-MONTH T-BILL YIELD: 0.01%
- 10-Year: 2.10 from 2.01
- YIELD CURVE: 1.80 from 1.72
MACRO DATA POINTS (Bloomberg Estimates):
- No material events today
WHAT TO WATCH:
- House, Senate not in session
- Government offices closed for Columbus Day holiday
- Superior Energy to buy Production Services for 29% premium in cash and stock.
- American Eagle, pilots’ union hit impasse in efforts to agree on a new contract before Eagle is spun off from AMR Corp., the union said.
- Microchip Technology (MCHP) may be poised to rise to $40, Barron’s said
- Borrowed shares climbed to 11.6% of stock last month from 9.5% in July, biggest increase since at least 2006: Data Explorers
COMMODITIES: rallying to lower highs across board this morning; I covered our short Gold position last week; looking to see if $1676 resistance holds.
MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:
- Hedge Funds Miss Biggest Rally as Short Bets Rise: Commodities
- Short Sales Rise Most Since ’06 as Stocks Lose $11 Trillion
- Thailand Bolsters Flood Defenses as Deluge Threatens Bangkok
- Hedge Funds Cut Bullish Oil Bets for Third Week: Energy Markets
- BHP Wins Australia’s Approval for Olympic Dam Expansion
- Gold Climbs as Investors Mull Europe Crisis Amid Merkel Pledge
- Oil Gains a Fourth Day After European Pledge to Contain Debt
- Paulson’s Main Fund Said to Lose 47% in 2011 Through September
- Copper May Drop in London on Concern About Outlook for China
- Chemical M&A Grinds to Slowest Pace Since 2009 on Growth Concern
- U.K. Wants EU Farm Payments Cut as Agriculture Policy Reviewed
- Hong Kong Bourses Decline to Comment on LME Bid-Interest Report
- Palm Oil Inventories Increase as Production Gains, Exports Ebb
- Police Say Two Workers Shot Near Grasberg Mine in Indonesia
- Australia’s Eastern Crops Improve, La Nina May Boost Yields
- COMMODITIES DAYBOOK: Saudi Oil Minister Sees No Excess Supply
- Indonesia’s Refined Tin Shipments Extend Drop as Prices Fall
- Lundin Mining to Consider Possible Merger in Review in 2012
- Pemex CEO Says Lack of Repsol Collaboration Is ‘Ridiculous’
EURO – cutting off perceived tail risk is bullish for the Euro’s insolvency pricing until it isn’t. TRADE line resistance = 1.36 and the TAIL (that’s broken) of resistance is up at 1.39 – so we’d be shorting Euros and buying US Dollars all day long on the news.
EUROPE: bazooka in play but markets not up as much as socialists would have thought; DAX and CAC look fine; Austria
getting hammered -4.4%
AUSTRIA – domino is as domino does; Erste bank is getting powered and the Austrian stock market is down -4.4% this morning; Greece is down another -4.5% (fresh new lows) and Romania is -2.5% - all of this tells me the interconnectedness of risk is what we think it is and not unlike Bear Stearns, this Dexia moment is not the end (no bailouts in Greece today).
ASIA: subdued session with China down -0.61%; HK flat, and KOSPI +0.38% as Asia looks for direction from Europe's bank bailout Part I.
Here is an interesting look at historical sell-side ratings for the restaurant industry.
This post will be short; the chart below says enough. The sell-side is quite optimistic at the moment, rating over 50% of the stocks in our monitor “Buy”. The number of “Sell” ratings is also at a low level. We believe there is significant possibility for downgrades throughout the space this earnings season. PFCB and CMG were downgraded yesterday but we expect others to follow suit over the remainder of the year. We may be wrong though; over the past couple of years, the street has been resolutely bullish.
As the first two charts below show, the street is fairly even in its sentiment on casual dining versus quick service. Given that quick service was more defensive during the ’08 downturn, we would advise clients of the view that a double-dip is likely to focus mainly on casual dining for shorts. Casual dining has seen multiples come in considerably, however, and while we expect many “bargains” in the category to remain so, we feel BWLD and TXRH have room to move lower.
Within QSR, we like PNRA on the short side. Sentiment charts on TXRH, BWLD and PNRA are also included below and show zero sells on either name from the sell-side.
The stocks used in this analysis are AFCE, BAGL, BJRI, BOBE, BWLD, CAKE, CBOU, CBRL, CHUX, CMG, DIN, DPZ, DRI, EAT, GMCR, JACK, KKD, KONA, MCD, MRT, MSSR, PEET, PFCB, PNRA, PZZA, RRGB, RT, RUTH, SBUX, SONC, TAST, THI, TXRH, WEN & YUM.
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