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EARLY LOOK: Macro Forces

 

"The lesson that I have learned is that it isn't reasonable to be agnostic about the big picture."

-David Einhorn

 

 

 

There was an article in the Wall Street Journal on Friday that was forwarded to me hundreds of times over. The article was titled “Macro Forces In Market Confound Stock Pickers.” There was nothing particularly new in the article. Everyone who has protected their client’s hard earned capital in the last 3 years gets that macro matters. But what about those who don’t get it? What’s their answer to David Einhorn’s mental flexibility? Do their answers matter?

 

Macro Forces certainly matter. As Risk Managers, it’s our job to both identify their market impact and proactively prepare for their most “improbable” outcomes. I have a great deal of respect for someone like Einhorn because he can skate circles around Captain Stock Picker out there but, at the same time, acknowledge that he needs to continually evolve his investment process to incorporate the macro frontier.

 

If you are a bloodhound who trades merger arbitrage or your job is to be long of the next stock to hit this market’s broadening “rumor mill” of takeout targets, that’s fine. Maybe you don’t do macro until, as Mike Tyson would say, it “punches you in the face.” For the rest of us, “it isn’t reasonable to be agnostic” about global macro market risk anymore. October 1987 mattered.

 

Being Duration Agnostic is also something we evangelize a lot here in New Haven. My sense is that the Buy-And-Hope model of yesteryear isn’t going to be emailed to me 100 times over via a WSJ article anytime soon. Legacy print media has a funny way of being a lagging indicator. All that said, we need to focus intensely on compartmentalizing calendar catalysts that are macro in nature. It’s unreasonable to actively manage risk otherwise.

 

During Friday’s US stock market short squeeze I was also getting a lot of emails asking me when I was going to short the SP500 (SPY). After 3 consecutive down days (Tuesday, Wednesday, and Thursday), the illiquidity rally was broad based and I think the questions were well timed.

 

Unfortunately, I’m not enough of a cowboy anymore to stand on the other side of this market’s intermediate term TREND line and call it anything other than what it became on Friday – what was 1144 resistance in the SP500 is now support.

 

It’s not my job to be bearish or bullish. It’s really not my job to be anything other than a student of whatever it is that Mr. Macro Market throws at me each and every day. There certainly were more bearish than bullish fundamental research data points in my notebook last week but at the end of the week they were all trumped by Mr. Macro’s market price. The US Dollar has been demolished (down 14 of the last 17 weeks) and the reflation trade is back on.

 

To be crystal clear, there are no rules in this game suggesting that the 1144 line cannot become resistance again. The Macro calendar of catalysts for the early part of this week that could easily be construed as bearish are:

  1. Monday: A breakdown close through 1144 on the SP500 combined with a failure of the VIX to breakdown through its critical 20.77 line of support.
  2. Tuesday: A reminder that Housing Headwinds remain in the US economy with the Case Shiller report for July.
  3. Wednesday: An acknowledgement by both Japan (Tankan Survey) and the US (Obama speaks on joblessness) that Fiat Republics are not stable.

Then, of course, you have month and quarter-end on Thursday for the hedge fund business on top of a Chinese PMI report for September that could go either way. No one said that doing macro is easy. The way we all get paid in this business, it shouldn’t be…

 

The Macro Forces that are bullish out there are fairly straight forward at this point:

  1. Prices: The SP500 is up +9.43% for September-to-date!
  2. M&A: Unilever buys Alberto Culver this morning for $3.7B making at least 1 of the 67 rumors of takeouts we are tracking true…
  3. Mid Terms: If you didn’t know the Republicans are going to take the House, now you know.

“Republican House” being on the cover of Barron’s this weekend certainly doesn’t make this a new Macro Force to consider. That’s why we did our risk management call with Karl Rove last month to get ahead of this. As always, the better questions in our risk management lives surround what people aren’t talking about. These factors, too, need to be considered on a Duration Agnostic basis.

 

Whether or not the intermediate term TREND line in the SP500 of 1144 holds or not definitely matters to me in the immediate term. At the same time, out on the long term TAIL, the biggest question is why won’t the US stock market continue to make a series of lower-long-term-highs like the Nikkei in Japan has?

 

 

EARLY LOOK: Macro Forces - nikkei

 

 

There are only 7 countries in the world who have underperformed Japanese equities for the YTD at this point (in order of worst to Japan: Greece, China, Slovakia, Italy, Portugal, Spain, and Ireland). Sadly, in response to another lower-long-term-high in the Nikkei, this morning the Japanese have introduced another 4.6 TRILLION Yen in stimulus. Shame on those who don’t learn history’s lessons. They deserve to lose.

 

My immediate term support and resistance lines for the SP500 are now 1131 and 1150, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

 

 

This note was originally published at 8am this morning, September 27, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.


Japanese Exports - The Storm Before the Flood?

Conclusion: Japanese Exports slowed again in August, highlighting additional concern that the island’s recovery is faltering. Moreover, the confluence of the strong yen and slow growth from the U.S. and Western Europe will continue to be a headwind for Japanese exports over the next 3-6 months.

 

Position: Short Japanese equities (EWJ); Short the Japanese yen (FXY)

 

If you didn’t know, now you know: Japanese exports rose 15.8% YoY in August – the slowest growth since last Deceber. August marks the sixth consecutive month of sequential deceleration of export growth on a YoY basis. On a seasonally adjusted basis exports fell (-2.3%) MoM. This marks the fourth consecutive decline on a monthly basis and the largest MoM decline since January 2009.

 

Japanese Exports - The Storm Before the Flood? - dd1

 

On a more granular level, Japanese exports to the U.S. – its second largest export destination at 16.4% to total – fell substantially on a sequential basis: +8.8% YoY in Aug. vs. +25.9% YoY in July. August also marked the first YoY decline in shipments of autos to the U.S. since October of 2009. This highlights two headwinds that will continue to restrict Japanese growth going forward – waning U.S. consumer demand and the painful appreciation of the yen.

 

Regarding the yen, Japanese exporters believe they can remain profitable if the yen trades at 92.90 per U.S. dollar or weaker, according to a Japanese Cabinet Ministry report. Since the start of the Japanese fiscal year on April 1st, however, the yen has traded an average of 89.02 – 3.88 less than their forecast. The spread, which we track using our proprietary Japanese Exporters Margin Kitty has been trending down throughout the entire period and closed at (-8.67) on Friday.

 

Japanese Exports - The Storm Before the Flood? - dd2

 

While we continue to have conviction that the yen will continue to weaken over the next 3-6 months due to (if nothing else) Japanese government intervention, we do not think intervention alone will be able to reverse the damage brought on by the yen’s recent strength. Speaking of, the strong yen is driving Japanese investment abroad, as exporters attempt to shield their profits from currency risk. Nissan is one of many Japanese exporters considering additional plants in Indonesia, Thailand, and other parts of SE Asia to counter this trend of currency strength. While it may provide reprieve for Japanese corporate profits, it will do so at the cost of exporting Japanese jobs to other countries further compounding the economies struggle to revive domestic demand.

 

In effect, both Japan’s exports and currency are likely to struggle going forward on a TREND duration. With trade accounting for more than half of Japan’s meager 1.5% expansion in 2Q10 (according to the Japanese Cabinet Office), we expect Japanese GDP growth to slow meaningfully from here.

 

To address the potential for a severe slowdown in the Japanese economy, Japanese politicians are likely to do what they’ve always done for the past two decades (to no avail, of course) – fire up the ‘ol stimulus. This morning, they are said to be considering an additional package worth 4.6 TRILLION yen ($54.6B). Prime Minister Naoto Kan’s administration is particularly excited about this round of stimulus, as it is unlikely to warrant any additional issuance in government debt:

  • 2 TRILLION yen from greater-than-forecast tax receipts
  • 1 TRILLION yen from savings on debt servicing
  • 1.6 TRILLION yen from the previous fiscal budget

While we certainly applaud their relative fiscal restraint, we don’t think piling another 4.6 TRILLION yen of stimulus on top of the most recent 915 billion yen of stimulus will achieve the desired effects of avoiding slow(er) growth.

 

All said, Japan’s fiscal situation is in an “emergency state”, according to Japan’s Vice Finance Minister Fumihiko Igarashi. At Hedgeye, we have added the Japanese economy to the growing list (politicians, bureaucracy, demographics, pension funding ,etc.) of things in an “emergency state” within Japan. It should, then, come as no surprise to see the Nikkei 225 down 9.3% YTD, trailed only by the PIIGS, China, and Slovakia.

 

Darius Dale

Analyst

 



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UK Housing in the Woods

Conclusion: While U.K. housing data points are rolling over, they are still more positive than in the United States.  This fact combined with an increased likelihood that interest rates in the U.K. increase sooner than in the U.S., supports our long Pound, short U.S. Dollar position.

 

Position: Long Pound (FXB)

 

Below are a few charts we keep front and center to track moves in the UK housing market: the UK’s Hometrack Survey and British Bankers Association Mortgage data.  In both we’ve seen a marked turn in housing since early 2010, a downward move we’d expect to continue over the intermediate term TREND due to significant oversupply issues (2004-7 period) and continued weak demand, reflected in buyer/consumer economic hesitance alongside new waves of austerity measures (higher VAT, government job and wage cuts) that should pinch the consumer and lead to tame economic growth out on the curve (see charts below).

 

UK Housing in the Woods - mh1

 

UK Housing in the Woods - mh2

 

UK Housing in the Woods - mh3

 

In context, we believe that the weakness in the US’s housing market could be a far greater driver in capital and currency market moves over the next 3 months (both locally and globally). To be clear, our bullish call on the Pound via the etf FXB in the Hedgeye Portfolio is a relative one based on our conviction for weakness in the USD over the intermediate term TREND. As a point to note, we’re still seeing inflation signals in the UK, which may also be fueling the move in the GBP-USD, which is up +2.75% in the last month and +6.04% in the last three months.  CPI in the UK has held above the 3% level (year-over-year) each month in 2010, while US CPI has trended lower this year, currently at 1.1% in August Y/Y.

 

Increased inflation in the United Kingdom is likely to lead to rates moving higher sooner than in the United States where the primary concern from Federal Reserve officials remains deflation. Further, an increase in interest rates in the United Kingdom will continue to support an appreciation in the Pound versus the U.S. dollar.

 

Our TREND level of support for the FTSE is 5,260. Our TRADE and TREND levels of support for the GBP-USD are $1.55 and $1.52, respectively (see chart below).

 

Matthew Hedrick

Analyst

 

UK Housing in the Woods - mh4


Q3 GDP WATCH - THE CONTRACTION CONTINUES

Consensus expectations are for an accelerated pace of GDP growth in 3Q10 to 1.9% from the 1.6% posted in 2Q10.  As an aside, on September 30th, the Department of Commerce will report the second revision to 2Q10 GDP and the expectation is for the growth to hold steady with annualized quarterly growth of 1.6%, according to Bloomberg.

 

While the durable goods data on Friday sparked a 2% rally in the S&P 500 on Friday, the MACRO data from last week continues to point to a sequential slowdown in 3Q10 GDP growth. 

 

On the housing front; existing home sales, new home sales, housing starts and building permits are now declining year-over-year and quarter-to-quarter.  The biggest quarter-to-quarter decline is coming from existing home sales followed by new home sales, down 28.5% and 14.3% respectively.  Building permits, and indication of future demand, is down 4.1% quarter-to-quarter.

 

Q3 GDP WATCH - THE CONTRACTION CONTINUES - home data 927

 

New orders for durable goods is also seeing a sequential slow down quarter-to-quarter of 0.3%, while still growing year-over year.  While the durable goods number missed overall expectations, when transportation and aircraft were stripped away it beat.

 

Q3 GDP WATCH - THE CONTRACTION CONTINUES - durable good 927

 

Moving to this week and today’s news, the Dallas Fed Manufacturing Index came at -17.7, on expectations of -6.0 and compared to -13.5 previously.  In addition, U.S. economic activity, according to the Federal Reserve Bank of Chicago fell in August to -0.53 versus -0.11 in July. 

 

The MACRO forces sending the S&P 500 (+9.43%) in September, don’t correlate with Gold (+4.8%) and the dollar getting hammered (-4.28%).  Bond yields also suggest that the state of the economy may not be as strong as many investors believe (or hope).  With the US economy continuing to weaken, the only option for the Federal Reserve to ensure stocks do not slump is to aggressively add liquidity to the system.    

 

Howard Penney

Managing Director


MACAU TABLE REVS THRU SEPT 26TH

Taking into account the number of weekend days versus weekdays and adding in estimated slot revenues, we project September will come in around HK$14.9 billion or +40% YoY growth.

 

 

Macau generated HK$12.5 billion in table gaming revenues through September 26th, implying +40% YoY growth for the full month of September, per our projections.  Market share trends remained consistent with last week:  MPEL and MGM above recent history and Wynn well below.  We are hearing that rolling chip hold percentage remains low at Wynn and MGM and high at MPEL.  The junket market continues to get more aggressive, mostly in the form of commission advances.  MGM and MPEL, on the margin, are most aggressive while LVS also appears to be extending terms for commission advances.  We will be writing more about this shortly.

 

Below are the September month to date table gaming revenues in Macau through the 26th.

 

MACAU TABLE REVS THRU SEPT 26TH - macau333


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