G3 Recap 7-27-11

NB: It’s vacation season, and your humble writer needs a break. As a result there will be no updates until mid-August. Best of luck to everyone in the interim – let’s hope the politicians fail at failing.

Main Items:

  • US DGO ex Transportation rose 0.1% MoM in June vs 0.5% exp and 0.6% prev
  • US Capital Goods Orders Nondef Ex-Air declined -0.4% MoM vs 1.0% exp and 1.6% prev.
  • WSJ reports that the Treasury may have enough cash until August 10th due to higher than expected tax receipts.
  • Christine Lagarde raised the possibility that the IMF will need more financial resources to tackle continuing economic crises and will likely have to discuss the issue soon.
  • BOJ warns that the stalled debt ceiling talks in Washington were having a considerable impact on FX markets; the central bank may discuss monetary easing at its next rate review on Aug. 4-5 or even earlier if the yen continues to spike. Reuters
  • Brazil hiked the IOF tax on FX derivatives in an effort to reduce the carry trade. An IOF of 1% is going to be charged on increases in the net LONG BRL exposures built through derivatives from the previous day that exceeds US$10 million, based on the delta.


  • German CPI rose 2.6% YoY in July vs 2.4% exp and prev
  • Swiss KOF LEI declined to 2.04 in July vs 2.11 exp and 2.23 prev.
  • UK CBI
  1. Trends Total Orders declined to -10 in July vs -3 exp and 1 prev
  2. Trends Selling Prices declined to 4 in July vs 27 exp and prev
  3. Business Optimism declined to -16 in July vs 10 exp and 9 prev
  • Australia CPI rose 3.6% YoY in 2Q vs 3.4% exp and 3.3% prev.


  • Wikipedia’s history of the 1995 government shutdown: http://en.wikipedia.org/wiki/United_States_federal_government_shutdown_of_1995
    One lesson is that this thing can drag out for a looong time. Last time it took 4 months.
  • Short term market movements are a bit erratic, so I’ll talk a bit about the longer term picture today.
    First, I posit the idea that with low net positioning, (as evidenced by discussions with brokers as well as recent articles on hedge funds trimming risk) the pain trade going to the end of 2H may be higher equities. Of course, hedge funds aren’t expected to outperform every year, but over the long haul, S&P returns remains a sort of a benchmark. The chart below shows that the HFRI macro index basically kept pace with the S&P over the 2003-2007 expansion, but since 2009 has been underperforming:

    Furthermore, US equities are reasonably cheap. The most recent S&P trailing nominal P/E is at a 36 percentile ranking using data over the past 50 years.

    Claims that recent earnings growth is solely driven by cost cutting are not accurate. Revenues have been growing north of 7% for over 2 years, which is roughly the norm:

    In fact, the Price to Sales readings are at levels prevailing from the lows of 2003:

    Of course, none of this matters if we get a politician induced recession…


2 thoughts on “G3 Recap 7-27-11

  1. interesting that there have been so many more revenue misses in europe versus states side as I suspect tightening of conditions coming through at a number of levels and banking system in piggies somewhat impaired.

    have a great holiday … lets hope good news delivered on a number of fronts by the time you get back!

  2. Thanks for your comments and thoughts, Bert. I’m a bit relieved that this mess with politicians is happening now, because I’m still a bit unsure as to how to trade these markets. I definitely hope we get better news in a couple weeks!

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