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Bear/Bull Battle: SP500 Levels, Refreshed

POSITION: Short SP500 (SPY)

 

Being short the SP500 today would make me wrong. I get it. I’m not going to point fingers or make excuses. The screen tells the score. Ben Bernanke has beaten me today.

 

I’m not always sure how it feels on the days preceding crashes, but today definitely feels as different as a few days did in late 2007. Not only from a price, volume, and volatility perspective, but in that dangerous place that we market practitioners call our gut. Any move beyond the 1215 line in the SP500 equates to a 3.3 standard deviation move on my key immediate term TRADE duration. These happen very infrequently. Someone might be blowing up.

 

I’ll leave getting today wrong for those who want to be focused on yesterday’s mistakes. Right here and right now our immediate term risk management task is to manage toward the risk that will be in this market tomorrow. In the chart below, we have outlined the immediate term TRADE risk to the downside at -3.5% (1173). Could it all happen in a day? For sure. I wouldn’t call it more than a 1.7 standard deviation move, which is normal – put it that way.

 

I’ve moved to 70% Cash in the Hedgeye Asset Allocation Model. However painful, tops are processes, not points.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear/Bull Battle: SP500 Levels, Refreshed - 1


Disconnect

Today’s October sales results can best be characterized by the term, “disconnect”.  A disconnect between the reality of a slower topline and a day in which almost every publicly traded retail stock is moving higher regardless of the quality of its monthly report.  Miss on the topline, stock is up.  Beat on the topline, stock is up.  Pre-announce to the upside, stock is up.  Pre-announce inline, stock is up. 

 

The bottom line is that October was the weakest month of the quarter and yes, weather was partly to blame.  Sales momentum did slow in the month, only to recover a bit towards the end as more seasonal weather patterns emerged.  Promotional activity was also up on the margin, largely the result of retailers such as GPS looking to prevent an inventory overhang as the most critical selling season of the year approaches. 

 

Is there anything major to glean from October?   Probably not.  The consumer remains in a holding a pattern, only to emerge around key events.  Despite retailers efforts to jumpstart holiday shopping at the same time Halloween costumes hit the clearance rack, we believe we have a long way to go before any definitive judgment can be made regarding Holiday 2010. Despite the waiting game also known as “holiday anticipation”, there  are a handful of callouts that are worth noting from today’s releases:

 

  • Same store sales day inches closer to obsolescence with ANF’s announcement that it will cease to report monthly results beginning in fiscal ’11.  That leaves just three more months to trade the lights out on all the speculation, whispers, and channel checks one could possible consume.  The truth is, apparel retail is managed around seasons, not months.  Within the next 1-2 years, it’s likely we’ll see many of the remaining monthly reporters calling it quits as well.  For reference, monthly sales reports are a legacy item, unregulated, not mandated, and unaudited.
  • From ANF’s recorded call, “Sales for the quarter are approximately in line with expectations at the beginning of the quarter.”  Aren’t sales either in-line or not in-line?  Ambiguity.
  • ROST noted that as cooler weather trends materialized, customer traffic increased.  Dresses were once again called out as a leading category, as well has home.  Pack-away levels were also notable, with an increase of 500bps year over year.
  • JCP noted that early sales of the Liz Claiborne exclusive remain strong and ahead of management’s plan. Men’s apparel and shoes were the best performing product categories for the month.   Cold-weather sensitive categories including sweaters, outerwear, and fleece were weak.  Overall, management once again noted AUR pressure as a result of heightened promotional activity.
  • JWN reported that California trends still remain below the company average but that the spread between CA and overall results continues to narrow.  Jewelry, dresses, and women’s shoes were leading categories in the month.
  • Despite pressure on margins driven by increased clearance activity, GPS guided EPS above the Street for 3Q to $0.47-$0.48 (Street $0.44).  Interestingly, the tail end of the quarter and the first week of 4Q have included 40% off promotions at core Gap.  Recall it has been quite some time since a “40% off any item in the store” promotion has been used.  If you haven’t already checked out this coming Friday’s promo, it’s worth taking a look at: http://www.facebook.com/event.php?eid=159056334132258
  • Costco highlighted that food inflation picked up in October, driven primarily by milk, butter, cheese, and deli meats.  Overall inflation for all food and sundries was 1.5%, a measurable increase from prior months.
  • ARO reported that its AUR’s decreased by mid single digits as a result of increased promotional activity as well as a negative mix shift towards lighter weight merchandise. 
  • AEO reported that its average prices on apparel were actually up year over year.  However, the mix impact of higher sales of accessories and Aerie negatively impacted overall AUR.
  • Add Gymboree to the list of retailers noting that a heightened promotional environment had a negative impact on margins.
  • Despite what was believed to be one of the strongest Halloweens in years, only Hot Topic called out the holiday’s impact on the month. Unfortunately, Halloween proved to be disappointing for HOTT.  Historically, the retailer was a merchandising leader for Halloween.  However, decisions to dramatically cut back on punk pants, corsets, and fish nets had a meaningfully negative impact on monthly results.

Eric Levine

Director


INITIAL CLAIMS REMAIN HIGH IN SPITE OF QE2

Initial Claims Rise 23k, Offsetting Last Week's 21k Improvement

The headline initial claims number rose 20k last week to 457k (23k net of revisions). Rolling claims came in at 456k, an increase of 2k over the previous week. This wiped out last week’s improvement, and claims still remain in the same band they’ve occupied for the year. We're still a solid 50-75k above where we would need to be in order to see unemployment fall.

 

QE2 Not Showing Any Signs of Taking Down Claims So Far

Interestingly, in the last round of Quantitative Easing (QE1), we saw almost all of the decline in mortgage rates occur between the time when the program was announced in late 2008 and when the buying commenced in early 2009. We think this time is similar in that mortgage rates have already come in substantially, to all time lows. What's interesting to observe is that mortgage rates have been exceedingly low now for a few months, but we've seen no real improvement in jobless claims. Maybe this is too short a window against which to measure success, but it is interesting to note that so far there appears to have been no transmission of QE2 into lower claims. We would not expect to see long rates drop much further from here, consistent with QE1.

 

INITIAL CLAIMS REMAIN HIGH IN SPITE OF QE2 - 1

 

INITIAL CLAIMS REMAIN HIGH IN SPITE OF QE2 - 2

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL CLAIMS REMAIN HIGH IN SPITE OF QE2 - 3

 

Joshua Steiner, CFA

 

Allison Kaptur


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INITIAL CLAIMS REMAIN HIGH IN SPITE OF QE2

Initial Claims Rise 23k, Offsetting Last Week's 21k Improvement

The headline initial claims number rose 20k last week to 457k (23k net of revisions). Rolling claims came in at 456k, an increase of 2k over the previous week. This wiped out last week’s improvement, and claims still remain in the same band they’ve occupied for the year. We're still a solid 50-75k above where we would need to be in order to see unemployment fall.

 

QE2 Not Showing Any Signs of Taking Down Claims So Far

Interestingly, in the last round of Quantitative Easing (QE1), we saw almost all of the decline in mortgage rates occur between the time when the program was announced in late 2008 and when the buying commenced in early 2009. We think this time is similar in that mortgage rates have already come in substantially, to all time lows. What's interesting to observe is that mortgage rates have been exceedingly low now for a few months, but we've seen no real improvement in jobless claims. Maybe this is too short a window against which to measure success, but it is interesting to note that so far there appears to have been no transmission of QE2 into lower claims. We would not expect to see long rates drop much further from here, consistent with QE1.

 

 INITIAL CLAIMS REMAIN HIGH IN SPITE OF QE2 - rolling

 

INITIAL CLAIMS REMAIN HIGH IN SPITE OF QE2 - raw claims

 

Yield Curve

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. The 2-10 spread (a proxy for NIM) has recently stabilized with the backup in the 10-year treasury. Yesterday’s closing value of 224 bps is down from 231 bps last week.

 

INITIAL CLAIMS REMAIN HIGH IN SPITE OF QE2 - spreads

 

INITIAL CLAIMS REMAIN HIGH IN SPITE OF QE2 - spreads QoQ

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS REMAIN HIGH IN SPITE OF QE2 - subsector perf

 

Our Macro Team's Howard Penney and Rory Green published the following chart yesterday showing that the AAII Bulls-Bears survey has not been more bullish since February of 2007, suggesting downside risk has grown considerably. For reference, peak bearishness occurred on March 5th, 2009, a day before the market bottom.  

 

INITIAL CLAIMS REMAIN HIGH IN SPITE OF QE2 - bulls bears

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - November 4, 2010

As we look at today’s set up for the S&P 500, the range is 15 points or -1.00% downside to 1186 and 0.25% upside to 1201.  Equity futures continue to hold above fair value as the positive reaction to yesterday's announcement by the Fed to purchase $600B of longer-term Treasuries over the next eight months encourages risk appetite.

 

Today's highlight sees weekly jobless numbers and Q3 Nonfarm Productivity….

  • Chesapeake Energy (CHK): 3Q EPS beat est, raised 2012 production outlook
  • Dendreon (DNDN) forecast 2010 rev. below est. 
  • MercadoLibre (MELI) 3Q rev. missed est.
  • Monolithic Power Systems (MPWR) forecast 4Q rev. below est.
  • News Corp. (NWSA) 1Q EPS ex. tax benefit beat est., maintained 2011 forecast
  • Prudential Financial (PRU) 3Q rev., EPS beat ests.
  • Qualcomm (QCOM) forecast 1Q, 2011 EPS, rev. above ests.
  • Whole Foods Market (WFMI) raised FY2011 profit outlook
  • True Religion Apparel (TRLG) cut its 2010 EPS forecast
  • ValueClick (VCLK) forecast 4Q adj. EPS, rev. above ests.
  • Zumiez (ZUMZ) 3Q EPS, Oct. comps beat ests.

 PERFORMANCE

  • One day: Dow +0.24%, S&P +0.37%, Nasdaq +0.27%, Russell 2000 +0.32%
  • Month-to-date:  Dow +0.87%, S&P +1.24%, Nasdaq +1.31%, Russell +1.68%.
  • Quarter-to-date: Dow +3.96%, S&P +4.95%, Nasdaq +7.25%, Russell +5.77%.
  • Year-to-date: Dow +7.55%, S&P +7.43%, Nasdaq +11.95%, Russell +14.35%
  • Sector Performance: Financials +0.99%, Consumer Disc +0.51%, Tech +0.57%, Consumer Spls +0.31%, Energy +0.21%. Industrials +0.15, Healthcare +0.06%, Materials (0.28%), Utilities (0.19%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Hartford Financial +9.18%, Marshall & Ilsley 5.50% and Ford +4.92%/Quanta -9.98%, EOG Resources -9.31% and Pulte -7.68%.

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 453 (-988)  
  • VOLUME: NYSE: 1103.41 (+21.61%)
  • VIX: 19.56, -9.32% - YTD PERFORMANCE: (-9.78%)
  • SPX PUT/CALL RATIO: 1.97 from 1.21 +63.216%  

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 17.24, +0.406 (2.412%)
  • 3-MONTH T-BILL YIELD: 0.13%    
  • YIELD CURVE: 2.33 from 2.29

COMMODITY/GROWTH EXPECTATION:

  • CRB: 305.07 +0.09% - up 8 of the last 9 days
  • Oil: 84.69 +0.94% - BULLISH  - up 7 of the last 9 days
  • COPPER: 378.50 -1.41% - BULLISH  
  • GOLD: 1,337.15 -1.43% - BULLISH

CURRENCIES:

  • EURO: 1.4040 +0.03% - BULLISH
  • DOLLAR: 76.481 -0.31%

OVERSEAS MARKETS:

 

European markets:

  • European markets saw solid gains from the open buoyed by the US Federal Reserve's decision for an additional $600B of QE and constructive corporate results from European heavy-weight companies.
  • A generally weaker US dollar post the Fed's decision saw commodities higher, with mining shares amongst the leading gainers.
  • All sectors tradomg higher with banks and food & beverage amongst the leading gainers.
  • Market participants await the BOE interest rate decision at 8ET with benchmark interest rate expected to be left unchanged at 0.5%, the focus on any additional QE and ECB is expected to leave interest rates unchanged at 1% at 8:45ET.
  • UK Oct Halifax house price index +1.8% m/m vs con +0.6%
  • France Oct final Services PMI 54.8 vs con 55.3
  • Germany Oct final Services PMI 56.0 vs con 56.6
  • EuroZone Oct final Services PMI at 5ET
  • EuroZone Sep PPI due at 6ET

Asian markets:

 

  • Asian markets rose today, reacting positively to the Federal Reserve’s quantitative easing announced yesterday.
  • Every sector except pulp and paper rose in Japan, with winning stocks outnumbering losers more than 4-to-1.
  • Property developers lifted Hong Kong on bets that interest rates will remain low for some time to come.
  • Li & Fung rose 2% on announcing it will become a sourcing agent for Li Ning.
  • BHP Billiton led Australia up after Canada blocked its bid for Potash.
  • Energy stocks rose as people assumed they might become targets for cash-rich BHP.
  • Tech players supported South Korea. 

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER



THE M3: SANDS COTAI LABOR STILL NO GREEN LIGHT

The Macau Metro Monitor, November 4th, 2010


TAM: SANDS' IMPORTED WORKERS NOT YET APPROVED Macau Daily Times

Secretary Tam said that the Human Resources Office is still processing the application for Sites 5 & 6.  He said it is hard to estimate when a result will be ready as the office is also dealing with “a lot of applications [from other enterprises]” at the same time.  Regarding the number of non-local workers, Tam said, “The number isn’t important... but should be around a few thousands... the most important is how many of them will be approved." On the Jacobs lawsuit, Tam stressed that “any person who wants to use improper means to achieve the goal of getting more gaming tables or imported workers must not be able to succeed”.


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