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THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - November 8, 2010

As we look at today’s set up for the S&P 500, the range is 32 points or -2.53% downside to 1195 and 0.09% upside to 1227.  Equity futures are trading lower tracking weakness in European markets and following a good rally last week underpinned by the FOMC’s QE2 announcement. No important economic data is due today.

  • Alpha Natural Resources (ANR) may rise to $60 on China, India demand, Barron’s said, citing Brean Murray Carrett & Co. analyst Jeremy Sussman
  • AvalonBay Communities (AVB) may sell up to $500m of common stock over three years, according to Nov. 5 filing
  • Cablevision Systems (CVC) said its avg. cable TV price may increase 2.88%
  • CommScope (CTV): TPG Capital may top Carlyle Group’s $3.9b offer, WSJ reported Nov. 5
  • Emcor (EME) CEO Frank MacInnis will sell 160,000 shares
  • GT Solar International (SOLR) raised fiscal 2011 EPS forecast to $1-$1.20 from 90c-$1, vs est. 93c
  • IDT (IDT) will pay 22c dividend and comparable payout in fiscal 2Q; also pursuing tax-free spin-off of Genie Energy
  • JDS Uniphase (JDSU) is undervalued and may rise as online video traffic grows, Barron’s said
  • Mariner Energy (ME) reported 3Q adj. EPS 2c vs est. 8c
  • Microsoft (MSFT): Demand for Kinect video game console looked solid on first day of sales, UBS said
  • Pfizer (PFE): Pfizer’s experimental pill for rheumatoid arthritis reduced pain, inflammation for 71% patients, according to study; drug may post annual sales of $2b, Bernstein says

 PERFORMANCE

  • One day: Dow +0.08%, S&P +0.39%, Nasdaq +0.06%, Russell +0.43%
  • Month-to-date: Dow +2.93%, S&P +3.60%, Nasdaq +2.85%, Russell +4.73%.
  • Quarter-to-date: Dow +6.08%, S&P +7.42%, Nasdaq +8.88%, Russell +8.94%.
  • Year-to-date: Dow +9.74%, S&P +9.93%, Nasdaq +13.65%, Russell +17.78%
  • Sector Performance: Financials +2.12%, Industrials +0.54%, Consumer Discretionary +0.53%, Energy +0.47%, Materials +0.33%, Tech +0.03%, Utilities (0.01%), Consumer Staples (0.40%), Healthcare (0.53%), and Telecom (0.60%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Massey Energy +11.21%, Fluor +9.50% and Boston Scientific +6.63%/Whole Foods -3.77%, CBS -3.68% and Allergan -3.63%.

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 511 (+1539)  
  • VOLUME: NYSE - 1243.47 (-9.55%)
  • VIX: 18.26 -1.40% - YTD PERFORMANCE: (-15.77%)
  • SPX PUT/CALL RATIO: 1.62 from 1.73 -6.41%  

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 16.80 -0.304 (-1.779%)
  • 3-MONTH T-BILL YIELD: 0.13%
  • YIELD CURVE: 2.20 from 2.20

COMMODITY/GROWTH EXPECTATION:

  • CRB: 313.56 +0.40% - up 9 of last 10 days
  • Oil: 86.85 +0.42% - BULLISH
  • COPPER: 394.85 +093% - BULLISH
  • GOLD: 1,396.72 +1.14% - BULLISH

CURRENCIES:

  • EURO: 1.4032 -1.12% - BEARISH
  • DOLLAR: 76.548 +0.88%  - BULLISH

OVERSEAS MARKETS:

 

European markets:

  • FTSE 100: (0.28%); DAX (0.07%); CAC 40 (-0.05%)
  • Markets are mixed with major indices finding some support on reports that Deutsche Bank had received several offers for BHF Bank, edging the sector into positive territory despite Commerzbank's results disappointing.
  • Basic materials led gains, one of only six sectors to trade higher.
  • Telecommunications and utilities lead decliners.
  • Greece's PM says will not call a snap general election after provisional estimates indicated the ruling party would win 7 of the 13 regional elections held over the weekend

Asian markets:

  • Nikkei +1.11%, Hang Seng +0.35%; Shanghai Composite +0.96%
  • Japan rose on a weaker yen and US jobs data.
  • NTT DoCoMo rose 1% on a report its next-gen phone service will be priced lower than the market was expecting
  • Shanghai-based companies powered China higher after Walt Disney (DIS) signed an agreement to build a theme park in the city
  • Qantas weighed on Australia, falling 2% after saying it is keeping its Airbus A380s grounded for longer than its initially planned 48 hours, having found potential issues with three engines on two planes 

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



Tightly Squeezed

“The tighter you squeeze, the less you have.”

-Thomas Merton

 

Thomas Merton was a Trappist monk who wrote “The Seven Storey Mountain”, one of National Review’s 100 best non-fiction books of the last century. After seeing most of my short positions get Tightly Squeezed last week, I figured I’d spend part of my weekend studying my personal performance purgatory.

 

Rather than opine on what is and what is not an unrealized gain or loss, long time readers of this strategy note know that the score doesn’t lie – people in this business do. Here’s my entire book of positions (with cost basis and performance) in the Hedgeye Virtual Portfolio as of Friday’s close:

 

Tightly Squeezed - 1

Tightly Squeezed - 2

 

Now the point here isn’t that this portfolio doesn’t look as bad as it will if this market keeps going higher. There are no rules against buying or covering anything at any given time. The point is that it’s possible to express a very bearish point of view without getting smoked. But you need to get the timing right.

 

On the way down, perma-bulls can get crushed. Since its October 2007 high, the SP500 is down -22%.  On the way up, perma-bears can get squeezed. Since its March 2009 low, the SP500 is up +81%. My role as a Risk Manager isn’t to be perma-anything.

 

My role is to attempt to be duration-agnostic and manage the multi-factor and interconnected risk that I see across global markets and time horizons. If I miss being long the top or short the bottom, sometimes that’s just the way it goes. Both tops and bottoms are processes, not points.

 

Here’s a brief rundown of the Hedgeye Portfolio’s current SHORT positions (in order of actions taken):

  1. Capital One (COF) – I shorted it again on Friday as Josh Steiner’s research continues to lead us to believe that putback liabilities aren’t priced in.
  2. Bank of America (BAC ) – I shorted it again on Friday after Josh Steiner highlighted some admissions in BAC’s 10Q that putback liabilities are real.
  3. Russell 2000 (IWM) – I shorted it on Thursday with the Russell +17.5% YTD and immediate term overbought in order to short small cap beta.
  4. The Euro (FXE) – I shorted it on Wednesday in conjunction with covering the short position I’d held in the US Dollar since June 7th.
  5. SP500 (SPY) – I shorted it again on Thursday as I continue to believe that Quantitative Guessing (QG) = JOBLESSS STAGFLATION.
  6. Italy (EWI) – I shorted it again on Thursday as Berlusconi’s leadership issues persist as do Italy’s sovereign debt problems heading into 2011.
  7. US Homebuilders (XHB) – I shorted it again on Thursday ahead of Friday’s pending home sales number (which was bad) and 30-year rates going up.
  8. Hudson City (HCBK) – I re-shorted this Josh Steiner idea (tri-state residential mortgage exposure) after covering it well, lower.
  9. Chipotle (CMG) – I shorted it again on Wednesday as Howard Penney’s research continues to indicate that the topping process is underway.
  10. Zimmer (ZMH) – I re-shorted this Tom Tobin idea (peak margins and pricing pressure) after covering it well, lower.
  11. Emerging Markets (FFD) – I shorted it again last Monday as global macro risks of mean reversion to the downside continue to mount.
  12. American Express (AXP) – I shorted it on 10/28 as Steiner thinks an imminent growth slowdown at Amex will lead to further multiple contraction.
  13. Illumina (ILMN) – I shorted it on 10/27 as Tom Tobin things growth expectations and multiple expansion are peaking ahead of a 2011 slowdown.
  14. Japanese Yen (FXY) – I shorted it on  10/8 as “Japan’s Jugular” remains one of our 3 core Hedgeye Macro Themes for Q410.
  15. Short Term Treasuries (SHY) – I shorted it on 6/23 with the expectation that at some point in my life, the yield on my savings account won’t be zero.

So, what does this tell you? Well, what it tells me is that what I’ve learned shorting stocks for the last decade continues to hold true. Unless you get the timing right, short-and-hold is not an effective risk management strategy.

 

Neither is buy-and-hope. Unless, of course, you get the timing right. While it was nice to see Howard Penney’s long Starbucks (SBUX) position continue higher out of Thursday’s earnings report, the only reason why we have a +168% long term gain here is that we had it in us to buy it when consensus didn’t want to buy anything Consumer Discretionary in early 2009.

 

When I look back on November 8th 2010, after being Tightly Squeezed for the entire week prior, will I have had it in me to hold the line on these short positions? I’m human, so I doubt it – but that’s probably the best reason why I should.

 

My immediate term support and resistance levels in the SP500 are now 1195 and 1227, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Tightly Squeezed - 3


UA/NKE and AMZN: Things are Changing

Three interesting callouts after a 'post daylight savings time' morning of online checks and research...

 

1) The rate at which Zappos is growing out its apparel offering is notable. Pay attention there. One of the few things that can stun growth there is internet taxation (like we saw in Texas two weeks ago). Separately, Amazon's apparel has been atrocious in the past. It's still nothing to write home about. But better on the margin? Definitely. Are we at a point yet where the two combined are 1+1=3? We're note sure. But the tail risk here for the rest of retail is that one day everyone wakes up and realizes that 1+1 now = 5. 

 

2) In looking through athletic apparel, it jumped out immediately that Nike has made a major push with performance apparel at Zappos. 710 out of the 7384 items on the site are Nike.  That's just shy of 10%. Under Armour's share? 0%. That means one of three things -- either a) AMZN/Zappos is not buying UA bc customers don't want it, b) Nike's push into getting apparel right and getting it into Zappos as a new channel partner came with a 'no Under Armour' inclusion in the implied agreement, or c) UA has simply chosen to not go there yet. Sounds to us like it is the latter.

 

3) Similarly, looking at shoes, Nike has 459 of the 2910 shoes currently on the site. Under Armour? 0.  Granted, UA is just starting its push into footwear, and Zappos is hardly in the relm of the aspirational retailers to showcase the brand as it launches. But the bottom line is this channel is there for the taking for the Armour.

 

This does not change our tune on UA (the stock)? No.  Simply put, the 2-3 year opportunity is enormous, and this company will continue to print 20%-30%+ ORGANIC top line growth through 2012. But consensus estimates for next year have finally come up to our level, and two new risks have entered the equation -- a) a meaningfully upped ante chip for athlete endorsements, and b) cotton prices in the stratosphere at the same time UA is making a push into a new line of cotton-based product (ie it has never had a process around managing cotton risk, and this is a heck of a time to develop one).  

 

Bottom line...We love the brand, really like the company and how it's progressed along its maturity curve, but we don't like the stock.

 

UA/NKE and AMZN: Things are Changing - 2


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.30%
  • SHORT SIGNALS 78.51%

MCD – OCTOBER SALES PREVIEW

McDonald’s is scheduled to report its October sales numbers before the market open on Monday, November 8th.  October had one less Thursday, and one additional Sunday, than October 2009. Based on this, I would expect a similar impact to that felt in January 2010 (-0.4% to +1.0%), varying by area of the world) which also had one less Thursday and one additional Sunday than the January prior.

 

In every region of the world, consensus estimates are calling for a significant slowdown in two-year average sales trends from September levels for MCD.  On a relative basis, a 5%+ in global same-store sales still suggests that MCD is continuing to take market share.  

 

Below I go through my take on what numbers will be received by the street as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for calendar and trading day impacts.  To recall, September same-store sales numbers showed improvement across the board.  While Europe and APMEA had been soft in August, they rebounded strongly in September.  The U.S. saw more marginal improvement.  In October, MCD needs to post impressive numbers in order to maintain the performance seen in September.  Expectations are likely muted, and I would expect some leeway to be given in terms of how investors view the results. 

 

 

U.S.  - Facing an easy -0.1% compare (including a calendar shift which impacted results by +1% to +1.7%, varying by area of the world):  As of today, the street is estimating a +6.1% comp in the U.S.  Based on our checks, the slowing sales of smoothies and Frappes will negatively impact same-store sales by 1-2% versus September.

 

GOOD: A print of 8% or greater would be perceived as a good result because it would imply that the company was able to maintain two-year trends close to those seen over the summer months.  While usually I look for an improvement in calendar-adjusted two-year average trends, and an 8% print would imply a significant slowdown from September, it is important to note that a +8% comp would be the strongest print since February 2008.  This may sound slightly unrealistic to some, but given the especially easy comparison of -0.1% from October 2009, it seems like it could be in play.

 

NEUTRAL: Roughly 7% to 8% implies two-year average trends that are approximately between 23 bps and 73 bps below the calendar-adjusted two-year average trends seen over summer and considerably below those seen in September.  However, given that a 7% print would still be 73 bps above the highest same-store sales number seen this year, in July, investors would likely view this as a neutral number.  

 

BAD: Below 7% implies that two-year average trends deteriorated sharply on a sequential basis from September.  Given that the U.S. was the only market to maintain sequential two-year trends over the last three months, a sharp drop off of the magnitude that a 7%-or-lower result implies would be received negatively (though it is important to remember that the current consensus estimate falls in this range).

 

 

Europe (facing a difficult 6.4% compare, including a calendar shift which impacted results by +1.0% to +1.7%, varying by area of the world):  As of today, the consensus estimate is for Europe to post +4.2% same-store sales growth.

 

GOOD:  A print of 5.5% or higher would be viewed positively because it would imply two-year average trends slightly below those seen during September in Europe (after accelerating sharply from August levels).  This would be the highest print since May.  Additionally, given the strong performance in September, investors will be watching to see if two-year trends maintain a level above 5% or have since moved lower towards the soft two-year trends in August.

 

NEUTRAL: A result of 4.5% to 5.5% would imply that sequential trends decelerated from the strong performance in September but maintained a level above those seen in August.   

 

BAD:  Less than 4.5% would imply, approximately, a 100 bp deceleration in two-year average trends from August.  Additionally, two-year average trends would fall below 5% which, with the exception of August, has not happened since February 2010. 

 

 

APMEA (facing a 4.7% compare, including a calendar shift which impacted results by +1.0% to +1.7%, varying by area of the world):  As of today, the consensus estimate is for APMEA to post +5.5% in same-store sales growth.

 

GOOD: 8% or higher would imply a slight acceleration from the results seen in September (after slowing in August).  Following the strong print in September, it will be interesting to see if performance in the APMEA region was maintained from the third quarter into the first month of the fourth quarter.   

 

NEUTRAL: Between 7% and 8% would imply two-year average trends roughly in line with those seen in September.  While the midpoint of this range implies a slight deceleration, it is unlikely to concern investors too much given the strong rebound in September sales in the APMEA region. 

 

BAD:  Below 7% would imply a significant slowdown from the two-year average trend in September and a return to the level of two-year average trends seen in August, which was a lackluster month for MCD APMEA.

 

MCD – OCTOBER SALES PREVIEW - mcd ranges

 

Howard Penney

Managing Director


EMPLOYMENT DATA POSITIVE AGAIN FOR QSR

Conclusion: October’s employment data from the BLS shows a growth in the employment level for 20-24 year olds for the third consecutive months.  This is incrementally positive for QSR stocks. 

 

Unemployment data released this morning by the Bureau of Labor Statistics were again positive for Quick Service restaurant stocks. Management teams in quick service and casual dining have been citing unemployment levels, particularly among younger age cohorts, as a particularly strong headwind for the restaurant industry. 

 

The most recent data from the BLS, for October, reveals that 20-24 year olds saw a year-over-year uptick in employment levels for the third consecutive month.  The improvement seen in August was the first since September 2007.  As the chart below clearly shows, the improvement in employment levels for 20-24 year olds appears to be growing at an increasing rate. 

 

EMPLOYMENT DATA POSITIVE AGAIN FOR QSR - unemployment by age black

 

Howard Penney

Managing Director


PRESSURE AND TIME

This note was originally published at 8am this morning, November 05, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Oh, Andy loved geology. I imagine it appealed to his meticulous nature. An ice age here, million years of mountain building there. Geology is the study of pressure and time. That's all it takes really, pressure, and time.”

-Red, The Shawshank Redemption

 

On a daily basis, we grind through a constant channel of noise.  E-mails, instant messages, text messages, Bloomberg messages, and phone calls all can interrupt our train of thought.  Generating valuable investment ideas for our clients in real-time requires pressure (effort) and time (focus) so at Hedgeye we value the time we take away from the various stimuli that surround us for so much of the day so that we can share ideas across sectors, discuss ideas with clients, or simply think in solitude.  As Keith referenced in his Early Look titled, “AMERICAN SOLITUDE” last week, solitude and leadership often go hand-in-hand. 

 

That said, I think I can speak for everyone at the firm when I state that the unique nature of our business model offers valuable dialogue channels with our clients.  The nature of that dialogue can vary broadly, agree or disagree, angry or calm, data based or pure qualitative opinion.  The fact is, all of it is critical to our process and all of it is appreciated. 

 

Besides the wide array of views we receive from our exclusive network, the disparate perspectives of our readers are also a key differentiator for our firm.  We hear from people managing billions and we hear from people managing a few thousand from their bedroom. 

 

While I am sensitive to the trust our clients have in us, I think it is important to highlight one of the more powerful thoughts that have come across our screens lately:

 

“What is the relatively small retirement investor to do?  He is long stocks--that is what has been taught to him over 80 years.  He is long on American patriotism and innovation.  He is disgusted with American politics.  He is naive on currencies, trade, global economics and the bigger picture.  He has income investments that he needs to pay the bills.  He lives in fear of the next bubble bursting.”

 

The reason why I think this thought is powerful is that it highlights a lot of the ideological dogmas that shackle people’s investment perspectives.  That is not a criticism, and I am not claiming to be immune to the influence of emotion or groupthink.  The best one can do is to be aware of it.  The above thought highlights several handcuffs that need to be removed in order to hold as dispassionate and lucid a view of the markets as possible. 

 

1)      American Patriotism, while admirable, should not be confused with American Delusion.  I love my country (Ireland) as much as the next man.  Thinking critically, especially about government and the path of the country, is a necessary feature of a democracy.

2)      American innovation is not what it used to be.  Some in the media may pine for the days when auto stocks used to “double and double” as soon as “they get going”, but this theme doesn’t sit well with our data-based conviction that Jobless Stagflation (inflation accelerating, growth decelerating) is here to stay.

3)      Currencies, trade, global economics and the bigger picture are all part of the same patient that we examine each day.  Interconnected markets are here to stay.  We strive to fully respect that fact in the positions we hold in the Hedgeye Virtual Portfolio; we are short the Euro and long the Dollar, while being short the S&P 500.

 

The last sentence of our client’s message is powerful.  Living in fear of the next bubble bursting is certainly a powerful engine driving market sentiment.  Whether it’s the “relatively small retirement investor” that “needs to pay the bills” or the banker that wants to get paid at year end, fear is a very persuasive mechanism.  In the end, we are as grateful to hear the perspectives of our individual investors as we are to hear the views of our most successful PM’s. 

 

In Ben Bernanke’s op-ed in the Washington Post, published yesterday morning, he writes that the dual mandate of helping promote increased employment and sustain price stability compelled the FOMC to announce its intention to buy an additional $600 billion of longer-term Treasury securities by mid-2011. 

 

The introduction to his piece refers to the actions taken by the Federal Reserve and other governments to “stabilize” the crisis in 2008 with a clear aim of claiming legitimacy for further quantitative easing in 2010.  In that same vein, I would refer to the uselessness of past forecasts by government employees like Bernanke and Christina Romer, former chairwoman of President Obama’s Council of Economic Advisers (remember the prediction of 8% being the “peak” of unemployment?).  When Keith coined the term Quantitative Guessing, he was not being flippant; these people do not – and cannot be expected to – offer anything more than guesswork in their economic forecasts. 

 

What does not involve guesswork is the monitoring of real-time market prices.  The impact of QE2 on the markets is clear to see in the data.  As the dollar has declined, oil, gold, corn, cotton and many other commodities have seen parabolic moves to the upside.  The jobless claims numbers yesterday underscore the dire circumstances that America’s unemployed find themselves in.  The actions of the Federal Reserve are not even close to meeting the expectations that the government set.  With respect to the “dual mandate” of the Federal Reserve, it is failing on both counts.  The consumer is experiencing inflation and job growth has been rather disappointing.

 

An intuition exists among the American public that I am convinced is lost on many inside the beltway in Washington.  The 401(k) is a significant depository of wealth for the American people so the fear of the “relatively small retirement investor” is understandable.  That investor can see and hear the realities of the economic situation.  The realities of the economy are all around for us to see - 43 million people on foods stamps and growing; a foreclosure crisis that shows no signs of abating and will likely get worse before it gets better.  Investing under a cloud of fear of the bubble bursting is exactly the kind of position we do not want our clients to be in.  In the end, all it will really take for the “Bernanke Bubble” to burst is pressure and time

 

In The Shawshank Redemption, the result of Andy Dufresne’s meticulous application of pressure and time resulted in him burrowing out of a prison over a twenty year period using only a small rock hammer.  As those of you who have seen the movie will remember, the prison warden was shocked to say the least.  Pressure, sustained by time, can work both ways.  In 2010 America, the pressure is being provided by a broken political system, government-sponsored inflation, and a merciless devaluing of the dollar.  All else that is required is time.

 

One thing is for sure, we will not be complacent.  The last thing we want to do is look like the warden of Shawshank when he realized what had become of Andy Dufresne.  As you can see in the chart below, the VIX Index has traded below its 15 year average.  Being bearish at this point is not consensus and we are down 2.18% on our short position in the S&P 500.  Yesterday’s move was significant but our conviction has not wavered that the largely policy-induced pressure building inside the market is reaching a critical point.

 

Time is ticking and pressure is growing.

 

Have a great weekend,

Rory Green

 

PRESSURE AND TIME - vix chart


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