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THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - November 17, 2010

As we look at today’s set up for the S&P 500, the range is 13 points or -0.11% downside to 1177 and 0.99% upside to 1190.  Equity futures are trading higher tracking a rebound in European equities. The developments on the Irish debt situation are being closely watched, with a joint European-IMF team expected to visit Ireland to prepare for a bailout.

 

In important economic data today: October CPI, October Housing Starts and October Building Permits.

  • Bob Evans Farms (BOBE) boosted year oper. income forecast to $108m-$112m (ex $13.9m charge) from $105m-$110m
  • Comerica (CMA) boosted dividend to 10c-shr from 5c-shr, said it will buy back up to 12.6m shrs
  • CVR Energy (CVI) said shareholders including affiliates of Goldman, Kelso will sell 15m shares in secondary offering
  • Giant Interactive (GA) reported 3Q rev. $50.6m vs est. $50.9m
  • Human Genome Sciences (HGSI), along with GlaxoSmithKline, won FDA advisory panel backing to sell Benlysta lupus drug
  • Woodward Governor (WGOV) forecast 2011 sales $1.55b-$1.65b, vs est. $1.53b

 PERFORMANCE

  • One day: Dow (1.59%), S&P (1.62%), Nasdaq (1.75%), Russell 2000 (2.03%)
  • Month-to-date: Dow (0.85%), S&P (0.42%)%, Nasdaq (1.50%), Russell (2.03%)
  • Quarter-to-date: Dow +2.18%, S&P +3.25%, Nasdaq +4.27%, Russell +4.31%;
  • Year-to-date: Dow +5.71%, S&P +5.67%, Nasdaq +8.84%, Russell +12.78%
  • Sector Performance: Materials (2.16%), Energy (1.87%), Tech (1.81%), Financials (1.67%), Industrials (1.61%), Consumer Disc (1.36%), Healthcare (1.45%), Utilities (1.16%), Consumer Spls (1.11%).
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Urban Outfitters +11.73%, Mattel +3.27% and Honeywell +1.79%/First Solar -6.42%, Jacobs Engn -5.04% and Kimco Realty -5.03%.

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -2249 (-2604)  
  • VOLUME: NYSE - 1354.34 (+53.99%)
  • VIX: - 22.58 +11.78% - YTD PERFORMANCE - (+4.15%)
  • SPX PUT/CALL RATIO: 1.80 from 1.46 +23.24%  

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 15.35 -0.304 (-1.943%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%
  • YIELD CURVE: 2.34 from 2.39

COMMODITY/GROWTH EXPECTATION:

  • CRB: 296.22 -3.20%
  • Oil: 82.34 -2.97% - BULLISH
  • COPPER: 373.10 -4.93% - BULLISH
  • GOLD: 1,337.35 -2.51% - BULLISH

CURRENCIES:

  • EURO: 1.3486 -0.94% - BEARISH
  • DOLLAR: 79.210 +0.88%  - BULLISH

OVERSEAS MARKETS:

 

European markets:

  • FTSE 100: (0.13%); DAX +0.37%; CAC 40 +0.47%
  • Shares are trading slightly positive following a weak open and a poor show yesterday and as the market waits for a resolution to Ireland’s debt situation.
  • Further support comes from GlaxoSmithKline after it found support for its key lupus drug.
  • Technology, banks and Insurance sectors are among the gainers today, while Telcos, Retail sectors are weak.
  • UK Sept ILO unemployment +7.7% vs consensus +7.7% and prior +7.7%
  • UK Oct claimant count (3.7K) vs cons. (5.0K)
  • BoE minutes: 7 MPC members voted for unchanged policy In Nov
  • Posen voted for £50B more QE, Sentance voted for 25bps rate hike

Asian markets:

  • Nikkei +0.15%; Hang Seng (2.0%); Shanghai Composite (1.97%)
  • Asian markets apart from Japan followed the US and Europe down today.
  • Resource shares fell on lower commodity prices.
  • Japan fell at the start of the day, but a weaker yen encouraged dip buying and allowed the market to finish barely up. Megabanks outperformed the market.
  • South Korea darted in and out of positive territory but ended down on the day.  Shipbuilders gained after falling yesterday.
  • Resource shares led Australia lower by (1.62%).  Qantas fell 2% as another airplane turned around in midflight, this time after a problem with its electrical system.
  • Blue chips extended China’s recent decline on a report that Premier Wen Jiabao said the government is preparing steps to fight inflation.
  • Hong Kong fell again on fears of higher interest rates in China.
  • Singapore and Indonesia were closed for Hari Raya Haji and Idul Adha, respecitvely.
  • Japan September revised composite index of coincident economic indicators (1.2 points) m/m to 102.1 vs preliminary (1.3 points) m/m.


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


TGT: Bullish Quote of the Day

Target's 3Q press release includes the bullish quote of the day:

 

"Based on our merchandising and marketing plans, combined with the expected impact of REDcard rewards and our newly completed remodel program, we expect Target’s fourth quarter comparable-store performance will be the best of any quarter in the last three years.”

 

So what does that mean exactly? Expect same store sales to exceed the prior three year peak comparable store sales performance of 2.8% achieved in 1Q10. While a low to mid single digit comp was once commonplace for TGT, this confidence has been elusive for at least three years. Interestingly, both WMT and TGT expect to see a sequential acceleration (with confidence from both) in sales during the most promotional, competitive, and IMPORTANT quarter of the year.

 

More details to come from the 10:30AM conference call, but it's safe to say that this commentary may have taken some of the suspense out of CFO Doug Scovanner's quarterly guidance ritual. 

 

Eric Levine

Director


THE M3: GAMING CONTROL; REAL ESTATE; AERL

The Macau Metro Monitor, November 17th, 2010

 

CHIEF HANDS OUT THE GOODIES Intelligence Macau, SCMP

CEO Chui said yesterday that the government  will monitor more closely its auditing of the casinos, enhance gaming-related laws and regulations, and restrict the opening of new casinos through measures like a cap on tables.  IM thinks the a tighter supply policy is good news for SJM and MGM Cotai ambitions.  The bigger news is the Great Handout:

  • 5,000 patacas for every elderly person;
  • 4,000 patacas for permanent residents;
  • 2,400 patacas for non-permanent;
  • 1,500 patacas for students with Macau identity cards;
  • 6,000 patacas for every central provident fund account;
  • 25% tax reduction;
  • Medical voucher worth 500 patacas for all permanent residents;
  • Rent subsidies for low income families awaiting public housing; and
  • Pay rise for civil servants.

IM thinks the new cash handout  is a positive step towards a looser policy on labor imports and steady growth prospects for Macau.  While noting that the cash handout is lower than the one instituted from the March policy address, Chui said the new scheme "is no longer part of a temporary policy. We want to provide long-term protection."  The cash handout will be launched in early 2011, instead of the usual Summer distribution.


REAL ESTATE WORRIES CHUI Macau Daily Times, SCMP

Chui repeated his previous commitment to build 19,000 public flats by 2012 and the creation of a task force to establish the ceiling income to buy affordable housing.  He said the Government will try to maintain a stable and healthy real estate market by curbing real estate speculation.   "Up to 72% of Macau residents own properties; we want to prevent a real estate bubble," he said.


AERL COMPLETES ACQUISITION OF VIP ROOM IN VENETIAN MACAO macaubusiness.com

VIP promoter, Asia Entertainment & Resources Ltd, has completed its acquisition of KGP, King's Gaming Promotion.  KGP had operated one room with five tables at the Venetian Macao, gneerating US$129MM per month under a fixed 1.25% commission rate.


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 80.28%
  • SHORT SIGNALS 78.51%

The Courage to Listen

“Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen.”

-Winston Churchill

 

For those of you unfamiliar with the story of Aung San Suu Kyi, she is a widely admired opposition politician in Burma and a former General Secretary of the National League for Democracy in her country.  The ruling military junta has oppressed Suu Kyi and her allies in order to maintain political control of the country. 

 

I am not a student of South East Asian politics but in the past few days I have found Suu Kyi’s story fascinating to delve in to.  What is most striking is her unwavering courage and commitment to serve her country; she refused to leave Burma for fear of being denied reentry by her political opponents.   After spending fifteen of twenty-one years in captivity, that courage and commitment is still as strong as ever. 

 

Upon her release from nearly 15 years of house arrest, Suu Kyi was quick to focus on making progress, saying of junta leader Senior Gen. Than Shew, “We have got to be able to talk to each other…real genuine talks, not just have some more tea or this or that”. 

 

Needless to say, Suu Kyi could offer a lesson in leadership to many politicians in the rest of the world.  Coincident with events in Burma, politicians throughout the West have been hastily passing blame, prematurely accepting plaudits, and wantonly pleading ignorance in accordance with the direction of the political winds.  From the Irish and Greeks to the Americans, it has been a tough time for political leadership in the Western Hemisphere. 

 

We have now witnessed a “compressed crash” of 3.87% in the S&P 500 since 11/05 and the carnage is even worse in some of the commodity markets: 

 

(1)    Gold -4.22%

(2)    Corn -10.26%

(3)    Oil -5.19%

(4)     Wheat -13.56%

 

The three worst performing sectors have been:

 

(1)    Financials -5.30%

(2)    Materials -5.09%

(3)    Technology -5.06%

 

The “compressed crash” is partly a function of the “blow off QE2″ euphoria that has been building since Bernanke’s speech in Jackson Hole, the David Tepper CNBC interview and the embarrassing Bernanke op-ed in the Washington Post which was nothing more than the FED admitting their intention to manipulate the stock market --no matter what the consequences.   

 

Following an open letter from a group of stock market practitioners and economists that was published in the WSJ demanding the FED to end QE2, the FED deployed two of its most senior officials to defend its policies on TV.  Both Janet Yellen and William Dudley (Federal Reserve Vice Chairwoman and President of the New York Fed, respectively) dismissed concerns that quantitative easing was aimed at Burning the Buck or that it could ignite inflation. 

 

It’s truly embarrassing what we are witnessing from some of the leaders of this country.  The perfunctory denial of what has been shown in real-time market prices for weeks now is a disgrace and an affront to our intelligence. 

 

The QE2 debate has been divisive in this country but its implications are global.  If it were solely another example of partisan politics why would Germany, China and Brazil all oppose the move too?  What is even more embarrassing is Representative Barney Frank having accused Republicans of “lining up with China and Germany in opposing the Fed’s credit easing!”  You couldn’t make this stuff up even if you wanted to! 

 

Overnight China declined 1.92% (now down -7.51% from 11/05) as Premier Wen Jiabao is now drafting measures to curb inflation, which means higher interest rate and slower economic growth in China.  I don’t think Wen picked up the phone to call the republican leadership to seek counsel on his inflation problems.  This becomes a problem for the USA because our “sick” economy cannot survive a slowdown in the economic engine of emerging markets.

 

We shouldn’t feel special, though; our friends across the pond are receiving the same treatment.  European Unity, the dream of Jean Monet, lies in shambles as “fellow Europeans” are turning out to be fair-weather friends with fingers pointing en masse across the once-again obvious borders that divide the 27 nations.  Whether it’s Greece “reclassifying” statistics or Ireland clinging to hope of retaining some vestige of autonomy throughout this episode, tensions are fraying.  Unelected politicians in Brussels are most distressed; Herman Van Rompuy, President of the European Council, struck a tone of desperation yesterday when he said “we’re in a survival crisis”. 

 

From a U.S. perspective though, the spotlight will be back on America’s problems soon enough.  Obama, by the sheer volume of the message the American people sent him from the polls earlier this month, has been forced to become somewhat more conciliatory in tone.  The Republicans, for their part, have been emboldened by their recent success, which is likely to be detrimental to getting anything accomplished in Washington.

 

Sadly, America’s ills are grave and should take precedence over the perpetual campaign for fame that politicians are now engaged in. 

 

These are important days for the United States and the ability of the country’s leaders to inspire confidence for a sustained period of time will be imperative for any real recovery to stand the test of time.  While the history of American Leadership is not without its blemishes, it is true to say that this country has been fortunate to find, more often than not, great leaders at the helm of political and social movements in times of national strife.  Abraham Lincoln, Franklin Roosevelt, John F. Kennedy, and Ronald Reagan are just a few of the Presidents that come to mind when one thinks of courage in a time of difficulty.

 

Sadly, our political system is broken and it seems gridlock is what we are faced with.  Gridlock is not good for equity prices.  Since November 2006, voting in Congress has become more and more tied to party lines.  There is no political leader with the courage and the backbone to bring together the needed cooperation to enact the change that can right size the listing ship. 

 

I will end with a thought from Jean Jacques Rousseau, a man who lived through times of crises: “The inflexibility of laws, which keeps them from bending to events can in some cases render them pernicious, and through them cause the ruin of a State in crisis”. 

 

From the FED, to Congress, to the White House, “politicking” is making a difficult situation very grave indeed.  Sadly, none lack the courage to speak.

 

Function in disaster; finish in style,

 

Howard Penney

 

The Courage to Listen  - HP EL



Stepping On Cocaine

This note was originally published at 8am this morning, November 16, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Sean: See you Monday. We'll be talking about Freud and why he did enough cocaine to kill a small horse.”

-Good Will Hunting

 

Yesterday, the Italian police reported intercepting 1 ton of pure cocaine inbound on 4 tractors from Brazil.  The street value was estimated at 250 MILLION Euros ($341M USD). That’s a lot of Fiat currency. That’s a lot of coke.

 

Since it was the largest intercepted transaction of cocaine in 15 years, I figured I’d start to analyze the matter. After all, Quantitative Guessing (QG) has many unintended consequences, not the least of which are moral.

 

Like creating “sugar highs” in markets for those who are levered-long of them, cocaine is a stimulant of the central nervous system. It suppresses the addict’s appetite to manage reputational risk. When it’s uncut, or “pure”, some really wild and crazy stuff starts happening post consumption.

 

According to one anonymous tweeter with knowledge in the crystalline tropane alkaloid space, pure cocaine “has no filters to increase the weight of the product. Dealers will usually “step on” their product to the tune of 30 or 40% of some other substance (usually Demerol, baby laxative, or B12) to increase their profits.”

 

As I dug deeper into my research, I couldn’t help but remember that this is exactly what 18th century Coin Clippers used to do to the their citizenry’s currency. Before we had central banking dealers clean up the messaging and delivery of the coin clipping business it was, per Wikipedia, “considered by the law to be of similar magnitude to counterfeiting, and was occasionally punishable by death.”

 

The good news here is that Americans are starting to figure this whole matter of feeding free money to debt addicts out. It actually didn’t take very long for consensus to come to realize that QG and Burning The Buck are bad things. This is progress.

 

We’re long the US Dollar (UUP) here and covering some of our US Equity short positions, not because we trust the alchemy of Alan Greenspan or Ben Bernanke, but simply because we are starting to see some of the cocaine highs of the last few weeks wear off. After all, over time, a stronger sovereign currency that isn’t being clipped by charlatans of government sponsored volatility is a good thing for America.

 

As risk managers, we are tasked with measuring real-time market prices, volatilities, and volumes. The output of this research results in probability-weighted market timing. As correlations and r-squares change, we start to change our positioning.

 

Today is November the 16th. To understand where markets can go next, we have to contextualize where they came from. So let’s look back at global macro correlation risk relative to the US Dollar on a THEN and NOW basis versus October 16th…

 

THEN (immediate term TRADE correlations to USD):

  1. SP500 = -0.80
  2. CRB Commodities Index = -0.88
  3. Brazil’s Bovespa Index = -0.92
  4. Oil = -0.91
  5. Gold = -0.96
  6. Copper = -0.95

NOW (immediate term TRADE correlations to USD):

  1. SP500 = -0.29
  2. CRB Commodities Index = -0.20
  3. Brazil’s Bovespa Index = -0.60
  4. Oil = -0.11
  5. Gold = -0.08
  6. Copper +0.10

The way to read this is very straightforward. Copper is undergoing the most glaring mathematical change, swinging from an INVERSE correlation of -0.95 to a POSITIVE correlation to the USD Dollar of +0.10 in only one month. This is a major new development in the risk management landscape.

 

While I wasn’t brave enough to buy Copper yesterday, I did buy-back my long Gold (GLD) position (email sales@hedgeye.com if you’d like my intraday note titled “Gold Diggers: Gold Levels, Refreshed”).

 

Last Tuesday, my asset allocation to Commodities was a Bernanke (ZERO percent). This morning, after seeing the CRB Commodities Index correct by -4%, the Hedgeye Asset Allocation to Commodities is back up to 6% (GLD = 3%, CORN = 3%). Managing your cash position dynamically isn’t rocket science. It’s called contrarian sobriety.

 

One of the most critical lessons I’ve had to learn in making global macro calls on markets is that the derivatives, correlations, and divergences embedded in the math are never perpetual. In other words, once it gets so easy that a coke-head can do it, it ends…

 

The SP500 is down for 5 out of the last 6 days and should test a critical level of immediate term TRADE support this morning. In the Hedgeye model, that line of support is 1190. If it holds, that’s bullish. If it breaks, that’s bearish. My immediate term TRADE line of resistance is now 1212.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Stepping On Cocaine - coke


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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