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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - January 10, 2011


As we look at today’s set up for the S&P 500, the range is 25 points or -1.61% downside to 1251 and 0.35% upside to 1276.  Equity futures are trading below fair value in response to weaker Asian and European markets as investors digest Friday's jobs report. This week’s MACRO data points sees the Fed's Beige Book, PPI, CPI, Initial Jobless Claims, Retail Sales and the first reading of January's Consumer Confidence later in the week.

 

According the FT, the Fed is expected to start stress testing a number of US banks this week to determine which ones are allowed to raise dividends or return capital to shareholders. The test is expected to be finalized by March. Alcoa starts the Q4 earnings season off after the close today.

 

MACRO DATA POINTS:

  • U.S. Fed to purchase $7b-$9b in notes/bonds, 11 a.m.
  • Export inspections (corn, soybeans, wheat), 11 a.m.
  • U.S. to sell $29b in 3-mo. bills, $28b in 6-mo. bills, 11:30 a.m.
  • Fed’s Lockhart speaks on U.S. economic outlook in Atlanta

TODAY’S WHAT TO WATCH:

  • Airgas Inc. (ARG US) extended tender offer for Airgas until Feb. 4 from Jan. 14.
  • Commonwealth REIT (CWH). Adam Portnoy to become president, replacing John Mannix, who resigned as president and chief investment officer to lead acquisition plans in Australia.
  • Olam International (OLMIF)  along with Wilmar International (WLMIF) and Noble (NOBGF) may be attractive amid global commodities boom, Barron’s reported.
  • Salix Pharmaceuticals (SLXP) may rise on Food and Drug Administration approval of its irritable-bowel syndrome treatment - Barron’s
  • Strayer Education (STRA) new student enrollments down by ~20%
  • Union Pacific (UNP) may rise as much as 50 percent over the next three years as the railroad raises prices and cuts costs, Barron’s reported, citing Lisa Dong, Westwood Holdings Group portfolio manager.
  • WellPoint (WLP) preliminary 2010 EPS exceeded $6.60

PERFORMANCE: Consumer Staples is BROKEN on TRADE

  • One day: Dow (0.19%), S&P (0.18%), Nasdaq (0.25%), Russell (0.45%)
  • Last Week: Dow +0.84%, S&P +1.10%, Nasdaq 1.90%, Russell +0.53%
  • Month/Quarter/Year-to-date: Dow +0.84%, S&P +1.10%, Nasdaq +1.90%, Russell +0.53%
  • Sector Performance - BEARISH (Only 3 sectors positive) - Energy +0.72%, Utilities +0.36%, Industrials +0.20%, Consumer Discretionary (0.05%), Healthcare (0.06%), Materials (0.09%), Tech (0.46%), Consumer Staples (0.51%) and Financials (0.90%)   

 EQUITY SENTIMENT: MIXED

  • ADVANCE/DECLINE LINE: -368 (+289)  
  • VOLUME: NYSE 1089.51 (-0.35%)
  • VIX:  17.14 -1.49% YTD PERFORMANCE: -3.44%
  • SPX PUT/CALL RATIO: 1.79 from 0.86 (+108.71%)  

CREDIT/ECONOMIC MARKET LOOK:


Treasuries were stronger across the curve; outperformance mainly in the belly of the curve, where 5s and 7s fell ~10bps. 10-yr yield down ~7bps, ending at 3.32%.

  • TED SPREAD: 17.33 0.507 (3.016%)
  • 3-MONTH T-BILL YIELD: 0.14% -0.01%    
  • YIELD CURVE: 2.74 from 2.76

COMMODITY/GROWTH EXPECTATION:  

  • CRB: 323.94 -0.35%
  • Oil: 88.03 -0.40% - trading +0.74% in the AM (down 3.67% last week)
  • Oil Rises in New York After Alaskan Crude Pipeline Leak Cuts U.S. Supplies
  • COPPER: 428.25 -1.09% - trading -0.11% in the AM (down 3.70% last week)
  • Copper May Fall for Fifth Day as Lower Equity Markets Cool Demand Outlook
  • GOLD: 1,367.90 -0.43% - trading 0.16% in the AM (down -3.58% last week)
  • Gold Fluctuates Amid Concern About Sovereign Debts in Euro-Zone Nations

OTHER COMMODITY NEWS:

  • Alaskan Oil Pipeline Shutdown Cuts Production, Pushes Crude Prices Higher
  • Corn Advances as Dry, Warm Weather in Argentina May Limit Grain Production
  • Freight Rates Poised to Tumble as 35-Mile Line of Ships Passes Coal Demand
  • Hedge Funds Increase Bets on Wheat Rally to Highest Level Since September
  • EU Wheat-Export Slump Signals Tightening Supplies of Grain, Analysts Say
  • Florida Orange Output May Fall on Unusually Frigid Weather, Survey Shows
  • China Likely to Impose Tariffs on U.S. Dried Distillers' Grains, Yigu Says
  • Silver is `Common Man's Gold' in India as Bullion Expensive, Trader Says
  • Copper Imports by China Decline in December as Arbitrage Profits Shrink
  • South Korea Finds More Foot-and-Mouth Cases, Livestock Culling Tally Jump
  • Palm Oil Production in Malaysia Declines to the Lowest Level in 10 Months

CURRENCIES:

  • EURO: 1.2907 -0.93% - trading flat in the AM (down 3.56% last week)
  • DOLLAR: 81.012 +0.27% - trading +0.07% in the AM (up 2.51% last week)

EUROPEAN MARKETS:

  • European Markets: FTSE 100: (0.56%); DAX: (0.87%); CAC 40: (1.54%)
    European markets fell as continuing concerns over peripheral Europe's debt crisis and weaker markets across Asia. 
  • Reports that Portugal denied having been pressured by France and Germany to accept a bailout impacted the euro, peripheral debt spreads and equity markets, with France and Portuguese equity markets leading the region lower down around (1.5%) and (1.86%), respectively.
  • All but one sector trades lower led by banks down over (2.5%) and basic resources (1.9%). US futures trade lower
  • France Nov Industrial Production +2.3% m/m vs consensus +1%
  • Eurozone January Sentix Index 10.6 vs consensus 11.3
  • UK Dec house prices (1.3%) m/m vs consensus (0.4%) and (1.6%) y/y vs consensus (1.4%) - 

ASIAN MARKTES:

  • Asian Markets: Nikkei (closed); Hang Seng (0.67%); Shanghai Composite (1.66%)
  • Asian markets mostly fell this morning, due to disappointment with the January US jobs report and renewed concerns about European sovereign debt.
  • Australia traded up 0.16%, with retailers supporting the market.
  • China's auto sales last year rose 32.37% to 18.06M units, according to the China Association of Automobile Manufacturers.
  • Hong Kong traded down 0.67%.
  • South Korea went down 0.26%.
  • India down 2.38%
  • Japan is closed for Coming of Age Day.
  • Indonesia was the biggest looser down 4.21% - the biggest drop in 2 years on inflation concerns
  • China’s December trade surplus $13.1B vs survey $20B.

Howard PenneyManaging

BCS Champ Game: NKE v. UA

I’m sitting here on this snowy Saturday afternoon celebrating my twins’ 13th birthday. Life is good. We’re watching the Saints play who my colleague Darius Dale calls ‘the best worst team in the NFL’. Yes, Darius is from Seattle and is a hardcore Seahawks fan. It’s halftime now and Darius is happy.

 

This is definitely a big game for football. But to ANYONE that cares about sports endorsements, the game on Monday is the one that matters by a country mile.

 

Yes, I’m talking about the BCS championship.  #2 Oregon Ducks vs. top-ranked Auburn Tigers.

 

It should come as no surprise that the Ducks serve as Nike’s primary face-plate in College Football. Phil Knight’s support for this program is legendary (Google it).

 

But Auburn is less obvious, as the Maryland Terrapins are logically the hallmark UnderArmour team. But the problem is that the high school team at our small New England town can probably hold its own against the Terps (not really, but you get the idea). Auburn, however, is a powerful franchise, and is UnderArmour’s most important college affiliation – as evidenced by a 7-year $28mm deal. Tack on all the noise around QB Cam Newton, who won the Heisman Trophy despite allegations of eligibility due to unethical/criminal behavior – and you’ve got yourself an event!

 

So let’s throw all this soap opera noise aside for a minute. What should we care about?

1)      The investments in each of these teams have already been made by NKE and UA, but…

2)      It is absolutely positively meaningless if the companies don’t suck it up and use the event to establish a better communication with consumers. That's incremental SG&A. Nike has the edge there due to sheer size.

3)      UnderArmour has more to gain, and little to lose. While Nike has more to lose and less to gain.

  • Nike is so big that people expect (consciously or not) to see the swooshes at any major sporting event.
  • No one expects UnderArmour to be on the grid. The fact that it will be at the big game is meaningful.  UnderArmour, however will need to be tactical about turning this into a near term-money maker.

4)      In netting it all out, what do you get? As it stands today, just showing up is a non-event for Nike. But they can boost top line in its American Football business if they run the right 11th hour marketing campaign. Keep in mind that Nike has been investing in this sport meaningfully over the past 12 months – and capped it with its deal to take over the NFL next year.

5)      For UA, the exposure should help. Furthermore, the apparel and footwear opportunity from the single event might actually be fairly meaningful to UA’s P&L – but that’s IF and ONLY IF they can be quick and tactical enough with marketing product that has already been created. They learned from their Superbowl experience a few years back that they need to be careful with their '11th hr' SG&A spend.  Also keep in mind that they just endorsed Tom Brady. We're not too sure if UA can afford an SG&A surprise at this valuation.

6)      Note: An important point is that it does not really matter who wins. Winning helps – don’t get me wrong -- at Hedgeye we expect to win every day.  But Some of the most powerful franchises were helped by marketing sportsmanship or other extraordinary events that don’t necessarily synch with a W or L.

7)      From a retailer perspective, its pretty much a wash. The obvious beneficiary might be Hibbett  Sports given southeast exposure, but keep in mind that last year we had the Texas Longhorns and Alabama Crimson Tide shooting it out for the BCS title. So from a yy perspective, the difference may be marginal.  

 

Go Jets

 

Brian


The Week Ahead

The Economic Data calendar for the week of the 10th of January through the 14th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - call1

The Week Ahead - call2

The Week Ahead - call333

 


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Apples To Inflated Apples: Comparing Global CPI Breakdowns

Conclusion: Global CPI measures are not apples-to-apples and may provide a leading indicator as to the nations where monetary policy will tighten the quickest in 2011.

 

We looked at the CPI breakdowns for the largest ten countries in the world by population with a specific focus on the contribution from food and beverages as a percentage of CPI to better understand the implications of rising food commodity prices.  Below we’ve outlined these contributions of food and beverage to CPI by country:

 

Contribution of food and beverage to CPI by %

 

China – 33%

India – 14%

United States – 16%

Indonesia – 36%

Brazil – 23%

Pakistan – 40%

Bangladesh – 59%

Nigeria – 50%

Russia – 38%

Japan – 26%

 

As can be seen, the differences between countries are quite dramatic.  Now, obviously, population is only relevant to a point and to the extent we want to consider an increase in inflation, and subsequent tightening of monetary policy, the size of the economy matters as well, especially as we consider the potential impact to slowing global growth.  As it relates to interest rates, most federal banking authorities look at CPI as key measure of inflation from which to set interest rate policy.  Assuming food input costs stay flat, or increase, CPI comparisons will continue to drive high inflationary numbers based on easy y-o-y compares.  As a leading indicator for which countries will implement tighter monetary policy over the coming quarters, those countries that have the highest percentage of commodities in their measure of CPI is a good place to start.

 

The other issue to consider is social unrest related to inflation, a tail risk that needs to be seriously considered.  Especially given the dramatic gains in food priced we are seeing, such at the 52% gain in corn last year and the 47% gain in grain prices. We are already starting to see some unrest globally and, in fact, have seen some riots in Algeria.  The picture below was taken in the Algerian capital as hundreds of youths protested and clashed with police.  According to reports from Algeria, “The cost of flour and salad oil has doubled in recent months, reaching record highs. A kilogram of sugar, which a few months ago cost 70 dinars, is now 150 dinars (£1.28).”  No doubt we will see more such scenes in the coming year.

 

 Apples To Inflated Apples: Comparing Global CPI Breakdowns - 1

 

While we wouldn’t expect inflation riots in the U.S. due to higher food prices, food inflation is becoming a more pertinent issue domestically with the growth in Americans using food stamps.  In the chart below, prepared by Rory Green from our Restaurant Team, the trend is quite clear.  An increasing amount of low income Americans are depending on a fixed amount of food stamps to subsist.   As food prices go up, these food stamps buy less food, which squeezes the low end consumer.  Currently, 43.2MM Americans are in the Federal Food Stamp Program.  For those Americans, I’m guessing food is more than 16% of their budget.

 

Daryl G. Jones

Managing Director

 

Apples To Inflated Apples: Comparing Global CPI Breakdowns - 2


Transitory Expectations

This note was originally published at 8am on January 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Man’s life is brief and transitory, literature endures forever.”

-Persian poet

 

I’m in the middle of reading Rory Stewart’s The Places In Between where he tells the risk management story of walking alone across Afghanistan. He ends one of his  chapters with that quote. It got my attention.

 

It should have. Every morning, day, and night, we market people walk alone with our P&L. We can’t drop our track record on someone else’s lap. We can’t pretend it’s not there either. No matter where we go, there it is…

 

That’s not life, but it’s certainly a big part of mine. Within that part, there certainly are a lot of places in between. All the while, I suppose I’m challenged with building bridges in a lot of those places between market prices and Transitory Expectations.

 

From a US-centric stock market investor’s perspective, expectations for this morning’s US Employment Report are extremely elevated. From a Global Macro investor’s perspective, from Indonesia getting tagged for a -2.8% loss overnight on inflation concerns to Gold testing 5-week lows, there’s a lot more going on.

 

That’s not to say that a Transitory Expectation for a US-centric economic data point doesn’t matter to Global Macro Risk Managers. It does this morning. Big time. But what exactly are those expectations and how can we proactively prepare to profit from them?

 

In an intraday note yesterday titled “Government Whispering”, this is how we framed it up:

  1. A Whisper of 580,000 US payroll adds has been going around all week
  2. Every market rally (from Wednesday’s pre-market futures lows) has been followed up with people reminding me of the whisper
  3. Government Whispering is turning into the casino that Big Government Intervention built into our markets – get used to it 

Where are we at on estimates versus expectations: 

  1. First, always remember that governments, to a degree, manipulates these numbers
  2. In our most bullish scenario, the payroll number could be at least 3x consensus (it started the wk at 125,000 which is a bit of a joke)
  3. The question now is can it be 2x that (or better than the whisper of 580,000)? 

In terms of what an improving (in the very short term) US jobs picture actually means for the interconnected macro markets: 

  1. BONDS: are definitely baking this in (collapsing UST’s have been since NOV and UST yields are bullish TRADE, TREND, and TAIL in our model)
  2. CURRENCY: definitely (maybe overly) baking this in (USD had a monster week, up +2.3% for the week-to-date ahead of the print)
  3. STOCKS: are trying their best to bake this in, but I think they’re going to look late – too late because they usually are

That’s the thing about Transitory Expectations in markets – by the time consensus realizes what they are, they’ve moved onto the next.

 

The key, in both Global Macro risk management and in life, may very well be to live in the moment. I’m not Buddhist, but I do respect the thought process behind the principle of playing the game that’s in front of you. After this morning’s US Employment Report is printed, that game is gone.

 

Post the 830AM EST report, I think US-centric investors will be forced to face the fiddle on the Expectations Mismatch between what they think the US Consumer is doing now versus what the US Consumer did in November to early December.

 

While everybody was pumping up Transitory Expectations of tax cuts and QG2 into their year-end Consumer Discretionary portfolios, evidently there was this little critter called reality toiling in the night.

 

At first, the Consumer Discretionary bulls said Best Buy’s (BBY) collapse was “secular” to their business. Then they said that McDonald’s (MCD) breaking down was due to some hedgies rotating into Best Buy because, I guess, Ackman was going to charge 2 and 20 to buy that one low. Now they’re saying that a broad based selloff in the Consumer Discretionary sector yesterday was due to the snow?

 

Here’s what some major US-centric Consumer Discretionary names (I mean names with market cap) did yesterday:

  1. Target (TGT) = -7.4%
  2. Gap (GPS) = -6.9%
  3. Macy’s (M) = -4.0%

I guess, with the Consumer Discretionary sector being the top US Sector performer in 2010 at +25.7%, bullish Transitory Expectations were a little off…

 

Back to the Global Macro risk management picture of Global Growth Slowing as Global Inflation Accelerates, most Asian and European stock markets have been sufficiently adjusting their bullish expectations to the downside all week. Last night, in addition to Indonesia trading down a ton, India was down -2.4%, Thailand lost -1.4%, and Taiwan was down -1.1%. After closing down -17.4% in 2010, Spain is already down -2.7% for 2011 to-date.

 

If the US stock market perma-bulls want to tell me that all of Asia and parts of Europe are slowing because US growth is strengthening, they can go do that. But they may very well have to adjust their Transitory Expectations after the last lagging bullish economic data point from Q4 is out of the way.

 

My immediate term support and resistance levels for the SP500 are now 1264 and 1280, respectively. Yesterday, I raised 3% cash, taking our allocation to US Cash back up to 52% in the Hedgeye Asset Allocation Model by selling our 3% position in Healthcare (XLV) on strength. We remain long the US Dollar via the UUP and short Gold (GLD).

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Transitory Expectations - ja


WHAT AN END TO THE FIRST WEEK OF 2011

Today, the BLS released its monthly jobs report showing that the U.S. economy added only 103,000 jobs this December, compared with the median forecast of 150,000 according to Bloomberg Estimates. 

 

November payrolls showed a revised 71,000 increase (previously 39,000) with October payrolls up a phony 210,000 in revision (previously 172,000).  The October revision would have been reported as a gain of 190,000, if the BLS consistently reported its monthly recasting of seasonal factors.

 

While the unemployment rate released today, 9.4%, came in well below expectations, the primary reason for this is that the labor force in America has plunged (decreased by 434,000) to a fresh 25 year low.  Where is the unemployed population going?  More importantly 260,000 Americans dropped out of the labor force entirely.  This means that the Obama economy is now driving Americans out of the labor force faster than it is bringing them in. 

 

This is akin to governments with net emigration (Ireland, for instance) publishing unemployment rate figures that do not accurately reflect the true extent of the decline in employment opportunities for their citizens.  The chart below indicates how unemployment rate would look if the labor force participation rate were maintained at the average from January 2000 through December 2010.  Clearly the declining participation rate is having a dramatic impact on the numbers.

 

WHAT AN END TO THE FIRST WEEK OF 2011 - lfpr

 

Cronyism is alive and well in Washington.  The remaking of the Obama administration and his investments is interesting to say the least.  How do the following three nuggets augur for the promise of “change”:

  1. Peter Orszag has gone to Citibank (Obama owned bank)  
  2. Obama named Gene Sperling as NEC Director (formally of Goldman Sachs, another institution that benefited from government handouts)
  3. Named Bill Daley as President Barack Obama’s Chief of Staff (JPM superstar and beneficiary of the government funds)

 

The dependence on close relationships between business people and government officials is a tight as ever, but our economy can’t generate any jobs and consumers are facing a severe squeeze on their wallets as inflation goes higher.   

 

Keith provides ample volume on the topic of inflation each day via The Early Look.  Today, however, we have heard Ben Bernanke on inflation and other matters as he testifies with the Senate Budget Committee in Washington.  On the subject of inflation, Bernanke once again downplayed concerns, stating plainly that, “inflation is 1% including food and fuel”.  When you decide what the weightings are to comprise a number, you can make that number whatever you want it to be.  Keith has had several thoughts on inflation during the testimony that he communicated over his @keithmccullough twitter account that I think are worth sharing:

  1. Here comes Bernanke justifying his #inflation view w/ a completely compromised and conflicted US govt calculation - rest of world be damned
  2. Do you think The Ber-nank knows what twitter is? its his Waterloo
  3. you won't hear The Ber-nank disclose that his #inflation calc has 41.96% weight on "owners’ equivalent rent"; this is embarrassing America
  4. I'm not being disrespectful about that Ber-nank pt either; no Global Macro risk manager worth his/her shirt would hire Bernanke to trade P&L
  5. Bernanke is either incompetent on global macro matters or lying
  6. there's no conspiracy theory in govt calculations, they are simply conflicted and designed to obfuscate
  7. and on growth - he uses the "blue chip" sell side estimates - nice

 

Rounding out the government’s TV campaign today was President Obama, commenting on the job growth trend being “clear” and to some extent he is correct given the gains in private sector jobs over the past twelve months.  However, the rate of growth is still indicating fragility in the economy and hesitancy on the part of corporations to accelerate hiring further.  Retail sales results for December and ABC consumer confidence have both lent credence to this hesitancy.  Whispers of 580k may abound, but those running P&L’s, not Bernanke or even Obama, will decide whether or not to accelerate hiring in the broader economy.

 

Howard Penney

Managing Director


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 80.64%
  • SHORT SIGNALS 78.61%
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