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Cupid's Bone

“And therefore is winged Cupid painted blind.”

-William Shakespeare

 

While the Greeks may disagree with Italians on this, Roman mythology tells the story of Cupid being the son of Venus, the goddess of love. In Latin, “cupido” means desire. And for America’s valentine this morning, this Hedgeye desires a strong US Dollar.

 

If you look at last week’s price action in Global Macro markets, strength in the US Dollar Index showered some love on some of the major global economic risks we’ve been pounding on for the last 3-6 months. While our call for Global Inflation Accelerating hasn’t adversely affected the US stock market, it’s hammered both bond and emerging markets since November.

 

Importantly, last week’s price action in the US Dollar Index was positive for the first time in the last 4 weeks. On a week-over-week basis the Burning Bone was up +0.54%, and while that’s not the type of long-term love you should get married to, in the immediate-term look what it did:

 

1.  CRB Commodities Index – deflated inflation by -0.3% week-over-week, and while that may not be by a lot, short-term love needs somewhere to start. This was the first week since the 1st week of January that the 19 component CRB Index didn’t close at a new intermediate-term high.

 

2.  Oil Prices – deflated big time with West Texas Intermediate crude oil losing -3.9% of its value on a week-over-week basis and breaking our intermediate-term TREND line of support at $86.98/barrel. While The Ber-nank’s driver probably didn’t talk this up on the way home Friday night, I can assure you this put some extra change in the hands of many American boys looking to buy roses after putting gas in their cars.

 

3.  2-year US Treasury Yields – inflated another +12% week-over-week to close out the week at 0.83%. This is good for the short-term rates of return on American savings accounts. Again, strong US Dollars find a funny way of empowering the gentleman in this country who is living on a fixed income to maybe buy an extra rose for his sweetheart today.   

 

Albeit with a very short leash, even I found the love in my heart to invest some of the Cash in the Hedgeye Asset Allocation Model as the US Dollar rose throughout the week. On Wednesday February 9th, I hit my lowest Cash position of 2011 at 49%. C’mon little bulls out there, pucker up – I should get at least a little peck on the cheek for that…

 

While it’s sometimes hard for a US-centric stock market investor to hear anything from me other than I’m not levered-long everything US Equities here, I think we’ve been crystal clear that there are many ways to be Bullish On Inflation in your Global Macro portfolios.

 

Whether it’s leaning long in the S&P Sector exposures (last week we we’re long 2 of the 9 US stock market sectors and didn’t have anything on the short side) or leaning short in emerging market equities and US Treasury bonds, there’s plenty out there for we men and women of the risk management gridiron to fall in love with. In the Hedgeye Portfolio 14 of the last 15 positions I’ve closed have been gains.

 

That’s not to say you should love me. I have a hard enough time convincing my wife that that’s a good idea when my alarm clock blares in her room every weekday at 4AM. It’s just to say that being a risk manager means not losing money and, for those of us who still remember the wealth destruction of 2008, that’s the risk management face that more than just our mothers can love.

 

The bad news about Cupid’s Bone is that it can start burning again. Before we get too lovy-dovy with everything that benefits from a strengthening US Dollar, remember that President Obama is on deck to release his Burning Budget this afternoon. While we’d love to hope that our Big Government Interventionists will cut spending this Valentine’s Day, we are reminded that hope is not an investment process.

 

With the US Dollar Index’s rise to close out the week at $78.46, this is where it’s trading relative to our 3 core risk management durations:

  1. TRADE (immediate-term) line resistance = $78.72
  2. TREND (intermediate-term) line resistance = $78.98
  3. TAIL (long-term) line resistance = $81.67

Yes, tragically, love’s reach has its resistance levels too. And while we really want to believe that professional politicians in America will put the long-term health of this country and currency ahead of their short-term job security, that’s just a benefit of the doubt they don’t deserve.

 

On Friday I did a lot of selling in the Hedgeye Asset Allocation Model and some of it was in Fixed Income where we fortuitously covered our shorts on the lows and capitalized on a nice bounce on the long side for a trade. Versus last Monday’s Cash allocation of 52%, this morning we’re back up to 61% and here’s the complexion of the mix:

  1. Cash = 61%
  2. International Currencies = 24% (long Chinese Yuan and Canadian Dollars – CYB and FXC)
  3. US Equities = 6% (long Healthcare – XLV)
  4. International Equities = 3% (long Sweden – EWD)
  5. Commodities = 3% (long Oil – OIL)
  6. Fixed Income = 3% (long Treasury Inflation Protection – TIP)

As a reminder, my view of asset allocation is what I would be doing with my entire net wealth, not what someone with an institutional mandate to be fully invested is doing. Stylistically, we understand the differences. If you look back at what Hedgeye was doing 2 years ago, we were investing our cash position as Wall Street was cutting theirs. Now we’re in harvest mode, picking our spots.

 

My immediate term support and resistance levels for the SP500 are now 1316 and 1332, respectively. If the US Dollar Index were to hold its bid and look more American rather than Cupid’s Bone, I’ll definitely get more constructive on a lot of things.

 

Happy Valentine’s Day to my Laura, Jack, and Callie and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Cupid's Bone - val1

 

Cupid's Bone - vall2


WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN

This week's notable callouts include US municipal swaps tightening significantly, while European Sovereign swaps widened once again.

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 3 of 10 improved / 6 out of 10 worsened / 2 of 10 unchanged
  • Intermediate-term (MoM): Positive / 4 of 10 improved / 2 of 10 worsened / 5 of 10 unchanged
  • Long-term (150 DMA): Positive / 4 of 10 improved / 3 of 10 worsened / 3 of 10 unchanged / 1 of 10 n/a

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - summary

 

1. US Financials CDS Monitor – Swaps were mostly tighter across domestic financials, tightening for 20 of the 28 reference entities and widening for 8. 

Tightened the most vs last week: MTG, XL, MBI

Widened the most vs last week: AXP, MET, ALL

Tightened the most vs last month: JPM, BAC, WFC

Widened the most vs last month: MTG, PMI, RDN

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mixed, widening for 20 of the 39 reference entities and tightening for 19.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - euro cds

 

3. Sovereign CDS – Sovereign CDS rose across Europe, climbing 25 bps on average last week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell early in the week before backing up on Friday to close at 7.84, 1 bps lower than the previous week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index continued to ascend, closing at 1619, 3 points higher than the previous week.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - lev loan

 

6. TED Spread Monitor – The TED spread backed up last week, ending the week at 17.8 versus 15.9 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index fell 1.5 points, closing at 34.7 on Friday.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 57 bps in a steady trend, erasing the prior week’s improvement.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads fell last week, closing at 169 on Friday, the lowest level since last November.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - markit

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  With Australian floods and oversupply pressuring the Index, it has fallen 30% so far this year and is down 60% from its most recent peak. Last week the Index had its first up week in months, rising 135 to 1178. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - bdi

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened 10 bps to 279 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: 0.2% upside to TRADE resistance, -1.6% downside to TRADE support. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNI SWAPS TIGHTEN WHILE SOVEREIGN SWAPS WIDEN - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: LEVEN/JACOBS EMAIL; SANDS MACAO JAPANESE GAME ROOM; CHINESE PROPERTY PRICES

The Macau Metro Monitor, February 14, 2011

 

LEVEN AWARE OF TALKS BETWEEN JACOBS AND CAESARS: E-MAIL  WSJ
LVS COO, Michael Leven was aware that former Sands CEO, Steve Jacobs, was negotiating a partnership with Harrah’s Entertainment (now Caesars Entertainment) in Macau, according to an e-mail allegedly exchanged by the two men.  Leven said to Jacobs in the email, "If you want to get it, let Gary Loveman [Caesars’ CEO] to suggest it in [a] one-on-one mtg [meeting] with SGA [Sheldon G. Adelson]. ... That's how billionaires think, we are just executors. They are strategic genii in their own minds."


The e-mail was included in a recent court filing by Mr Jacobs in a case against Las Vegas Sands in which he alleges he was wrongfully fired.

 

SANDS MACAO OPENS FAMILY ATTRACTION macaubusiness.com 
Sands Macao opened a family-centered, Japanese style game center called "Adores Macau" last week.  The 330 square meter venue contains around 30 Japanese games machines.


CHINESE PROPERTY PRICES UP AS DEVELOPERS LOOK TO SMALLER CITIES FOR GROWTH PropertyWire

Residential property prices in China increased 0.95% in January from a month earlier, according to private data provider China Real Estate Index System which is believed to reflect real estate trends better than official government figures since it tracks only residential property, while the government data includes non-residential prices.  CREIS said home prices stood at an average 8,645 yuan ($1,677) per square meter in the 100 cities it covers in its survey.  


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%

CHART OF THE DAY: Cupid's Burning Bone Getting Some Love?

 

 

CHART OF THE DAY: Cupid's Burning Bone Getting Some Love? -  chart


Fooling The People

This note was originally published at 8am on February 09, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If you once forfeit the confidence of your fellow citizens, you can never regain their respect and esteem.”

-Abraham Lincoln

 

In the same quote Lincoln went on to point out that while “it is true that you may fool all of the people some of the time… and “you can even fool some of the people all of the time”… “but you can’t fool all of the people all of the time.”

 

So how is The Ber-nank doing in Fooling The People of the United States of America that the inflation of the US stock market is good?

  1. Confidence – in the week that The Inflation he is playing for in US stocks was booming (SP500 +2.7% last week), the weekly ABC US Consumer Confidence reading got hammered down to -46 versus -41 in the week prior (those are minuses).
  2. Trust – in the latest boldprogressives.org poll, when asked “who do you think the Federal Reserve Chairman Ben Bernanke cares about more, Wall Street or Main Street?”, only 20% replied Main Street (even Geithner had a higher trust reading than Bernanke on that score).
  3. Invested Position – “91% of all equity holdings in the United States held by the top 20% income group in the country. The top 1% own 38% of all the equity valuation.” (from David Rosenberg and Zero Hedge yesterday).

Now if The People of America were as stupid about what’s in their wallets as the Fed must think they are, they’d be plowing through their snow covered driveways and barging through the doors at The Lehman Brother to open a brokerage account. Oh, wait – The Lehman Brother is gone – maybe that’s why Americans aren’t investing their confidence and trust in The Ber-nank’s inflation. Maybe it’s the snow and closed for business thing?

 

Whatever your opinion of the Incumbent 23rd Chairman of the Federal Reserve, odds are that if you are in the business of being long the inflation (stocks), after a +93.8% rally from the March 2009 low, you’ve got to be happy. I am.

 

But, to be crystal clear on this, you and I are not America  - and neither is a humble looking central planner who thinks he knows exactly how this is all going to play out. Some Americans were fooled by that when the perma-bulls were cheering Bernanke on to provide the “shock and awe” of interest rate cuts in late 2007 and early 2008. But you can’t fool all of America again on this Mr. Bernanke – not this time.

 

Sadly, at the end of the day this is all about storytelling and the worst part about the marketing message behind the Austrian versus Keynesian economic views right now is probably that Ron Paul is the one delivering the commercials. He’s much better in print than he is on TV. What Americans really need is Robert Rubin to massage this concept of how debauching the US Dollar perpetuates American unemployment.

 

Unfortunately, Robert Rubin isn’t for hire anymore. Last I heard he is living large and licking his Doritos fingers, forgetting that he didn’t foresee another sovereign debt default cycle pending.

 

Back to Fooling The People

 

In a recent survey from Selzer and Co., 7 out of 10 respondents said “the US is deliberately keeping the dollar low against other currencies, while only 1 in 4 think it’s letting the market decide the value of the greenback.”

 

I get it. The world’s largest bond fund manager gets it (see Bill Gross’ latest monthly letter). The American People get it. The Chinese get it. And now, even 2 of The Ber-nank’s Federal Reserve Presidents came out yesterday to remind the land of the living that they get it!

 

Yesterday, Federal Reserve Bank of Richmond President Jeffrey Lacker and Federal Reserve Bank of Dallas President Richard Fisher came out explicitly acknowledging both The Inflation trends in the global economic system and the need for the independent Federal Reserve to address it.

 

“I will be at the forefront of the effort to trim back our Treasury holdings and tighten monetary policy at the earliest sign of inflationary pressures are moving beyond the commodity markets and into the general price stream.”

 

Well done, Mr. Fisher.

 

What’s most important about these dissenting Fed Head comments is the timing. Today, The Ber-nank is going to testify in front of the Congress that what is scaring the living daylights out of the US bond market (inflation) is wrong and that he, our Almighty Central Planner, is right.

 

This isn’t a centrally planned Russia folks. This is America  - and the next person who tells you our red, white, and blue free-market is what it used to be needs to go back and re-read the Constitution. As Steve Hanke states most succinctly, “the Constitution was designed to govern the government, not the people.”

 

Before you listen to Bernanke’s politicized view this morning, let me leave you with three Austrian economic thoughts (paraphrasing von Mises), because Ron Paul is going to have two thought leaders from this school lay down the opposite side of the Keynesian case today at the sub-committee meeting on Domestic Monetary Policy (that Bernanke won’t attend) in Washington, DC:

  1. Controlling Prices - “The metaphorical expression “price level” must never be used… with prices there is no such thing as a “level”… prices do not change at to the same extent at the same time” … as a central planner promises.
  2. Inflation’s Social Stratification - “When inflation starts, different groups within the population are affected by this inflation in different ways. Those groups who get the money first gain a temporary benefit.”
  3. Devaluation of a Currency - “If one devalues the currency and the workers are not clever enough to realize it, they will not offer resistance against a drop in real wages, as long as nominal wage rates remain the same.”

Sorry, Mr. Bernanke. Apparently America’s Main Street workers are clever enough. America’s small business owners aren’t hiring because they get this too. Best of luck out there in the Twitter-sphere and YouTube channels of modern day transparency in continuing to fool some of the people from here on in – the 60 Minutes gig isn’t working.

 

My immediate-term support and resistance lines for the SP500 are now 1303 and 1332, respectively. God Bless America.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fooling The People - d1

 

Fooling The People - d2


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - February 14, 2011


Equity futures are trading slightly below fair value ahead of this week's key data releases which are likely to set the tone for further short-term risk appetite.  As we look at today’s set up for the S&P 500, the range is 16 points or -0.99% downside to 1316 and +0.21% upside to 1332.

 

 MACRO DATA POINTS:

  • 8:30 a.m.: NOPA monthly oil, soybean capacity, Jan.
  • 10 a.m.: New York Fed briefing on regional economy. President William Dudley speaks
  • 11 a.m.: Weekly export inspections (corn, soybeans, wheat)
  • 11:30 a.m.: U.S. to sell $32b 3-mo. bills, $30b 6-mo. bills

EARNINGS/WHAT TO WATCH:

  • Biogen Idex (BIIB): May buy back 20m shrs
  • Devon Energy (DVN): May rise to $100-shr: Barron’s
  • KLA-Tencor (KLAC): Plans to buy back 10m shrs
  • Intercontinental Hotels (IHG): may rise on economic recovery: Barron’s; may boost div. ~10%: Sunday Times
  • International Paper (IP): May raise div., buy back shares: Barron’s
  • Silicon Graphics International (SGI): May be profitable for the full year: Barron’s
  • Tootsie Roll Industries (TR): 4Q EPS in line with est., sales beat (1 est.)
  • Transocean (RIG): Richard George is resigning from board, and Chairman Robert E. Rose and director Victor E. Grijalva won’t stand for re-election; seeking board approval for a $1b div.

PERFORMANCE:


Strength was seen from Financials and Discretionary; weakness in Energy and Tech. We have day 5 of perfect = 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.36%, S&P +0.55%, Nasdaq +0.68%, Russell +1.16%
  • Month-to-date: Dow +3.21%, S&P +3.35%, Nasdaq +4.05%, Russell +5.23%
  • Quarter/Year-to-date: Dow +6.01%, S&P +5.69%, Nasdaq +5.9%, Russell +4.91%
  • Sector Performance: - Financials +1.37%, Consumer Discretionary +1.02%, Industrials +0.75%, Consumer Staples +0.54%, Materials +0.56%, Tech +0.53%, Healthcare +0.22%, Energy (0.01%), and Utilities (0.19%)

  EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1453 (+1360)  
  • VOLUME: NYSE 972.00 (-5.34%)
  • VIX:  15.69 -2.49% YTD PERFORMANCE: -11.61%
  • SPX PUT/CALL RATIO: 1.84 from 1.66 (+11.17%)

CREDIT/ECONOMIC MARKET LOOK:


Treasuries were stronger on the session, but not without a pullback following the Egypt news flow. The 10yr yield fell to 3.61% in early trading, before pulling back to 3.64%.  

  • TED SPREAD: 20.04 -0.101 (-0.503%)
  • 3-MONTH T-BILL YIELD: 0.12%
  • 10-Year: 3.64 from 3.70
  • YIELD CURVE: 2.79 from 2.85

COMMODITY/GROWTH EXPECTATION:

  • CRB: 337.78 -0.64%; YTD: +1.50%  
  • Oil: 85.58 -1.33%; YTD: -7.15% (trading +0.06% in the AM)
  • COPPER: 453.60 -0.17%; YTD: +3.41% (trading +1.49% in the AM)  
  • GOLD: 1,357.30 -0.35%; YTD: -4.26% ( trading +0.09% in the AM)  

COMMODITY HEADLINES:

  • Oil fell to a 10-week low in New York after Egyptian President Hosni Mubarak stepped down and handed power to the military, reducing concern that crude shipments from the Middle East will be disrupted.
  • Gold erased some of early gains in directionless trade on Friday, under pressure from a
    drop in ETF holdings to their lowest since late January, a firm U.S. dollar and a lacklustre physical market. 
  • The tightest physical silver supplies in four years have tipped the U.S. silver futures market into backwardation this week, making near-term prices more expensive than more distant months. 
  • Corn traded near a 30-month high in Chicago, heading for a second weekly advance, on increased demand amid tight supply. Wheat and soybeans climbed.

CURRENCIES:

  • EURO: 1.36554 -0.53% (trading -0.63% in the AM)
  • DOLLAR: 78.46 +0.27% (trading +0.29% in the AM) 

EUROPEAN MARKETS:

  • FTSE 100: (-0.20%); DAX: +0.23%; CAC 40: (-0.18%) (as of 07:00 AM EST)
  • European markets mostly trade higher following firmer markets across Asia, with European M&A activity and generally constructive corporate results also helping sentiment.
  • Credit Suisse rallied after raising capital from Middle Eastern investors.
  • The pound and the euro are trading at $1.6017 and $1.3460 respectively
  • euro was pressured by reports that WestLB failed to agree on a restructuring over the weekend and BaFin becoming increasingly involved in how the bank will be rescued

 ASIAN MARKTES:

  • Nikkei +1.13%; Hang Seng +1.28%; Shanghai Composite +2.54%
  •  Asian markets rose this morning on optimism that an Egyptian crisis has been largely averted, getting a boost when Japan’s GDP shrinkage was less than expected.
  • Japan rose on the economic data and a weaker yen.
  • South Korea +1.89, Samsung Engineering rallied on announcing a $600M contract with Saudi Arabian Oil Co.
  • Widespread gains by banks and miners powered Australia higher +1.12. BHP Billiton gained 2% after China January copper imports beat expectations.
  • Taiwan up 0.88% - Asustek jumped 7% on results.
  • Japan Oct-Dec GDP real GDP (1.1%) y/y. China January trade surplus $6.45B vs consensus $10.7B.

Howard Penney

Managing Director

 

THE HEDGEYE DAILY OUTLOOK - 2 14 2011 7 29 10 AM


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