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Wait & Watch: SP500 Levels, Refreshed

POSITION: Short SPY

 

While it’s very tempting to short more SPY here, it’s even more tempting to Wait & Watch for a higher price. I have immediate-term TRADE upside in the SP500 to 1323 (see chart) and there’s no reason why it can’t get there. Volume is anemic.

 

One of the most tempting signals to short SPY is the VIX holding its intermediate-term TREND line of support this morning. That line = 17.89. That said, a breakdown through that line could easily put the high 16s in play for the VIX and there are plenty bulls left in this marketplace who would love to see those prints into month and quarter end.

 

Month and quarter end is on Thursday and from a US Macro Catalyst Calendar perspective, here what’s on tap in the immediate-term (this week): 

  1. Monday – US Personal Income and Consumption (FEB)
  2. Tuesday – Conference Board Consumer Confidence (MAR) and Case-Shiller Home Prices (JAN)
  3. Wednesday – MBA Mortgage Applications (weekly) and II Bullish/Bearish Sentiment (weekly)
  4. Thursday – Month and Quarter End (MAR) and Producer Manufacturing Index (FEB)
  5. Friday – ISM Survey (FEB) and the Monthly US Employment Report (MAR) 

While the sucker trade might be waiting for Thursday to start selling aggressively again, sometimes the most obvious play is the one to make. For now, I’m giving the bulls the better benefit of the doubt, expanding the net exposure of the Hedgeye Portfolio again today (17 LONGS, 13 SHORTS). On the short side, I want to  Wait & Watch.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Wait & Watch: SP500 Levels, Refreshed - 1


A REGIONAL RESURGENCE?

Bad weather in January and 1H of Feb may have masked strengthening regional demand. We think March will show a nice uptick that could reverse recent negative investor sentiment.

 

 

We’ve been no big cheerleader for regional gaming companies lately.  Revenue growth has been nonexistent, weather has been bad, and catalysts have remained elusive.  Investor sentiment now seems to be on the same page.  Well, we are turning the page.  The Street is comprised of slow readers.

 

January and February were not great months on an absolute basis for the regional gaming markets.  However, weather was an issue and probably masked some underlying strengthening of demand.  As can be seen in the following chart, actual gaming revenues in February was weak, contributing to lower stock performance.  February, however, was better, despite the weather although investors just looking at YoY change would’ve missed it.

 

Through our contacts, we are hearing March has been strong month to date.  We think March will generate YoY growth, better than February’s 3% decline and better than the sequential, seasonally adjusted prediction of down 1%.  A strong March should contribute to earnings upside for a couple of names in our universe.

 

A REGIONAL RESURGENCE? - regional

 

We favor pure play regional operators ASCA and PNK.  Both look like they will beat Q1 earnings estimates and carry large free cash flow yields.  ASCA, in particular, has a history of generating outsized investment returns when its FCF yield rises over 20% and the company begins to beat earnings expectations.  We believe we are in that scenario currently.

 

This resurgence may be no more than a trade.  Certainly, we still harbor macro concerns about whether this recovery is sustainable.  The American consumer faces significant hurdles.  Gaming has proven to be one of the most cyclical of the consumer sectors so any downturn should hit the casinos disproportionately as it did in 2009.  However, successful trades in gaming can pay investors annual and two year returns in a matter of months. 


TALES OF THE TAPE: MCD, YUM, DRI, KKD, WEN, DRI

Notable news items from the last few days and Friday’s price action.

  • MCD can serve customers faster because of new methods of preparing food.  A machine that dispenses frozen fries into a wire-mesh basket for a deep fry in hot oil has reduced the time taken to about four seconds.  Previously, a basket of fries was loaded manually and took two-to-three minutes.  MCD announced Friday that the wages of its 6,000 rank-and-file workers will increase by an average of 20%, thanks largely to new machines and work systems that have enhanced productivity.
  • YUM has opened its first KFC outlet in Zambia.
  • U.S. food costs will rise 3-4% this year, unchanged from February’s estimate, according to the Department of Agriculture.  The increase would be the fastest since 2008.
  • Robusta coffee may rise 23% to its highest in at least three years because supply from Vietnam, the biggest producer of the coffee bean, will decline as demand from roasters is acclerating, according to F.O. Licht.
  • DRI highlighted gasoline prices as a significant headwind on its earnings call on Friday. 
  • KKD gained 4.9% on accelerating volume.
  • WEN declined 1.2% on accelerating volume.  I retain my positive outlook on WEN.
  • WEN was upgraded today from “Neutral” to “Buy” at Roth Capital.  The firm’s price target, per Bloomberg, is now $8.
  • DRI decined 5% on accelerating volume.  Poor performance from Olive Garden is a concern; traffic could be sacrificed for margin as commodity inflation weighs on Red Lobster.

 

TALES OF THE TAPE: MCD, YUM, DRI, KKD, WEN, DRI - stocks 328

 

Howard Penney

Managing Director


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WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE

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 / 5 of 11 improved / 2 out of 11 worsened / 4 of 11 unchanged
  • Intermediate-term (MoM): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged
  • Long-term (150 DMA): Positive / 5 of 11 improved / 4 of 11 worsened / 2 of 11 unchanged

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - summary


1. US Financials CDS Monitor – Swaps were mixed across domestic financials, widening for 13 of the 28 reference entities and tightening for 15. 

Tightened the most vs last week: BAC, C, MET

Widened the most vs last week: CB, MBI, GNW

Tightened the most vs last month: C, WFC, UNM

Widened the most vs last month: ACE, XL, MBI

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mixed, tightening for 17 of the 39 reference entities and widening for 22.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - euro cds

 

3. European Sovereign CDS – Sovereign CDS widened across Europe, particularly in Portugal, rising 21 bps on average last week. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates rose slightly last week, ending at 7.88, 7 bps higher than the previous week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose last week to end the week at 1605.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - lev loan

 

6. TED Spread Monitor – The TED spread fell from its highs last week, ending the week at 22.0 versus 23.7 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index rose to end the week at 35.1, 7.6 points higher than the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 29 bps.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - greek bond

 

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.  As of Thursday, the most recent data available, spreads hit a new low of 121.8. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - mcdx

 

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.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30%. Since then it has bounced off the lows.  Last week it rose slightly, climbing 54 points to 1585. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - baltic dryu

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread widened slightly to 270 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  0.9% upside to TRADE resistance, 0.8% downside to TREND support.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MUNICIPAL SWAPS HIT NEW LOW AS EUROPEAN RISK METRICS RISE - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - March 28 2011


As we look at today’s set up for the S&P 500, the range is 40 points or -2.34% downside to 1283 and 0.70% upside to 1323.

 

PERFORMANCE:

               

As of the close yesterday we have 6 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.  The three sectors that remain Broken on TRADE are Financials, Technology and Utilities.   

  • One day: Dow +0.41%, S&P +0.32%, Nasdaq +0.24%, Russell +0.83%
  • Month-to-date: Dow (0.05%), S&P (1.01%), Nasdaq (1.41%), Russell +0.05%
  • Quarter/Year-to-date: Dow +5.55%, S&P +4.47%, Nasdaq +3.40%, Russell +5.13%
  • Sector Performance: Energy +0.90%, Materials +0.54%, Industrials +0.35%, Healthcare +0.28%, Consumer Discretionary +0.18%, Financials +0.28%, Tech +0.24%, Consumer Staples +0.00% and Utilities -0.03%

THE HEDGEYE DAILY OUTLOOK - daily

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 939 (+2)  
  • VOLUME: NYSE 824.83 (-5.26%)
  • VIX:  17.91 -0.50% YTD PERFORMANCE: +0.90%
  • SPX PUT/CALL RATIO: 1.99 from 2.33 (-10.59%)

CREDIT/ECONOMIC MARKET LOOK:


Treasuries were weaker for a seventh day despite significant MACRO headwinds.

  • TED SPREAD: 22.89 +0.153 (0.672%)
  • 3-MONTH T-BILL YIELD: 0.09%
  • 10-Year: 3.46 from 3.42
  • YIELD CURVE: 2.67 from 2.70

MACRO DATA POINTS:

  • 8:30 a.m.: Personal spending, est. 0.5%, prior 0.2%
  • 8:30 a.m.: Personal income, est. 0.4%, prior 1.0%
  • 10 a.m.: Pending home sales, est. M/m 0.0%, prior (-2.8%)
  • 10:30 a.m.: Dallas Fed Manufacturing, est. 17.6, prior 17.5
  • 11 a.m.: Export inspections (corn, wheat, soybeans)
  • 11:30 a.m.: U.S. to sell $32b in 3-mo. bills, $30b in 6-mo. bills
  • 12:40 p.m.: Fed’s Lockhart to speak on U.S. economy in Atlanta
  • 1 p.m.: U.S. to sell $35b in 2-year notes
  • 3:40 p.m./4 p.m.: Fed’s Evans speaks in South Carolina
  • 6 p.m.: Fed’s Rosengren speaks in Boston

WHAT TO WATCH:

  • Libyan rebel forces advance westward with support from NATO air strikes targeting Sirte, Muammar Qaddafi’s hometown hours after the Western alliance agrees to take command of military operations from the U.S.
  • The highest radiation levels so far at the crippled nuclear Japanese power plant may have come from a meltdown of nuclear fuel 
  • Portuguese President Anibal Cavaco Silva may call early elections for June 

COMMODITY/GROWTH EXPECTATION:

  • CRB: 359.57 +0.30% YTD: +8.04%  
  • Oil: 105.40 -0.19%; YTD: +12.20% (trading +0.48% in the AM)
  • COPPER: 441.90 -0.12%; YTD: -2.15% (trading -1.66% in the AM)  
  • GOLD: 1,428.75 -0.34%; YTD: -0.18% (trading -0.90% in the AM)  

COMMODITY HEADLINES FROM BLOOMBERG:

  • Rice Planting in Fukushima May Be Abandoned Amid Soil Tainted by Radiation
  • Cotton Rally Peaking as Record Crop Means First Stockpile Gain Since 2007
  • Commodities Retreat for Second Day on Japanese Radiation, Merkel's Setback
  • Oil Drops for a Third Day in New York Following Victories By Libyan Rebels
  • Aluminum Stockpiles Climb on Two Locations as Demand Rising: Chart of Day
  • Copper Falls Most in Two Weeks as Japanese Carmakers May Suspend Activity
  • Wheat, Corn Gain as Japan May Boost Imports Amid Radioactive Contamination
  • Gold Declines on Rally to Record Price, Signs of Improving Economy in U.S.
  • Cocoa May Gain as Ivory Coast Unrest Heightens Shortage Risk; Coffee Falls
  • Qaddafi Has $7 Billion of Bullion to Fund War Against Rebels: Chart of Day
  • Mugabe Vows to Force Foreign Mining Companies  to Sell Stakes in Zimbabwe
  • Posco Extends Gains After Saying It May Raise Steel Prices as Costs Climb
  • Hedge Funds Boost Bullish Bets on Gas Most in Three Months: Energy Markets
  • Corn, Soybeans May Climb This Week on Stockpile Speculation, Survey Showss

CURRENCIES:

  • EURO: 1.4088 -0.70% (trading -0.27% in the AM)
  • DOLLAR: 76.217 0.74% (trading +0.18% in the AM) 

EUROPEAN MARKETS:


According to the Hedgeye models both the FTSE and the DAX remain bearish from an intermediate-term TREND perspective; this is new.  No major MACRO events today.

  • United Kingdom: +0.10%
  • Germany: -0.16%
  • France: +0.12%
  • Spain: +0.18%
  • Greece -0.36%
  • Italy: +0.10%

ASIAN MARKTES:


Japan down overnight and has at least another -8.5% downside from here; China remains bullish, up for the 6th of last 7 days.  We are currently long CAF.      

  • Japan: -0.60%
  • Hang Seng: -0.39%
  • Australia -0.19%
  • China: +0.21%
  • India: +0.68%
  • Taiwan: -0.67%
  • South Korea +0.11%

 

 

Howard Penney

Managing Director

 

THE HEDGEYE DAILY OUTLOOK - setup



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