TODAY’S S&P 500 SET-UP - April 13, 2011
China continues to trade higher, up another +0.96% last night to +8.6% YTD (almost 2x the YTD SP500 return, unadjusted for Burning Bucks) leading what continues to be an improving Asian equity picture (ex-Japan). As global growth slows, unlevered Chinese growth becomes more valuable.
After being bearish/short China in 2010, we’re long now and will focus 1/3 of our Q2 Macro Theme presentation (Friday) on the why. As we look at today’s set up for the S&P 500, the range is 18 points or -0.32% downside to 1310 and 1.05% upside to 1328.
SECTOR AND GLOBAL PERFORMANCE
Two more sectors broke trade yesterday; Energy and Technology. We now have 6 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS:
WHAT TO WATCH:
COMMODITY HEADLINES FROM BLOOMBERG:
ASIA PACIFIC MARKTES:
“One need not be a prophet to be aware of impending dangers.”
With the US stock market down for its 4th consecutive day yesterday I moved to our most invested position of 2011. The Hedgeye Asset Allocation Model now has a 37% position in Cash and the following allocations:
This certainly doesn’t imply that I am a raging bull. Neither does it suggest that I am a raging bear. I really don’t think there’s a lot of value in being raging anything when you are tasked with being a Risk Manager.
In the past week I’ve moved from a zero percent asset allocation to US Equities to 9%. With virtually every sell-side strategist cutting their US GDP Growth estimates, and the US stock market’s price now down for the month-to-date, expectations for Growth Slowing As Inflation Accelerates are starting to get priced in.
JP Morgan’s earnings can be as good today as Alcoa’s were bad yesterday – then Bank of America can have no earnings on Friday. Managing risk in an environment where everyone isn’t a winner on earnings day anymore is going to present tremendous opportunities for the proactively prepared.
One of the hallmarks of effective risk management isn’t just having it in you to short and/or sell things when they are up – it’s having a repeatable risk management process to cover and/or buy them when they are down. Some people in this industry will tell you they can’t do that because that’s called “market timing.” And if you saw what some of these people do when under pressure, you should definitely take their word for it on that.
I’ve made two “Short Covering Opportunity” calls in 2011. The first was on March 16th and I made the second one intraday yesterday (send an email to if you’d like our intraday Risk Manager notes). That’s not me pumping my own tires – that’s just me telling you what I did.
Short Covering Opportunities in these interconnected times aren’t raging bull calls to action. In this case I see every opportunity for the SP500 to bounce to another lower-long-term-high and lower-immediate-term high up at 1328. Then you start making sales again. If it’s not in your investment mandate to manage risk on a short to intermediate-term basis like this, that’s cool. I don’t have that mandate.
If the US stock market sees a breakdown below 1310 and Volatility (VIX) breaks out above $18.03 (intermediate-term TREND line resistance) again, this call to cover shorts and get more invested will likely be a bad one.
Why would it be a bad one? Because I made a short-term risk management decision to get longer yesterday in the face of mounting long-term risks. This is what we call Duration Mismatch – and every Risk Manager is hostage to its uncertainties.
Notwithstanding that the world’s reserve currency (US Dollar) has gone no bid and appears to be on a crash course to nowhere, here are some of the other major market risks that I called out on Thursday April 7th (before this 4-day correction in US Equities, Commodities, etc.):
The good and bad news is that all of these factors change in real-time. While it probably felt pretty cool to be levered-long oil and everything that is The Inflation trade last week, it didn’t feel so good yesterday – or the day before that. From their YTD highs last week, the price of oil (WTI) and energy stocks (XLE) are down -5.8% and -5.7%, respectively, in pretty much a straight line. Yes, chasing The Bernank’s Beta can leave a mark.
So… after prices fall:
And we’ll all go on in life dealing with the today.
Not surprisingly, today’s Bullish-to-Bearish weekly survey saw the spread between Bulls and Bears narrow by 2 points to +38 for the Bulls (down from last week’s +41). And the prophecy of this Risk Manager is that this spread will narrow again next week. At only 16.3% of institutional investors admitting they are Bearish, that number only has one way to go when stocks and commodities come down like they just did – and that’s up.
My immediate-term support and resistance levels for oil are now $105.23 and $109.02, respectively. My immediate-term support and resistance levels for the SP500 are 1310 and 1328, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
Cheese prices bounced once again after a sustained period of trading down. The level of inflation in cheese has declined greatly but its rebound over the past week was the most substantial of all the commodities we monitor. All in all, looking at the table below shows more red than blue in the week-over-week column. Coffee continues to press higher, now up 94% year-over-year as it gained 2.2% over the past week. I continue to hold a cautious view of chicken producers (SAFM, TSN and PPC) despite corn’s week-over-week decline. The commodity surged 14% last week and, I believe, is likely to remain at these elevated levels for some time. This will likely lend support to protein (feed costs) and wheat (substitution effect) prices.
Cheese gained 3.2% on the week. As the chart below shows, cheese prices have come down considerably over the past month. Below, I gain provide some commentary from management teams from their most recent earnings calls with their views on cheese prices and the implications for their businesses.
"Yeah, so the forward curve and kind of looking at about three different sources right now have cheese actually easing a little bit through the rest of the year. We're at almost $2 right now. And so, our expectation is that we're going to see a little bit of easing, to give you on cheese. We've talked about this in the past, we've got a contract in place that basically reduces the volatility on cheese moves by about a third. So about two thirds of increases or decreases in cheese are passed through to our system.
I think the kind of consensus forecast out there right now for cheese are in the $1.70 to $1.75 range. And – you know so what you're looking at is kind of a $0.25 to $0.30 move and I think we've said in the past a $0.40 move in cheese is equal to a point at the store level P&L."
“We expect the favorable impact of early year sales results to substantially mitigate the unfavorable impact of currently projected commodity cost increases, most notably cheese, throughout the remainder of the year.”
DPZ is 95% franchised and, as such, management claims a degree of insulation from commodity costs. Of course, to the extent that price needs to be taken and royalties slow, the company is not immune from inflation. The downward move of cheese over the past month will raise hopes that a price increase can be avoided.
It’s also worth noting the strong week-over-week move in gas prices. Demand destruction is coming to the restaurant space this quarter. Clarence Otis, Darden CEO, said as much on DRI’s most recent conference call. Companies like CBRL (see post from yesterday), are particularly vulnerable.
Wheat prices declined sharply last week as other grains, such as corn and rice, also saw downward price action. Media reports today suggest that wheat futures tumbled today as a result of speculation that demand will decline for U.S. commodities as the nuclear crisis seems to escalate in Japan. Some commentators see this decline as incongruous with the underlying dynamics of the wheat market, given the poor crop conditions currently in the U.S., but if a fall-off in demand were to occur, it could provide relief for PNRA. The company expects wheat costs for 2011 to be roughly flat versus 2010, as the company currently has nearly 75% of its wheat costs locked in for 2011, modestly below the 2010 price.
PENN should be the first of three strong regional gaming earnings releases followed by ASCA and PNK.
We’ve been positive on the regional gamers for the past month or so and we’re confident that PENN’s Q1 earnings release next week will prove us right, at least on the fundamentals. March was a good month for regional gaming as evidenced by the state released gaming revenues, all of which, thus far, have proven to be sequential upticks from Q4 and January and February.
Our Q1 EBITDA and EPS estimates for PENN of $172 million and $0.42 slightly exceed both company guidance and the Street consensus. Certainly, there are headwinds including high gas prices and unemployment. However, we expect management will be reasonably constructive about near term trends. Management rarely exudes bullishness and we don’t expect that they will get expectations too high now either. Their tone should be nonetheless, positive on the margin.
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