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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - May 4, 2011


The mechanism driving most Correlation Risk across asset classes in the market remains the USD. So watching where the USD might stop crashing is a critical risk management exercise in play yesterday (USD flat on day = XLE (Energy stocks) down -2.5%; Brazil down -1.8%, etc…).

 

The Hedgeye immediate-term TRADE line of resistance in the USD developing at $73.52 – watching that very closely as resistance becoming support could easily trigger a much larger move in the hedge fund community’s largest net long position since 2007 - long the Inflation trade.  As we look at today’s set up for the S&P 500, the range is 24 points or -0.56% downside to 1349 and 1.21% upside to 1373.

 

SECTOR AND GLOBAL PERFORMANCE


Yesterday, Energy broke the TRADE duration leaving 7/9 sectors broken on TRADE and 8/9 broken on TREND.

 

THE HEDGEYE DAILY OUTLOOK - levels 54

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING GLOBAL

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -911 (-400)  
  • VOLUME: NYSE 1003.11 (+7.26%)
  • VIX:  16.70 +4.44% YTD PERFORMANCE: -5.92%
  • SPX PUT/CALL RATIO: 1.84 from 1.38 (+33.87%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 25.00 -0.200 (-0.794%)
  • 3-MONTH T-BILL YIELD: 0.03% -0.02%
  • 10-Year: 3.28 from 3.31
  • YIELD CURVE: 2.67 from 2.70 

 

MACRO DATA POINTS:

  • Quarterly Treasury debt sales announcement
  • 7 a.m.: MBA Mortgage Applications, prior (-5.6%)
  • 7:30 a.m.: Challenger job cuts, prior (-38.6%)
  • 8:15 a.m.: ADP employment, est. 198k, prior 201k
  • 10 a.m.: ISM non-manufacturing, est. 57.5, prior 57.3
  • 10:30 a.m.: DoE inventories
  • 3:30 p.m.: SF Fed President John Williams makes first policy speech
  • 4 p.m.: Fed’s Fisher speaks in New Mexico
  • 4:15 p.m.: Geithner speech on economy in Washington
  • 7 p.m.: Fed’s Lockhart speaks in Atlanta

WHAT TO WATCH:

  • Treasury Secretary Tim Geithner speaks in Washington on the economy.
  • Conagra makes a $86/share cash bid for Ralcorp for a takeover that would acquire $2.5b of debt.
  • Applied Materials agrees to buy Varian Semi for 55% premium at $63/share.
  • Richard Branson says no deadline for decision on whether to sell airline.

COMMODITY/GROWTH EXPECTATION


THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Silver Slumps on Higher Margins; Gold Drops on Report of Soros Fund Sales
  • Rice May Drop on ‘Abundant’ Thai Supply, Aiding World’s Poor as Corn Gains
  • Cocoa Poised to Tumble as Maersk Cargo Signals Price Peak: Freight Markets
  • Glencore Seeks $61 Billion Value in London, Hong Kong Initial Share Offer
  • Crude Oil Halts Two-Day Decline in London Before U.S. Employment Report
  • Copper Drops to Seven-Week Low on Concern China May Tighten Credit Further
  • Corn, Soybeans Drop for a Third Day as Price Rallies May Cut Into Demand
  • Sugar Falls for a Fifth Day on Thai Output, China Inflation; Coffee Drops
  • Cash-Copper Premium in China Signals Demand May Increase: Chart of the Day
  • Gasoline ‘Bubble’ May Grow Past 2008 Record on Supply Drop: Energy Markets
  • Palm Oil Drops to Two-Week Low as Demand for Soybeans Weakens, Crude Falls
  • Coal Stocks ‘Alarming Low’ in China, ‘Critical’ in India: Chart of the Day
  • Cocoa Arrivals From Bahia Boost Brazilian Production to Most in 16 Years

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • Euro approaches 18-month high versus dollar before interest-rate decision
  • Portugal financial rescue medicine may be just a first taste - euro credit
  • German 2-year notes drop on ECB tightening bets; Portuguese bonds advance
  • Spain’s thousands of illegal homes sour development minister’s sales pitch
  • BMW profit advances more than estimated on demand for 5-series, x3 models
  • new deutsche bank CEO turns on Krause vying with Weber for power with Jain
  • European stocks fluctuate; Holcim drops while shares of Actelion advance
  • Europe retail sales drop most in 11 months on rising oil, government cuts
  • UK house prices drop for first time in three months as cuts deter buyers
  • UK Mar mortgage approvals 47.6k vs consensus 48.0k and prior revised to 46.7k from 47.0k
  • Uk Apr Construction PMI 53.3 vs consensus 55.5 and prior 56.4
  • Eurozone April Services PMI 56.7 vs consensus 56.9 and prior 56.9
  • Germany April Services PMI 56.8 vs consensus 57.7 and prior 57.7

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIA MARKETS

  • China and Hong Kong fell on fears of further monetary tightening in china.
  • Most Asian stocks decline as raw material producers, Australian banks retreat
  • Hong Kong home sales fall to two-year low on government curbs, loan rates
  • Shinhan profit little changed as Korea property slump drives up bad loans
  • Vietnam raises repurchase rate for fifth time this year in inflation fight
  • Philippines, Malaysia will consider rate rises as oil fuels Asia inflation
  • Asia seeks to boost use of local currencies in trade, reduce dollar’s role.
  • Japan was closed for Greenery Day and will remain closed until 6-May.

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

Howard Penney

Managing Director



Correlation Risk

“We are willing to accept almost any explanation of the present crisis of our civilization except one.”

-F.A. Hayek

 

That’s an important quote from page 65 of a chapter that Hayek wrote in “The Road To Serfdom” titled, “The Abandoned Road.” As I take a step back and think about what a tremendous opportunity our profession has had to learn about real-time risk management and the interconnectedness of Global Macro markets in the last 3 years, it’s somewhat sad to realize that consensus hasn’t been paid to learn much.

 

What we get paid to do is chase short-term returns. The Bernank perpetuates this performance pressure by marking the short-term “risk free” rate to model (or the ZERO bound) and, as a result, this gargantuan experiment of starving savers of returns imputes 3D Risk (3 D’s) into markets:

  1. The Dare – zero percent rates dare you to chase yield across asset classes where you can justify it
  2. The Delay – zero percent short-term financing for banks delays the financial restructurings that free market prices would impose
  3. The Disguise – zero percent expectations disguise the interconnected risks associated with carry trading, correlation risk, etc

The Disguise is the one that can really nip a perma-bull in the butt. That’s the one that, allegedly, “no one can see coming.” That’s the one that is being revealed real-time. In terms of making excuses for being willfully blind to it, this time is different because we have a modern day technological innovation in financial market transparency – it’s called Twitter.

 

Going back to Hayek’s aforementioned point, I think that’s the one thing our professional politicians do not get paid to understand. That would be called accountability. The Disguise in financial markets is The Correlation Risk – and while his original text was addressing a different kind of socialism and Big Government Intervention in 1944, I still think what Hayek goes on to say about explaining our perpetual financial “crisis” is very appropriate:

 

“… that the present state of the world may be the result of genuine error on our own part… and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.”

 

With another 78 Billion Bailout Euros being extended to the government of Portugal this morning, Spain seeing unemployment spike to 21.3% (new all-time highs), and Americans staring down $5/gas at the pump with jobless claims re-accelerating, wasn’t that some advice our “independent central bankers” and fiscal spenders should have considered?

 

Independent research? Should we just never mind silly old school things like the American Constitution or what John Locke wrote On Liberty 80 years before Hayek penned his original counter-points to Keynes? Just buy-the-damn-dips, chase yield, and believe that it’s going to end well this time?

 

Back to The Correlation Risk and playing the game that’s in front of you…

 

Given that the US Dollar is the #1 factor we are talking about when we say Global Macro Correlation Risk (say it central planners -“who –ho-wns de Campaigner-in-Chief?”), let’s  get a real-time price check on how that looks on our intermediate-term TREND duration (3 months or more):

  1. Crude Oil = -0.92
  2. Gold = 0.94
  3. Silver = -0.94
  4. Coffee = -0.84
  5. Pork Bellies = -0.92
  6. CRB Commodities Index = -0.87

I know, I know – The Bernank calls this commodity stuff that you put in your cars, stomachs, and teeth “transitory”…

 

How about the intermediate-term TREND inverse-correlations between the US Dollar Index and relatively larger matters like countries?

  1. USA (SP500) = -0.82
  2. Brazil = -0.88
  3. Mexico = -0.82
  4. Germany = -0.93
  5. Spain = 0.94
  6. Russia = -0.85
  7. China -0.85
  8. South Korea = -0.90
  9. Australia = -0.91

How about the obvious, the intermediate-term TREND inverse correlations between the USD spot price and the world’s currencies?

  1. Euro = -0.99 (not a typo)
  2. Swiss Franc = -0.96
  3. British Pounds = -0.95
  4. Chinese Yuan = -0.92
  5. Japanese Yen = -0.87
  6. Singapore Dollar = -0.96
  7. Aussi Dollar = -0.94
  8. Brazil’s Real = -0.92
  9. Canadian Dollar = -0.85

Really? Yes, President Obama – really. This Correlation Risk math checks out from Hawaii to Havana. We get it. Anyone gaming Geithner and The Bernank get it. The Chinese get it.

 

In the Peoples Bank of China’s Q1 Monetary Policy Statement last night (published on China’s website – not to be politically pandered to on 60 Minutes this Sunday or at a US Federal Reserve Presser), this is what the Chinese had to say about all of the aforementioned real-time prices:

 

“Stabilizing prices and managing inflation expectations are critical… given the loose monetary policies of major economies and gradual recovery of the global economy, commodity prices and global inflation expectations are rising significantly.”

 

“Significantly” versus “transitory.” Academic dogma versus independent analysis. Government storytelling versus Correlation Risk. It’s all out there folks. It always has been – and, sadly, when it comes to US policy, so has Hayek’s “Abandoned Road.”

 

My immediate-term support and resistance lines for Gold are now 1525 and 1565, respectively. For oil I’m at $109.39 and $114.21 – and for the SP500, my immediate-term support and resistance lines are now 1349 and 1373, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Correlation Risk - Chart of the Day

 

Correlation Risk - Virtual Portfolio


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Royal Awareness

This note was originally published at 8am on April 29, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It’s choice not chance that determines your destiny.”

-Jean Nidetch

 

Interestingly this quote comes from a one-time overweight housewife with a self-confessed obsession for eating cookies—a woman who eventually kicked her weight and went on to start a peer group to support her overweight friends, which expanded and in 1963 was incorporated as the Weight Watchers organization.

 

The quote also seemed appropriate for it reminded me of the vaulted status of global central bankers and their choice (along with a committee vote) to act or not (in what sometimes seems like chance) to direct a country’s monetary policy, and therefore economic health. In the recent era, central bankers have attained a sort of rockstar status typically reserved for celebrities and athletes, and just this week Ben Bernanke joined the club of celebrated central bankers (notably the ECB’s Jean-Claude Trichet) with a live press conference following his policy announcement—trappings that must clearly enhance his “cult” status.

 

Yet, with today being the Royal wedding day, and with my role being European analyst on the Macro Team, we thought we’d give The Bernank a needed rest and focus on the actions across the pond at the Bank of England, namely the hefty choice that CB Governor Mervyn King faces with the UK stuck between stagnant growth as inflation accelerates.

 

In particular, we’d like to call out the strength of the British Pound versus the USD, in our opinion an out-of-consensus call that we’ve been long of via the etf FXB in the Hedgeye Virtual Portfolio since 3/23 due to the following positive factors:

  1. The BoE’s increasingly hawkish lean on inflation and evidence that suggests the positive currency impact of an interest rate hike (examples include ECB and Riksbank decisions)
  2. The announcement of austerity by the UK Government in the fall of last year to proactively cut public spending and boost revenue, versus the US’s passiveness in addressing its rising debt and deficits, a position that has perpetuating a weak USD versus most major currencies (US Dollar Index down for 14 of last 18 weeks)
  3. Bernanke’s commitment to keep rates near zero percent and his  indication that some form of QE-lite will follow QE2’s expiration in June = continued USD weakness
  4. The flight to safety of Sterling as Eurozone debt contagion remains at large (also bullish for the CHF and SEK)

 

The Proof is in the Pudding

While the above points have been supportive of the GBP-USD trade to some degree this year, the prospect of high inflation with slow growth in the UK is the pressing threat facing policy makers. And while there are numerous ways to spin the headline data out of the island nation, in our mind it’s hard to argue against the  inflation data, which has charged higher for the last 18-22 months. The current inflation readings include:

  • Consumer Price Index (CPI)   +4.0% in March Y/Y
  • Producer Price Index (PPI) for Input   +14.6% in March Y/Y
  • PPI Output   +5.4% in March Y/Y

While the BoE drew a sigh of relief with the March CPI number 40bps below the February reading, current levels are a full 2% higher than the BoE’s target, and 1.5-2.5% above European peers, as rising energy costs continue to fuel high readings this year.

 

While the BoE has maintained its 0.50% benchmark rate since March ‘09, the lowest level in over 300 years of the history of the BoE, we’re of the camp of Andrew Sentance, one of the nine voting members of the BoE’s Monetary Policy Committee, and affectionately known as the ueber inflation hawk due to his very vocal stance for an interest rate hike since June 2010. We’re now seeing in the last few BoE meetings that fellow members Spencer Dale and Martin Weale have joined ranks for a rate rise of 25bps, while Sentance has upped his rate hike call from 25bps to 50bps, leaving the committee a 6-3 vote against interest rate action, but marginally more hawkish.

 

Below are a few key drivers that Sentance notes to justify a rate hike, which he’s included in this speaking tours:

  1. The UK’s need to strengthen its currency with its trading partners, particularly against the EUR as the Eurozone accounts for about half of total exports and half of total imports.
  2. A stronger domestic currency will help to combat imported inflation. The renewed surge of energy and commodity prices only adds to the imported inflation driven by a weak Sterling versus the EUR since 2007. 
  3.  The squeeze on disposable income is already a factor holding back the growth of consumer spending in the short term.
  4. Ergo, a rate hike is essential to boost the Sterling versus the EUR and other major trading partners to mitigate inflation and therefore improve consumer spending.

Not so Fast – Austerity’s Bite and Growth Fears

While Sentance makes some very convincing points supportive of a rate hike, others remain convinced that excess capacity in the economy will slow/drive down prices and that a rate hike would only create a further shock to the consumer.

 

Rightfully, this camp also points out the negative impact of the government’s austerity program, which broadly calls public job cuts of ~500K and ~£81 Billion in public spending cuts over the next 4 years, and an increase in VAT (from 17.5% to 20%) that began in the beginning of this year. Their position is that weaker consumer and business surveys are indicative of the strain of public sector deleveraging and expectations for slower growth. Additionally, it is argued that the negative impact on the housing mortgage market from a rate hike—with the housing sector mired in an anemic state—would be an additional blow to the consumer’s wallet.

 

Boiling it Down

As we’ve said from the outset, there are any number of ways to interpret the data. Arguably the BoE and UK government are left in a tough spot, trying to head off inflation while not pinching growth prospects. For reference real annual GDP was +1.4% last year, with the final quarter of 2010 showing a -0.5% hit Q/Q, while 1Q2011 rebounded to +0.5% Q/Q.

 

While the jury is still out on whether or not Q1 can be a sustained inflection, our call is focused on the implication of the Pound versus the USD, in particular, but also the EUR. We continue to applaud PM David Cameron’s forceful strategy to reduce fiscal debt and deficits, which according to the UK statistical office were 59.6% of GDP in 2010 and 10.4%, respectively (see chart below). Notably, the chart of cumulative public sector net borrowing shows improvement across annual compares, an indication that austerity may, in fact, be working.

 

Further, compared to the US administration, Obama and Company are just now coming to terms with the budget ceiling debate and the great issue on shaving down the budget deficit that is expected to rise well over 10% next year, according to our calculations, with the US debt as a % of GDP expected to reach 96% this year and over 100% next.

 

On these metrics, we think the UK’s proactive attention to reduce fiscal imbalance, coupled with the increased likelihood of an interest rate rise, should boost the GBP versus the USD. Should we get a rate hike, it should help alleviate inflation pressures, which will improve consumer and business optimism and therefore encourage growth prospects over the intermediate to longer term.  Given the likelihood that elevated input cost pressures are here (globally) to stay over at least the medium term, we think there’s prudence in a rate hike.

 

Increasingly we’re seeing the bifurcation in economic performance on the basis of policy decisions to cut fiscal imbalances and increase interest rates off historical lows. So long as the US continues to fuel its monetary policy of extend and pretend and promote the fiscal printing press, we’d expect the USD to suffer versus major currencies. Getting long the GBP-USD is but one way we’ve chosen to express this bifurcation.   

 

Matthew Hedrick

Analyst

 

Royal Awareness - ME1

 

Royal Awareness - Virtual Portfolio




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