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Correlation Risk: SP500 Levels, Refreshed

POSITION: Short SPY

 

It’s pretty clear that the institutional investing world’s consensus is cheering on another US Dollar Debauchery. Most people are still long The Inflation. Fundamentally, that’s not a good thing for the country - that’s just how part of the country gets paid.

 

What that is going to look like if it does in fact occur from this price level in the US Dollar Index is very confusing. Will that be the last blast up to lower-highs for commodities and equities? Will US equities make higher-highs on astonishingly low volume? Or will the ongoing crash in the US currency ultimately come home to roost for everything priced in US Dollars like it did in Q208 (and last week)?

 

Critical questions and critical lines in the SP500 continue develop as we push with a full head of steam out of the beloved (and cyclical) “earnings season” and into the hottest macro calendar of politicking (May/June deficit and debt ceiling debate) that we have seen in a very long time.

 

Across our 3 core risk management durations (TRADE, TREND, and TAIL), here are my lines: 

  1. TRADE (3 weeks or less): TRADE line support of 1334 continues to hold and should be given the bullish benefit of the doubt until it breaks.
  2. TREND (3 months or more): support remains at 1314 (down -3.6% from the YTD high of 1363) and should come into play if we see a TRADE line break of 1334.
  3. TAIL (3 years or less): lower-long-term highs (much like Japanese equities since the 1990s) will be the result of trying to devalue our way to cheap debt financed prosperity – current range of scenarios can get me as high as 1377 and nothing will have changed my long-term view of how all this ends. 

The Price Volatility driven by The Heavy Hand of government intervention isn’t for me. I’ve tightened up the net exposure of the Hedgeye Portfolio to 13 LONGS and 12 SHORTS on this morning’s strength in global market prices.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Correlation Risk: SP500 Levels, Refreshed - 1


TALES OF THE TAPE: DRI, TAST, KKD, CPKI, CBRL

Notable news items and price action from the past twenty-fours along with our fundamental view on select names.

  • DRI’s Olive Garden received a warning but no fine following a Florida state investigation into how a toddler was accidentally served sangria at a Lakeland restaurant.
  • TAST reported 1Q11 EPS of $0.10 versus consensus at $0.12.  Comparable restaurant sales increased 13.5% at Pollo Tropical, 2.0% at Taco Cabana, but decreased 5.0% at Burger King.  Guidance is for comps to come in at +6-8% at Pollo Tropical (versus 3-5% previously) and to increase 2-3% at Taco Cabana (versus 1-2% previously).  Burger King comparable sales are expected to be negative for the full year but improving in 2H11.
  • TAST declined 1.2% on accelerating volume yesterday, ahead of the earnings miss.
  • KKD gained 7.2% on accelerating volume. 
  • CPKI and CBRL declined on accelerating volume.

TALES OF THE TAPE: DRI, TAST, KKD, CPKI, CBRL - stocks 510

 

 

Howard Penney

Managing Director


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - May 10, 2011

 

Yesterday, we saw the USD down to start the week (down for the 15th week of the last 20), which had CRB Index ripping yesterday (+2.1%) after getting crushed last week (down -8.9% for the wk).  Oil moved back above our intermediate-term TREND line of support = $98.63 and Gold continues to look better than almost everything that’s big and liquid other than maybe the German DAX. As we look at today’s set up for the S&P 500, the range is 17 points or -0.99% downside to 1334 and 0.35% upside to 1351.

 

SECTOR AND GLOBAL PERFORMANCE

 

The Hedgeye models now have 7 of 9 S&P Sectors bullish TRADE and 8 of 9 bearish TREND.  The XLF is the only sector broken on both durations. 

 

THE HEDGEYE DAILY OUTLOOK - levels 510

 

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: +1181 (+188)  
  • VOLUME: NYSE 778.48 (-24.18%)
  • VIX:  17.16 -6.47% YTD PERFORMANCE: -3.32%
  • SPX PUT/CALL RATIO: 1.94 from 1.85 (+4.61%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 24.55 -1.521 (-5.834%)
  • 3-MONTH T-BILL YIELD: 0.03% +0.01%
  • 10-Year: 3.17 from 3.19
  • YIELD CURVE: 2.60 from 2.62 

 

MACRO DATA POINTS:

  • 7:30 a.m.: NFIB Small Business, est. 91.8, prior 91.9
  • 7:45 a.m.: ICSC-Goldman weekly retail sales
  • 8:30 a.m.: Import price, est. 1.8% (M/m), prior 2.7%
  • 9:30 a.m.: Fed’s Duke speaks in St. Louis
  • 10 a.m.: Wholesale inventories, est. 1.0%, prior 1.0%
  • 11:30 a.m.: U.S. to sell $28b 4-wk bills
  • 12 noon: DoE short-term energy outlook
  • 12:45 a.m.: Fed’s Lacker speaks on Arlington, Vir.
  • 1 p.m.: U.S. to sell $32b in 3-yr notes
  • 4:30 p.m.: API inventories

WHAT TO WATCH:

  • China’s April inflation data due out tomorrow.
  • Microsoft close to completing $7B for Skype - WSJ
  • Google online music service to probably be announced tomorrow at Google I/O developers conference - WSJ

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Crop Weather Damage Grows as Europe Drought, Canada Rain Boost Grain Costs
  • Oil Inventories Increase to Near a Two-Year High in Survey: Energy Markets
  • Sugar Rises Most in Six Weeks as Imports Into China May Jump; Cocoa Gains
  • Wheat Gains for Third Day as Adverse Weather Threatens Harvests Worldwide
  • Copper Climbs for a Third Day Before Release of Figures on China Inflation
  • Copper Imports by China Decline on Ample Supplies, Higher Overseas Prices
  • Gold May Advance as Sovereign-Finance Concern Stokes Demand; Silver Gains
  • Malaysia Smelting Climbs to Three-Month High as Tin Prices Produce Profit
  • Mississippi Flooding Threatens Cropland, Refineries and Shipping Traffic
  • Soybean Imports by China Tumble on Canceled Orders as Stockpiles Stay High
  • Palm Oil Stockpiles, Output Reach Six-Month High in Malaysia on Weather

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • Greek banks jump on talk country to avoid debt restructuring.  But…
  • Greece denies report it is discussing new aid package -- Reuters, citing Greek Finance Minister
  • France Mar Industrial output (0.9%) m/m vs consensus +0.4% 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIAN MARKETS

  • Most Asian markets that were open today ended a higher
  • Hong Kong was closed for Buddha’s Birthday.
  • South Korea was closed for Sukka Tansin II.
  • China April trade surplus $11.4B vs consensus $1-3B. Australia March trade balance A$1.74B vs consensus A$500M.

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


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THE M3: PANSY HO NON-COMPETE AGREEMENT; MBS CLUBS DELAY; CHINA HOUSING

The Macau Metro Monitor, May 10, 2011

 


PANSY HO CAN KEEP FAMILY SHARES AFTER MGM CHINA LISTING SCMP

Pansy Ho's non-compete agreement with MGM China Holdings will let her keep her directorship and 3.77% minority stake in STDM, the parent of SJM Holdings.  MGM China said, "As Pansy Ho is a director and substantial shareholder of the company, she does not intend to participate in board decisions of STDM which concern the exercise of rights attaching to its indirect majority shareholding in SJM."  In addition, Ho and her associates can own shares in STDM as long as they do not directly or indirectly control the firm, and so long as STDM's Macau casino investments are confined to publicly listed SJM.

 

Any breach of the non-compete agreement by Ho that is triggered by the activities of STDM, SJM or Shun Tak Holdings would give her 30 days to resolve the situation. Ho would then have three options: undo such a breach of the agreement, sell down her stake in MGM China to below 20%, or sell down her stake in Shun Tak, STDM or SJM to a level that "no longer causes a breach".


LAWSUIT MAY DELAY US CLUBS' OPENING AT MBS Business Times

Because of a legal battle between the operators of American celebrity nightclubs Pangaea and Avalon and a former partner, MBS said the clubs' opening in July 2011 will be delayed by at least another month. Also, MBS is moving ahead with a new parter after Kraze, which has ties with South Korean entertainment company Krazetech, failed to get the intellectual property rights to operate the clubs under the brands, Avalon and Pangaea.

 

HOUSING TRANSACTIONS FALL IN MORE KEY CHINESE CITIES; PRICES MOVE LITTLE Business China

Housing transactions fell in 25 of the 35 key cities monitored by the China Real Estate Index System (CREIS) in the week of May 2-8, following a short-term boost over the three-day Labor Day holiday, although prices remain high.  Of the nine most closely watched cities - Beijing, Tianjin, Shanghai, Wuhan, Nanjing, Guangzhou, Shenzhen, Chengdu and Chongqing - seven saw week-on-week declines.


Ragingly Bullish Bears

This note was originally published at 8am on May 05, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Forget about style; worry about results.”

-Bobby Orr

 

Last night, after the Boston Bruins scored 2 goals in the 1st minute of the 1st period against the Philadelphia Flyers in the Stanley Cup Playoffs, I found myself high fiving friends in the Boston Garden amongst 18,000 of the most Ragingly Bullish Bears I have seen in my life.

 

Bears wearing black and gold jerseys have been pounding Boston’s pavement since the Bruins were born in 1924. While I’m not a long-time Bruins fan, I can assure you that the best risk managed position I could assume last night was to be one for the night.

 

Bears, Bud Lights, and belting heavy metal music with the Bruins about to go up 3-0 in a playoff series in May is as bullish a 3-factor model as a hockey fan can recognize. It’s been a long time. They haven’t won The Cup since Bobby Orr (1972). These bears are hungry.

 

How Ragingly Bullish are you?

 

While sentiment is one of the more difficult risk management factors to quantify, we do have some qualitative data that we overlay with our models. In mid-February, one of the key sentiment signals we called out in calling for a US stock market correction was the Institutional Investor (II) Bullish-to-Bearish survey.

 

Like most surveys, this one is far from perfect – but if measured relative to itself, you can at least consider little mathematical critters that matter like mean reversion and spread risk.  

 

So let’s forget about the style of this survey for a second and consider the results:

  1. Bulls up 100 basis points week-over-week to 55%
  2. Bears down 200 basis week-over-week to 16.5%
  3. The Spread (Bulls minus Bears) widened by 150 basis points week-over-week to +38.2% for the Bulls

Again, relative to itself, there are a few critical risk management callouts in this long-dated survey to consider:

  1. Bulls are not ragingly bullish
  2. Bears are not allowed to be bearish
  3. The Spread between Bulls and Bears is only 200-300 basis points from its all-time wides (all-time is a long time)

All-time “wides” is risk management locker-room speak at Hedgeye for something you don’t want to mess with – kind of like being a man dressed in orange last night drinking a smoothie with your i-pod on in the bowl of the Boston Garden – it’s just a bad position to be long of.

 

Of course, with Correlation Risk to the US Currency Crashing running at all-time highs (see yesterday’s EL note to see how we quantify that), that definitely doesn’t mean you couldn’t try riding that Silver bull to the bitter end. But remember, the last 8-seconds of that ride is where all your risk really lives.

 

Interestingly, but not surprisingly, all it took to rock the raging inflation bulls’ world for a few days was some deflation.

 

How do you Deflate The Inflation (one of our Q2 Global Macro Themes)?

 

You stop the Currency Crash in the US Dollar.

 

For the week-to-date, after closing down for 14 of the prior 18 weeks, all it took to Deflate The Inflation was an arrest of the US Dollar’s decline. For the week, with the US Dollar Index trading flat, pull up a some of the following charts and you tell me how Ragingly Bullish you are on being long The Correlation Risk:

  1. Gold
  2. Silver
  3. Oil
  4. Cotton
  5. Copper
  6. Energy stocks

I can tell you that I for one am not enthused about being long Gold and Oil this week. When this gargantuan global carry trade of Gaming Policy unwinds, we can all forget about debating risk management styles and see who is left standing. Mr. Market owes the fans nothing.

 

My immediate-term support and resistance lines for Gold are now 1488 and 1526, respectively. Immediate-term support and resistance lines for oil are now $107.11 and $109.54 and my immediate-term lines of support and resistance for the SP500 are now 1332 and 1371, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Ragingly Bullish Bears - Chart of the Day

 

Ragingly Bullish Bears - Virtual Portfolio



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