SP500 Levels Refreshed: Go Shorty

The U.S. equity market has now been trading below our key support lines for three days.  Like most chaos theorists, we look at the number three as an important factor in verifying trends.  A close today below 1,324, as outlined in the chart below, would be important verification of our bearish outlook for U.S. equities.


In terms of verification, the jobs report today provided even more verification that growth is slowing.  If you didn’t know before today, now you know.  After normalizing for the birth / death adjustment, the economy actually lost jobs in the month and the headline number from the Bureau of Labor Statistics was only an anemic +54,000. In combination with the weak labor market is, not surprisingly, the fact of weak weekly earnings growth.  In fact, U.S. average weekly earnings has seen negative growth on year-over-year basis over the last two months.


Given this backdrop it’s likely not surprising that some of our best short ideas are in the consumer sector or related to consumer spending.  A couple of our key short ideas are as follows:


1. Darden Restaurants (ticker: DRI) – Our view is that in an anemic consumer spending environment, tired brands with little in the way of new products will fare the worst, such as Darden.  And, by the way, the CRB index is up roughly 35% on a year-over-year basis, which isn’t a positive leading indicator for restaurant level margins.   Consensus estimates expect DRI to grow EPS 25% year-over-year in the coming quarter.  Expectations are indeed the root of all heartache.


2. Henry Schein (ticker: HSIC) - Henry Schein has outperformed the SP500 by more than 1,000 basis points over the last two years.  As our Healthcare Sector Tom Tobin recently wrote: “HSIC is largely tethered to the consumer one way or another as employment trends and/or discretionary income influence each of its North American business lines (Dental, Medical, Animal Health), collectively representing ~65% of 2010 revenue.” Needless, to say we think reversion to the mean cometh and that HSIC should be on your short list of shorts.


3. Wynn Casinos (ticker: WYNN) – Our Gaming Sector Head, Todd “The Axe” Jordan is bearish on Wynn.   According to Jordan, their Macau business is set to slow due to their exposure to the VIP business which is being negatively impacted by the recent opening of Galaxy.  WYNN is trading  just shy of its all-time high, which to us suggests that a Macau slow down is not priced in.  Just over 5% of the float is short, so this isn’t an overly consensus perspective.


With slowing economic growth globally and a broken U.S. equity market, we think it’s prime time to re-load on the short side.  As the popular 50 Cent song goes, “Go, shorty. It's your birthday.” Given the status of the macro factors, we agree with 50 Cent on this one.


Daryl G. Jones

Managing Director


SP500 Levels Refreshed: Go Shorty - 1

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