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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - July 11, 2011

 

As we look at today’s set up for the S&P 500, the range is 39 points or -1.47% downside to 1324 and 1.43% upside to 1363.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 711

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1202 (-2926)  
  • VOLUME: NYSE 771.13 (-8.57%)
  • VIX:  15.95 YTD PERFORMANCE: -10.14%
  • SPX PUT/CALL RATIO: 1.65 from 1.15 (-44.05%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.57
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 3.03 from 3.17
  • YIELD CURVE: 2.63 from 2.68

 

MACRO DATA POINTS:

  • 11 a.m.: Export inspections: Corn, soybeans, wheat
  • 11:30 a.m.: U.S. to sell $27b in 3-mo., $24b in 6-mo. bills
  • 4 p.m.: Crop conditions

WHAT TO WATCH:

  • Ruth’s Hospitality (RUTH) may rise as much as 40% in next 18 mos. as economy rebounds: Barron’s, citing Rollins Capital
  • Morgan Stanley (MS) may be attractively priced after 27% plunge from its Feb. high: Barron’s
  • European officials meet today to consider how to dig Greece out of its financial hole; meanwhile markets are battering bonds of Spain, Italy
  • Williams board was expected to meet yesterday about whether to raise its bid for Southern Union, CNBC reported. SUG trading ~5% above Energy Transfer’s offer price
  • Monsanto, Sinochem said to be in advanced talks over strengthening ties between cos.: WSJ
  • “Transformers: Dark of the Moon” top-grossing film at U.S., Canadian theaters for second weekend, taking in $47m 

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Copper May Decline on Concern Sovereign-Debt Crisis Might Spread to Italy
  • Gold May Advance for a Sixth Day as Growth Concern Fuels Demand for Haven
  • Wheat Drops as India May Allow 2 Million Tons for Sale to Foreign Buyers
  • Sugar Drops as Sovereign-Debt Crisis May Spread to Italy; Coffee Slides
  • Platinum Eyes ‘Top End’ of India’s Mass Bullion Jewelry Market, Group Says
  • Monsoon Rain Covering India a Week Early Boost Crops From Rice to Soybeans
  • Tin Exports From Indonesia Jump to Highest Level Since 2009 as Rain Eases
  • Codelco Miners Fight Job Cuts in Company’s First General Strike Since 1993
  • Palm Oil Stockpiles in Malaysia Climb to 18-Month High on Increased Output
  • Copper Imports by China Climb for First Time in Three Months on Stockpiles
  • Gillard Hits Miners as Bond Spreads Widen Most in Year: Australia Credit
  • Hedge Funds Raise Bets on Gasoline After Retail Price Drop: Energy Markets
  • Bangladesh Plans to Buy More Wheat for Welfare Programs, State Agency Says
  • Steel Beating Oil on China Demand Spurs Metalloinvest Debut: Russia Credit

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: just a mess this morn; FTSE and DAX holding TREND, but Greece and Spain in particular look awful; Finland down 1.6% to -14% YTD

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: overdue correction across the board except China (we're long) which closed up +0.18%; KOSPI and Sensex holding TREND support

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


PVH/WRC: Not so Fast...

Wells is out this morning saying that it thinks a PVH/WRC combination makes sense.

We actually like WRC here – relatively speaking --  as we think it lacks much of the earnings risk that the rest of the group has this year.

 

But the fact of the matter is that if it trades up meaningfully on this, more nimble investors should probably sell it. 

 

Find me anyone that owns WRC where this deal is not part of their ultimate long-term thesis/safety net.

The market has always accepted this deal as inevitable, and embedded it accordingly into WRC’s stock price.

 

It is simply too soon for PVH to digest such a big transaction.

 

It is not on the near-term horizon.

 

18 months out, maybe. But a lot can happen between now and then.


Macro Consumer

This note was originally published at 8am on July 06, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I have often, this past decade, wished that there was a formal and well-established discipline called macro-consumer.”

-Rama Bijapurkar

 

That quote is from the author of a book that one of our sharpest Global Macro clients sent me recently titled “We Are Like That OnlyUnderstanding The Logic of Consumer India.” That’s what I’m reading this week. It’s an excellent perspective on the real-time global economy.

 

What is the real-time Global Macro economy? Is it different than the traditional Bachelor of Arts view of the US economy? What is Keynesian economics? And what, if anything, have central planners of Fiat Fool Kingdoms learned about how their short-term decisions impact currencies, commodities, and the Macro Consumer since Rama Bijapurkar made the aforementioned wish in 2007?

 

These are critical questions concerning both Global Macro-Economic Context and Causality. Instead of a few days of vacation, I could probably take off for a few years and write a book of my own considering the answers. Unfortunately, I don’t have the time to do that, yet.

 

What I do have time for this morning is throwing some of these questions right back to President Obama. Today, Obama’s economic group-thinkers are going to be huddled in the conference room fielding questions in a wanna be “town hall” on Twitter @ #AskObama. So if you want to know if he calls Geithner his pet Squirrel Hunter in Chief, here’s your chance.

 

Back to the Global Macro Grind

  1. Global Equity markets like Deflating The Inflation (China, Germany, and USA all holding TREND line support)
  2. The Macro Consumer likes Deflating The Inflation (MBA mortgage applications UP finally this week, +4.8% w/w in the US)
  3.  If President Obama wants to Deflate The Inflation, he’s going to have to do a lot more than tap the SPR

He’s going to have to get out of the way.

 

A lot of people whine that critics of US Congress “don’t have a solution.” That’s a crock. There is a very simple solution to this Macro Consumer mess:

 

A)     Strengthen the US Dollar with a credibility bid to get government out of the business of trying to make things happen

B)      Then just let it ride

 

Ride on the back of the biggest Global Macro Consumption Engine created in the history of mankind – the American Consumer… ride Cowboy Obama, ride!

 

Tapping the SPR only taps on peoples’ nerves that Big Government Intervention is here to stay. Getting someone like Stan Druckenmiller or Michael Bloomberg to run the US Treasury instead of The Squirrely One would have the opposite effect. The last thing Americans want is Geithner’s smug smirk whispering about the 14th Amendment powers of The President. What they want is change.

 

Change starts with stopping what isn’t working. Change in Global Macro markets is marked-to-market - not to some cochamamy Keynesian concept that’s attempting not to die in a Princeton textbook.

 

Just look at what Deflating The Inflation (a 21% peak-to-trough decline in oil prices from late April to the end of June) has done for Global Equities and Global Consumption. It stopped both from going down!

 

The last 48 hours of Global Macro data has been percolating on this score - and bullishly so:

  1. German Service PMI for the month of June was up sequentially to 56.7 versus 56.1 in May
  2. India’s Services PMI for the month of June was up sequentially to 56.1 versus 55.0 in May
  3. Indonesia’s Consumer Confidence for the month of June was up sequentially to 91.8 versus 90.6 in May

But, again, these are June numbers – and in June, the US Dollar arrested its decline and oil prices were falling. Today is July the 6th, and it’s not clear, yet, if there is a political spine to strengthen the US Dollar sustainably. The Chinese raising interest rates one last time should help.

 

We shorted oil for the first time in a long time yesterday in the Hedgeye Portfolio. So that means there is an interconnected chance here folks. There really is a chance that the US Dollar Index continues to make a series of higher-lows and busts a bigger move to the upside in the coming months.

 

If that happens, you will see:

  1. A continued selloff in Oil’s price down to its long-term TAIL of support ($90.51/barrel, or -7% downside from here)
  2. A continued short squeeze in Global Equities from China to Indiana
  3. A continued deleveraging of the Global Hedge Fund community’s carry trading of Geithner’s Down Dollar policies

“We are like that only” in America, Canada, and Germany too. We like to buy gas and food when they are on sale.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1490-1526, $90.51-97.11, and 1315-1350, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro Consumer - Chart of the Day

 

Macro Consumer - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

Timing Markets

“There are times when it’s important to invest cautiously, and there are times when it’s important to invest aggressively… A big part of the job is knowing where we are and choosing between those two.”

-Howard Marks

 

Howard Marks is one of the world’s top Risk Managers primarily because he doesn’t have an investment mandate that doesn’t allow him to change. If you can manifest the change you want to see in this industry into your risk management style, I think you can win.

 

The aforementioned quote is one of the many winner’s quotes you’ll find from Marks. It came at the end of an excellent Bloomberg article by Gillian Wee titled “Biggest Distressed Debt Investor Marks Europe After 22 years of 19% Return.”

 

Whether we like it or not (I personally love it), Timing Markets matters – big time. Whether it’s on the long or short side of what you think is a great research “idea”, try putting real risk capital on the line for a decade or more across cycles and you’ll quickly realize this lesson the hard way – there is a huge difference between great research and great risk managed research (timing).

 

Back to the Global Macro Grind

 

After a massive 2-week melt-up across Global Equities, last week ended on a stinky note. By the time it was all said and done, commodity inflation was up a lot more than US stock market inflation last week; and with US style Jobless Stagflation compounding the stinky-ness of it all, the US Equity futures don’t like it this morning either.

 

Reviewing the week-over-week moves where it matters on this front, here’s what happened last week:

  1. US Dollar Index = UP +1.1% to $75.18
  2. Euro/USD = DOWN -2.1% to $1.42
  3. CRB Commodities Index = UP +2.1% to 343
  4. West Texas Crude Oil = UP +1.2% to $96.20
  5. Gold = UP +4.0% to $1541
  6. Copper = UP +2.6% to $4.41
  7. SP500 = UP +0.3% to 1343
  8. UST 2yr Yields = DOWN -17% to 0.39%
  9. UST 10yr Yields = DOWN -5% to 3.03%
  10. Yield Spread (10s minus 2s) = DOWN 7 basis points to +264bps wide

What’s a little squirrely about those 10 moves is that we saw Commodity Inflation in the face of a strong US Dollar. That’s a TRADE though and not the TREND. The intermediate-term TREND that we have been calling for since April has been a Deflating Of The Inflation (Q2 Hedgeye Macro Theme). That’s predominantly driven by a series of higher-lows in the US Dollar Index.

 

Whether it was the 2008 strengthening of the US Dollar or the May-July 2010 period, carry traders of the US Dollar inspired Inflation Trade don’t particularly like it when that happens. Why? Well that’s easy – Timing Markets gets a lot harder when you can’t bank on the Fed bailing you out with another Dollar Devaluation policy. Got an imminent catalyst for QG3?

 

In terms of the Debt Ceiling debate finding a July compromise and QG2 (Quantitative Guessing Part Deux) ending at the end of June, our call has been that for the first time in a long time both US monetary and fiscal policy have bullish US Dollar catalysts.

 

We’ll see if this holds, but the odds are that as Silvio Berlusconi shifts his focus from hot-tubbing to going after the “speculators” in Italy, the Euro should be under duress inasmuch as the US Dollar searches for Waldo. Remember, Timing Markets matters – and to get the US Dollar right, you need to get the Euro right.

 

If you change the duration of the thesis, I can give you a different “research” call for almost everything I am looking at right now. The tricky thing about markets is that they couldn’t care less about the duration of my thesis. I used to get upset about it – now I just deal with it.

 

In terms of positioning for the intermediate-term TREND, I think Deflating The Inflation and a Strong US Dollar is constructive for US, Chinese, and German equities, from a price.

 

Here’s how I am currently positioned from a Global Macro perspective in the Hedgeye Asset Allocation Model:

  1. Cash = 49% (down 3% week-over-week as I add exposure to Global Equities)
  2. International Equities = 21% (China, Germany, Sweden and S&P International Dividend ETF – CAF, EWG, EWD, and DWX)
  3. Fixed Income = 18% (US Treasury Flattener – FLAT)
  4. US Equities = 6% (Healthcare – XLV)
  5. International Currencies = 6% (Canadian Dollar – FXC)
  6. Commodities = 0%

From a timing perspective, I risk managed getting long both Chinese Equities (CAF) and the US Treasury Flattener (FLAT) well. Both of these positions are good examples of expressing a “research” view with solid risk management (timing).

 

As US growth slows, I wanted to express Growth Slowing by being long the compression of the US Treasury Yield Curve. As global growth slows, I wanted to buy the best major growth market in the world (China) while it’s on sale.

 

That’s not to say I haven’t made my fair share of timing mistakes. Two weeks ago I sold my Gold (GLD) position as I thought rising US Treasury Yields could deflate the gold price (historically, that’s when gold underperforms –when real-interest rates are negative). This morning, after the train wreck (9.2% US unemployment), US Treasury Yields are falling again, and Gold is rising (as it should).

 

No one said Timing Markets is easy. But “there are times when it’s important to invest cautiously, and there are times when it’s important to invest aggressively”, and I’ve made it my firm’s responsibility to be thought leaders on the front lines of these Global Macro debates.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1 (no position in GLD), $91.10-96.93 (we’re short OIL), and 1 (no position in SPY), respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Timing Markets - Chart of the Day

 

Timing Markets - Virtual Portfolio


Weekly Latin America Risk Monitor: Divergence

Conclusion: Both prices and policy outlooks came in largely divergent on an intra-regional basis.

 

This is the first installment of our now-weekly recap of prices, economic data, and key policy events throughout Latin America. We’re aiming to keep our prose tight here, so if you’d like to dialogue more deeply regarding anything you see below, please reach out to us at .

 

PRICES

 

From an equity market perspective, “divergence” was the name of the game this week. One could drive a figurative truck through the 670bps spread between the best performer (Peru’s Lima General Index) and the worst performer (Brazil’s Bovespa). Latin American FX rates were also divergent, with a 100bps spread between the best performer (Chilean peso) and the worst performer(s) (Argentine peso and Brazilian real) vs. the USD. Interestingly, the options market is bearishly positioned on every major Latin American currency vs. the USD over various durations (3wk, 3mo, and 1yr).

 

On the credit front, there was nothing spectacular to write home about other than a significant widening of yield spreads relative to US Treasuries. On the flip side, however, CDS declined broadly with Argentina being the lone holdout to the upside.

 

Weekly Latin America Risk Monitor: Divergence - 1

 

Weekly Latin America Risk Monitor: Divergence - 2

 

Weekly Latin America Risk Monitor: Divergence - 3

Weekly Latin America Risk Monitor: Divergence - 4

 

Weekly Latin America Risk Monitor: Divergence - 8

 

CORRELATIONS

 

Like Asia, we’re seeing a broad-based pickup in positive correlations between Latin American equity markets and currencies and the S&P 500 over shorter durations. It remains to be seen whether or not this is something we should expect to continue over the near-to-intermediate term, however.

 

Weekly Latin America Risk Monitor: Divergence - 5

 

Weekly Latin America Risk Monitor: Divergence - 6

 

Weekly Latin America Risk Monitor: Divergence - 7

 

KEY ECONOMIC & POLICY DATA

 

Brazil:

  • Brazil’s June trade data was rock solid: Export growth accelerated to +38.6% YoY and its YoY Trade Balance growth was up sequentially to +$2.2B. Still, a weak June Manufacturing PMI report (slowed to 49 vs. a prior reading of 50.8) may foreshadow a near-term pullback in Brazil’s overseas sales.
  • By breaking out the composition of Brazil’s YTD dollar inflows, the central bank exposed Brazil’s recent capital controls for what they really were – attempted currency devaluation. With only 16.5% of the total dollars flowing into Brazil’s fixed income market, Finance Minister Guido Mantega certainly has some explaining to do regarding his relentless quest to “ban the speculators”. Interestingly, President Rousseff was out today saying that Brazil isn’t considering additional steps to curb real appreciation, citing inflation as her “bigger priority”. We’ve been saying that all along and have been appropriately bearish on Brazilian equities since November.
  • Speaking of inflation, Brazil’s CPI accelerated in June to +6.7% YoY – a six year high. We remain bullish on the slope of Brazilian CPI through the next 2-3 months, and as such, we continue to anticipate incremental tightening out of Brazil’s central bank. Further, we continue believe structural inflation has the potential to take hold in Brazil under the current structure of monetary and fiscal policy.
  • Two buy-side funds ran a story in the Financial Times warning about the potential for the Brazilian consumer to drift into a household debt “death spiral”. With consumer credit running at rates north of +20% YoY (well beyond the central bank’s +13% target) and an average debt service burden of ~24-28% of household disposable income, we certainly see reason for caution here. That said, however, hyper-bearish stories like this tend to surface after an -11.2% YTD equity market move. We’ll proceed very carefully here.
  • Brazil’s Finance Ministry is preparing to issue dollar bonds abroad for the first time since September in attempt to take advantage of the falling yields (down nearly -75bps YTD). The bonds are more than likely to be of the 10Y or 30Y duration, as officials look to continue extending Brazil’s sovereign debt maturity profile.

Mexico:

  • Both of Mexico’s key corporate surveys slowed in June: the IMEF Manufacturing Index fell to 53.3 vs. a prior reading of 53.7 and the IMEF Non-Manufacturing Index fell to 52.5 vs. 53.1. The slowdown is supportive of our bearish call on the Mexican peso (MXN) and our cautious outlook for Mexican equities.
  • On the flip side, Mexican Consumer Confidence increased sequentially to 93 in June, supporting the central bank’s view that the Mexican consumer remains robust enough achieve its aggressive 2011 GDP growth estimates.
  • Mexican CPI came in flat on a sequential basis at +3.3% YoY – also supportive of our bearish MXN thesis. The Mexican interest rate futures market continues to price in marginal dovishness out of Agustin Carstens and Co.
  • The US and Mexican governments came to terms on an accord that will resolve a 15Y cross-border trucking dispute, with the Mexican government agreeing to suspend punitive tariffs worth about $2.4B of US goods in exchange for increased trucking safety.

Chile:

  • Chile had a mixed bag of data this week with its Economic Activity Index accelerating in May to +7.3% YoY vs. a prior reading of +6.3% and its Export and Trade Balance growth both slowing sequentially in June to +17.1% YoY and -$573.9M YoY, respectively.
  • Finance Minister Felipe Larrain, a non-voting member of the central bank board, said that Chile is close to the end of its tightening cycle, citing “reduced priced estimates”. We are of the view that a likely 2H slowdown in Chilean economic growth is also a factor.

Peru:

  • The central bank kept its benchmark interest rate flat at 4.25%, citing uncertainty over new president Ollanta Humala’s economic policies. We remain bearish on socialism and Big Government Intervention over the long-term TAIL and would look to short Peruvian equities, its currencies, or its sovereign debt on any signs of either going forward. Socialism continues to be a failed experiment in Venezuela – where Humala’s mentor Hugo Chavez has presided over since 1999.

Venezuela:

  • In the latest sign that socialism is not a sound economic policy, Venezuelan CPI accelerated in June to +23.6% YoY. Not much else needs to be said here.

Darius Dale

Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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