prev

THE HEDGEYE DAILY OUTLOOK

THE HEDGEYE DAILY OUTLOOK

 

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

 

The French governments (and their bankers) now, allegedly, have an edge on what independent rating agencies are going to do with their sovereign ratings. Nice!   The most important thing central planners have missed in 2011 are growth estimates – that won’t change gravity.  As we look at today’s set up for the S&P 500, the range is 50 points or -3.01% downside to 1087 and 1.45% upside to 1137.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 811

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1500 (-4151)  
  • VOLUME: NYSE 2147.22 (-10.89%)
  • VIX:  42.99 +22.62% YTD PERFORMANCE: +142.20%
  • SPX PUT/CALL RATIO: 1.74 from 2.64 (-34.11%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 27.09
  • 3-MONTH T-BILL YIELD: 0.02% -0.01%
  • 10-Year: 2.17 from 2.20    
  • YIELD CURVE: 1.98 from 2.01

MACRO DATA POINTS:

  • 8:30 a.m.: Trade Balance, est. (-$48.0b), prior (-$50.2b)
  • 8:30 a.m.: Initial jobless claims, est. 405k, prior 400k
  • 8:30 a.m.: WASDE (corn, soybean, cotton, wheat)
  • 8:30 a.m.: Net export sales (commodities)
  • 9:45 a.m.: Bloomberg consumer comfort: est. (-48.7), prior (-47.6)
  • 10 a.m.: Freddie Mac mortgage rates
  • 10:30 a.m.: EIA Natural Gas
  • 1 p.m.: U.S. to sell $16b 30-yr bonds

WHAT TO WATCH:

  • U.S. trade deficit probably narrowed in June from the highest level in almost 3 years, helped by cheaper imported crude oil, economists said before a report today
  • Fed officials are drawing up rules for the largest U.S. banks that won’t be more stringent than global capital standards agreed to in Basel, people familiar said

COMMODITY/GROWTH EXPECTATION

                               

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Gold Falls From Record as Rising Equities Curb Investor Demand
  • CME Increases Gold Margins as Investors Drive Record Rally
  • Rice Is Next Japan Food Risk From Fukushima Nuclear Meltdown
  • Power Trading Set for Record on Europe Sun, Wind: Energy Markets
  • Copper Climbs Most in Two Months on Chinese Demand Speculation
  • Standard Chartered Recommends Buying Brent Oil Below $100
  • Aussie, Kiwi Rise as U.S. Stock Futures, Commodities Advance
  • Palm Oil Climbs as Malaysian Stockpiles Drop on Record Exports
  • Metals Lead Commodity Gains as Yuan Strength Buoys China Demand
  • Copper Climbs Most in Four Months, Lifted by Chinese Purchases
  • Commodities Rise for Second Day, Led by Metals on China’s Demand
  • Spot Gold Falls 0.6% After Rallying to Record Above $1,800
  • Palm Oil Imports by India Seen at Record May Halt Price Decline
  • Nestle Pakistan to Fend Off Engro by Doubling Dairy Output
  • Being Like Soros in Buying Farmland Reaps Annual Gains of 16%
  • Gold May Extend Record Rally Above $1,800 as Global Stocks Drop
  • Thai Sugar Exports May Increase to Record, Cane Board Forecasts
  • Oil Gains Most in Three Months as Supplies Fall, Demand Rises

CURRENCIES

 

EUR/USD – remains the most critical FX pair in all of global macro and this is really where the rubber meets the road on which European politician is telling you the truth; TREND line is now 1.44 and its bearish/broken - no bid this morn

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: another low quality short squeeze to lower-highs in the lowest quality country markets (Italy/Spain); not good
  • FRANCE – important to acknowledge what real-time prices have been signaling in French Equities since February of 2011 when they put in another lower-long-term high – including this morning’s rally, the CAC40 has crashed (down -27% since FEB2011)

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: not as bad as I thought it would act = constructive; China leads gainers (we're long) up +1.3%; Singapore day2 of neg divergence $CAF

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


Questionable Mathematics

This note was originally published at 8am on August 08, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Common sense is not so common.”

-Voltaire (quote used at the end of David Einhorn’s Q2 2011 letter)

 

This morning has nothing to do with legitimate credit risk in America’s sovereign debt. US Treasuries would be collapsing if it did. Instead, stocks are as Treasuries are making new 2011 highs!

 

This morning has everything to do with analytical incompetence. If watching the analytically incompetent chastise the analytically incompetent yesterday didn’t remind you that both S&P and the US Government have issues, you need to replay the tapes. The People don’t trust either ratings agencies or governments’ risk management processes anymore. And they shouldn’t.

 

As outgoing Chairperson of President Obama’s “Council of Economic Advisers”, Austan Goolsbee, told Meet The Press yesterday that S&P had “Questionable Mathematics”, I literally started laughing out loud. This is AFTER the US government revised their Q1 2011 GDP estimate for the US by 81% to the downside to 0.36%!

 

With all due respect to my fellow Yalie (Goolsbee was Yale 1991), there is nothing to respect about the accuracy of either the US government’s economic forecasts in 2011 or what US Growth Slowing implies for any rating agency that has to impute a massive top line slowdown into its rating. AFTER the top line (revenues) slows, both the sell-side and ratings agencies downgrade – not before. They are THE lagging indicators.

 

Bloomberg Consensus (78 buy-side and sell-side institutions) forecasts for US GDP Growth in Q3 and Q4 of 2011 are still at +3.2% respectively. Our models continue to point to rates of U.S. economic growth that are HALF, or less, of those consensus estimates.

 

There is nothing questionable about this math: the US stock market has lost -12% of its value since the end of April for a lot of reasons – but one of the most obvious has been Growth Slowing.

 

Back to the Global Macro Grind

 

Why are US Treasuries bid to new all-time highs (all-time is a long time) on the “news” of a rating agency downgrade this morning? That’s simple. This is old news to the analysts who provide Wall Street with leading indicators.

 

To review the time stamps:

  1. March 5, 2010: Jim Grant issued an effective downgrade of USA’s long-term bonds
  2. May 14, 2010: Hedgeye cites Grant’s work and reiterates the conclusion using Reinhart & Rogoff data to compliment our own
  3. August 3, 2010: Hedgeye holds a conference call titled “Should US Debt Be Rated Junk?”

As recently as July 7th, 2011 in his quarterly client letter, Greenlight Capital’s David Einhorn wrote (on page 3): “Earth to S&P, if you can foresee a near-term default scenario that is plausible enough for you to warn about it, AAA cannot be the correct current rating.”

 

Einhorn, like Jim Grant, is one of the world’s most competent financial analysts. He has been profiting from the incompetence of ratings agencies and the governments who pay them for years. Einhorn and his clients won’t be freaking out this morning or looking for Bill Miller and Timmy Geithner to throw them some completely conflicted and compromised view of S&P’s work. They’ll be profiting from it.

 

Tomorrow starts today – so what’s next? Well, let’s start with what AAA not being AAA means for everyone else’s ratings.

  1. It’s now politically palatable to downgrade other AAA rated Sovereigns (France)
  2. Big Bank Ratings that rode USA’s AAA Rating Uplift need to be downgraded

After we moved to ZERO percent US Equity exposure in the Hedgeye Asset Allocation Model last Monday, our Financials guru, Josh Steiner, wrote an important note titled “New Risks For Financials” where he dug into this obvious problem of Big Bank Rating Uplifts:

 

“There are 8 banks that benefit directly from the United States AAA credit rating through ratings uplifts. They include: BK, STT, BAC, C, WFC, JPM, GS and MS. If the US isn’t AAA, then the implicitly backed Too Big To Fail banks can’t rely on the US’s ratings to get AAA debt themselves.”

 

Now Steiner has been The Bear on the moneycenter banks and US Housing since this time last year (sorry Meredith Whitney). Hedgeye has shorted Banker of America (BAC) 10x since 2010 in the face of “smart” money buying it on “valuation.”

 

Well, sorry “smart” money, valuation is not a catalyst.

 

Neither is a pending downgrade of a bank’s credit rating. Citigroup (our top short idea above and beyond BAC right now, which is saying something!) could see a 2-notch downgrade with the end of these “ratings uplifts”. This will add notably to already existing NIM pressure on Citi’s earnings (NIM = Net Interest Margin).

 

And when S&P or Moody’s “downgrades” Citigroup, we’ll cover the short position on that “news” too. Timing matters.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1638-1711, $84.02-92.03, and 1165-1219, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Questionable Mathematics - Chart of the Day

 

Questionable Mathematics - Virtual Portfolio



the macro show

what smart investors watch to win

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.

Forecasting Dark

“Weather forecast for tonight: dark.”

-George Carlin

 

When 2011 is all said and done, we’ll separate the winners in this Globally Interconnected Game from the whiners. Whoever had their growth estimates right will have had a lot of other things right.

 

In the meantime, we’ll have to deal with politicians, journalists, and bankers obfuscating this very simple fact – Global Growth Has Been Slowing Since The End of 2010.

 

That’s it. That’s what Wall Street, Washington, SocGen, and the Government of France all have in common this morning – their top-line estimates for GDP Growth are still way wrong. And, as a result, being long any of their conflicted promises that are associated with using the wrong GDP assumptions will continue to be wrong. Markets don’t lie; politicians do – and the market has this right.

 

Markets don’t trade on politicians, journalists, and bankers using the wrong sources – they trade on expectations. To amplify this point about Growth Expectations, let’s take a step back and review where these “blue chip” forecasters were on these matters in Q1 of 2011:

 

Forecasts for 2011 US GDP Growth:

  1. Bank of America = 3.2%
  2. Barclays = 3.1%
  3. Citigroup = 3.1%

*Disclaimer: these estimates must have all been based on the exact same Keynesian model for garden variety “recovery”

 

Forecasts for 2011 SP500 Returns:

  1. Bank of America (David Bianco) = 1400 (up +11.4%)
  2. Barclays (Barry Knapp) = 1420 (up +13.0%)
  3. Citigroup (Tobias Levkovich) = 1400 (up +11.4%)

*Disclaimer: two of these forecasting czars opted for round numbers on the absolute; one opted for the rounded off % return

 

2011 Reported Numbers (Year-To-Date):

  1. US GDP Growth Q1 2011 = 0.36%
  2. US GDP Growth Q2 2011 = 1.29%
  3. SP500 YTD Return = DOWN -10.9%

3 investment banks with conflicted analysis + 3 train wrecks versus expectations = priceless.

 

Actually, that’s not fair – there is a price to pay for Wall Street/Washington groupthink. It’s being marked-to-market in every American’s 301k each and every day. While I’ll be the first to admit that this is not 2008 (it’s 2011), all it took to remind me how bad Wall Street’s forecasting models remain at calling growth slowdowns was another growth slowdown!

 

There isn’t really a trickle-down effect associated with getting growth estimates this wrong – it’s more like a waterfall. To borrow a frightening quote from Bank of America’s CEO, Brian Moynihan, on yesterday’s conference call, “think about it this way and you’ll have to trust us”:

  1. COUNTRIES – when they are wrong on GDP assumptions, they are wrong on their DEFICIT/GDP assumptions.
  2. RATINGS AGENCIES – when they see countries with DEFICIT/GDP assumptions rising, their ratings start falling (on a lag)
  3. BANKS – when their GDP assumptions are wrong, their assumptions for their net interest margins and cash flows are wrong

That last point is less clear to your average journalist attempting to “trust” Brian Moynihan on the numbers. What does it mean?

  1. Banks make money on a spread (the Yield Spread – that’s why La Bernank wants to keep rates of return on your savings low)
  2. When growth slows, the Yield Spread compresses (the 10s/2s spread has compressed by 28% in the last 6 months)
  3. When the Yield Spread compresses, Bank of America, Barclays, and Citigroups NIM (net interest margin) and cash flow declines

So… if you get that… and you’re still using Hedgeye’s GDP estimates for 2011 instead of a conflicted and compromised Street’s… you would have immediately recognized anything coming out of SocGen, the Government of France, or Bank of America’s mouths yesterday as irrelevant and/or wrong.

 

I continue to forecast that the sun will rise in the East today.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $77.20-88.29, and 1087-1137, respectively. We bought Goldman Sachs yesterday in the Hedgeye Portfolio and we remain short Citigroup.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Forecasting Dark - Chart of the Day

 

Forecasting Dark - Virtual Portfolio


COH: Shorting

 

Keith shorted Coach in the Hedgeye virtual portfolio into the close. The stock is broken below both his TREND support of $63.54 and immediate-term TRADE support of $58.18.

 

While the company came in slightly better than expected on the top-line, it missed on gross margins and made up for it with lower SG&A in Q4 – not the formula you want to see for a company looking to maintain double-digit top-line growth. In addition, calling the for a bottom in gross margins after breaching a “very achievable” 72% boundary (they came in at 71.8%) as we head into the 2H does not insight confidence. Sentiment is at peak, management has been selling stock, and inventory growth remains twice the rate of sales growth. We see room for further downside from here.

 

COH: Shorting - COH VP 8 11

 

COH: Shorting - COH S 8 11

 

COH: Shorting - COH Sent 8 11

 

 



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 80.30%
  • SHORT SIGNALS 78.51%
next