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Risk Ranger: SP500 Levels, Refreshed

POSITION: no positions in SPY or Sector ETFs

 

On this morning’s opening strength, I cut my US Equity exposure in the Hedgeye Asset Allocation Model back down to 0%. I had been at 6% and all of it was in Utilities (XLU), which continue to outperform every Sector ETF in the SP500.

 

A lot of people I speak with are focused on the SP500 not having breached its “lower-low” (on a closing basis) of 1119 (August 8th). That, on the margin, is a less than bearish signal, until it isn’t.

 

Don’t forget that the Russell 2000, Financials, Industrials, etc. have all breached their August 8th lows and have been the leading indicators for all of 2011.

 

What’s also interesting to point out is that if I stretch my model by a half of a standard deviation point (on my immediate-term TRADE duration), I register support at a lower-low of 1109. In other words, closing there would fit the definition of immediate-term possible.

 

In the chart below, I show two ranges: 

  1. Immediate-term TRADE resistance = 1144-1149
  2. Immediate-term TRADE support = 1109-1127 

After seeing this morning’s rally fail at my resistance range and with US Equities being in a Bearish Formation again (bearish TRADE, TREND, and TAIL), I’m not going to be betting on some Eurocrat to protect me from the possible. Not here, not now.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Risk Ranger: SP500 Levels, Refreshed - SPX


MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW

This week's notable callouts include growing default risk for both US and EU financials and EU sovereigns. Further, we saw a new YTD high in the TED spread and a YTD low in our commodities proxy, the JOC Industrial CPI.

 

Margin Debt Falls in August - Don't Get Excited

NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. Let’s put things in context. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. There are two important takeaways. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period). We flagged this for the first time back in May of this year.

 

The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. For those unfamiliar, autocorrelation is simply a statistical term that means that trends tend to continue. In other words, the last few month’s change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which has retraced back to +0.64 standard deviations as of August, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. We’ve dropped 230 S&P handles in getting from +1.5 standard deviations to +0.64 standard deviations. Bear in mind there’s plenty of room for short/intermediate term reversals within this broader secular move.  That said, this setup represents a material headwind for the market.  

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - margin debt

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 1 of 11 improved / 7 out of 11 worsened / 3 of 11 unchanged
  • Intermediate-term (MoM): Negative / 3 of 11 improved / 7 of 11 worsened / 1 of 11 unchanged
  • Long-term (150 DMA): Negative / 2 of 11 improved / 7 of 11 worsened / 2 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - Summary

 

1. US Financials CDS Monitor – Swaps widened across 27 of 28 major domestic financials last week. 19 of 28 companies saw their swaps widen compared to a month ago. 

Widened the most vs last week: JPM, GS, MS

Tightened the most/Widened the least vs last week: COF, PMI, AGO

Widened the most vs last month: C, GS, MS

Tightened the most vs last month: PMI, CB, MMC

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - CDS  US

 

2. European Financials CDS Monitor – Bank swaps mostly widened in Europe last week.  39 of the 40 reference entities were wider week over week. The average widening was 11.3%, or 56 basis points, and the median widening was 23.4%

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - CDS  Europe

 

3. European Sovereign CDS – European sovereign swaps were mostly wider week over week, with only Spanish and Irish CDS spreads tightening. Most notably, the German sovereign CDS spread widened week over week by 26%.  (Please note: Greek CDS is not shown in the chart because the data was not available.  To gauge Greek credit risk, please refer to Greek bond yields below.) 

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - sov 1

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 36 bps last week, ending at 8.20 versus 7.84 the prior week.

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - High Yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 7 points last week, ending at 1534. 

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - Leveraged Loan Index

 

6. TED Spread Monitor – The TED spread made another new YTD high, ending the week at 36.5 versus 35.1 the prior week.

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - TED spread

 

7. Journal of Commerce Commodity Price Index – After treading water for more than a month, the JOC index fell 9.9 points last week, ending the week at -14.3.

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - JOC index

 

8. Greek Yield Monitor – The 10-year yield on Greek bonds rose 244 bps to end the week at 2,363 bps versus 2,119 bps the prior week.

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - Greek Bond Yields

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1.  After bottoming in April, the index has been moving higher.  Last Friday, spreads rose 26 bps and closed at 170 bps.

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - MCDX spread

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index hit its YTD high to ending the week 106 points higher at 1920.

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - Baltic Dry Index

 

11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 10-year yield fell to 1.84, pushing the 2-10 spread to 162 bps, 27 bps tighter than a week ago.   

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - 2 10 Spread

 

12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows the following:  5.6% upside to TRADE resistance, 2.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: RISK CONTINUES TO GROW - XLF Macro Quantitative Setup

 

Joshua Steiner, CFA

 

Allison Kaptur


Big Default

This note was originally published at 8am on September 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Greece should default, and default big.”

-Mario Blejer

 

The day after European stock markets put in their 2011 bottom (September 12th), Bloomberg’s Eliana Raszewski and Camila Russo wrote a  Big Headline article titled “Greece Should Default Big To Address Worsening Debt Crisis.”

 

Notwithstanding this newsy headline being a classic contrarian indicator in its own right (German stocks are up +10% in a straight line since September 12th), Bloomberg was citing a reputable source on the matter. Mario Blejer took over Argentina’s central bank during its epic $95B default in 2002.

 

Back then, that was considered a Big Default.

 

Today, what’s another $100, $200, or $800 BILLION dollars? That’s chump change compared to what Madame Lagarde has in mind with what she has dubbed, en englais s’il vous plait, an “infinite amount of resources.” Read: she’s thinking a bazooka 2-3x the size of Hank The Market Tank Paulson’s in 2008. The ECB and IMF central planning for a Euro-TARP is called the EFSF. And it’s Big!

 

Back to the Global Macro Grind

 

Whether it’s that September 13thBloomberg headline (the SP500 is up +3.4% since) or yesterday’s “How To Prevent A Depression” article from the venerable Perma-Bull himself, Mr. Nouriel Roubini, we have a lot of Big Government Intervention here on our plate to process. So let’s get cracking.

 

It takes an aggressive short seller to know one, and I can assure you that plenty of the bears thought yesterday’s selloff in the SP500 into the close was going to be bearish for both Asian markets overnight and the US stock market Futures this morning.

 

Not happening.

 

Why?

  1. ASIA – Last I checked, it’s a big part of this globally-interconnected earth and ostensibly still has a say in domestic matters that are not related to Europigs or Timmy The Squirrel Hunter Geithner’s latest Keynesian ideas. Both South Korean and Hong Kong unemployment dropped to generationally lows levels last night with August unemployment readings of 3.1% and 3.3%, respectively. On the news, the KOSPI Index (South Korea’s leading indicator for a real-time Global Macro Model like mine) shot back above the 1813 line. What was resistance in Korean stocks is now immediate-term TRADE support.
  2. EUROPE – Qu’est ce qui ce passe avec les higher-lows? (that’s French for why won’t Italy go down on the “news”). What goes down in a raging bear market eventually bounces and could bounce really big if Lagarde pulls out La Bazooka when she speaks in Washington (Fall meetings for the World Bank and IMF) in the next 24-48 hours.
  3. USA – While it’s hard to believe I have not mentioned La Bernank in this note yet (it really is his big Presser day), I think the poor Keynesian is out of bullets. Like his debt-monetizing predecessor of the 1970s, Arthur Burns, he has been neutered by Le Stagflation (0.36%-0.98% Q1/Q2 GDP Growth and 3.8% headline consumer price Inflation) and most likely won’t be able to Twist his way out of it before his career as central-economic-planner-in-chief comes to an end. Pardon le pun. 

Bernanke being in a box (he can’t cut or raise rates anymore) is, on the margin, bullish for Americans. No, not the 10% of us who actually traffic on the long side of the stock market casino. I mean the other 90% of us who really couldn’t give a damn about stocks and would much prefer lower prices for gas, food, college, etc. You know, the non-government manufactured stuff.

 

Bernanke not being able to do much to debauch America’s Dollar anymore will continue to Deflate The Inflation and put pressure on Gold prices. That’s why I cut our exposure to Commodities in the Hedgeye Asset Allocation Model to ZERO percent again yesterday. While commodity price deflation is very bad for Energy and Basic Material stocks, this is very good for Americans.

 

As for what a Big Default in Greece today or tomorrow will bring, don’t sweat it. That’s not going to happen. It’s already happened in both their stock and bond markets. We don’t need another big “Blue Chip Economist” who has been wrong on his 2011 GDP forecast by 60-70% to remind us commoners of that.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1767-1820, $85.69-86.93, and 1188-1229, respectively. Don’t let headlines freak you out at the high or low ends of these ranges. Proactively manage your risk around them.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Big Default - Chart of the Day

 

Big Default - Virtual Portfolio


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Reformation Time

“There is an embarrassing lack of talent and imagination in the last generation of the technocrats.”

-Victor Davis Hanson

 

On August 9th, 2011, Hanson published a thought provoking article in the National Review titled “A Tottering Technocracy” that I highly recommend. If you want to stop the losing in this country, first you need to get the ball out of the losers’ hands. Winners win.

 

“An education-age Reformation is brewing every bit as earth-shattering as its 16th century religious counterpart… So the elites furor grows at those who seek and obtain power, exposure, and influence without the proper background, credentials, or attitude.”

-Victor Davis Hanson (National Review, August 2011)

 

Losers don’t want to hear this today, tomorrow, or the next day. Especially from me. But, for them, I guess that’s too bad isn’t it? I’m the one hiring and we’re going to do everything we can to be the change we all want to see in this country. We can do this.

 

Back to the Global Macro Grind

 

With global markets hanging on every whisper coming out of Eurocrats from Greece to Germany this morning, our economic freedoms remain in the balance.

 

What the Europeans ultimately decide to do when they pull out their multi-trillion Euro-TARP bazooka is out of our hands at this point. That said, we can make sure that the likes of Tim Geithner and his compromised and conflicted cronies don’t’ fool us the 2ndtime.

 

Remember, whatever bazooka took the US Financials up for the short-term remains a national banking embarrassment in this country for the long-term. Letting losers lose is an important principle of “free” markets because, in the end, they’ll lose anyway.

 

I can’t imagine anyone likes playing the game this way, but we have to play the game that’s in front of us. Here’s your Global Macro calendar of critical catalysts for this week: 

  1. Tuesday, Greece’s PM meets with Angela Merkel in Germany
  2. Tuesday, US Federal Reserve President Fisher discusses why he disagreed with Bernanke on implementing the Twist
  3. Wednesday, Bernanke gives a speech on “Emerging Markets” and how his policy to inflate had nothing to do with nothing
  4. Thursday, US GDP for Q211 is released (still subject to 32-81% downside revisions)
  5. Thursday, Germany’s Bundestag votes on the Euro-TARP bazooka
  6. Friday, Congress votes on another Keynesian Spending Bill (and could shut down again if they don’t pass it)
  7. Friday, is month and quarter end for all of the asset managers in our business (watch out for the customary markups) 

Why my Macro calendar of catalysts isn’t more data and fundamentally driven is a failure of our financial system’s current architecture in and of itself. If I’ve said this 1000x in the last 3 years, I have said it 10,000x - Big Government Intervention in our markets will continue to have 2 general outputs:

 

A)     Shortened Economic Cycles

B)      Amplified Market Volatility

 

And… so the “furor grows” for calling policy people out on this… the truth hurts.

 

The truth also reveals new horizons of opportunity. The best news we had last week was that a Strong Dollar can re-build a Strong America. The US Dollar Index was up another +2.5% week-over-week, taking its cumulative appreciation to +7.5% since the end of April.

 

Strong Dollar Deflates The Inflation. Period.

 

Week-over-week, here’s how that looked in the Commodity prices: 

  1. CRB Commodities Index down -8.5%
  2. Oil down -9.2%
  3. Copper down -16.5% 

Yes, the price of Gold and US Equities were down -9.6% and -6.6% respectively. But, that’s good for all of the astute buyers out there who knew Growth Slowing was going to be their 2011 investment theme. The winners are in cash and there’s nothing more a proactively prepared American likes than buying things on sale.

 

The only people who don’t want a Strong Dollar are the people who don’t get paid by a strong dollar. Follow the money and you’ll usually figure these types of things out. You’ll probably pick up some transparent and accountable friends along the way too.

 

To one of Washington/Wall Street’s finest central planners, it may sound upside down for me to say that seeing energy stocks and prices at the pump decline in unison is good for America. But that’s exactly what I want them to hear.

 

They can’t buy my vote of confidence anymore with their fleeting schemes to inflate. It’s Reformation Time in America, indeed.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $79.19-85.91, and 1121-1144, respectively.

 

Bes of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Reformation Time - Chart of the Day

 

Reformation Time - Virtual Portfolio


THE M3: HO'S SJM STAKE; CHINA SEPT CPI

The Macau Metro Monitor, September 26, 2011

 

 

STANLEY HO SELLS REMAINING STAKE IN SJM: REPORT Macau Business

Stanley Ho has liquidated his remaining 0.09% stake in SJM Holdings to his 4th wife, Angela Leong On Kei, for HK$76.4MM.

 

CHINA'S SEPT CPI FORECAST TO BE 6.0-6.2% VS 6.2% IN AUG China Securities Journal

A government researcher tells the China Securities Journal that the slight drop should mainly be attributed to the stringent monetary policy that China government has adopted.


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