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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - November 21, 2011

 

The bull markets we see are in the US Dollar (UUP), Long-term Treasuries (TLT), and Growth Slowing (FLAT).  As we look at today’s set up for the S&P 500, the range is 40 points or -1.29% downside to 1200 and 2.00% upside to 1240. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 1121

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 


EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +411 (+2289) 
  • VOLUME: NYSE 955.68 (-6.73%)
  • VIX:  +32.00 -7.27% YTD PERFORMANCE: +80.28%
  • SPX PUT/CALL RATIO: 1.05 from 2.14 (-50.93%)

 

CREDIT/ECONOMIC MARKET LOOK:

 

  • TED SPREAD: 48.78
  • 3-MONTH T-BILL YIELD: 0.00%
  • 10-Year: 2.01 from 1.96    
  • YIELD CURVE: 1.72 from 1.69

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed, est. 0.19, (prior -0.22)
  • 0am: Existing home sales, est. 4.8m, prior 4.91m
  • 11:30am: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 1pm: U.S. to sell $35b 2-yr notes
  • 2:30pm: Fed’s Lockhart to speak on economy in Brazil
  • 8 pm: Fed’s Bullard gives welcoming remarks in St. Louis

 

WHAT TO WATCH: 

  • Bipartisan supercommittee said to be on brink of failure, setting stage for $1.2t in automatic spending cuts
  • Deutsche Bank CEO Josef Ackermann said yesterday Europe needs a “firewall” to prevent its debt crisis from spreading and should increase the size of its rescue fund
  • Deadline today for the Congressional Budget Office to receive information for scoring a proposal in advance of supercommittee target date of Nov. 23; Democratic aide says supercommittee likely will announce today that it can’t reach agreement on deficit savings

 

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Hedge Funds Cut Bullish Bets by Most in Seven Weeks: Commodities
  • Gold May Drop as Spanish Opposition Victory Curbs Haven Demand
  • Oil Falls to Lowest in a Week on Asian Demand, European Crisis
  • New Cameco Bid Topping Rio Seen in Record Hathor Value: Real M&A
  • Oil Bets Jump to Six-Month High Before Seaway: Energy Markets
  • Dana Gas Yields Jump Most in Month on Debt Risk: Islamic Finance
  • Copper Set for ‘Strong Rally’ in 2Q on Deficit, Goldman Says
  • Mechel ‘Lucky’ Paying Less Than Norilsk on Loans: Russia Credit
  • Graff Diamonds to Use Planned IPO Proceeds on Asia Stores
  • Gold Falls to 3-Week Low as Stronger Dollar Cuts Investor Demand
  • Tin Exports From Indonesia May Drop 26% This Month on Curbs
  • Copper Imports by China Gain for a Fifth Month on Arbitrage
  • Rubber Blacklist Proposal May Cut Defaults, Thai Group Says
  • Copper Falls for Third Day as Growth Concerns Threaten Demand
  • Temasek, ADM, Mitsui to Invest in New Hope Agriculture Fund
  • Newfoundland’s Oil Royalties Fund Debt Reduction: Canada Credit
  • ABB, Siemens to Benefit From Commodity Mkt Strength: Citigroup
  • OPEC’s Meeting in December Will Be ‘Comfortable,’ Badri Says
  • UniCredit Names Fischer Co-Head of Project & Commodity Finance

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

CURRENCIES

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

 

SPAIN  - center right government = austerity = European Stagflation; if Singapore thinks they only to +1-3% GDP growth in 2012, the Europeans could be down -2-4% GDP in no time. European stocks getting rocked and now all major European tapes back in Bearish Formations (bearish across all 3 of my risk management durations); Greece -60% since FEB


THE HEDGEYE DAILY OUTLOOK - euro performance

 


ASIAN MARKETS

 

SINGAPORE – these guys are now being as explicit as we have seen them since 2008 about Global Growth Slowing (the Monetary Authority of Singapore: “The world economy and financial system are at their most fragile state since the 2008-2009 global financial crisis”); both HK and India continued to crash overnight (down -25.3% and -22.2% respectively from YTD tops)

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

  • New York Man Charged With Plotting Pipe-Bomb Attacks in City
  • Fatal Egypt Clashes Fuel Investor Concern Before First Vote
  • Dana Gas Yields Jump Most in Month on Debt Risk: Islamic Finance
  • Assad Defiance in Syria Spurs U.S., Allies to Mull New Steps
  • Egyptian Protesters, Forces Clash for Third Day Before Election
  • Saudi Aramco CEO Sees Risk of World Double-Dip Recession
  • OPEC’s Meeting in December Will Be ‘Comfortable,’ Badri Says
  • Iranian Airline Buys Mothballed Merkel VIP Jet, Spiegel Says
  • Kuwait Opposition Groups Plan Protest Tonight to Oust Premier
  • Saudi Arabia’s Oil Minister Says ‘Very Happy’ With Crude Prices
  • Majid Al Futtaim Seeks to Raise About $500 Million From Sukuk
  • Fawaz Al Hokair May Tap Debt Markets in 2012, CFO Says
  • Dubai’s Shares Retreat to Month Low on U.S. Impasse, Europe Risk
  • Iran Says Oil Market Will Suffer If Its Exports Disrupted
  • Al Futtaim Group Says in Final Stage to Raise $1 Billion Loan
  • Yara, Hydro Raise Salaries for Qataris Amid New Rules: DN Link
  • Shuaa Sinks to Eight-Year Low on Firing Plan, Quarterly Loss
  • Majid Al Futtaim Seeks to Raise About $500 Million From Sukuk

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

The Hedgeye Macro Team

Howard Penney

Managing Director


MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER

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* The TED spread made a new YTD high at 49 bps, again signaling that risk in the banking system continues to rise. Until we see either stabilization or a reversal in this trend Financials investors should not assume the systemic risks are being properly addressed.

 

*Despite newly elected governments in Italy and Spain, credit default swaps for Eurozone countries mostly widened on Monday. Spanish and French swaps were particularly noteworthy widening by 8% and 12%

 

Margin Debt expanded in October to $283B, up from $262M in September.  The increase reflects the massive move in the market in that month, and reminds us yet again that the retail investor usually buys high and sells low. As a reminder, our analysis shows margin debt is highly cointegrated with the market over long periods of time, and importantly hit an important cycle peak in April 2011. We walk through this in greater detail below.

  

* Our macro quantitative model indicates that the short term (TRADE) downside/upside setup in the XLF is currently around 1 to 1 (2.3% downside vs. 2% upside).

 

Margin Debt in October

We publish NYSE Margin Debt every month as soon as it’s released. 

 

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. 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. In other words, the last few months’ 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 retraced back to +0.43 standard deviations in September, 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. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in October’s print of +0.78 standard deviations. But overall, this setup represents an ongoing material headwind for the market.  

 

One limitation of this series is that it is reported on a lag.  The chart shows data through October.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Margin Debt

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 1 of 11 improved / 6 out of 11 worsened / 4 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 6 of 11 worsened / 4 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 8 of 11 worsened / 2 of 11 unchanged

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Summary

 

1. US Financials CDS Monitor – Swaps widened for 26 of 27 major domestic financial company reference entities last week.   

Widened the most vs last week: RDN, MET, XL

Widened the least/ tightened the most vs last week: COF, UNM, MMC

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

Tightened the most vs last month: MBI, GNW, MMC

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - CDS  US

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 39 of the 40 reference entities. The average widening was 8.1% and the median widening was 13.6%.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - CDS  Europe

 

3. European Sovereign CDS – European sovereign swaps mostly widened last week. Spanish sovereign swaps widened by 8% (+36 bps to 463) and French by 12% (+25 bps to 227).

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 24 bps last week, ending the week at 8.06 versus 7.82 the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - High Yield LT

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 5 points last week, ending at 1587.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - LLI LT

 

6. TED Spread Monitor – The TED spread hit another YTD high rising 3.1 points last week. It ended the week at 48.8 versus last week’s print of 45.7. 

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - TED spread LT

 

7. Journal of Commerce Commodity Price Index – The JOC index rose 0.48 points, ending the week at -22.8 versus -23.3 the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - JOC LT

 

 8. Greek Yield Monitor – The 10-year yield on Greek debt fell 26 bps last week, ending the week at 2819 bps.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Gr Bond LT

 

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. Last week spreads widened, ending the week at 183 bps versus 172 bps the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - MCDX

 

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 rose 60 points, ending the week at 1895 versus 1835 the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Baltic Dry Index

 

11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 172 bps, 9 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.3% upside to TRADE resistance and 2.0% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - XLF macro setup

 

Joshua Steiner, CFA

 

 

Allison Kaptur

 

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Future Generations

“We are scattering the substance that belongs to future generations.”

-Irving Fisher

 

“In 1908, after the assassination of President McKinley, Fisher was appointed by his successor, Theodore Roosevelt, the youngest President of the United States, to the National Conservation Commission.” (Sylvia Nasar, “Grand Pursuit”, page 164).

 

Commissions and committees have been around forever. In times of crisis, successful leadership by government committee has rarely worked. Ultimately, a super-sizing of that committee concept isn’t going to work this time around either.

 

By 1909, Congress refused further funding of the National Conservation Commission. Today, they’d probably try to double or triple down on the idea as long as there were some bridges, roads, and teaching jobs to spinoff from it as “economic growth.”

 

The problem, of course, is that no matter what the American Keynesians try to do, the world’s economic growth continues to slow. As cyclical Growth Slowing in Asia and European Stagflation becomes more clear, Global Equity markets are becoming more red.

 

On the heels of last week’s nasty -16.2% year-over-year export slowdown in Singapore, the Monetary Authority of Singapore said: “The world economy and financial system are at their most fragile state since the 2008-2009 global financial crisis.”

 

Much to Timmy Geithner’s centrally planned chagrin, Singapore is China’s trusted economic advisor. When they say something like this – they mean it – and a man-made US committee isn’t going to be able to slow its implications.

 

Back to the Global Macro Grind

 

This morning’s Top 3 Headlines on my screens are: 1. Super-committee Fails, 2. Spain Elects Center-Right Government and 3. Packers Move to 10-0. So at least there’s one team out there who is still focused on winning instead of whining.

 

Asian and European stocks continue to crash and the so called “Santa Claus Rally” in US Equities has never looked so rouge. Last week we were offered plenty of warning signs – here were some of the more important Macro callouts:

  1. US Dollar Index - had another solid week, closing up +1.45%, taking its cumulative gain since May to +6.8%
  2. US Stocks – SP500, Nasdaq, and Russell2000 down -3.3%, -4.0%, and -3.4% on the week, respectively
  3. US Equity Volatility (VIX) – up another +6.7% (up +113% since May)
  4. Commodities (CRB Index) – down another -2.5% (down -14.5% since May)
  5. Oil – WTIC down -1.6% vs Brent down -5.6% (breaking its TAIL line of $110/barrel support)
  6. Gold – down -3.5% on the week closing barely above TREND line support of $1722/oz
  7. Copper – down -1.7% and remains in a Bearish Formation (bearish TRADE, TREND, and TAIL)
  8. US Treasuries – long-term bonds continued to rally, with 30-year yields falling another -4.5% on the week to 2.99%
  9. US Yield Spread – continued to compress (another 10bps week-over-week) as growth continued to slow
  10. TED Spread (3month LIBOR minus 3month Treasuries) – up another 3bps on the week to +49 basis points wide

Those were some of the more obvious leading indicators that a US centric stock market investor may have incorporated into his/her risk management view.

 

Some of the less obvious week-over-week Global Macro moves were as follows:

  1. Argentina’s stock market down -8.1% (major funding issues continue)
  2. France’s CAC40 Index was down another -4.8% (we’re short EWQ)
  3. Austria’s stock market lost another -7.0% (moving YTD down to -38.1%!)
  4. India led decliners in Asian Equities, moving back into crash mode at > -20% from YTD peak (down -4.8% wk)
  5. Hang Seng down another -3.4% and continues to crash from YTD peak (we’re short EWH)
  6. Natural Gas down -7.7% on the week making YTD lows
  7. Palladium down -9% week-over-week
  8. Cocoa down -7.3% week-over-week

Obvious or not to consensus, all of these risk factors are measurable and incorporated into our globally interconnected macro view. It’s a lot of work. And it can be as boring as the day is long – but someone has to be your Risk Manager. Risk never sleeps.

 

Bottom line from here: Get the US Dollar right, and you’ll get mostly everything else right.

 

That’s been our call since May, and we’re sticking to it.

 

Yale economist, Irving Fisher, certainly made his fair share of mistakes – but one of them wasn’t ignoring how mathematical realities could drive inflations and deflations of prices.

 

He called it the “Money Illusion” – and what he ultimately missed was how much debt could perpetuate price volatility. Hopefully, Future Generations of economists figure out that debt’s impact on economies and market prices are not illusions. They are real-time.

 

My immediate-term support and resistance ranges for Gold, Brent Oil, CAC40, and the SP500 are now $1, $106.11-110.29, 2911-3135, and 1199-1240, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Future Generations - Chart of the Day

 

Future Generations - Virtual Portfolio


KNAPP NUMBERS SLOW IN OCTOBER

The Knapp Track report for October shows a sequential deterioration in casual dining trends from September. 

 

Our estimates for Knapp Track October comparable sales and traffic were +0.5% and -0.5%, respectively.  Actual comps and traffic came in at +0.8% and -0.7%, respectively.

 

Estimated Knapp Track casual dining comparable restaurant sales grew +0.8% in October versus a final accounting period number of 1.9% (versus the prior estimate of 2.0%) in September and +1.2% in October 2010.  The sequential change from September to October, in terms of the two-year average trend, was -60 basis points.

 

Estimated comparable guest counts were -0.8% versus a September number of -0.2% (versus a prior estimate of 0.0%) and -1.2% in October 2010.  The sequential change from September to October, in terms of the two-year average trend, was -20 basis points.

 

We  are maintaining a favorable view of EAT on the TRADE, TREND, and TAIL durations and see the company’s positive traffic trends, at a time when the industry is seeing declining traffic, to be a positive sign.

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


The Week Ahead

The Economic Data calendar for the week of the 21st of November through the 25th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - 1. cal

The Week Ahead - 2. cal


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