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Process: SP500 Levels, Refreshed

POSITION: Long Healthcare (XLV), Long Consumer Discretionary (XLY)

 

Our call yesterday was to buy the SP500 if it held our immediate-term TRADE support (1232). Our call was also to sell it if it failed at our immediate-term TRADE line of resistance (1249). We did both.

 

Don’t fight us – it’s just the process of managing the risk implied in our range (I explained that in more detail in this morning’s Early Look).

 

While the long-term TAIL (1270) of resistance for the SP500 insulates managing the broader 1 range of risk, our process attempts to get in there and make a call on the shorter-term durations. I realize that’s not for everyone. But it’s what we do well. So we’ll do more of it.

 

As a reminder, across all 3 of our risk management durations, here are the key lines we’re focused on: 

  1. TAIL = 1270
  2. TRADE resistance = 1249
  3. TRADE support = 1232 

Manage your gross and net exposures around these ranges instead of being forced to chase beta.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Process: SP500 Levels, Refreshed - SPX


THE HBM: DNKN, PEET, SBUX, PNRA, EAT

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Chain Store Sales

 

The post Black Friday sales decline continues with the ICSC index falling -0.1% on top of the prior week’s 2.3% decline. The index has now fallen 3 of the last 4 weeks.  The year-over-year growth declined to 2.9% from 3.8% last month.  Since there were apparently no weather issues and the survey suggests that more shopping has been completed than at this point last year, sales trends are likely to slow further.

 

 

Small Business Optimism

 

The National Federation of Independent Business index rose from 90.2 to 92 for November driven by better U.S. consumer spending and credit conditions. This is the third consecutive monthly gain and puts the index at its highest since February 2011; although the index remains 2-points lower than where it started the year. Most of the details are improving from depressed levels; hiring plans and sales expectations showed improvement between October and November.

 

 

Comments from CEO Keith McCullough

 

Our call yesterday for a Short Covering Opportunity only remains relevant from the level we made it at – manage your risk on green today:

  1. CHINA – certified train wreck in Chinese stocks didn’t stop overnight w/ the Shanghai Comp down another -1.9% to -19.9% YTD finally moving it to an immediate-term TRADE oversold signal in my model. Chinese Exports to Italy in NOV down -23% y/y! (not a typo)
  2. European Data – first morn in what seems like forever (10 months) where my entire data run on Europe was not a another sequential deterioration – better than toxic is still awful, but German ZEW up for the 1st time in 10mths to -53.8 (vs -55.2) and the UK inflation print stopped going up (+4.8% NOV vs +5.0% OCT). European Stagflation remains.
  3. COMMODITIES – last Thursday I cut my asset allocation to commodities back down to 0% after the ECB press conf as I thought the EUR/USD was going to unwind again – get that USD direction right and you get Commodities right – Oil, Copper, Corn, etc all have broken TAILS and Gold continues to break down this morning (new Gold range = 1 w/ TREND resistance = 1743)

I’m long SPY and holding my longest net long position of Nov/Dec. I doubt I overstay my welcome.

KM

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: DNKN, PEET, SBUX, PNRA, EAT - subsector fbr

 


QUICK SERVICE

 

DNKN: Dunkin’ Brands released an investor presentation this morning on the back of yesterday’s positive initiation from Jeffries (“Buy”, PT $30). Both the presentation and the initiation were bereft of any details on the all important backlog.  To hit the company’s long-term target EPS growth of 15%+, unit growth needs to pick up and we are not seeing sufficient evidence of this yet.

 

PEET: Peet’s Coffee was initiated “Buy” at Jeffries.

 

SBUX: Starbucks was initiated “Buy” at Jeffries.

 

SBUX: Starbucks was reiterated “Overweight” at JP Morgan.

 

PNRA: Panera Bread was initiated “Buy” at Jeffries.

 

 

CASUAL DINING

 

EAT: Brinker President of Global Business Development, Carin Stutz, has left the company in order to take over as president and CEO of Illinois-based COSI from January 1.

 

THE HBM: DNKN, PEET, SBUX, PNRA, EAT - stocks 1213

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Incredibly Hobbled

This note was originally published at 8am on December 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.

 “I can believe anything, provided it is quite incredible.

-Oscar Wilde 

 

Heading into tomorrow’s highly anticipated two-day EU Summit, Wilde’s pithy quote reminds us that Eurocrats have a tall order to impress the market with policy that will revert the direction of Europe’s 19 month-old sovereign debt and banking crisis. Below we caution that tomorrow’s results will likely disappoint investors’ expectations. Why?

 

If we’re right that the focus of tomorrow’s resolutions are largely centered on the topic of a fiscal union, either for the EU’s 27 countries or the Eurozone’s 17, we don’t think that the creation of another (likely bureaucratic) organization to monitor and impose budget restrictions will be the “bazooka” around which markets will see a sustained rally. Over the last decade we’ve seen the utter inefficiency of a somewhat similar program in the EU’s Stability and Growth Pact—a budget agreement issued in 1997 that limited member states to public debt (as a % of GDP) to 60% and deficit to 3%— as the majority of countries (including Germany) breached its mandates. 

 

Further, beyond how a “hands-on” Fiscal Union 2.0 is going to make up for the shortcomings of the Stability and Growth Pact, it’s unclear how Eurocrats will address the pressing question:  if peripheral European countries can’t grow and can’t fund themselves with rising credit spreads, and therefore can’t balance their budgets no matter how much austerity is delivered; aren’t allowed to default (Greece); and can’t individually adjust monetary policy, 1.) how do weak states get out of this vortex? and 2.) what’s the benefit to weaker states to be bound in the Eurozone?

 

If we take the view that major Eurocrat actors (including Merkel, Sarkozy, and Draghi) strive to preserve the fabric of the Eurozone, we believe Eurocrats largely have their hands tied as they don’t have the facilities (firepower) to adequately answer the questions above.  We estimate that European banks and the sovereigns need a funding facility to the tune of $2 to 3 Trillion (or $1.25 to 1.75T to recapitalize banks and $0.75 to 1.25T to fund future sovereign deficits) to address bailout and funding assistance needs.

 

Key factors that will continue to challenge issuing a “bazooka”:

1.)    The ECB, unlike the Fed, cannot print money to leverage/expand the EFSF

2.)    Merkel and ECB stand against the issuance of Eurobonds

3.)    We don’t see it in China’s interest to run in with a blank check to “save” Europe

4.)    The current EFSF has a mere €250 Billion left to address sovereign and banking concerns

5.)    The IMF only has €385 Billion in lending capabilities

6.)    Fiscal Union 2.0 will require treaty changes and a united voices across at least 17 countries

 

Should we not get any positive discussion on points 1-3 on Friday, which we think is highly likely, we do not expect capital markets or the EUR-USD to lift into a sustained rally (see chart below of our EUR-USD levels; we’d short any rally around $1.36 and don’t see a next material line of support until the previous low of $1.19).  It’s more probable that the ECB reiterates its ardent position that its sole mandate is price stability; Merkel says she is unwilling to see German funding costs rise; and the “value” of assets on the chopping block for the Chinese is unclear.

 

Under such a scenario, particularly in which there’s no talk or action specific to ECB backstop involvement or the issuance of Eurobonds, we’d expect the ECB’s secondary bond purchasing program, the Securities Market Program (SMP), to take on a larger role to fill waning demand for PIIGS paper. For context, last week the SMP bought €3.7 Billion versus €8.6 Billion in the previous week to take its total since May 2010 to €207 Billion.

 

Ultimately, we think this leaves the region in a tenuous position. First, the SMP is intended to only be a “temporary” program. Second, it will force the SMP to take on a much larger role to meet the demand of PIIGS issuance, or put an artificial bid that alone may not drive down sovereign yields.

 

More Risks on the Horizon Without ECB Support


While we view the actions of ratings agencies as lagging indicators, Monday’s move by Standard & Poor’s to place the ratings of 15 Eurozone nations on CreditWatch negative and Tuesday’s announcement that the EFSF’s AAA rating is being placed on CreditWatch negative adds one more bee in the Eurocrats’ bonnet ahead of Friday.  S&P said that ratings could be cut up to one notch for Austria, Belgium, Finland, Germany, Netherlands, Luxembourg – and by up to two notches for everyone else (France, Italy, Spain, Portugal, Ireland, Slovakia, Slovenia, Estonia, and Malta.)  (Note: Greece was spared, and Cyprus remains on negative watch.)

 

While S&P said it would review the ratings following the Summit, the warning portends negatively for the EFSF, a facility that is built around its AAA status. Should downgrades come to Germany and France, its main contributors at 28% and 22%, respectively, we’d expect funding costs to rise, which negates the very purpose of this facility, and once again (negatively) refocuses the eye on the undercapitalized programs to fund imbalanced sovereigns and banks. 

 

Expect insolvent banks in this environment to struggle to raise money on the secondary market. This will elevate risk as sovereigns are now less capable to back their struggling banks, and the EFSF is far undercapitalized. Here we think French and German banks will be critical to watch. Along those lines, the European Banking Authority will publish updated stress tests at 12pm EST today to review how much capital lenders should raise to absorb losses from Eurozone bonds. We’ll reiterate that if countries truly mark their sovereign holdings to market, we think the capital raise will need to be substantially larger than the Q2 published result of €106 Billion to reach a 9% core Tier 1 capital by mid-2012.

 

German Chancellor Angela Merkel said to her Parliament on Dec. 2, 2011: "Resolving the sovereign debt crisis is a process, and this process will take years." If Europe’s currency union is here to stay, beware of the lofty expectation that Friday will bring quick-fixes to years of fiscal and banking imbalances and excesses, as well as cultural differences that divert priorities as Europe will once again need to find a united voice on fiscal union.

 

Unfortunately, should Friday’s Summit come up short of expectations, there’s nothing currently on the calendar in terms of summits or major catalysts into year-end around which markets could get behind.  

 

Hobble on.

 

Matthew Hedrick

Senior Analyst

 

Incredibly Hobbled - EL EUR

 

Incredibly Hobbled - VP 12.8


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 13, 2011

 

KM notes from this AM - Our call yesterday for a Short Covering Opportunity only remains relevant from the level we made it at – manage your risk on green today.  I’m long SPY and holding my longest net long position of Nov/Dec. I doubt I overstay my welcome.  As we look at today’s set up for the S&P 500, the range is 16 points or -0.36% downside to 1232 and 0.93% upside to 1248. 

 

SECTOR AND GLOBAL PERFORMANCE

 

Yesterday our immediate-term TRADE line of support for the SP500 (1232) holding intraday, KM took the asset allocation to US Equities up to 12% today. We’re also long Healthcare (XLV) and Consumer Discretionary (XLY) as both Sectors (1) remain bullish on both TRADE and TREND durations and (2) are supported by our fundamental Global Macro research view of King Dollar. Strong Dollar = Strong US Consumption.

 

We’ve stopped hoping that central planners and their Keynesian sources understand this basic point about a country’s currency and her purchasing power. The political economy is not the real-time economy – and hope is not a risk management process.  The 2 worst Sectors to be long under our bullish US Dollar theme remain Financials (-19.8% YTD) and Basic Materials (-13.3% YTD).

 

THE HEDGEYE DAILY OUTLOOK - levels

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE:  -1867 (-4017) 
  • VOLUME: NYSE 779.79 (-5.06%)
  • VIX:  25.67 -2.69% YTD PERFORMANCE: +44.62%
  • SPX PUT/CALL RATIO: 1.66 from 1.61 (+3.07%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 53.84
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.03 from 2.07   
  • YIELD CURVE: 1.79 from 1.85

 

GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business, est. 91.5, (prior 90.2)
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Retail Sales, est. 0.6%, (prior 0.5%)
  • 10am: IBD/TIPP economic optimism, est. 42.3, (prior 40.6)
  • 10am: JOLTS job openings: (prior 3354)
  • 10am.: Business inventories: est. 0.8% (prior 0.0%)
  • 11:30am: U.S. to sell $35b 4-wk bills, $25b 52-wk bills
  • 1pm: U.S. to sell $21b 10-yr notes reopening
  • 2:15pm: FOMC Rate decision, est. 0.25%
  • France Nov final CPI (EU harmonized) +2.7% y/y vs consensus +2.5%
  • UK Nov - CPI +4.8% y/y vs consensus +4.8%, prior +5.0%; RPI +5.2% y/y vs consensus +5.1%, prior +5.4%
  • Germany ZEW Survey Current Situation (Dec); actual +26.8%; consensus +30
  • Germany ZEW Economic Sentiment (Dec); actual (53.8); consensus (55.3)

WHAT TO WATCH:

  • Fed holds policy meeting today amid speculation officials will maintain pledge to keep borrowing costs near record low
  • Former MF Global CEO Jon Corzine appears before Congress again; CFO Henri Steenkamp and Bradley Abelow, president and COO, said they didn’t know what happened to as much as $1.2b in missing client funds, in testimony prepared for today’s hearing
  • House expected to vote today on package that extends employee payroll tax cut for one year
  • Secretary of State Clinton meets with UAE Foreign Minister Abdallah bin Zayed, then holds bilateral meeting with Bosnia and Herzegovina President Zeljko Komsic

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

COMMODITIES – last Thursday we took the my asset allocation to commodities back down to 0% after the ECB press conf as I thought the EUR/USD was going to unwind again – get that USD direction right and you get Commodities right – Oil, Copper, Corn, etc all have broken TAILS and Gold continues to break down this morning (new Gold range = 1 with TREND resistance = 1743)

  • Sino-Forest May Default as It Will Miss Earnings Deadline
  • Laborer-Turned-Billionaire Tinkler Plans More Coal M&A
  • Death of Gold Bull Market Seen by Gartman After Selling Metal
  • China’s 150 Million Electric Bikes Bolstering Lead: Commodities
  • Gold May Fall a 2nd Day in London as Dollar Strength Cuts Demand
  • Oil Trades Near Two-Week Low as Downgrade Risk Weighs on Outlook
  • World Fuel Seen Riding Shipping Bankruptcy to 12% Gain: Freight
  • Gold Imports by India May Decline as Rupee Plunges to Record
  • Rio Allowed to Maintain Ivanhoe Stake, Arbitrator Decides
  • Freeport Indonesia Workers Expect Deal to End 3-Month Strike
  • China’s Gold Imports From Hong Kong Surge 51% on Haven Demand
  • OceanaGold Seeks Acquisitions to Boost Output, Wilkes Says
  • Copper Drops for Second Day on European Debt-Crisis Concern
  • Vale Pays $1.1 Billion to Increase Fertilizer Unit Stake
  • Palm Oil Production in Malaysia Declines to Seven-Month Low
  • Wheat Gains as Traders Speculate Farmers May Switch From Corn
  • Saudi Oil Minister Says He’s Happy With Current OPEC Output
  • Aluminum Surplus May Narrow 12% as Asian Consumption Expands

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

 

European Data – first morning in what seems like forever (10 months) where my entire data run on Europe was not a another sequential deterioration – better than toxic is still awful, but German ZEW up for the 1st time in 10mths to -53.8 (vs -55.2) and the UK inflation print stopped going up (+4.8% NOV vs +5.0% OCT). European Stagflation remains.

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

 

CHINA – certified train wreck in Chinese stocks didn’t stop overnight with the Shanghai Comp down another -1.9% to -19.9% YTD finally moving it to an immediate-term TRADE oversold signal in my model. Chinese Exports to Italy in NOV down -23% y/y!

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST (HEADLINES FROM BLOOMBERG)

  • Tunisia After Revolt Can Alter E-Mails With Big Brother Software
  • Egyptians Seek Dollars as Devaluation Concern Grows: Arab Credit
  • Security Council Urged to Act as UN Raises Syria Death Toll
  • IEA Cuts 2012 Demand for OPEC Oil as Global Consumption Slows
  • Iraq Can Lead the Arab World If It Gets Oil Policy Right: View
  • Pakistan Sukuk Drought Spurs Demand From Banks: Islamic Finance
  • Iran to Hold Military Drill for Closing Hormuz Strait, Fars Says
  • Saudi Oil Minister Says He’s Happy With Current OPEC Output
  • Iran Sees Oil Prices Falling in 2012 If OPEC Doesn’t Curb Output
  • U.A.E.’s New Company Law May Struggle to Prompt IPOs Amid Slump
  • Drake & Scull Wins 142 Million Dirhams Contract in Egypt
  • Petrofac to Beat Oil Services Profit Target With 20% Growth
  • BP Plans to Produce First Natural Gas in Oman by 2016
  • Saudi Arabia, Pakistan, Emirates, Selangor: Islamic Bond Alert
  • BP to Spend $1b by 2012 on Omani Tight Gas Appraisal, Evans Says
  • Emirates, Qatar Banks Interested in Turkey, Hurriyet Reports
  • U.S. Violation of Iran Airspace Was Clear, Mehmanparast Says
  • Saudi Arabia’s Al-Naimi Says He’s Happy With Current OPEC Output
  • Obama Says U.S. Has Asked for Iran to Return Downed Drone

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

The Hedgeye Macro Team

Howard Penney

Managing Director

 



Time and Price

“The only reason for time is so that everything doesn’t happen at once.”

-Albert Einstein

 

Intraday yesterday we made another “Short Covering Opportunity” call. It was no different than any of the other short covering calls we’ve made in 2011 (August 8th, September 12th, October 4th). It’s what we do. Timing matters.

 

Immediately after making the call our Sales Desk and tweet-machines lit up like a Christmas tree with questions that weren’t all the same – but they certainly rhymed: “but what’s changed”… “why here”… “what’s the catalyst”… etc.

 

The summary answer to all of the questions is that nothing in our risk management process changed – time and price did. With a long SP500 (SPY) position, a 12% asset allocation to US Equities, and 10 LONGS vs 4 SHORTS in the Hedgeye Portfolio, this is the most bullish position I have taken in all of November-December (that’s a good thing – the SP500 is down for both months).

 

Back to the Global Macro Grind

 

If you go all the way back to a week ago today, our Senior Analyst of European research, Matt Hedrick, and I were making an explicit call to short Global Equities and Commodities into the EU Summit. Long live King Dollar (UUP) versus the Euro (FXE) was implied.

 

On two separate occasions (last Tuesday and Wednesday) you had an opportunity to sell SP-1268. Maybe you didn’t top tick it, but hopefully you cut your gross and net exposures up there because I can assure you that in the world of your own money, a -3% drawdown of your capital (from 1268 to yesterday’s lows of 1229) matters.

 

Now some people throw their arms up in the air and say, ‘well, I can’t manage that type of a move’ or ‘I’m too big to make those types of decisions that quickly’ – and I hear and respect where they are coming from. But that doesn’t mean that other people can’t.

 

Yes We Can.

 

Managing your gross and net exposure within a band of 300 basis points of risk (3%) is very achievable if A) you have a Global Macro research process and B) you have the catalysts right.

 

Sometimes catalysts like the EU Summit are scheduled events. Sometimes the catalyst is simply time and price. You need a process to absorb both.

 

Why did I buy the SP500 (SPY) yesterday?

  1. My immediate-term TRADE line of SP500 support (1232) held
  2. My immediate-term TRADE line of VIX resistance (27.78) held
  3. My immediate-term range of risk collapsed to 37 SP500 points wide (vs 77 on the day prior)

Those first two points are easy to understand. US Equities (SPY) and Volatility (VIX) are inversely correlated on the order of -0.7 right now and of the many factoring relationships in our model, that’s one of the most important ones to consider.

 

Volatility is also one of the most misunderstood risk factors in all of portfolio construction. In many instances it’s a coincident to lagging indicator – in some instances it’s a leading indicator. That’s why it drives people nuts. That’s why I have built a model to front-run my own volatility signals.

 

Front-running? Bad word – if you run a brokerage like Corzine did. Good idea if you want to get ahead of the robots that are making decisions in real-time. If you didn’t know that they chase beta, now you know.

 

Most of you who have dialed into our Morning Call (every morning at 830AM EST – ask for access) know that I front-run my Volatility range using a ‘range of risk’ model that calculates the probability of the next move in both volatility and price.

 

What does that mean?

  1. If my range is compressing (ie from 77 points wide to 37 points), the implied risk of the range is going down (= BUY)
  2. If my range is widening (ie from 37 points wide 145 points wide where it was last Tuesday), implied risk goes up (= SELL)

To be clear, my ‘range’ signal is one of the many signals I consider before making any exposure, asset allocation, or position decision. Remember, Multi-Factor and Multi-Duration is how we roll.

 

Not unlike seeing a play develop on the ice, time and patterns are omnipresent. As opposed to the time and space a hockey player needs to consider in making a short-term decision, solving for time and price risk in markets is what can make for a longer-term career.

 

My immediate-term support and resistance ranges for Gold (bearish TRADE and TREND), Brent Oil (Bearish TRADE, TREND, and TAIL), and the SP500 (bullish TRADE; bearish TAIL) are now $1, $107.12-109.29, and 1. On a move back towards 1248, I’ll likely do the opposite of what I did yesterday. Time and price pending.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Time and Price - Chart of the Day

 

Time and Price - Virtual Portfolio


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