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Hypnotic Markets

This note was originally published at 8am on December 28, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The only time I have problems is when I sleep.”

- Tupac Shakur

 

In Greek mythology, Hypnos is known as the god of sleep.  His palace was a dark cave where the sun never shone.  The palace itself had no gates or doors, so that he would never be awakened by sounds from doors opening and closing.  Unlike Hypnos, global macro markets, especially in these interconnected times, never sleep.

 

The most noteworthy news overnight, not surprisingly, comes fromEurope.  The first Italian bond auction of the week was held this morning and it was, on the margin, successful. Italysold 9 billion euro of 6-month bills at 3.25%, which was dramatic improvement over the last auction on November 25ththat sold at a yield of 6.5%.

 

As Greek mythology tends to work, Hypnos’ brother was Morpheus, the King of Dreams.  So, while you may still be asleep, especially given the holiday shortened week, the paragraph above is not a dream.  The Italians actually did have a better than expected bond auction this morning.  If there was any disappointment, it was likely in the tranche of 2013 zero coupon Italian debt that was auctioned this morning.  The Italians were able to sell only 1.7 billion euro of the maximum allotted 2.5 billion euro.

 

Certainly though, we need to jot down this auction as a positive data point in our notebooks, as it is a sequential improvement.  The true test of whether there is an improved appetite for Italian sovereign debt will occur tomorrow.  In tomorrow’s auction, the Italians will attempt to sell up to 8.5 billion euro of 3, 6, and 10-year debt.  In theory, if the Long-Term Refinancing Operation, or LTRO, of the ECB is even moderately successful, then tomorrow’s auction should see some improvement over the prior comparable auction.

 

Yesterday in an intraday note to our subscribers, we wrote a note titled, “The LTRO is No Bazooka” (email sales@hedgeye.com if you’d like a copy) and highlighted the following key points:

 

“In the chart below, we’ve highlighted the ECB liquidity facility going back one year and in the inserted chart going back roughly one month. The key takeaway is that the ECB liquidity facility, which is used by European banks to effectively park money, hit a new all-time high at 411 billion euros this morning and has been increasingly rapidly since the inception of the LTRO just over a week ago. In fact, the day before the LTRO was put into effect, the ECB facility was at 265 billion euro and as of this morning has increased by 146 billion euro, or more than 70% of the incremental liquidity from the LTRO.

So, not only is the LTRO not being used as a bazooka by the European banks, but these banks are parking the borrowed LTRO money with the ECB rather than using it to buy sovereign debt, and thus are experiencing a negative yield on the trade.”

 

Given the results of the Italian bond auction this morning, there is some evidence the LTRO is being used as the fabled bazooka.  Ironically, though, the amount of money parked at the ECB’s liquidity facility increased dramatically overnight to a record of 452 billion euro.  This is an increase of 41 billion euro from the prior day. We would caution reading too much into the “successful” Italian bond auction as clearly the risk aversion trade remains in full effect.

 

In other European news, the prominent Spanish newspaper, Expansion, is indicating that Rajoy may force Spanish banks to cut the valuation of the real estate assets on their books by up to 20%.  The fact that Spanish banks still need to write down real estate assets on their balance sheets should not be terrible surprising to anyone.

 

Spanish home ownership rates are above 80% on the back of cheap long-term mortgages, often up to 40 and 50 years. As well, the government encouraged home ownership by making 15% of mortgage payments a tax deduction.  The Spanish real estate bubble makes Phoenix and Florida housing look like a value investment.

 

Unfortunately, the Spanish real estate market isn’t likely to improve anytime soon. Specifically, in October, Spanish real estate loans decreased for an18th straight month and were down 43.6% year-over-year.  Our long term analysis has shown that demand for mortgages is one of the best predictors for future real estate prices.  Therefore a 20% cut in the valuation of real estate assets for Spanish banks seems more than reasonable.

 

On the domestic front, Bloomberg this morning is predicting that 2012 could be the biggest year for IPOs since 1999.  Given the current filings, internet IPOs may raise more than $11.0 billion in the coming year.  In the face of heightened volatility and a 2011 that was lackluster in terms of equity offerings, raising only $156 billion in 2011 versus $252 billion, the onslaught of internet offerings seems a bit excessive.  Undoubtedly, even Dionysus, the Greek god of partying and excesses, would agree with that.

 

Keep your head up and your stick on the ice,

 

Daryl G. Jones

Director of Research

 

Hypnotic Markets - DJ chart EL wednesday

 

Hypnotic Markets - hvp12 28


WMT: Portfolio Update

WMT continues to be one of our favorites on the long side as the Hedgeye Macro team maintains a bullish outlook on the US dollar and consumer discretionary into 2012.

 

Though it is near-term TRADE overbought, we continue to like WMT over the TREND and TAIL durations for the following reasons…

 

1) US business is inflecting after years of investing to turn the cruise ship. This is partially apparent in WMT outperforming peers this holiday -- in part due to layaway plan, but also due to better alignment outside of consumables.         

 

2) Great play on stronger dollar heading into 2012. 


3) Street estimates are low next year by 3-4%. Not huge, but meaningful for WMT. 


4) Though not really 'new' is share repo is a part of many investors' thesis, the fact is that the Walton Family is slowly but surely taking the company private. 


5) Sentiment (per our backtested indicator) has never been worse.  

 

WMT: Portfolio Update - WMT TTT

 

WMT: Portfolio Update - WMT Sentiment


Sneaking One Past the Goalie – CAF Trade Update

Position: Long Chinese equities (CAF)

 

Late yesterday afternoon, Keith purchased the Morgan Stanley China A-Share Fund (CAF) in our Virtual Portfolio. Not for the faint of heart, Chinese equities closed 2011 down -21.7% after front-running 2011’s global growth slowdown by falling -14.3% in 2010. Cumulatively, the Shanghai Composite Index is down -31.8% and China’s yield curve (10’s-2’s) has compressed -82bps since we made a then-contrarian bearish call on China in Jan ’10 via our Chinese Ox in the Box thesis. For comparison, the S&P 500 is up +11.1% over that same duration.

 

That’s certainly not to say we’ve had it right the entire time. We were bullish on China from a fundamental perspective throughout the second and third quarters of 2011, based largely upon a series of internal and external catalysts that included: 

  1. A slowing of the multi-year deceleration in rates of Chinese economic growth;
  2. A peaking and a subsequent rolling over of Chinese inflation;
  3. An introduction of accommodative monetary policy – first via ending the tightening cycle and secondly via introducing an easing cycle; and
  4. Slowing global growth forcing investors to pay a premium for the growth they could find (i.e. China). 

For the most part, this thesis is still very much intact and could come to fruition in 2012. What made us early (and wrong) was the misjudgment of Time & Space Risk, or the amount of trading days it would take for the catalysts to line up and valuation to become supportive enough to warrant a purchase of Chinese equities to the marginal investor.

 

In full respect of the coaching points learned from the last rep, this is certainly not a risk we’re likely to miscalculate again – particularly given current elevated levels of volatility across asset classes (i.e. time itself is a major risk factor when volatility is high). That said, however, we did see a near-term opportunity for a short-term mean reversion trade in Chinese equities. Our process was rewarded with a +1.2% bounce in the Shanghai Composite Index overnight on the strength of a sequential acceleration in HSBC’s Manufacturing PMI report (48.7 DEC vs. 47.7 NOV).

 

More importantly, the gain fueled the index to a close just above our TRADE line of 2,190. We’re still long and we’re happy to wait and watch to see if this confirms. The next line of resistance (TREND) is up at 2,381. A sustained breakout above the TREND line would likely put the aforementioned storytelling back in play and may force investors to chase China. And while this is an outcome we do not necessarily expect at the current juncture due to the sheer uncertainty around the magnitude of the growth slowdown and the associated implications for the banking and property sectors, we are cognizant of the fact that every trend starts with a mere trade

 

Wishing you all the best in the New Year,

 

Darius Dale

Senior Analyst

 

Sneaking One Past the Goalie – CAF Trade Update - 1


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.

Signing Off: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY)

 

I don’t have a short position in either SPY or a Sector ETF here. That needs to change. But it likely won’t today. The Year End is being TimeStamped right around where the SP500 started.

 

While it requires some serious storytelling on why a Perma-Bull is long now (‘Europe priced in, stocks are cheap, etc’) versus why they were long then (‘US Growth 3-4%, Sales Growth Accelerating, etc’), history will mark its spot in t-minus 5 hours of trading. Growth Slowing will have equated to multiple compression across Global Equities.

 

Looking forward, here are the lines that matter most across our 3 risk management durations: 

  1. Long-term TAIL resistance = 1270
  2. Immediate-term TRADE support = 1249 

Not unlike the end of July and October of 2011, what’s interesting about my long-term TAIL is that it rests above the 200-day Moving Monkey. We call it that because that’s where 1-factor price momentum chasers have been getting sucked in (repeatable process!).

 

If there’s one quantitative risk management lesson from 2011, it’s the same lesson learned in 2008: Simple moving averages like the 50 and 200 day do not proactively predict risk – they force emotional reactions.

 

Signing off for 2011,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Signing Off: SP500 Levels, Refreshed - SPX


NKE: Portfolio Update

Nike remains one of our top longs headed into the new calendar year. Keith sold NKE from the virtual portfolio today on a TRADE basis. The TREND and TAIL remain solid.

 

For our longer term thoughts following the latest quarter's results, please see our 12/21 note "NKE: Too Good".

 

NKE: Portfolio Update - NKE Trade Trend

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 30, 2011

 

As we look at today’s set up for the S&P 500, the range is 25 points or -1.43% downside to 1245 and 0.55% upside to 1270. 

 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 1230

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE:  1739 (-1899) 
  • VOLUME: NYSE 531.68 (-2%)
  • VIX:  22.65 -3.7% YTD PERFORMANCE: +27.61%
  • SPX PUT/CALL RATIO: 2.79 from 2.47 (12.96%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 58.1
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.03 from 1.97   
  • YIELD CURVE: 1.63 from 1.63

 

GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Net export sales, grains
  • 10am: NAPM-Milwaukee, Dec., est. 58.3 (prior 56.7)

 

WHAT TO WATCH:

  • S&P 500 enters the final trading day of the year up 0.4% for 2011; the Dow is 6.1% higher, while the Nasdaq is down 1.5%. Markets are open for regular trading day.
  • Bank of America is poised to be worst performer in Dow, off 59% YTD
  • In Europe, Stoxx 600 headed for first annual decline since 2008, down about 12% YTD
  • IMF may warn Greece bond writedown isn’t enough, WSJ says
  • JPMorgan, Ally sued yesterday by HSH Nordbank on $293m losses in mortgage bonds
  • North Korea warned world not to expect change from regime under new leader Kim Jong Un
  • No major movie releases this weekend
  • No IPOs expected to price today

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Corn Traders Extend Bullish Bets on South America: Commodities
  • Commodities Poised for First Annual Decline Since 2008 on Europe
  • Oil Heads for Third Yearly Gain on Mideast Tension, U.S. Economy
  • Gold Rebounds, Heads for 11th Annual Gain on Demand Speculation
  • Copper Rises as U.S. Growth May Make Up for Slowdown in China
  • Slowing China Means Ore-Ship Rates at Lowest in Decade: Freight
  • Alcoa Accused of Bribing Alba Officials in Aluminum Scheme
  • Corn Gains in Chicago as South America Dryness Worries Persist
  • Rubber Posts First Annual Loss in Three Years on Europe Crisis
  • Fracking Ban Threats Seen Hollow in Calfrac Bonds: Canada Credit
  • Palm Oil Gains, Paring First Annual Loss Since 2008, on Weather
  • Asia Refiners’ Fuel Oil Losses at Two-Year Low: Oil Products
  • Cellulosic Ethanol Again Misses U.S. Target: Chart of the Day
  • COMMODITIES DAYBOOK: Oil Heads for Third Annual Increase
  • CDS Dealers to Judge If Sino-Forest in ‘Credit Event,’ ISDA Says
  • Record Surge in CO2 Credits May Hamper Rebound: Energy Markets
  • Oil May Rise as Iran Threatens to Block Waterway, Survey Shows

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

CURRENCIES

 

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - asia performance


 

MIDDLE EAST (HEADLINES FROM BLOOMBERG)

  • Oil Heads for Third Yearly Gain on Mideast Tension, U.S. Economy
  • Gold Rebounds, Heads for 11th Annual Gain on Demand Speculation
  • Google Backs Israel Entrepreneurs as Local Financing Drops: Tech
  • Malaysia’s Highest-Rated Sukuk Lead 2011 Gains: Islamic Finance
  • Teva Heads for Biggest Decline in Five Years: Israel Overnight
  • Treasuries Set for Best Year Since 2008, Beating Stocks, Dollar
  • Egypt’s Long-Term Currency Debt Downgraded by Fitch Ratings 

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

The Hedgeye Macro Team

Howard Penney

Managing Director

 

 

 

 


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