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Bullish TAIL: SP500 Levels, Refreshed

POSITIONS: Long Consumer Discretionary (XLY), Long Consumer Staples (XLP), Long Utilities (XLU)

 

Being longer works when the market goes up. I know, it’s the stuff of genius.

 

I thought I was some version of a genius circa 2004-2006 when I was getting paid too much because everything I’d buy would be rumored to be LBO’d. Now some of those companies are bankrupt. Thinking we’re smarter than the market is cyclical.

 

Today, I’m much more comfortable Embracing Uncertainty and letting the market tell me what to do. My governor in that regard is my TRADE/TREND/TAIL risk management process. I built it to govern my own illusions of intellect.

 

Across all 3 of our risk management durations, here are the lines that matter most to me right now: 

  1. TRADE resistance = 1291
  2. TRADE support = 1269
  3. TAIL support = 1267 

In other words, my new immediate-term TRADE range = 1 and that’s bullish because the range is above my long-term TAIL (1267).

 

What would change my positioning? Price, volume, and volatility signals. But they haven’t changed yet.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bullish TAIL: SP500 Levels, Refreshed - SPX


STRONG START TO JANUARY IN MACAU

On track for HK$24-25BN in January

 

 

Macau generated average daily table win of HK$782 million in the first 8 days of the month versus HK$706 million in December.  The first week definitely received a boost from December 31st being counted in January but we’ve also heard the mid-week performance was strong.  Remember that the Chinese New Year celebration will take place in January of this year versus February of last year so the comp is relatively easy.  Nevertheless, we expect that the accelerated growth rate from December’s GGR YoY increase of 25% should be received warmly.  We’ve seen at least one estimate of 50% YoY growth for January but we think that is too aggressive and not consensus.  We are maintaining our expectations of HK$24-25 billion, which would represent +32-40% YoY growth.  The higher end of that range looks more likely given the strength of the first 8 days.

 

STRONG START TO JANUARY IN MACAU  - adtr

 

While market share is pretty irrelevant after only one week of data, LVS was definitely the standout.  We surmise that VIP volumes and hold played a role in the first week.  Rather than focus on share, the early January results should be taken as a positive for all the Macau operators.  MPEL remains our favorite through earnings season given the magnitude of the earnings beat we are expecting for Q4 and the likely improved sentiment as January continues to come in hot.

 

STRONG START TO JANUARY IN MACAU  - 1


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 9, 2012


As we look at today’s set up for the S&P 500, the range is 21 points or -0.85% downside to 1267 and .80% upside to 1288. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - chart1f

 

THE HEDGEYE DAILY OUTLOOK - chart 2

 

THE HEDGEYE DAILY OUTLOOK - chart 3f

 

 

EQUITY SENTIMENT:

 

  • ADVANCE/DECLINE LINE: -200 (656) 
  • VOLUME: NYSE 710.51 (-14.3%)
  • VIX:  20.63 -3.96% YTD PERFORMANCE: -11.81%
  • SPX PUT/CALL RATIO: 1.40 from 1.62 (-13.58%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 57.64
  • 3-MONTH T-BILL YIELD: 0.0%
  • 10-Year: 1.97 from 1.96
  • YIELD CURVE: 1.727 from 1.702

 

MACRO DATA POINTS (Bloomberg Estimates): 

  • 11:30am: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 12:40pm: Fed’s Lockhart to speak on economy in Atlanta
  • 3:00pm: Consumer Credit, Nov., est. $7b (prior $7.6b)

 

WHAT TO WATCH

  • German Chancellor Angela Merkel, French President Nicolas Sarkozy meet today in Berlin to discuss euro rescue plan
  • Alcoa marks the traditional kick-off of earnings season with report after the market close
  • Bristol-Myers Squibb agreed to buy Inhibitex for $2.5b to boost its position in hepatitis C medicines; watch Achillion
  • Johnson & Johnson goes to trial today facing demand by Texas for damages of more than $1b on Risperdal marketing
  • Nokia’s Lumia 900 Windows phone may be introduced today; watch for other announcements tied to Consumer Electronics Show
  • Other conferences this week include J.P. Morgan Health Care, North American International Auto Show in Detroit
  • Hungary PM Viktor Orban drops objection to IMF bailout, says his govt is open to “any kind” of credit line
  • Netflix starts service in U.K., Ireland, taking on Amazon.com’s Lovefilm
  • No IPOs scheduled to price

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


OIL – I thought oil would come down on a Tebow like move like this in the US Dollar Index. I thought wrong. Iran is the #1 story on Bloomberg’s most read this morning as Brent Oil remains > my long-term

TAIL line of $111.89 support (next resist = $115.21).

 

  • Speculators Increase Bullish Wagers Most Since ‘10: Commodities
  • Copper Declines on Concern Euro Crisis Is Affecting Economies
  • Goldman Sachs Remains “Overweight” Commodities; Favors Gold Commodities Market
  • Crude Oil Declines to Five-Day Low Before Merkel, Sarkozy Meet
  • Morgan Stanley Says Gold, Grains to Outperform Oil in 2012
  • Wheat Rises as Feed Demand May Build on Dry Argentine Weather
  • Sugar Rises on Index Weight Changes, MENA Demand; Cocoa Climbs
  • Gold May Extend Gains on European Crisis, Reliance Capital Says
  • Rice Exports From India May Surge as Ban Ends on Record Crop
  • Gold May Gain in London as Europe, Iran Concerns Spur Demand
  • Hedge Funds Resume Bullish Bets as Oil Tops $103: Energy Markets
  • Iran Able to Block Strait of Hormuz, General Dempsey Says on CBS
  • Ethanol Eats More Corn Than Cows as Herds Drop: Chart of the Day
  • COMMODITIES DAYBOOK: Hedge Funds Boost Bet on Commodity Gains
  • Gold Moving Average Signaling a Bear Market: Technical Analysis

 

THE HEDGEYE DAILY OUTLOOK - chart 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - chart 5

 

 

EUROPEAN MARKETS

 

ITALY – starting to diverge from Germany in more ways than just bond yields; this makes sense if Italian banks are at the back of a long line w/ Deutsche Bank and Commerzbank in front of them. Unicredit’s risk is now clear in the rear view mirror, but what does that mean for the broader Italian MIB Index? Looks safe to be short MIB with a 15,160 stop vs DAX long.

 


THE HEDGEYE DAILY OUTLOOK - chart 6

 


ASIAN MARKETS

 

CHINA – winning move for Chinese stocks overnight (we’re long), putting on their best 1-day gain in 3 months, closing up +2.9% to 2225 on the Shanghai Comp after a better sequential gain in Money Supply

Growth (M2 moves to +13.6% y/y); M2’s slope of acceleration/deceleration actually tracks Chinese Equities quite well.

 

THE HEDGEYE DAILY OUTLOOK - chart 7

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - chart 8

 

 

The Hedgeye Macro Team


Early Look

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THE M3: EVEN TABLE NUMBERS; VENETIAN MASS UPGRADE

The Macau Metro Monitor, January 9, 2012

 

 

EVEN-SPREAD TABLE NUMBERS, ASKS FRANCIS LUI Macau Business

According to Galaxy's vice chairman, Francis Lui Yiu Tung, Galaxy has no concerns that the opening of Sands Cotai Central could hurt performance at Galaxy Macau.  He says the government cap on live gaming tables is needed but wants an even spread of tables across the city’s six gaming operators so "they can compete on a more equal ground."  Mr Lui also confirms that Galaxy will offer three-star accommodation to attract more middle-class mainland visitors and look to expand into new Asian markets.

 

VENETIAN UPGRADES HIGH-LIMIT AREA Macau Business

The Venetian Macao this weekend unveiled its upgraded high-limit gaming area which features 66 live table games and 156 slot machines.  “Our new spaces will cater to our premium mass gaming guests and will set a new standard for a high limit gaming experience in Macau,” says Andrew Billany, senior vice president of Paiza and Plaza operations at Venetian Macao.


MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS

Highlights from this week's Risk Monitor


* The TED spread rose by less than one basis point to 57.6 bps and the Euribor/OIS tightened 4 bps vs last week. These are important gauges of perceived risk among interbank participants, currently showing contradictory signals. 

 

* Bank swaps in the U.S. tightened significantly, while European bank CDS continued to widen out. 

 

* The MCDX measure of municipal default risk fell sharply week over week.

 

* The ECB Liquidity Recourse to the Deposit Facility continued to climb.  

 

 * Slightly More Downside - Our macro quantitative model indicates that on a short term duration (TRADE), there is slightly more downside risk in the XLF (1.5% downside vs. 1.3% upside).

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged

 • Intermediate-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged

 • Long-term(WoW): Negative / 1 of 12 improved / 9 out of 12 worsened / 2 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - Summary

 

1. US Financials CDS Monitor – Swaps tightened for 25 of 27 major domestic financial company reference entities last week.   

Tightened the most WoW: AGO, MMC, MBI

Widened the most/ tightened the least WoW: MTG, RDN, SLM

Tightened the most MoM: MBI, AGO, MMC

Widened the most MoM: C, SLM, MTG

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - CDS  us

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 29 of the 40 reference entities. The average widening was 2.5% and the median widening was 7.2%

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - CDS  euro

 

3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. Irish sovereign swaps tightened by 4.1% (-30 bps to 696 ) and Spanish sovereign swaps widened by 15.2% (58 bps to 439)

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - Sovereign 1

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - Sovereign 2

 

4. High Yield (YTM) Monitor – High Yield rates fell -66 bps last week, ending the week at 8.20 versus 8.86 the prior week.

There appear to be data integrity issues associated with the month of December in this series such that this week's result can't be taken at face value. 

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 14 points last week, ending at 1597.

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - LLI

 

6. TED Spread Monitor – The TED spread rose less than 1 basis point last week, ending the week at 57.6 this week versus last week’s print of 57.1.

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC index rose 4 points, ending the week at -20 versus -24 the prior week.

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - JOC

 

8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 4 bps to 94 bps.

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - Euribor OIS

 

9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding.  Over the course of the last few months, this metric has been making higher highs and higher lows, a pattern that continued last week. 

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - ECB liquidity deposit

 

10. 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 tightened 26 bps, ending the week at 154 bps versus 180 bps the prior week.

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - MCDX

 

11. 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. The Baltic Dry Index has fallen 391 points since December 23rd and ended this week at 1347.

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - Baltic

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 170 bps, 6 bps wider than a week ago.

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.3% upside to TRADE resistance and 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - XLF

 

Margin Debt in November

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

 

 NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. 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 and November’s print of +0.78 and +0.55 standard deviations.  But overall, this setup represents a material headwind for the market.  

 

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

 

MONDAY MORNING RISK MONITOR: CONTRADICTORY SIGNALS - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser


OLD DOGS

This note was originally published at 8am on January 04, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“New Year's Day is every man's birthday.”

-Charles Lamb

 

For Wall Street, and many people around the world, the New Year is a big deal.  The New Year offers a chance to leave behind the past and focus on our goals going forward.  While every new day, technically, offers us the same opportunity, no other time of year inspires the same level of introspection and resolution as early January. 

 

After the excesses of the Holiday season, such a mood can seem particularly apropos.  Along those lines, in Christian tradition, the Tuesday before Ash Wednesday and the beginning of the Lenten season is typically an indulgent time.  Whether this day is referred to as Mardi Gras in New Orleans or Pancake Tuesday in London, the idea is generally the same: enjoy this day before Lent begins – a time of soul searching and repentance.

 

While some may ridicule others for using New Year’s or Lent as catalysts for self-improvement, the fact is that every year occasions such as this offer valuable reminders for people not to live an unexamined life, a life that Socrates would say is not worth living.  Are you convinced that Wall Street follows a similar process of self-examination and reflection?  Have the Old Wall Street follies of times past been faced up to following hours of soul-searching?  Or is Old Wall Street simply unwilling or unable to learn new tricks?

 

One trick that these Old Dogs love to perform is year-end S&P 500 targets and targets for U.S. GDP growth.  We wake up every morning trying to embody our vision of what Wall Street 2.0 is all about.  Taking pot shots at numbers (made up in the case of GDP) a year out is not what we do because it is not helpful for our clients, which is our number one priority.  We focus on shorter durations based on scenarios, probabilities and ranges.  In doing this, we offer our clients more than just a “target”; over time they develop an understanding of our process and incorporate it into their own.  So, before anyone else asks: we don’t do full year targets – let the Old Dogs perform Old Tricks. 

 

One of the classic Old Dogs doing the same Old Trick is Byron Wien of the Blackstone group with his 10 surprises.  The inception of 10 surprises for the New Year came nearly three decades ago.  Right on time, Bloomberg reported the 2012 predictions despite a less-than-stellar showing from Wien in his 2011 predictions (S&P 1500, Real GDP growth of 5%).  While we did not make similar predictions, we were early in stating our view that U.S. growth would slow in 2011 – at a time when consensus was calling for accelerating growth.

 

One of his 10 surprises of 2012 might not have made it to January 4th; “Spain/Ireland will strengthen finances in 2012.” Well unfortunately today the new Spanish government has warned the 2011 deficit could top 8% of gross domestic product, versus a target of 6%. In addition, Spanish Prime Minister Mariano Rajoy’s is considering applying for loans from the European Union’s rescue fund and the International Monetary Fund to finance the restructuring of the ailing banks. There are 361 more days to go, but that particular “surprise” is one that I think seems unlikely to win Wien any plaudits in a year’s time. 

 

What are the implications for GDP growth if Byron’s prediction that the “yield on the 10-year Treasury will go to 4%?”  Unfortunately, the Old Dogs of Washington continue performing their same old tricks coming into the New Year!  According to the U.S. Treasury, America ended 2011 with debt at an all time record $15.2T, with the implications being now the U.S. debt-to-GDP ratio is over 100%.  The USA cannot afford to pay a 4% yield; the implications to the debt and deficits are staggering not to mention it will stifle US GDP growth.  Furthermore, Wien’s prediction is based on China shifting investment from bonds into hard assets and raw materials.   Given that the country holds roughly $1.5 Trillion in American government debt, an investment so great that there is little else China can do but continue to support the value of Treasury bonds.

 

We like to say that Hedgeye is redefining how the investment community operates and we are defining Wall Street 2.0.  Thus, it is not surprising that we continue to get questions from clients asking us to conform to the old mentality of year end predictions.  Clearly, our goals are going to take time to achieve but we are heartened by the feedback we have received from our hard-won clients at this early stage.  In our view, any parties claiming to be able to accurately forecast, rather than guess, Real GDP growth a year out is not being entirely honest.  

 

Rather than waste people’s time with Old Tricks, we prefer to offer up themes quarterly that are relevant to the investing landscape that is in front of you.  Our 1Q12 MACRO Themes call will be held on January 13th, 2012.  We will be sending out details of the themes in due course, but avid readers of the Early Look will know our view on “King Dollar” and the implications for consumption in the USA.  Bernanke staying out of the way and allowing the Greenback to appreciate has boosted the U.S. Consumer and the Macro Team will be sharing its thoughts on this trend in 2012 a week from Friday.  Our immediate-term support and resistance ranges for Gold, Oil (brent), EUR/USD, Shanghai Composite, France’s CAC40, and the SP500 are now $1591-1641, $111.26-112.13, $1.29-1.31, 2157-2219, 3149-3276, and 1267-1285, respectively.

 

Function in Disaster; Finish in style

 

 

Howard Penney
Managing Director

 

OLD DOGS - Chart of the Day

 

OLD DOGS - Virtual Portfolio


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 80.64%
  • SHORT SIGNALS 78.61%
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