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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 13, 2012


As we look at today’s set up for the S&P 500, the range is 11 points or -0.59% downside to 1363 and 0.21% upside to 1374. 

 

SECTOR AND GLOBAL PERFORMANCE

 

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EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -365 (-1567) 
  • VOLUME: NYSE 643.71 (-10.48%)
  • VIX:  15.64 -8.59% YTD PERFORMANCE: -33.16%
  • SPX PUT/CALL RATIO: 1.36 from 1.57 (-13.38%)

CREDIT/ECONOMIC MARKET LOOK:


US Deficit – we know it doesn’t matter anymore, right? Right. At -$237B for FEB that’s a new US record for monthly deficit print and should remind genius growth forecasters that tax revenues are collected on a real-basis too. Inflation at the pump finally running as headline headwind for Obama even in the NY Times poll this morning. US Tax revs are down y/y in FY 2012 vs FY 2012, despite the GDP “recovery”… spin.

 

TREASURIES – either 2s and 10s are testing a breakout in the US this morning because credit risk is rising on the margin (deficit) and/or Bernanke is going to be less dovish than he has been for the last 6yrs at today’s FOMC whisperings. Asymmetric risk lives on as long as this ridiculously short-sighted game of chasing yield does. Breakout lines for 2s and 10s = 0.26% and 2.03%, respectively. 

  • TED SPREAD: 39.72
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.05 from 2.03
  • YIELD CURVE: 1.72 from 1.71 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business, est. 94.5 (prior 93.9)
  • 7:45am/8:55am: ICSC/Redbook weekly comp sales
  • 8:30am: Advance Retail Sales, Feb., est. 1.1% (prior 0.4%)
  • 10am: IBD/TIPP optimism, est. 50.0 (prior 49.4)
  • 10am: JOLTs Job Openings, Jan., est. 3334 (prior 3376)
  • 10am: Business Inventories, Jan., est. 0.5% (prior 0.4%)
  • 11:30am: U.S. to sell $40b 4-week bills
  • 1pm: U.S. to sell $21b 10-yr notes (reopening)
  • 2:15pm: FOMC Rate Decision, est. 0.25% (prior 0.25%)
  • 4:30pm: API

 GOVERNMENT:

    • President Obama takes British PM David Cameron to a basketball game in Ohio
    • Senate Democratic Leader Harry Reid will force a vote on 17 of Obama’s judicial nominees starting today
    • House in recess all week
    • Supreme Court not in session
    • Defense Secretary Leon Panetta traveling in Kyrgystan  

WHAT TO WATCH:

  • U.S. to file complaint at WTO today over Chinese limits on exports of rare earths used in high-tech products
  • Retail sales probably rose 1.1% in Feb., the most in five months, spurred by strongest demand for automobiles since 2008
  • FOMC meets today; Fed Chairman Bernanke said Jan. 25, after last meeting, that policy makers were considering additional asset purchases to boost growth
  • Intel said to be considering creating online pay-TV service that works on TV sets, computers, mobile devices
  • Alabama, Mississippi hold primaries in the Republican presidential race; Hawaii holds caucuses
  • Facebook accused in lawsuit by Yahoo! of infringing patents covering functions critical to websites, including Internet advertising, information sharing and privacy
  • Disney annual meeting in K.C, Missouri today; Glass Lewis opposes five nominees to board
  • Chevron hosts analyst meeting, 9am
  • Euro-area finance ministers signed off on second Greek bailout
  • Employers in U.S. plan to boost hiring during next three months as pace of economic growth picks up: Manpower survey
  • More than twice as many Americans view economy’s prospects as brightening as see them darkening, reversal from nine months ago, according to Bloomberg National Poll conducted March 8-11 

EARNINGS

    • Factset Research (FDS) 7 a.m., $1.12
    • Empire Co (EMP/A CN) 7:20 a.m., C$1.10
    • Raven Industries (RAVN) 9:10 a.m., $0.48
    • Transcontinental (TCL/A CN) 9:50 a.m., C$0.34
    • Power Financial (PWF CN) 11:20 a.m., C$0.59
    • Alimentation Couche Tard (ATD/B CN) 11:23 a.m., $0.48
    • Francesca’s Holdings (FRAN) 4:01 p.m., $0.17
    • Zhongpin (HOGS) 4:10 p.m., $0.51
    • Capital Power (CPX CN) 5:59 p.m., $0.35    

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Milk Souring as Record Profit Spurs Herd Expansions: Commodities
  • Copper Advances as Economic Rebound in U.S. May Stoke Demand
  • Oil Gains From One-Week Low as Economy Lifts Fuel-Demand Outlook
  • Gold Declines in London Before Fed Meeting as Dollar Strengthens
  • Vekselberg Quits Deripaska’s Rusal, Citing ‘Deep Crisis’
  • Soybeans Advance as China Seen Boosting Purchases; Wheat Rises
  • Palm Oil Gains to Nine-Month High as Malaysian Inventory to Drop
  • Kansas Wheat Faces Weather Risk as Warm Spell Aids Crop Progress
  • Water Pollution Tied to Agriculture Increasing, Costing Billions
  • Viterra Soaring on Bid Talk Still Offers 42% Discount: Real M&A
  • Iran Oil Power Declining as Explorers Increase Spending: Energy
  • Obama Takes Aim at China With WTO Case on Rare-Earth Export Caps
  • Ore-Shipping Rates Seen 13% Lower as China Cuts Target: Freight
  • Natural Gas Falls to 10-Year Low on Weather
  • Natural Gas Falls to 10-Year Low on Mild Weather, Record Output
  • Copper ETP Investments Increase to Record, ETF Securities Says
  • Rubber Climbs for Fourth Day as Yen Weakens, Supply May Decline 

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CURRENCIES


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EUROPEAN MARKETS


SPAIN – despite the concept that all is fine in no-volume rallies until it isn’t, the rest of the world’s deficit/debt problems do not cease to exist. The recent breakdown in Spanish stocks and bonds show you that in pictures – now the Euro is failing to overcome $1.32 resistance as well. Sovereign Debt risk never goes away, but its intensity focuses the mind when country currencies, stocks, and bonds do the same thing at the same time.

 

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ASIAN MARKETS

 

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MIDDLE EAST


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The Hedgeye Macro Team

 

 


THE M3: MSC SYNDICATE LOAN; OKADA; VIETNAM

The Macau Metro Monitor, March 13, 2012

 

 

MELCO CROWN CLOSE TO CLOSING SYNDICATE LOAN Macau Business

According to sources, MPEL is targeting syndication in April for a loan of about US$1.25 billion (MOP10 billion) to be likely used for construction of the Macau Studio City project.  MPEL is considering a five-year tenure for the syndicate loan.


OKADA SUES WYNN FOR FORCIBLE SHARE BUYOUT Macau Business, Reuters

Kazuo Okada is seeking a court order voiding the redemption of his shares decided by WYNN's board last month, and unspecified compensatory and punitive damages.

 

Okada, Chairman of the Board of Directors of Universal Entertainment, said, "We are taking this action to protect our investment from what we believe to be an unconscionable course of conduct perpetrated by Steve Wynn and the Wynn Resorts Board of Directors to facilitate Mr. Wynn's agenda of maintaining his absolute control over Wynn Resorts and in order to enrich himself."  Universal Entertainment's Counterclaim contains allegations, among others, that 1) No redemption has occurred and that there is no legal basis for the redemption. 2) The stock held by Aruze USA is subject to transfer restrictions in a stockholders agreement, which preclude any redemption of Aruze USA's stock. 3) Unlike most Wynn Resorts shares, Aruze USA's shares were never subject to the redemption provision of the Wynn Resorts Articles of Incorporation, as Aruze USA acquired its interest before the redemption provisions became effective.

 

GOVERNMENT MULLS LICENSING CASINO PROJECT Vietnam News

Minister Vu Duc Dam, chief of the Vietnam Government Office, has confirmed that the Government was considering licensing a huge resort complex (US$4-5 BN) including a casino in northern coastal Quang Ninh Province's Van Don District.  Located on an 1,800 hectare area in Van Yen Commune, the complex is expected to help develop the Northern Economic Zone and attract more visitors, especially foreign tourists, to the province.

 

Vietnam has yet to license casinos, but the Government has granted licences to a number of entertainment-gaming complexes in southern Phu Quoc Island, the New City in central Phu Yen Province, Silver Shores and Furama in central Da Nang and Sai Gon Atlantic in southern Vung Tau.  None of them admit local visitors.

 

Sheldon Adelson, CEO of LVS, has expressed interest in building resort complexes worth as much as $6 billion in HCM City and Ha Noi.


President Obama with 58.5% Likelihood to Win Presidential Election If Held Today

 

 

President Obama with 58.5% Likelihood to Win Presidential Election If Held Today - HEI


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Making the Call: VXX Trade Update

Conclusion: Looking to recent history, VIX ~15 has been an explicit signal to get hedged; thus, we are doing so in our Virtual Portfolio.

 

Position: Long the iPath S&P 500 VIX Short-term Futures ETN (VXX)

 

In this morning’s Early Look, Keith used a very appropriate quote from Daniel Kahneman that we feel describes the appropriate state of our industry:

 

“The illusion of skill is not only an aberration, it is deeply ingrained in the culture of the industry. Facts that challenge such basic assumptions – and thereby threaten people’s livelihood and self-esteem – are simply not absorbed.” (Kahneman, page 217)

 

Regarding the first part of the quote, perhaps the reason the VIX has a coincident relationship with the S&P 500 instead of a leading one is that it’s simply human nature to not want to buy downside protection when the market feels like it wants to trend higher. Everyone’s best ideas are working on the long side and both sell-side consensus and legacy financial media sources cheer on gains instead of focusing on the catalysts which could bring about mean reversion. While it’s not always an appropriate time to position for mean reversion, we’ve been consistently making calls to hedge for meaningful downside risk in U.S. equities when the VIX is trading with a 15-handle on it – just as it is today.

 

Making the Call: VXX Trade Update - 6

 

That brings us the second point Kahneman makes, which is that “facts that challenge such basic assumptions” (like combining top-down fundamentals with a quant overlay to make an explicit call not to chase “Dow 15,000”) and are threatening to the “livelihood and self-esteem” of market operators “are simply not absorbed”. Often times, they are, in fact, refuted with great vigor as we have seen in our inboxes from making similar calls in years past.

 

That said, however, our number #1 goal as an outsourced Macro Team remains to help our clients preserve and grow capital across economic cycles and all types of market environments; thus, making contrarian calls is not something we shy away from.

 

Today, that call is to get hedged, no matter how counterintuitive it feels at current prices. Our quantitative levels on the VIX are included in the chart below.

 

Darius Dale

Senior Analyst

 

Making the Call: VXX Trade Update - 7


The Policy Implications of China’s Souring Property Market Trends

Conclusion: Just as Chinese officials intended, both supply and demand trends are going the wrong direction as it relates to the price of real estate in China. While we don’t think the PBOC will cut its benchmark interest rates in the immediate-term, we do think these data points are supportive of continued consensus speculation around monetary easing in China and could lead to additional RRR cuts over the next quarter or so. Even still, domestic monetary easing will have a highly disappointing effect on stimulating Chinese growth absent a removal of the curbs on real estate activity.

 

In JAN, Chinese residential real estate prices posted their worst performance in at least a year, with 48 of 70 cities declining MoM and 22 cities holding flat. For commercial buildings, the number of cities posting MoM price gains came in at 5; 11 held flat and 54 cities declined MoM.

 

JAN ‘12 marked the start of the second year of China’s discombobulated official national price reporting due to the National Development and Reform Commission’s nation-wide index terminating in DEC ’10. Since then, investors have had to rely largely upon the sale price data from the transactions of large developers – entities who may or may not be incentivized to “put their best foot forward”, so to speak (akin to data from our own National Association of Realtors).

 

So in the absence of what we’d deem as totally reliable data, we’ve taken advantage of the latest supply & demand data points to form an educated view of China’s property market, which, as we have shown in previous notes, is the largest driver of Chinese, and, by extension, global growth.

 

The Policy Implications of China’s Souring Property Market Trends - 1

 

In the JAN-FEB period, the growth rate of completed supply accelerated to an all-time high of +45.2% YoY as seen in the Floor Space of Buildings Completed series. From a pending supply perspective, growth in Floor Space of Buildings Under Construction accelerated to +35.5% YoY in the JAN-FEB period – good for the second-highest rate on record. The State Council’s goal of building 36 million units of affordable housing from 2011-2015 is a key policy initiative affecting the underlying trends in supply.

 

The Policy Implications of China’s Souring Property Market Trends - 2

 

From a demand perspective, growth in Total Sales of Buildings slowed in JAN-FEB to an all-time low rate of -20.9% YoY. Moreover, growth in Floor Space of Buildings Sold and Purchases of Land have each slowed to multi-year lows of -16% YoY and -0.5% YoY, respectively.

 

The Policy Implications of China’s Souring Property Market Trends - 3

 

Looking at the investment climate, the one positive data point we’d highlight is that growth in domestic financing for real estate investment accelerated to +16.3% YoY in JAN-FEB, which is the fastest rate of growth since NOV ’10. That said, however, China Economic Network’s Real Estate Climate Index ticked down to a 32-month low of 97.89 in the JAN-FEB period; the index’s YoY growth rate of -4.9% is the slowest rate since JUN ’09.

 

The Policy Implications of China’s Souring Property Market Trends - 4

 

The Policy Implications of China’s Souring Property Market Trends - 5

 

With supply increasing at much higher rate than any measure of demand, continued price declines seem likely and, in fact, may be poised to accelerate. Our financials team, led by Josh Steiner, has shown that demand leads U.S. housing prices by one full year. While certainly not an apples-to-apples case study, one would expect Chinese property prices to continue trending lower throughout 2012 given the current supply and demand setup.

 

From a policy perspective, we believe the current trends will prove supportive for continued speculation around monetary easing in China. While we certainly don’t see any reason for the PBOC to suddenly abandon ship and cut rates aggressively in response to this data (the State Council and PBOC have been explicitly trying to deflate housing prices and slow real estate speculation for two full years), it does lend credence to the view that conditions on the ground in China are, in fact, threatening enough to support near-consensus expectations of a full-scale rate cutting cycle.

 

Again, given the stated and oft-reiterated policy objectives, it remains our view that China isn’t as close to lowering its benchmark policy rates as a great many investors would like; that said, however, we would expect continued action on the RRR front ahead of any material easing. Most importantly, we continue to hold the belief that, until Chinese policymakers actually lift the property market curbs, domestic monetary easing will have a highly disappointing effect on stimulating Chinese growth.      

 

Darius Dale

Senior Analyst


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