“Be who you are and say what you feel because those who mind don’t matter and those who matter don’t mind.”
I’m sure after reading the quote above, especially after reading yesterday’s declaration of the Bernanke War, you are wondering if Keith has gone soft. Well, since I’ve known Keith for upwards of 15 years, I can say categorically he hasn’t gone soft, but he has handed the proverbial hockey stick on today’s Early Look to me as he is flying up to Thunder Bay, Ontario.
Yesterday, we had a long internal debate about branding and marketing. The key questions, which of course are similar for your organizations, related to who we are, who we want to be, and what people actually think we are. These are challenging questions for any organization, especially one that perceives itself to be the standard bearer for Wall Street 2.0.
Naturally, being the social media addict that I am, after our meeting I posed the question to the Twitter Sphere. Specifically, I tweeted:
@HedgeyeDJ Question for the day: What is a brand?
The best answer actually came from a good friend and former colleague who tweeted back that “a brand is specifically the *perceived* sum of all the experiences, actual and emotional, associated with your brand.” If you think about it, that’s not totally dissimilar to a stock price or stock index price. It is actually the sum of all fundamental inputs, plus the behavioral or emotional input of market participants.
In the Chart of the Day, we actually emphasize that last point in looking at Chinese equities. The Shanghai Composite, which is a capitalization weighted index which tracks all A-shares and B-shares listed on the Shanghai Stock Exchange, is at a 10-week low. Further, the index is only up +3.9% in the year-to-date and is down -22.5% in the last year. In as much as China is a proxy for global growth, as one of the world’s fastest growing and largest economies, the performance of Chinese equities is a little disconcerting.
The next key catalyst for the Chinese economy is Chinese PMI, which is out this Saturday. Ahead of that, as is typical before disappointing Chinese data, rumors are circulating that China will implement another reserve requirement ratio cut. In theory, this action will free up money supply within the Chinese banking system. My belief is if the Chinese indeed have to ease again, then it is probably ominous for the Chinese growth outlook. Incidentally, the last time the Chinese cut the “RRR” was on the weekend of February 19thand the Shanghai Composite is literally in a straight line down since then.
For those that are looking for bullish global growth catalysts, you need to look no further than Morgan Stanley and HSBC. This morning Morgan Stanley upped its China GDP growth forecast to 9.0% from 8.4%, while HSBC raised its price targets for all major Chinese indices. HSBC may be on to something as slowing growth is starting to, obviously, be priced into Chinese equities. As for Morgan Stanley, I’m not sure what they are feeling (or smoking for that matter).
The other key data points from global macro land this morning come from Europe. As usually occurs when austerity is implemented aggressively, a general strike is underway in Spain this morning. Interestingly, neither strikes, especially those that result in clashes with the policy, nor austerity are all that positive for economic growth. I dare say that Spain is starting to look a little like Greece, but don’t take my word for it. According to the head of the Spanish Banking Federation, “the strike takes us a lot closer to Greece and farther from Germany.”
For starters, I’m not sure Spain was ever all that close to Germany, except perhaps by plane or high speed train. Germany’s unemployment rate fell -18,000 in March versus an estimate of -10,000 and the unemployment rate is now at 6.7%, which is a 20-year low. Conversely, the Spanish unemployment rate is just shy of 23%.
Also, unlike Germany, Spanish credit default swaps have accelerated dramatically recently. In fact, Spanish 5-year CDS are now trading at 423 basis points, which is up more than 14% since the start of the month. While still below the all-time high, this measure of risk certainly agrees with the idea that Spain is moving closer to Greece than Germany. Incidentally, Spain Housing permits were down -25% year-over-year this morning, as well.
I’ll leave you with one last thought this morning from an email my colleague Darius Dale just sent to our team:
“Global cross-asset volatility hasn’t been this low since OCT ’07. Terrifying. Unless, of course, this time is different and we’ve reached “escape velocity”. Bernanke’s war has begun; we’re either off to the races from a growth perspective or things are about to get weird. You have to pick sides at these levels of investor complacency.”
Weird? Indeed. Almost as weird as starting a Wall Street morning strategy note with a quote from Dr. Seuss. Or, perhaps, that is all part of the brand . . .
Our immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1, $122.12-124.96, and 1, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
TODAY’S S&P 500 SET-UP – March 29, 2012
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: -900 (-393)
- VOLUME: NYSE 817.02 (11.88%)
- VIX: 15.47 -0.77% YTD PERFORMANCE: -33.89%
- SPX PUT/CALL RATIO: 3.16 from 2.25 (40.44%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 39.33
- 3-MONTH T-BILL YIELD: 0.08%
- 10-Year: 2.18 from 2.20
- YIELD CURVE: 1.84 from 1.86
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: GDP, 4Q T, est. 3.0% (prior 3.0%)
- 8:30am: Personal consumption, 4Q T, est. 2.1% (prior 2.1%)
- 8:30am: Jobless claims, March 24, est. 350k, prior 348k
- 9:45am: Bloomberg Consumer Comfort, March 25(prior -34.9)
- 10am: Freddie Mac 30-yr mortgage
- 10am: Fed’s Braunstein testifies on mobile payments
- 10:30am: Fed’s Lacker to speak on credit markets in N.C.
- 10:30am: EIA natural gas
- 11am: Kansas City Fed Manufacturing, March, est. 13, (prior 13)
- 12:15pm: Fed’s Lockhart speaks on global economy in Atlanta
- 12:45pm: Fed’s Bernanke gives lecture at George Washington U. (4 of 4)
- 1pm: U.S. to sell $29b 7-yr notes
- 1pm: Fed’s Plosser speaks on economic outlook in Wilmington, DE
- 6:45: Fed’s Lacker speaks to bankers in Charlotte, N.C.
- Senate plans to debate bill that would repeal tax breaks for big oil companies
- Lawmakers will seek an extension to a highway funding measure that expires Saturday
- CFTC holds a meeting of its advisory panel on automated and high-frequency trading. 10 am
- House, Senate in session:
- House Energy and Commerce Committee hears from FTC Chairman Jon Leibowitz on balancing privacy and innovation. 9am
- Senate Energy Committee holds hearing on gasoline prices. 9:30am
- House Financial Services Committee hears from CFPB Director Richard Cordray on the bureau’s semi-annual report. 9:30am
- Senate Government Affairs subcommittee holds hearing on how cost information is used to make decisions. 10am
- Senate Banking Committee votes on Fed Board of Governors nominees Jerome Powell and Jeremy Stein. 10am
- Senate Appropriations Committee hears from Agriculture Secretary Tom Vilsack on the agency’s budget. 2pm
WHAT TO WATCH:
- Best Buy releases 4Q results, probably will give yr forecast; watch 4Q gross margin
- Research in Motion releases first earnings under CEO Thorston Heins, having missed sales est. for four consecutive qtrs
- Roche raises hostile takeover offer for Illumina to ~$6.7b, or $51/share
- Express Scripts said to get FTC ruling as early as tomorrow on proposed Medco Health takeover
- Fed nominees Jerome Powell and Jeremy Stein face Senate Banking Committee vote
- Tata, Vodafone get extension to April 19 to decide on Cable & Wireless offer
- FDA advisers to recommend whether makers of new obesity drugs should be required to complete studies on heart risks
- Oil trading near lowest close in a week as Western countries discuss tapping emergency reserves
- Canadian finance minister releases his annual budget, 4pm
- Pearson CFO says FT newspaper is not for sale, co. seeking targets in India, Brazil and China
- SEC investigators said to review short-term VIX ETN from Credit Suisse that became unhinged from its benchmark
- Economic confidence in the euro region unexpectedly declined in March
- Greece may have to restructure debt again, S&P’s Kraemer says
- Sprott (SII CN) 7:00am, C$0.06
- Movado (MOV) 7:30am, $0.10 (1 est.)
- Shaw Group (SHAW) 8am, $0.45
- Best Buy (BBY) 8am, $2.15
- Worthington Industries (WOR) 8:15am, $0.35
- Cascade (CASC) 4pm, $1.09
- Forest City Enterprises (FCE/A) 4:02pm, $0.32
- Tibco Software (TIBX) 4:04pm, $0.19
- Research In Motion (RIM CN) 4:15pm, $0.81
- Finish Line (FINL) 4:40pm, $0.81
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Palladium Seen Beating Gold With Record Car Sales: Commodities
- Oil Falls Near One-Week Low on Stockpile Gain, Talk of Release
- Sugar Falls for Fifth Session on Surplus Prospects; Cocoa Drops
- Soybeans Rise as Demand for U.S. Crops May Strengthen on Drought
- Former UBS Executives Will Start London Commodities Hedge Fund
- China Buys Five Cargos U.S. of Corn, State Researcher Says
- Copper May Fall on Speculation of More Supplies; Nickel Declines
- Gold May Drop in London on U.S. Outlook, Weak Physical Demand
- Japanese Crude-Oil Imports From Iran Dropped 43% in February
- Commodity Holdings Expand as Volatility Drops: Chart of the Day
- Palm Oil Declines for Second Day as High Prices May Erode Demand
- Gold May Gain 8.5% on Moving Average, Hammer: Technical Analysis
- Runaway Gas Well Threatens Total Revival as Shares Slump: Energy
- Palladium May Beat Gold on Rising Demand
- China Cotton Demand to Recover, Lifting Prices, Weiqiao Says
- Vitol’s Taylor Says Atlantic Oil Refinery Closings Spur Shipping
- World-Leading Platinum, Rubber Stall on China: Chart of the Day
US DOLLAR – the USD went from up +0.25% at this hour yesterday (commodity inflation was deflating = good) to down -0.62% on the close. What changed intraday? Bernanke reminded the world of his conflicted and compromised policy to inflate. Fun while it lasts (if you’re long), but our strong sense is that the next stock/commodity market crash will be perpetuated by the bubble in Easy Money. There’s no one left to blame.
SPAIN – rising bond yields and a down -3.4% stock market YTD finally manifesting into higher yields (sequentially) on the 6mth side of the Spanish bond auction. Major stagflation issues in the Spanish south perpetuating political issues for Rajoy as he attempts to implement an austerity budget.
CHINA – someone forgot to tell the Chinese to stop slowing; stocks in China closed down -0.15% overnight and India rallied +0.8% on no volume to another lower-high. Down Dollar/Up Oil (particularly Brent oil) is what keeps China and India from cutting rates here.
The Hedgeye Macro Team
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Conclusion: We expect a solid quarter driven by robust February sales to finish out the quarter and believe that current trends suggest March is running ahead of expectations for Q1 as well.
TRADE (3-Weeks or Less):
We’re at $0.86 for FINL headed into Thursday’s print after the close ahead of Street estimates at $0.81E.
- February sales in the Athletic Specialty channel came in big up +17% increasing the quarterly average a full 4pts to +10.3% from +6.3%. Based on the Hedgeye FINL Comp index below, which has proven to be a strong indicator, we expect comps of +10% vs. +6.7%E to drive sales up +15.5% reflecting the 14thweek and ~$25mm in incremental sales.
- These results are even stronger than FL’s bullish commentary last month noting that February sales were up mid-teens month-to-date. This strength isn’t captured in consensus estimates.
- In addition, weekly sales suggest that March is running up HSD. While a sequential deceleration from February levels, this too is better than expectations and will be viewed favorably if confirmed as expected on the call.
- In light of a more robust top-line, we are modeling GMs up +150bps driven by +110bps in occupancy leverage and +40bps of merchandise margin and SG&A up +15% yy reflecting incremental e-commerce investment.
TREND (3-Months or More):
The company remains committed to investing in its digital platform, which has and will continue to drive higher than average SG&A growth for the next few quarters. This is a known, however, and is largely the reason why FINL has been trading at a discount relative to its historical range as well as to FL among other reasons. What’s changed here recently is the top-line. Sales are coming in stronger than expected helping to offset FINL’s higher costs. If this trend continues as we’ve seen since February, we could see upside to our $1.85 2012 estimates.
TAIL (3-Months or Less):
FINL is spending when it should to fuel its e-commerce business, which now accounts for ~10% of total sales. With 60% growth last quarter there is little question that this is a key growth engine. As investment spending rolls off and e-commerce grows in addition to further growth in its run specialty store initiative, we expect earnings to approach $2.20 in two years. At $25, will FINL make you rich? Probably not, but we're definitely positively inclined on the name here.
This note was originally published at 8am on March 15, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Why are experts inferior to algorithms?”
That’s just another great risk management question from the guru of behavioral finance on page 224 of “Thinking, Fast and Slow.” If you don’t have time to read the entire book, definitely take the time to study and consider the implications of Chapter 21, Intuitions vs Formulas. In the last 4.5 years of my time away from a hedge fund desk, I’ve thought a lot about Experts vs Algos.
Understandably, algorithms scare people; particularly people who have zero analytical competence in modern math (i.e. 99% of the politicians and central planners running America). This contrasts sharply with the Chinese political leadership where 8 of China’s top 9 political dudes are mathematicians and/or scientists.
I started building my own predictive tracking algorithms so that I could attempt to remove the emotion when I hit buy and sell buttons. It helped me so much that we started plugging these predictors into our fundamental Growth and Inflation models for countries. That’s why our intermediate-term forecasts on things like GDP, PPI, etc. are so variant from the Old Wall’s consensus.
I’m not saying that what we have built is perfect. However, I am saying it’s better than what I used to use – and a lot of people on Old Wall Street still use what I was taught to use at A) the Keynesian School of Economics and B) the Sell-Side brokerage firms that perpetuate its dogmatic principles.
Kahneman’s answer to the aforementioned question is pretty simple. “One reason, which Meehl suspected, is that experts try to be clever, think outside the box, and consider complex combinations of features making their predictions. Complexity may work in the odd case, but more often than not it reduces validity. Simple combinations of features are better.” (page 224)
Kahneman goes on to remind us that “humans are incorrigibly inconsistent in making summary judgment of complex information.” And if there is one thing that any of you know about your own team’s investment meetings since late 2007, that’s God’s honest truth.
Back to the Global Macro Grind…
Rather than attempt to handicap who has to chase S&P 1400 into options expiration tomorrow (there’s a massively skewed position in the 1400 strike calls vs puts), I’ll just rattle off what my Algos think on risk ranges, prices, and probabilities vs Experts:
- SP500 could easily trade to 1401 inasmuch as it could fall to 1369 – that’s my immediate-term TRADE range
- US Equity Volatility (VIX) holds its long-term TAIL line of 14.21 support like a champ; upside to $17.34
- US Equity Volume/SKEW signals are at least as bearish as the 1987 signals that started developing in Q1 of 1987
- The first 2 of 9 S&P Sectors that have snapped their immediate-term TRADE lines of support (XLE and XLB) did last yr too
- Size (as in the risk management factor to describe cap) flashed another bearish signal yesterday (Russell 2000 = -0.82%)
- US Basic Materials (XLB) and Small Cap (IWM) stocks have been making lower-highs since peaking YTD on Feb 3rd
- US Dollar Index has moved back into a Bullish Formation (bullish on all 3 risk mgt durations – TRADE, TREND, and TAIL)
- US Treasury Yields are ripping above their intermediate-term TREND lines of 0.26% (2yr) and 2.03% (10yr), respectively
- US Treasury Yield Spread has widened 20bps as the Financials (XLF) have moved to immediate-term TRADE overbought
- US Technology (XLK) Sector Study is flashing a grossly immediate-term TRADE overbought signal at $29.97
While it’s tidy to tell ourselves that everything in America is fine, what all of this is really saying is that if Apple (17% of the XLK) and the Financials (up in a straight line in the last 2 days in response to the rallying cry of “success” to a made-up test) stop going up, the SP500 will probably stop going up too, in the immediate-term (3 weeks or less), at 1401.
What are the rest of the world’s signals telling us?
- Japanese Yen is crashing (yes when a Top 3 world currency drops 10% in a straight line, that’s a crash)
- Japanese Equities (like European Equities did around this time last year – pre Sov Debt Crisis) like a crashing currency
- Chinese stocks, down for 2 consecutive days (-3.3%) post the US “stress test”, still see Growth Slowing
- Indian stocks, down -1.6% overnight, failing at immediate-term TRADE resistance of 18,023 again, don’t like oil up here either
- Germany’s DAX melts up to +20% YTD as German bond yield spreads versus US Treasuries widen (bullish for Germany)
- Spain’s stock market (IBEX) is flashing a very bearish negative divergence vs Global Equities (down -1.4% YTD)
- Spanish bonds, currency (euro), and stocks are now all falling at the same time – clean cut sovereign debt alarm bell ringing
- Greece’s stock market would need to close > 771 on the Athex to signal any accomplishment of quantitative support
- Israel’s Equity market (TelAviv25) up for the 3rdconsecutive day, holding 1081 support (post Gaza “truce”)
- Dr Copper agrees with China on Growth Slowing, failing to close above its long-term TAIL line of $3.98/lb, again
Obviously weaving throughout this Storytelling of “growth is back” (as US GDP Growth gets cut in ½ sequentially vs Q4) are US stock market centric people trying to tell you that Gold falling is a “bullish sign for US stocks” (like they did in FEB and SEP of 2011). My Algos vs Experts on that say God Speed. Bond Yields spiked, momentarily, as US Stocks topped in February of 2011 too.
I’ve tried to not get mad at my Algos since 2008. They don’t give me any lip, and they don’t make excuses when they fail. They may have not always made my risk management views popular either. But at the big turns, before big draw-downs in asset prices, they’ve also gotten me out of the way.
My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, Japanese Yen, and the SP500 are now $1644-1691, $105.02-106.49, $79.79-80.61, $82.71-83.98, and 1369-1401, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Despite dollar weakness over the past week, most agricultural commodities that we monitor declined week-over-week. Chicken wing prices continue to gain as leading indications of chicken supply and increasing demand for chicken from food service.
Gasoline prices continue to rise as Ben Bernanke’s recent commentary sent the dollar lower. Average national prices are now above $3.90 and consumers’ displeasure is increasingly apparent. Below, we present the most recent quotes from a select group of companies on the issue of gasoline prices. We expect, if the current trend continues, for the tone of these statements to change when each management team discusses gas prices again.
There have been two dueling schools of thought during the recent debate on gas prices that we feel are worth calling out. First, there seems to be a camp that has a fixed price such as $3.75 or $4.00 that is seen as the “rubicon” beyond which consumer demand is greatly impaired. Second, there is another group that proposed that it is the rate of change, rather than the dollar price, that impacts consumer spending. While we have a view on that debate, the important takeaway from the chart below is that there is ample evidence to suggest that a consensus can be reached; not only are gas prices closing in on $4, they have gotten there in an expedited fashion (+20% YTD, roughly).
WEN: Obviously, we're all watching gas prices carefully and – but consumers seem to quite honestly have digested that quite nicely.
BAGL: If employment continues to be positive, again from my perspective, I think that sort of offsets any impact that you might get – we might get on gas prices … That said, if employment tightens up or we don't see continuously positive momentum than longer-term, obviously, if we get a $5 gas price, that's one of those price points that hits overall.
CBRL: We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.
DRI: Yes, I would say as we look back, we don't think the current levels, the $4 current gas prices, no longer represents sticker shock.
SUPPLY & DEMAND
Goldman released a note yesterday saying that coffee may gain in Brazil if weather remains dry in the country’s crop growing regions. German researcher, F.O. Licht GmBH, also said in a report that the main coffee growing areas in Brazil were “drier than usual” in February.
World coffee demand growth remains “resilient”, according to Roberio Silva, executive director of the London-based International Coffee Organization. Silva attributes the resilience to emerging market demand, increased consumption in producing countries, and the expanding popularity of single-cup dispensers.
Egg sets placements continue to contract at around the same rate, -6%, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production. As the chart below shows, supply is not showing any clear signs of picking up.
RECENT COMPANY COMMENTARY
Coffee: Prices are now down -24% versus last year
PEET: We expect 2012 coffee costs to rise 12% instead of last year's 42%.
SBUX: We've taken advantage of the recent declines in the C-price to lock in more of our coffee needs for fiscal 2013. We now have six months of our fiscal 2013 requirements secured at costs moderately favorable to 2012.
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.48%
SHORT SIGNALS 78.35%