Down another 6.4% at $37.45, the VIX is hitting its 3 day low as the SP500 hits its 3 day highs. The VIX has effectively crashed -54% from its November 20th peak of $80.86 – yes, that was also the date of the SP500’s capitulation low of 752.
The VIX could easily put on a +27% move from this level and not violate the dotted red line we are showing below in this chart. If that were to occur, stocks aren’t going to be going up at the same time. Manage towards the improbable outcomes as well as the obvious ones – that’s what risk management is all about. It feels really good to be long here, but all good things find a point of exhaustion.
Keith R. McCullough
CEO / Chief Investment Officer
The trading range that is forming in the face of a 50% price cut in volatility is this:
BUY “Trade” = 878
SELL “Trade” = 922
That’s both a nice 5% trading band of a sandbox for the real short sellers to pick off those hurrying into what they have been missing on the long side here, and a very solid base of support for those who bought the November/December lows. We’re a long way from that SP500 low of 752 by the way, +23.4% higher to be precise. Day 1 of the New Year is no day to start making up for last year. Stay with the process. Stay patient. Prices will come back to where we can make purchases again – they always do.
Research Edge LLC
Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.
This gas story is nothing new; in January 2006 Gazprom also turned off Ukraine’s supply. On 12/14 I wrote a weekend edition piece entitled: “Eye On The Energy Threat: Ukraine’s Geopolitical Impact”. In it I highlighted many of Ukraine’s geopolitical forces at work, including: its geographic importance as a transit country for natural gas from Russia to Europe; the country’s political orientation as it becomes more “western” and Euro-centric; and discussed Europe’s alternative energy strategies to become less reliant on Russia for its natural gas supply.
This latest shut-off was predictable. While I don’t discount that numerous political gestures are at work behind the scenes, we simply need to return to the clichéd expression, “Cash is King”, to understand the fundamentals. The fundamental for Russia right now is CASH, for she doesn’t have it. Like the rest of the world that is levered to commodities, Russia’s balance sheet doesn’t look like it did over the summer when commodities were reaching historical highs. This came to a head yesterday when Gazprom decided it was done negotiating over repayment and gas price. Russia signaled to Ukraine—which receives heavily subsidized gas from Russia to the tune of half of the European market price—that either the Ukraine is going to play ball their way or suffer the consequences.
This point may be marked as Ukraine’s struggle to transition from a socialist to capitalist state. On one hand the latest news reports from Ukraine show democratic-thinking leaders and a populous looking West. Yet on the other hand, Ukraine has a weak economy (high debt, and unstable currency, and like Russia is levered to commodities) and therefore needs Russia’s handout. The country’s lack of negotiating power is evidenced by Ukraine’s President Viktor Yushchenko attempt on December 31st to negotiate the transit price (what Gazprom pays Ukraine to ship gas through the country to Europe) from $1.70 per 1,000 cubic meters per 100 kilometers to $2. Kindly stated, Ukraine has a weak handshake and no cards to put out on the table.
Ukraine has agreed to pay $1.52 billion to Gazprom by January 11th, leaving a balance of over half a billion dollars to pay off its debt. It will be interesting to monitor this development in the next days. In the wake of the shut-off Gazprom stated it will increase supply to Europe via a line running through Belarus. Unlike in 2006, Europeans are not as worried for they have adequate inventory and alternative supplies such as liquefied natural gas. Ukraine says it has gas in storage equivalent to about 35% of annual consumption.
Let’s hope this number is accurate. Today’s weather report out of Kiev shows 13 degrees Fahrenheit and a chance of snow.
Key highlights from the article include:
• Aeon stores with 33 Hong Kong outlets grew 9 % y-o-y in the week of December 24 – 30th.
• Sun Hung Kai Properties, Hong Kong’s largest private operator of shopping centers, said sales at its 20 shopping malls grew more than 10% y-o-y; and
• A record 420,000 shoppers visited apm, SKHP’s flagship shopping center in Kwun Tong for New Year countdown.
Based on these preliminary reports, which are more than anecdotal, both holiday sales and traffic were very strong in Hong Kong over the holidays. As we have been emphasizing over the last few months, both stock selection and country selection will be critical in 2009. While a rising tide, in terms of emerging market growth did indeed lift all boats from 2003 - 2007, in the coming 12-months differentiation will occur. And rightfully so as the economic prospects and country balance sheets are widely divergent in emerging markets, and the countries formerly known as BRICK.
We continue to be long FXI, which is the iShares FTSE/XINhua China 25 Index.
Daryl G. Jones
The Reserve Bank of India cut rates for the fourth time in four months as weekly inflation data continues to provide Prime Minister Singh’s government with justification to take up rates. Indian stocks rallied for a second day on the news, but trade data released yesterday suggests that the long term impact of the cuts will be minimal. Exports declined again in November by nearly 10% year-over-year, the second consecutive decline. For a country in which over a third of GDP is dependent on external trade, declining foreign demand is ominous.
In the face of increasingly grim data, the Indian recovery plan looks woefully inadequate -particularly when contrasted with China’s massive $580 billion stimulus package. The doubling of limits for foreign holdings in government debt that accompanied the rate cuts suggest that Singh’s team is already scrambling to find ways to finance the stimulus measure announced without reducing current spending on social services – a necessity if they hope to survive this year’s elections.
We bought back our IFN short on Tuesday to take a modest profit and get out of the way of a squeeze rally spurred by this rate cut, which we anticipated would arrive even if WPI came in flat. We will continue to keep our eye on the Indian market and will look to re-short into strength opportunistically.
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.