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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 23, 2012


As we look at today’s set up for the S&P 500, the range is 40 points or -2.33% downside to 1286 and 0.71% upside to 1326. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1a

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 5/22 NYSE 104
    • Down from the prior day’s trading of 2143
  • VOLUME: on 5/22 NYSE 846.67
    • Increase versus prior day’s trading of 6.09%
  • VIX:  as of 5/22 was at 22.48
    • Increase versus most recent day’s trading of 2.14%
    • Year-to-date decrease of -3.93%
  • SPX PUT/CALL RATIO: as of 05/22 closed at 1.83
    • Up from the day prior at 1.58 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.74
    • Decrease from prior day’s trading at 1.77
  • YIELD CURVE: as of this morning 1.45
    • Down from prior day’s trading at 1.48 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week of May 18
  • 10am: House Price Index (M/m), Mar., est. 0.3% (prior 0.3%
  • 10am: New Home Sales, Apr., est. 335k (prior 328k)
  • 10am: New Home Sales (M/m), est. Apr., est. 2.1%  (prior -7.1%)
  • 10:30am: DoE inventories
  • 11am: Fed to purchase $1.5b-$2b notes in 8/15/2022 to 2/15/2031 range
  • 1pm: U.S. to sell $35b 5-yr notes
  • 2pm: Fed to purchase $4.25b-$5b notes in 5/31/2018 to 5/15/2020 range
  • 2pm: Fed’s Kocherlakota speaks in South Dakota 

GOVERNMENT:

    • President Obama attends campaign events in Colo., Calif.
    • Mitt Romney won Republican primaries in Arkansas, Kentucky yesterday
    • Nuclear Regulatory Commission Chairman Gregory Jaczko, who is resigning, holds news conference in Charlotte, N.C., 9:30am
    • Senate in session, House not in session
    • Senate Finance holds hearing on health-care delivery, with testimony from UnitedHealth, Advocate Health Care, Kindred Healthcare, Renaissance Medical Management officials, 10am
    • NRC staff meets on agency’s yearly assessment of safety for Entergy Corp.’s Vermont Yankee nuclear plant, 5:30pm
    • Financial Industry Regulatory Authority holds final day of annual conference 

WHAT TO WATCH:

  • Merkel faces Hollande pleas to shed “taboos” at summit
  • Morgan Stanley defended its role in Facebook’s IPO after a Massachusetts regulator subpoenaed the bank
  • Facebook investor sues Nasdaq over “mishandled” stock offering
  • PetroChina looking at American, Caribbean assets, Jiang says
  • U.S. April new home purchases forecast to rise 2.1% from March to 335k annual rate
  • Barclays to raise $5.5b from sale of BlackRock stake
  • U.K. retail sales fall most in two years as rain hits demand
  • Japan’s April exports rise less-than-forecast 7.9% Y/y
  • ECB’s Lipstok says no need for additional ECB stimulus at the  moment, “no guarantee” Greece will keep euro
  • BofA to buy back $330m of mortgages from Freddie Mac
  • RailAmerica reviewing alternatives including possible sale
  • SEC Chairman Schapiro says SEC’s JPMorgan review focused on VAR models
  • U.S. consumer bureau seeks comments on prepaid debit card rules
  • More CFOs willing to pay bribes, global survey finds 

EARNINGS:

    • Suntech Power (STP) 6am, $(0.49)
    • Big Lots (BIG) 6am, $0.69
    • Canaccord Financial (CF CN) 6:30am, C$0.09
    • Hormel Foods (HRL) 7am, $0.41
    • Trina Solar (TSL) 7am, $(0.27)
    • Bank of Montreal (BMO CN) 7:30am, C$1.35
    • Zale (ZLC) 7:30am, $(0.20)
    • Apollo Investment (AINV) 7:30am, $0.21
    • Genesco (GCO) 7:35am, $0.74
    • American Eagle Outfitters (AEO) 8am, $0.20
    • CAE (CAE CN) 8am, C$0.20
    • Eaton Vance (EV) 8:30am, $0.48
    • NetApp (NTAP) 4pm, $0.63
    • Pandora Media (P) 4:02pm, $(0.18)
    • PVH (PVH) 4:03pm, $1.26
    • Hewlett-Packard (HPQ) 4:05pm, $0.91
    • Synopsys (SNPS) 4:05pm, $0.55
    • Semtech (SMTC) 4:30pm, $0.31
    • Bristow Group (BRS) 5pm, $1.03

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

GOLD – plain ugly since the February top (down -12.7%) and this remains one of our top Global Macro short ideas that we’ll be discussing on our Best Ideas call at 11AM. Get the US Dollar right, and you’ll get a lot of big beta in macro right. 

  • Mining Slump Feeds M&A as Projects Overrun Budgets: Commodities
  • Wheat Drops for Second Day as Price Surge Prompts Farmer Selling
  • Rubber Set for Glut on Weaker China Growth Hurting Prices
  • Copper Slumps as Euro-Area Crisis May Threaten Chinese Growth
  • FreePort Founder Sells Diamonds as Investment Bet on China
  • Oil Drops a Second Day on Iran Agreement, Rising U.S. Stockpiles
  • Gold Declines in London as European Crisis Concern Boosts Dollar
  • Cocoa Falls to Three-Week Low in New York After African Rains
  • New Robusta Harvest in Indonesia’s Sumatra Seen Boosting Exports
  • Iron Ore Heads for Worst Run Since October as China Demand Slows
  • EU Farm Income May Drop for First Time Since 2009 as Prices Fall
  • Rubber Retreats to Lowest Level in a Week on Greek Exit Concern
  • Commodities to Gain on China’s Stimulus Pledge: Chart of the Day
  • Oil Falls for Second Day on Iran Agreement
  • Cotton Extends Slump to Lowest in More Than Two Years on Demand
  • Palm Oil Drops to Lowest This Year on European Crisis Concerns
  • Commodities Drop to Five-Month Low as Greece Concern Cuts Demand 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


ITALY – getting powdered again this morning (down -2.5%, crashing since March = -23.4%) after reporting the worst consumer confidence reading in Italy since 1996 (pre-Euro). Germany/France draw-downs chasing the Spanish and Italian ones; DAX and CAC down -11.5% and -15.5% from March. Nothing is going to happen at their 3hr dinner tonight.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


JAPAN – finally seeing consensus walk our way on the massive interconnected global macro risk associated with Japan’s fiscal and debt problems. This is an Export economy that just missed another export number – that’s bad. Japanese stocks down for 23 of the last 33 days (draw-down = -16.6%). Japan matters to Global Demand.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team



Long Time Leaving

“I been a long time leaving, but I’m going to be a long time gone.”

-Willie Nelson

 

I think we have been pretty clear on this – Global Growth is slowing and the USA is not going to “de-couple” from this globally interconnected world. This time is not different.

 

Last night on CNBC I asked Goldman’s chief of everything US economic forecasting, Jan Hatzius, when he was going to cut his US GDP forecasts again. He didn’t really answer the question.

 

That doesn’t mean that you don’t have to answer it for yourself and/or your clients out there today. Real-time risk waits for no one.

 

Back to the Global Macro Grind

 

Willie Nelson is also known as the Red Headed Stranger. He’s the kind of Red-White-and-Blue blooded American we Canadian folks from Northern Ontario grew up respecting. He was born during a legitimate Great Depression (1933). He was self-made. And he didn’t wake up every morning looking to point fingers at anyone but himself.

 

That’s who I am. That’s who many of you are. That’s why this entire political Gong Show that has become our policies and markets gets us so fired up. That’s also why we are going to lead from the front and change it. The day you stop blaming everyone but yourself, is the day you start to lead.

 

Morgan Stanley got a subpoena last night for doing what it is that the Old Wall does. So, they put out a press release admitting as much – but, in doing so, entirely missed the point – i.e. what it is that they do during the IPO process doesn’t make sense to The People. This is a huge political football going into the US Presidential Election.

 

Since Morgan Stanley was a recipient of socialized bailout policies, now that’s their problem to deal with. That’s the other side of the Hank Paulson trade. It’s now the US stock market’s problem too. The US Financial Sector ETF (XLF) is laden with the Too Big To PR names.

 

In the last 2 days I have basically yard-sale’d my Global Equity exposure. On Monday morning we had 27% US Equity and 12% International Equity exposures, respectively. I’ll go into the open with the following:

  1. US Equities 6% (Healthcare = XLV)
  2. International Equities = 0%
  3. US Dollar = 9%

I’m not going to apologize for playing this game fast. Sometimes you have to. I’ve been a Long Time Leaving this charlatanic parade of storytelling. There are only so many times you can assure people that growth “is back” or it just “feels like” an economic recovery.

 

Enough of the “feel” already.

 

Quantitatively, this doesn’t feel like anything other than what the score is telling you. Growth Slowing has been plainly obvious to any economist/strategist who has live quotes and real-time data since March.

 

Inclusive of this morning’s selloffs, here are the asset price draw-downs (ie real-time indicators) since February-March:

  1. Japanese stocks (Nikkei225) = -16.6%
  2. Hong Kong stocks (Hang Seng) = -13.3%
  3. Indian stocks (BSE Sensex) = -13.5%
  4. German stocks (DAX) = -11.8%
  5. Italian stocks (MIB) = -23.8%
  6. Russian stocks (RTSI) = -27.5%
  7. Commodities Index (CRB) = -12.3%
  8. Oil (WTIC) = -17.8%
  9. Gold = -13.0%
  10. Copper = -14.1%

If you bought into any of the cockamamy “surveys” that growth “feels” fine, you can tell me how that’s going to feel in your P&L today. We, as a profession, have been living through growth slowdowns for 5 years and we are better than some of the said sources on growth have repeatedly proven to be.

 

You’ll note that I didn’t include Spain or the US stock market in the draw-down table. But they are in our refreshed Chart of The Day. You’ll recall that you’ve had plenty of opportunity to sell US Equities in the last 3 months; plenty of opportunity to ask yourself ‘heh, why on God’s good earth would the US, China, and Japan “de-couple” from mean reversion risk?’

 

Even if you didn’t say it to yourself that way, you probably thought about it in terms of what we have coined as The Correlation Risk. Get the US Dollar right, and you’ll get pretty much everything else right. That’s not a perma-strategy. Nothing is. It’s just the one that’s not losing you money right here and now.

 

With the US Dollar up for the 4thconsecutive week to $81.80 this morning, here’s your refreshed immediate-term inverse correlations between the USD and everything else:

  1. SP500 = -0.95
  2. Euro Stoxx600 = -0.96
  3. MSCI Emerging Market Index = -0.97
  4. CRB Commodities Index = -0.93
  5. US Treasury 10-yr Yield = -0.93
  6. Copper = -0.97

How does that “feel”?

 

I’ve been a Long Time Leaving the broken forecasting processes of the Old Wall. Most of these outfits have missed every single Growth Slowing call since 2007. Unless they change what it is that they do, they might just be a long time gone soon too.

 

My 27 person research team and I will be grinding through our long/short positions on our Best Ideas Conference Call this morning at 11AM EST. Please ping if you’d like access to Risk Managed Buy-Side Research built by buy-siders.

 

My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, EUR/USD, and the SP500 are now $1, $90.13-93.28, $1.26-1.28, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Long Time Leaving - Chart of the Day

 

Long Time Leaving - Virtual Portfolio


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FITCH GOES IN ON JAPAN

CONCLUSION: We continue to flag what we view as heightened risk for a JGB market rout; for now, however, the coast remains clear.

 

POSITION: Short the Japanese yen (FXY).

 

In the wee hours of the morning (US time) the international ratings agency Fitch downgraded Japan’s long-term local-currency sovereign debt rating one notch to A+; additionally, the agency reduced the country’s long-term foreign currency debt rating two notches to the same level. This action is critical in nature because we are now one step (i.e. a downgrade from another “Big 3” agency: S&P = AA- w/ NEG outlook and Moody’s = Aa3 w/ STABLE outlook) closer to triggering a ~$78B capital shortfall across the Japanese financial system.

 

FITCH GOES IN ON JAPAN - 1

 

One catalyst we see in accelerating the time frame of additional downgrades is that Japanese bureaucrats may wait until scheduled Upper House elections in the summer of 2013 to hold elections in the Lower House, per Azuma Koshiishi, secretary-general of the DPJ. Unless the LDP has backed off of their demand to dissolve the Diet prior to negotiating on the VAT hike, there will be no progress made on this front for over one full year – a major catalyst for further downgrades of Japanese sovereign debt further per commentary out of both of the remaining agencies.

 

The most recent downgrade (today) had a fair impact on the currency market, with the USD/JPY cross jumping from ¥79.58 to as high as ¥79.77 within minutes following the downgrade.

 

FITCH GOES IN ON JAPAN - 2

 

Looking to the Japanese sovereign debt market – which has been a key focus of ours this year as it relates to potentially being the next domino in the context of our Sovereign Debt Dichotomy theme – prices are not confirming Fitch’s worry that “[t]he country’s fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk.”

 

Two, ten and thirty-year nominal JGB yields have trended down in recent months to ~7, ~9 and ~2 year lows, respectively. From a market demand perspective, a couple of recent developments highlight the [arguably] well-deserved complacency within that market in that the BOJ failed to receive enough offers from financial institutions for its recent Asset Purchase Program open market operation (only ¥480.5B of a ¥600B target); this is in addition to failing to meet a ¥310B target (¥174.7B offered) for its Rinban operation (purchases of JGBs w/ a maturity < 1yr). For now, Japanese financial institutions can’t get their hands on enough JGBs!

 

FITCH GOES IN ON JAPAN - 3

 

Given the impressive demand conditions, it’s no surprise to see that L/T-S/T nominal JGB yield spreads have compressed meaningfully over that same duration. Part of this is due to the risk that the BOJ decides on implementing further easing measures in its monetary policy meeting, which is currently underway (results published tomorrow). Increasing the [bond] duration of their purchases and potentially acquiring foreign assets are two policy initiatives we think they may pursue if they do decide to incrementally ease at the current juncture.

 

FITCH GOES IN ON JAPAN - 4

 

For context, we’re of the view that the Cabinet Office’s recently upgraded 2012 economic outlook and the central bank’s increasingly hawkish fiscal 2012-13 inflation guidance limits the need for them to pursue further easing measures in the near term; a chart of medium term breakeven inflation expectations in Japan confirm our view. On the flip side, the threat of rolling blackouts this summer ranging from 7-20% of peak consumption (depending on region) could force downward pressure on the Japanese economy over the intermediate term and force the central bank to react preemptively to maintain Japanese Real GDP growth, which, after four consecutive quarters of YoY contraction, accelerated to +2.7% YoY in 1Q12.

 

FITCH GOES IN ON JAPAN - 5

 

Jumping back to JGB risk, Japanese sovereign credit default swaps of the 5yr and 10yr tenors have backed up a fair amount in recent weeks, widening +18bps and +31bps, respectively, from their YTD lows. As the table below highlights, however, the widening seen in Japanese swaps recently has dramatically lagged the region, lending credence to our view that Japanese sovereign debt risk on this metric is merely accelerating as a function of global financial market contagion borne largely out of Europe. The same can be said regarding the recent widening of Japanese bank CDS as well, though perhaps to a lesser degree, given their outsized exposure to JGB risk (25% of total assets).

 

FITCH GOES IN ON JAPAN - 6

 

FITCH GOES IN ON JAPAN - 7

 

FITCH GOES IN ON JAPAN - 8

 

All told, we continue to flag what we view as heightened risk for a JGB market rout – particularly from current prices. That said, however, our call has not and will not invoke the consensus storytelling that simply focuses on highlighting the unsustainable nature of Japanese fiscal imbalances; rather we will continue to stay finely in tune with any/all catalysts that we find material enough to potentially shift sentiment within this market. For now, the coast remains clear and we remain bearish on the JPY vs. the USD from a long-term TAIL perspective – of course trading it with a bearish bias over the intermediate term, given its preponderance to appreciate in the context of our TREND-duration fundamental Global Macro view.

 

Darius Dale

Senior Analyst

 

FITCH GOES IN ON JAPAN - 9

 

FITCH GOES IN ON JAPAN - 10




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