TODAY’S S&P 500 SET-UP – May 30, 2012

As we look at today’s set up for the S&P 500, the range is 21 points or -1.23% downside to 1316 and 0.34% upside to 1337. 












    • Up from the prior day’s trading of 114
  • VOLUME: on 5/29 NYSE 714.24
    • Increase versus prior day’s trading of 19.91%
  • VIX:  as of 5/29 was at 21.03
    • Decrease versus most recent day’s trading of -3.35%
    • Year-to-date decrease of -10.13%
  • SPX PUT/CALL RATIO: as of 05/29 closed at 1.71
    • Down from the day prior at 2.03 


GROWTH – 1st Commodities, then Bonds, and now Stocks getting it; the Old Wall’s economists do not, yet – but they will; we’ve yet to see Hyman or Hatzius cut their US GDP Growth estimates to where we or the bond market has them (1.7-1.9% US GDP is our best case, for now). Looking for that consensus capitulation, blaming Europe.


  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.68
    • Decrease from prior day’s trading at 1.74
  • YIELD CURVE: as of this morning 1.40
    • Down from prior day’s trading at 1.46 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week of May 25
  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 10am: Pending Home Sales (M/m), Apr., est. 0.0% (prior 4.1%)
  • 10am: Pending Home Sales (Y/y), Apr., est. 22.0% (prior 10.8%)
  • 11am: Fed to purchase $4.5b-$5.25b notes in 8/15/2020 to 5/15/2022 range
  • 11:30am: U.S. to sell $25b 52-week bills
  • 11:30am: U.S. to sell 4-week bills
  • 1:20pm: Fed’s Fisher speaks on economy in San Antonio, Texas
  • 1:30pm: Fed’s Dudley to speak on regional economy in New York
  • 4:30pm: Fed’s Rosengren speaks in Worcester, Mass
  • 5pm: API weekly petroleum inventories


    • House returns to work following recess; Senate out until Jun 4
    • President Obama signs U.S. Export-Import Bank reauthorization
    • Commerce Dept. announces level of wind tower import tariffs
    • Mitt Romney wins Texas, giving him enough delegates to clinch Republican nomination


  • Euro-area economic confidence dropped more than est. in May
  • America Movil discussed cooperation with KPN before offer
  • Spain’s Ordonez says Bankia bailout terms still unknown
  • Pep Boys terminates $1b merger with Gores Group
  • Fiat to list in NY after CNH unit merger
  • Apple’s CEO says focus is TV, sees closer Facebook ties
  • Euro-area loans grew at slowest pace in 2 yrs. in April
  • Atlantic Broadband said to seek $1.4b sale
  • RIM shares plummet after surprise 1Q op loss
  • BankAtlantic must face SEC disclosure fraud lawsuit
  • Facebook’s Zuckerberg drops off Billionaires Index


    • Fresh Market (TFM) 6am, $0.36
    • Yingli Green (YGE) 6am, $(0.22)
    • CorVel (CRVL) 6:15am
    • Booz Allen Hamilton (BAH) 7am, $0.40
    • Daktronics (DAKT) 7am, $0.03
    • RBC Bearings (ROLL) Bef-mkt, $0.63
    • TiVo (TIVO) Aft-mkt, $(0.16)
    • Lions Gate Entertainment (LGF) Aft-mkt, $0.22


  • Marubeni Follows Glencore to Boost Grain Trading: Commodities
  • Brent Falls to 5-Month Low as U.S. Supplies Seen at 22-Year High
  • Gold Falls a Second Day as Europe’s Debt Crisis Boosts Dollar
  • Copper Drops as Spain’s Credit Rating Revives Crisis Concern
  • Wheat Slides as U.S. Harvest Accelerates While Soybeans Decline
  • Cocoa Falls as Ivory Coast’s Mid-Crop Harvesting Gathers Pace
  • Felda Said to Seek $3.2 Billion in Year’s Second-Biggest IPO
  • Iraq Begins First Oil, Gas Exploration Auction Since Saddam Era
  • Japan Aluminum Buyers Said to Agree to Record Quarterly Fee
  • Standard & Poor’s GSCI Index Drops to Lowest Since October
  • Dollar’s Gold Backing Drops With Metal’s Price: Chart of the Day
  • Pakistan Seen Shipping 100,000 Tons Sugar by September on Prices
  • ONGC Plans Shale, Deepwater Strategy in Bid to Double Production
  • Oil Drops as U.S. Stockpiles Seen Rising
  • Rubber Inventory Climbing in China as Slowdown Cuts Demand
  • Rubber Drops as Rising Thai Supply Adds to Chinese Stockpiles
  • Palm Oil Set for Worst Monthly Loss Since 2009 on China Outlook










SPAIN – still crashing. IBEX down another -1.4% (immediate-term TRADE oversold) to a fresh new low (down -31% from the Feb top when Global Growth Slowing became readily apparent in our models); Russia down -27% from the March top and Italian bond yields ripping a move > 6.00% this morning; there is no “de-coupling” from this.






CHINA – but the rumors of Chinese stimulus have, at least for today; the Shanghai Comp backed off at an important TRADE line of resistance (2393) last night and the Hang Seng got crushed again, down -1.9% - no follow through from the USA day of no volume US Equity buying (US volumes down -26% vs our composite avg of the down days in May).










The Hedgeye Macro Team

AMZN: Adding TRADE, Respecting TREND and TAIL

Conclusion: AMZN already had a favorable TREND and TAIL setup. Now it scores the trifecta by working within our near-term TRADE framework as well. As with all TRADES, it might be a short-lived event. But do not ignore the power of the story across our TREND (3 months or more) and TAIL (3 yrs or less) durations.


TRADE (30 Days or Less)

Keith added it to the Hedgeye Virtual Portfolio as he was looking for names levered to US Consumption with favorable TREND and TAIL setups. In Retail, AMZN clearly fits that bill.


From a near-term perspective, AMZN does not have all the characteristics we’d ordinarily look for in a long idea at face value. First off, while 2Q estimates appear to be in check, this is a company that's not afraid to miss. It's happened in 3 of the past 10 quarters. With the company going up against a 51% revenue comp this quarter, the hurdle is a big one.


From a sentiment standpoint, of the 41 Analysts, there are no sells, and the 71% ‘Buy rating ratio’ just set a 5-year peak. Yes, this definitely concerns us, especially with AMZN facing its toughest yy revenue growth compare in 2Q (51% growth in 2Q11). Its trough, fyi, was 21% in 1Q 2007.


TREND (3 Months or more)

But make no bones about it... after the 2Q print, revenue compares start to ease, while margin compares start to get quite easy effective immediately (including 2Q).  Margins were cut in half last year to 1.8%, with an even distribution across quarters. People beat Bezos up – as usual -- for that investment. But now he has Fire, expanded DC capacity, a new B2B initiative...


We’ve been at a point where AMZN has had Eight quarters is a row where inventories grew faster than sales. Note that this is at the same time capex as % of sales ramped by another 90bps to 3.8%. None of this is sustainable, and ultimately very bullish for cash flow and therefore, the stock.


In the back half of this year, our estimates are 10% above consensus.



TAIL (3-years or less)

Let's not forget that it is the Haley’s Comet of retail. It's a retailer with $48bn in revenue growing at 40% with 2% EBIT margins that's investing on its balance sheet and p&l at a rate to make a third of retailers alive today extinct in 5+ years.  Capex is inflated, margins are depressed, and while sentiment has rebounded considerably from the latest 1Q upside, the fact of the matter is that estimates for next year are likely low as investments today drive sales and margins tomorrow. For a world class franchise like AMZN, you generally don’t want to get in the way of that. The ‘it’s too expensive’ call simply holds no water when the company can earn the $4.50 2014 consensus estimate a year early.


AMZN: Adding TRADE, Respecting TREND and TAIL - AMZN TTT

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CONCLUSION: When it comes to spurring growth and protecting its currency, we are of the view that India “can’t have its cake and eat it too” at the current juncture. The benchmark SENSEX Index remains in a Bearish Formation – a clear quantitative signal to us that the recent spate of oft-conflicting policy maneuvers is likely to have a muted effect on turning around the Indian economy and the country’s poor investment climate over the intermediate term. 


The phrase “[insert proper noun] wants to have its cake and eat it too” doesn’t really make sense to me. As a former offensive lineman, I generally enjoyed eating all the cake I could get my hands on. That being said, I believe the saying refers to an individual or entity’s desire to pursue an outcome that is conflict with another one of his/her/its wishes.


In the case of India, a country we have generally remained fundamentally bearish on across asset classes (stocks/rupee/rupee-denominated debt) for much of the past 19 months, the aforementioned phrase is quite appropriate. The Reserve Bank of India, in the midst of battling what we’d consider a full-fledged currency crisis (a peak-to-present decline > 20% over the LTM), is being forced to chose between fighting inflation – which is 270bps above their +4.5 YoY unofficial target (APR) and above it every month since OCT ’09 – or protecting growth, which has slowed to an 11-quarter low of +6.1% YoY in 4Q12 and looks to continue that trend when 1Q GDP is reported on Wednesday.


Rather than biting the bullet and hiking rates to protect the purchasing power of their citizenry, which is what many developing nations have been forced to do historically during periods of international stress (usually accompanied by USD strength), India has chosen the route of easing and tightening at the same time (more on this later). Their policy confusion has been rather unsupportive for the rupee, which has fallen to an all-time low vs. the USD as recently as MAY 23.




As we penned in our APR 17 note titled “IS INDIA OUT OF BULLETS?”, the country’s twin deficits, which have widened in recent years, are a real risk to the nation’s currency in times of heighted global volatility due to the typical slowdown in cross-border capital flows to developing nations like India. Coincidentally, inflows into India’s equity and bond markets peaked in the YTD right around the time we started getting loud about our expectations for a breakout in cross-asset volatility over the intermediate term (mid-MAR).






Per the aforementioned note: “No doubt, a further Deflating of the Inflation will eventually be supportive of the Indian economy; that said, however, we think India’s intermediate-term growth outlook, as well as the country’s financial markets are particularly at risk in an a higher-vol. environment over the intermediate term due to its widening current account and fiscal gap. India’s bloated fiscal deficit is of particular importance given that any slowing of capital inflows or outright capital outflows ultimately translates to a crowding-out of private sector funding.” With money supply (M3) growth at a ~7yr low, we’re seeing this phenomenon show up in the data in real-time.




Regarding the point we made about them easing and tightening at the same time, below is a list of the recent measures Indian policymakers have taken in order to combat either currency deprecation pressures (via fiscal and/or monetary tightening/capital controls) or economic growth headwinds (via fiscal and/or monetary easing/stimulus), which, if done at the same time, can seem a bit oxymoronic, or of the “having one’s cake and eating it too” variety: 

  1. In MAR, the central government introduced an import duty on gold and platinum bars and coins, which facilitated a -33% YoY decline in gold and silver imports in APR;
  2. Raised interest rates on foreign currency deposits by as much as 300bps in addition to easing restrictions on foreign exchange loans for Indian exporters;
  3. Reduced the amount banks can hold in FX derivatives contracts to < $100M or 15% of the total such agreements (whichever is lower);
  4. Reduced the amount of overseas income Indian corporates can hold in foreign currency-denominated assets to 50% from 100%;
  5. Sold $5.4B of FX reserves (USD) to the market over the past 3-4 weeks, taking their total reserves down to $290B (-6% YoY); and
  6. Late last week, the central government allowed the State-run refiners to increase gasoline prices by +11% in a bid to combat fiscal deficit pressures stemming from the bloated subsidy bill (12.7% of total expenditures). 

Interestingly, to point #5 above, providing USD liquidity to India’s FX market can be helpful for the exchange rate, but only because it tightens monetary conditions by curbing supply of Indian rupees in the domestic market. As such, their options here are limited given the Indian banking system’s persistent liquidity deficit (having borrowed nearly a trillion rupees from the central bank on average via reverse repo transactions a – form of monetary easing – over the last five days).






To point #6, we’ve crunched the numbers on the deficit below; the conclusion is short and simple: while the +11% increase can be taken by market participants as a signal that they are willing to cut further, it accomplishes very little in the direction of moving the needle on the fiscal deficit: 

  • In FY12, the subsidy bill on energy-related expenses was 59.1% of the total… holding that flat, we get to 1.123T rupees for FY12;
  • Reducing that by -11% leaves us with 999.45B rupees for on energy-related subsidy expenses for FY13E;
  • That takes our total planned subsidy expense 1.77T rupees or 11.9% of FY13E expenditures;
  • The -123.5B rupees in savings is a mere 0.8% of the total planned expenditures and just 2.4% of the budgeted deficit;
  • All in, the maneuver shaves a whopping -12bps off of India’s FY13E deficit/GDP ratio (assuming all other revenues and expenditures meet their targets). 

All told, the math doesn’t lie. When it comes to spurring growth and protecting its currency, we are of the view that India “can’t have its cake and eat it too” at the current juncture. As the chart below highlights, the benchmark SENSEX Index remains in a Bearish Formation – a clear quantitative signal to us that the recent spate of oft-conflicting policy maneuvers is likely to have a muted effect on turning around the Indian economy and the country’s poor investment climate over the intermediate term.


Darius Dale

Senior Analyst



Net Long II: SP500 Levels, Refreshed

POSITIONS: Long Healthcare (XLV) and Apple (AAPL); Short Industrials (XLI) and Basic Materials (XLB)


In my note titled “Net Long” at 1140AM EST on Friday, I explained the immediate-term upside scenario. With 1316 TRADE line support intact, we’re looking at finding an immediate-term TRADE overbought signal between 1.


Across my risk management durations, the lines that matter to me most right now are: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE resistance = 1337
  3. Immediate-term TRADE support = 1316 

With month-end approaching (Thursday) and the Employment Report (Friday) right after that, I don’t think trading the risk of this immediate-term range is going to be easy. Nothing in this business should be.


We currently have 9 LONGS, 6 SHORTS.


Keep moving out there,




Keith R. McCullough
Chief Executive Officer


Net Long II: SP500 Levels, Refreshed - SPX

European Banking Monitor

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .



Key Takeaways:


* American and European bank swaps mostly tightened in the latest week. Notably, French and German banks saw their swaps fall WoW along with the US Global banks. 


If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 28 of the 39 reference entities we track. French and German banks tightened across the board. The median tightening was 1.6%. 


European Banking Monitor - 11. banks


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 widened by 2 bps to 41 bps.


European Banking Monitor - 11. Euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis. The latest overnight reading is €741.86B.


European Banking Monitor - 1. ecb overnight


Security Market Program – For an eleventh straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 5/25, to take the total program to €212 Billion.


European Banking Monitor - 11. smp

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 80.45%
  • SHORT SIGNALS 78.38%