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LVS: TRADE UPDATE

Keith bought LVS in the Hedgeye Virtual Portfolio at $45.79.  According to his model, the TRADE range is at $45.65-49.73 and the TREND resistance is at $51.33.

 

 

As we wrote about in "A MACAU TRADE" (05/25/12), we like LVS for a long trade.  Macau market share has been unquestionably disappointing since Sands Cotai Central opened in April.  However, we believe share will increase from May's 17.5% to a more appropriate 19-20% range over time.   

 

Overall, Macau revenue growth for May will likely come in at the lowest level since summer 2009.  While we've been hitting on the slowing growth theme for almost a year, May was additionally hampered by low hold, a shorter Golden Week, and an unfavorable calendar.  Based on our math and assumption of normal hold, June should post higher YoY growth.  Sequentially better market growth and growing LVS market share should provide positive catalysts for a stock that has plunged 25% since its April high.

 

LVS:  TRADE UPDATE - LVS


The Test: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Industrials (XLI) and Short Basic Materials (XLB)

 

Our Growth Slowing, Strong Dollar, and Bernanke’s Bubbles (short Commodities) Macro Theme calls for Q2 have not changed – consensus is starting to.

 

Here are the lines, across risk management durations in my model, that matter most: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE resistance = 1316
  3. Immediate-term TRADE support = 1294 

In other words, I expect to see The Test (as in a re-test of the YTD closing lows), then maybe I’ll get net longer from there for the bounce. We’ll see. I think being able to change your mind fast is important right now.

 

Almost the entire Sell-Side still needs to cut their US GDP Growth estimates, again.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Test: SP500 Levels, Refreshed - SPX


INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS

Two More Months of Worsening Data to Go

Initial jobless claims rose 13k last week to 383k. As usual, the prior week print was upwardly revised - this time by 3k. Incorporating the 3k upward revision to last week's print, claims were higher by 10k. Rolling claims also increased, rising 3.75k to 375k. On a non-seasonally adjusted basis, claims rose 11k to 341k.

 

This week's number was well short of expectations for 370k, and, taken in conjunction with a weaker than expected ADP report this morning, continues to point to a perception that the jobs recovery is stumbling. As we've pointed out many times, this is an illusion caused by faulty seasonal adjustment factors in the government data. The error traces back to Lehman's bankruptcy. This is a major component of why the financials have followed a recurring trading pattern for the last three years, and why they should continue to for the next two years until the five-year lookback period has run its course.

 

The better way to evaluate the data is to look at the year-over-year trend in rolling NSA claims to remove the effects of the seasonal distortions. When viewed this way, claims continue to improve at a rate of ~11% YoY.  

 

INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS - Raw

 

INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS - Rolling

 

INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS - NSA

 

INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS - NSA rolling

 

INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS - S P

 

INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS - Fed

 

INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS - NSA YoY

 

Meanwhile, the Yield Curve Continues to Pancake

The 2-10 spread tightened 10 bps versus last week to 135 bps as of yesterday.  The ten-year bond yield decreased 11 bps to 162 bps. To put this in perspective, if spreads hold where they are now, the 3Q12 sequential change will rival what we saw in 3Q11 when banks across the board saw their margins flatten. It remains to be seen whether the end of Operation Twist on June 30 will take some pressure off the long end of the curve.

 

INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS - 2 10

 

INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS - Scoreboard

 

INITIAL CLAIMS: JOBS DATA CONTINUES TO TRICK MOST MARKET OBSERVERS - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 

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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 80.64%
  • SHORT SIGNALS 78.61%

Dancing With the Bear

“Theory helps us to bear out ignorance of facts.”

-George Santayana

 

I have a good friend whose dad is legendary for giving his sister’s suitors a difficult time.  As it’s been told to me, this young lady will bring guys she is dating home and her father will take them for a little walk outside and basically warn these young lads that they don’t want to dance with the bear – the bear being him.  Since he is a small town burly Canadian fire chief, the daughter’s suitors are pretty clear on the message.

 

As it relates to being stock market operators, I don’t think any of us enjoy dancing with bear markets.  A good friend of mine, and former colleague, is one of the head traders at a major mutual fund complex.  Every day I get his morning internal news summary which leads off with the ACWI etf, which is a proxy for global large cap equities.  On April 2ndhis note had the ACWI up +11.9% and on May 29thhe had the ACWI up +0.76%.  In effect, any investor who has a long only mandate has had to dance with the bears over the past couple of months and likely, just due to the inflexibility of their mandate, had to endure giving back performance.

 

But even as many of us have had to dance with U.S. and global equity bears, the Japanese have perhaps had it the worst.  The most populous bear in Japan is the Asian black bear, also called the moon or white chested bear, which is medium sized and, luckily enough, largely a herbivore.  While the Asian Black Bear is mostly focused on eating plants, the Japanese stock market has been focused on eating investors whole. Specifically, overnight the Nikkei close -1.1% and finished the month down -10.3%.

 

Our bearish thesis on Japan is, hopefully, at this point relatively well known.  In late February we hosted a conference call with a 100 page presentation (email us at sales@hedgeye.com if you aren’t a subscriber of our macro product and would like to trial and view the presentation) that outlined our view that Japan is facing a debt, deficit and demographic reckoning.  It seems Japanese equities are agreeing with us.  

 

One of the key catalysts we highlighted back then was the potential for a sovereign debt downgrade.  Early last week this catalyst came to fruition as 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.  As the other rating agencies follow suit and the ratings continue to tumble downwards, the larger risk is that the Japanese banking system has to do a massive capital raise in the future to keep their Tier 1 capital ratio at appropriate levels.  This is an increasingly realistic risk that you may want to bear in mind.

 

By the time you get this missive, the U.S. will have reported GDP and jobless claims this morning.  Both our predictive tracking algorithms and the stock market have been telling us that GDP is slowing and we would expect the data this morning to reflect the same.  On some level, of course, slowing growth is starting to be priced into the market.  Currently, in the Virtual Portfolio we are leaning slightly net long and have 8 longs and 7 shorts. 

 

The three most recent positions that we have added to the Virtual Portfolio on the long side are as follows:

 

1.   Apple (APPL) – As oil and commodities deflate, from a macro perspective the outlook for the iEconomy improves.  Additionally, and not that I have any edge of course, Apple is cheap at 10x forward earnings but also growing the top line, based on the last quarter, at north of 30%.  The simple fact is that many investors still don’t get that Apple is not a hardware company; it is a software company with long term sustainably high margins (think moat and barriers to entry).

 

2.   Amazon (AMZN) – Amazon, much like Apple, is a play on consumption which we believe continues to improve as oil, and energy input costs generally, continue to break down.  As my colleague Brian McGough wrote about Amazon yesterday:

 

“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.”

 

3.   Utilities (XLU) – On our quantitative model, utilities are the only sector that is bullish on both TRADE and TREND durations.  This is in part due to the predictability of the cash flow streams in utilities and thus relatively safety, but also a compelling dividend yield of right around 4% which, when compared to the government bond market, is downright juicy.

 

So, even in the doldrums of dancing with the bear market, we’ve been able to find some compelling long ideas.  Time and price will tell whether they are rentals or names that, like Starbucks, we will hold for multiple years.  But the bottom line is this: if you are going to dance with the bear, be prepared to keep your hands, feet, and portfolio moving.

 

In fact as Wikihow instructs us, the top three tips for avoiding bear attacks are as follows:

  1. Avoid close encounters;
  2. Keep your distance; and
  3. Stand tall, even if the bear charges you.

For stock market operators, the last point is probably the most instructive and translates into buying high quality names when the bear market is charging away and providing a compelling entry point.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $103.27-106.97, $81.99-83.24, $1.23-1.26, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Dancing With the Bear - Chart of the Day

 

Dancing With the Bear - Virtual Portfolio


WEEKLY COMMODITY CHARTBOOK

Dollar strength is helping to deflate the inflation; with the exception of hogs, dairy, and (of course) chicken wing prices, all of the commodity prices that we track declined week-over-week.  Corn and wheat continue to track lower on optimism that this year’s spring crop will boost supplies.  Analysts are attributing the decline in grain prices to many factors including heavier-than-normal rain in some growing areas of the United States and mounting fears of economic growth slowing. 

 

For SAFM, falling corn prices are bullish for the company’s margins.  Heading into a stronger period of demand for chicken, a tight supply of chicken nationally and more favorable feed costs could boost the stock’s prospects.  It is worth being wary of seasonality in how this stock trades during the summer months, but on a longer-term duration we feel that this stock is a compelling long. 

 

Looking at the table below, we see +144% chicken wing inflation as a problem for BWLD.  We know that every 10% of chicken wing price inflation adds $3.8mm in COGS to the company’s P&L. 

 

Beef prices coming down is a positive for several names in the industry like TXRH, CMG, WEN, and one of our favorite longs, JACK.  Jack in the Box has been trading well over the past couple of weeks and we still like the stock. 

 

WEEKLY COMMODITY CHARTBOOK - commod

 

 

GAS PRICES WATCH

 

WEEKLY COMMODITY CHARTBOOK - gas prices

 

 

 

SUPPLY & DEMAND:

 

Chicken

 

Supply: Egg sets placements continue to contract at -4%, 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.

 

WEEKLY COMMODITY CHARTBOOK - wings v egg sets

 

 

CORRELATION

 

WEEKLY COMMODITY CHARTBOOK - correl

 

 

CHARTS

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

WEEKLY COMMODITY CHARTBOOK - corn

 

WEEKLY COMMODITY CHARTBOOK - wheat

 

WEEKLY COMMODITY CHARTBOOK - soybeans

 

WEEKLY COMMODITY CHARTBOOK - live cattle

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

 

WEEKLY COMMODITY CHARTBOOK - chicken wing prices

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

WEEKLY COMMODITY CHARTBOOK - milk

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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