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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

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser.



investing ideas

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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.

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

 


Happiness Oversold

This note was originally published at 8am on May 17, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The happiness that Jack and Jill experience is determined by the recent change in their wealth.”

-Daniel Kahneman

 

Across Global Equities and Commodities, this morning our Globally Interconnected Macro Models are signaling the best immediate-term TRADE oversold signal we’ve had in 2012. The perma-bulls have been under siege for 2-3 months. Happiness from their February-March highs is oversold too.

 

In Chapter 25 of Thinking, Fast and Slow, Kahneman does a great job debunking one of the many dogmas of modern economics. He calls it Bernoulli’s Error – and it’s one that’s pervasive in our profession today. It’s the classic mistake of generalization in assumptions when it comes to utility curves and expectations.

 

“Bernoulli’s theory assumes that the utility of their wealth is what makes people more or less happy. Jack and Jill have the same wealth, and the theory therefore asserts that they should both be equally happy, but you do not need a degree in psychology to know that today Jack is elated and Jill is despondent.” (page 275)

 

Back to the Global Macro Grind

 

At the end of March, if Jack bought Chinese stocks (my son Jack indirectly did), and Jill bought US stocks, Jack is up +5% and Jill is down 7%. So, even if I had a daughter named Jill, Jack would be relatively happier than her if they were going shopping this morning.

 

If Jill’s Dad was right levered up long in everything US, Asian, and European stocks… and he had a side pocket of Gold, Oil, and maybe a special situation basket that included long JC Penney… Jill and her Dad are going to be eating hot-dogs instead of steaks this summer.

 

Anyone who has run real-money under the real-time performance pressure cooker for the last 5 years knows precisely what I am talking about. Timing Matters. If you buy high and are forced to sell low, you could wreck your year in a very short period of time.

 

What does immediate-term TRADE oversold mean?

  1. It doesn’t mean we are all bulled up about Global Growth Accelerating
  2. It doesn’t mean we are bullish on our intermediate-term TREND (3 months or more) duration either
  3. It means that, on a 3 factor basis (price, volume, volatility), stocks and commodities are simply oversold

So the first thing I do with that is start covering short positions. That gets me longer on a net basis. Then I start to slowly take up my gross invested position, selectively, in our best ideas.

 

I’ve screwed this up enough times to know that you really need to wait and watch on that second part. Your gross long exposure to the market is where you can get run-over; particularly if the market continues to trend lower with no mean reversion bounce.

 

The good news for US Stocks is that has already happened:

  1. US Dollar Index has been up for 12 consecutive days (new all-time record – all-time is a long time)
  2. US Stocks have been down for 10 of the last 11 days
  3. SP500 and Russell2000 draw-downs from the YTD tops in March-April = -6.7% and -8.7%, respectively

Jill (and her Dad) are not happy. And they probably won’t be until their hard earned capital gets back to break-even. That’s another concept that dysfunctional gamblers don’t quite understand until it’s too late either. The market doesn’t owe you a break-even. Mr Macro Market couldn’t care less about what’s in your pocket either.

 

The US Stock market (SP500) is down -15.4% and -6.7% from its 2007 and 2012 highs, respectively. That doesn’t mean if you’re up +6.7% from here you break-even. It means you have to be up +7.1% from here to get back to your April 2nd2012 break-even, then up another +10.3% from there to get back to your 2007 high-water mark.

 

This isn’t easy.

 

Neither is being happy in this business. But your greed can get overbought and your happiness can get oversold, in the meantime.

 

Immediate-term TRADE oversold lines, across asset classes in our model are as follows:

  1. SP500 = 1320
  2. Russell 2000 = 770
  3. Nikkei = 8709
  4. Shanghai Composite = 2338
  5. German DAX = 6341
  6. Spanish IBEX = 6548
  7. Gold = $1531
  8. Oil (Brent) = $109.78
  9. Copper = $3.44
  10. Apple = $543

That’s why we bought Apple (AAPL) yesterday. It was immediate-term TRADE oversold right where we bought it at 3:06PM EST. I took our US Equity Asset Allocation up to 12% with that (Cash down to 76%). I’d much rather buy AAPL at immediate-term oversold than buy Tech (XLK) which wasn’t yet signaling the same. Not all happiness gets oversold in the same way, at the same time.

 

Our immediate-term term support and resistance ranges for Gold, Oil (Brent), US Dollar, and the SP500 are now $1531-1588, $109.78-112.34, $80.48-81.55, and 1320-1351, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Happiness Oversold - Chart of the Day

 

Happiness Oversold - Virtual Portfolio


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