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TODAY’S S&P 500 SET-UP – June 12, 2012

As we look at today’s set up for the S&P 500, the range is 42 points or -1.90% downside to 1284 and 1.30% upside to 1326. 












  • ADVANCE/DECLINE LINE: on 6/00 NYSE -1830
    • Down from the prior day’s trading of 1238
  • VOLUME: on 6/11 NYSE 740.42
    • Increase versus prior day’s trading of 6.91%
  • VIX:  as of 6/11 was at 23.56
    • Increase versus most recent day’s trading of 10.98%
    • Year-to-date increase of 68bps
  • SPX PUT/CALL RATIO: as of 6/11 closed at 1.44
    • Up from the day prior at 1.34 


  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.05%
  • 10-Year: as of this morning 1.61
    • Increase from prior day’s trading at 1.59
  • YIELD CURVE: as of this morning 1.34
    • Up from prior day’s trading at 1.32 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus. Optimism, May, est. 94.0 (prior 94.5)
  • 7:45am/8:55am: ICSC/Redbook retail sales
  • 8:30am: Import Price Index (M/m), May, est. -1.0% (prior -0.5%)
  • 8:30am: WASDE
  • 10am: IBD/TIPP Economic Optimism, June, est. 47.3 (prior 48.5)
  • 11am: Fed to purchase $1.5b-2.25b notes in 2/15/2036 to 5/15/2042 range
  • 11:30am: U.S. to sell 4-wk. bills
  • 12pm: DOE short-term energy outlook
  • 1pm: U.S. to sell $32b 3-yr notes
  • 1pm: World Bank Releases Global Economic Forecast
  • 2pm: Monthly Budget Stmt., May, est. -$125.0b (prior - $57.6b)
  • 4:30pm: API inventories 


    • FDIC Board of Governors meets on implementing Basel III provisions on defining which companies are “predominantly engaged in financial activities,” 10am
    • SEC holds meeting of Dodd-Frank Advisory Committee, 10am
    • Senate in session, House meets in pro forma session
    • Senate Judiciary hears from Attorney General Eric Holder at oversight hearing, 10am
    • Senate Finance holds hearing on impact of tax reform on energy policy, 10am
    • DOE holds meeting of Nuclear Energy Advisory Committee on small modular reactors and used nuclear fuel, 8:30am
    • IMF Managing Director Christine Lagarde speaks at “Back to Rio, The Road to a Sustainable Economic Future” conference, presented by Center for Global Development, 10am
    • Postmaster General Patrick Donahoe discusses outlook for the U.S. Postal Service in keynote speech at PostalVision 2012 event of customers and shippers, 10:15am 


  • U.S. employers plan to add jobs in 3Q: Manpower survey
  • Europe’s AAA members at risk as debt crisis worsens: Fitch
  • Buffett pounces in private-jet slump with record $9.6b order
  • TomTom gains after Apple agreed to use its digital maps in new mobile services
  • Kodak says 20 patent bidders sign non-disclosure agreements
  • China’s new loans exceeded ests. in May, more money went into longer-term lending
  • Unitas Capital, Stanley Black & Decker, Carlyle Group said to be invited to make 2nd-round bids for Infastech
  • JPMorgan knew of London trading risks two years ago: WSJ
  • JPMorgan could have spotted trouble at its CIO long before traders there racked up at least $2b in losses; one reason it didn’t: CEO Jamie Dimon.
  • Rajat Gupta lost a bid to have a jury hear wiretaps of Goldman executive David Loeb tipping Galleon co-founder Raj Rajaratnam
  • U.S. Commerce Secretary John Bryson to take medical leave
  • U.S. media industry rev. rises 2nd straight yr: PWC
  • Goldman brings back Mark Schwartz as chairman for Asia
  • Lilly targets Sanofi’s top diabetes drug with weight loss effect
  • World Bank releases semi-annual global economic forecast
  • Morgan Stanley, other global banks undergoing credit review by Moody’s; decision expected by end of month 


    • FactSet Research Systems (FDS) 7am, $1.16
    • Michael Kors (KORS) 7am, $0.16
    • Casey’s General Stores (CASY) 4pm, $0.67 



COMMODITIES – despite Chucky telling you it’s still time to dance, the USD is holding its bid and Commodities continue toward crash zones (20% peak to now declines); Oil’s reversal yesterday was impressive; Brent will finally be immediate-term oversold at $96.29.

  • Pink Slime No Brake to Beef Rally as Herd Contracts: Commodities
  • Gold Hinges on Emerging Markets, Not Inflation: Chart of the Day
  • Oil Declines for a Fourth Day on Naimi Comments, Iran Exemptions
  • Japan May Take Indonesia to WTO Over Ban on Ore Shipments
  • Copper Seen Declining on Skepticism About Spanish Bank Rescue
  • Robusta Coffee Falls to One-Month Low as Indonesian Sales Rise
  • Thai Mills to Boost Refined Sugar Output as Premium Climbs
  • Palm Oil Falls on Speculation Malaysian Production Set to Climb
  • Shanghai Rubber Support Seen at 22,000 Yuan: Technical Analysis
  • Soybeans Gain as U.S. Crop Conditions Deteriorate; Corn Rises
  • Oil Supplies Fall Most in Five Months in Survey: Energy Markets
  • Japan Seeks Least Milling Wheat in Seven Weeks in Tender
  • Rinehart Seeks to Reclaim 3 Billion-Ton Iron Deposit Stake
  • Gold Drops First Day in Three on Europe
  • Gold Drops With Commodities on Concern Europe Crisis Escalating
  • Cooking-Oil Imports by India Set to Advance for Fourth Month
  • Rubber Declines on Concern European Debt Crisis Is Deepenin











ITALY Geithner/Lagarde forgot to tell the Italians they’re going to get bailed out; MIB Index hammered for the wk to-date, adding to losses this morning (don’t forget Italy is also in crash mode, down -24% since March 19th) and economic stagflation continues to be a reality of a centrally planned life. Not 1 European stock market has recovered 1 of our immediate term TRADE lines on this no volume bounce.






JAPAN – Japan is suspiciously out of the news (other than in Japan or for those that are risk managing it) but Japanese stocks led losers again last night, down another 1%, inching closer to their own fiscal cliff and a market crash zone (Nikkei -17% since March). The IMF now has an opinion on the Japanese Yen’s “valuation” (not kidding) and has joined Krugman in telling the Japanese to print/stimulate. Won’t end well.










The Hedgeye Macro Team

President Obama’s Reelection Chances Slip – Hedgeye Election Indicator

 If the US Presidential election were held today, President Obama’s chance of winning  reelection stands at 54.1%, the lowest level in five months, according to the Hedgeye Election Indicator (HEI). Similarly, Intrade shows a 53.9% probability that President Obama will win reelection.



President Obama’s Reelection Chances Slip – Hedgeye Election Indicator  - HEI



According to the HEI,  a slightly weaker US stock market and a stronger US dollar contributed to the President’s lower reelection odds. Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment. Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  


The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.


Hedgeye releases the HEI every Tuesday at 7am ET until the election November 6.

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HedgeyeRetail COTD: Pricing Crack

We’re seeing the already wide gap between Hanes and Fruit of the Loom pricing widen, as prices for FOTL come off by 30% inside KSS. We still think that pricing integrity will be tough to come by.  


We’ve been very closely monitoring the pricing spread at retail for Hanes vs. Fruit of the Loom since it became more of a concern for us six months ago. We’ve gotta hand it to HBI, as they have maintained a consistent pricing premium to Fruit of the Loom in all major channels. But we’ve been floored to see a 40% price gap between the two on the same exact product at KSS vs. JCP. In other words, Kohl’s sold that same exact product as JCP, but advertized at a 40% higher price.


Now, we see the pricing dynamics change again. But not as we’d think. KSS has reduced its Fruit of the Loom Pricing to $11.99 from $17.99 for 5 pack crew t shirts, boxer briefs & a-shirts while Hanes' pricing is unchanged for the same pack size. As a result, the Hanes to Fruit of the Loom premium on crew necks has increased from 89% to 184% while the premium in boxer briefs is now 113% from 42% in April.


Fruit of the Loom has clearly been impacted by the EDLP battle between KSS and JCP, while Hanes’ pricing has remained seemingly unchanged.


Our view is that this closely mirrors the consensus view, and company guidance. HBI needs pricing integrity in 2H to hit earnings. As gaps like this widen, we think that pricing integrity dynamics can change quickly.


HedgeyeRetail COTD: Pricing Crack  - HBI FOL pricing gap

Spain’s Cracked Credibility and Europe’s Bailout Messaging

Positions in Europe: Short Spain (EWP); Short EUR/USD (FXE); Long German Bunds (BUNL)


“We’re building it up, to break it back down.”

-Linkin Park, “Break it Down”


TRADING VIEW: Spain’s €100B “credit line” to recapitalize its banks may bid the broader equity market higher over the short run; however, we see significant headwinds for Spanish growth ahead, including another 30% leg down for housing and property values, further credit ratings downgrades on the sovereign and banks, and the inability of PM Rajoy to reduce the country’s 8.9% deficit (as % of GDP) as the country’s debt expands alongside this newest loan.  


It’s worth pointing out the market’s message from today’s results: The IBEX35 gave back all of its morning pop, and closed down -0.52%; the EUR/USD has traded flat to down intraday at $1.2492, the S&P500 is down slightly, and 5YR CDS for Spain and Italy have risen considerably since this morning: Spain gained 16bps to 595bps, just short of an all-time high of 604bps recorded on 6/5!  And Italy rose from 533bps to 554bps intraday.  How about that for some confidence in Spain!



On Spain’s Cracked Credibility:


While the headline number may prevent a full-on Spanish crash, we think there are numerous headwinds ahead for Spain, the sovereign, and its banks. The major one stems from a lack of credibility that PM Rajoy can follow through on his fiscal consolidation targets, in particular to materially budge the public deficit off 8.9% of GDP.


We see numerous risks to growth, with signals including:

  • Bombed out PMI Services and Manufacturing numbers (both around 42 = major contraction).
  • Housing and Property values that have another 30% to fall.
  • Further credit ratings downgrades on the sovereign and banks.
  • Rising debt levels (68% of GDP in 2011) as the future credit line, funneled through the FROB, adds to the debt.


On the banking side our Financials sector head Josh Steiner points out:

  • To put things in perspective, a €100bn bailout to Spain’s banking system is the per capita equivalent of providing $875bn to the US banking system, which is roughly 25% larger than TARP.
  • Expectations are that the infusion will rank senior to existing creditors, which means there will ultimately be a PSI-style loss taken by existing creditors.
  • This may calm systemic fears around counterparty risk and breakup of the Euro in the short-term, but individual holders of Italian, French and even German bank debt should find this far from comforting, as unfavorable resolution protocols are being established.
  • This may ultimately put more pressure on the banking system, not less, as banks find fewer willing non-governmental sources of funding.


Shape of the Loans?

  • The bailout plan is short on details, a draft really. It’s not clear if funds will come from the EFSF, ESM, or both. Remember, the ESM has yet to come online, expected for July, and in its current state does not have the directive to fund bank recapitalization/bailouts.
  • The proposed loan is expected to carry an interest rate of 3%.


Eurocrat Messaging:


---We were frankly surprised by the timing of Saturday’s announcement that the EMU is prepared to lend up to €100 Billion to recapitalize trouble Spanish banks.  Why?

  • We expected a bailout to be named after the IMF’s review of the recapitalization needs (expected today) and the results of two independent audits from Wyman and Berger (expected by June 21).
  • We expected Eurocrats (led by Chancellor Merkel) to wait on a decision before the results of the Greek election to send a signal to the Greeks that a certain level of austerity is required to remain in the Eurozone and that Brussels will not simply write blank checks.
  • Risk signals have not elevated to extreme levels over recent days: Week-on-week (as of Friday) Spanish bank CDS actually came in and the 10YR Spanish bond has held relatively stable in a range of 6-6.30%.


So why did the loan hit Saturday?

  • We think Europeans were greatly pressured by Geithner and more largely the Obama administration to inflect the bearish headlines to help Obama’s reelection chances. This position was likely made clear during the finance chiefs G7 conference call on Spain last week.  We also view the IMF’s Lagarde positioning for direct IMF loans to Eurozone countries, a position that goes against the original charter. No other facts point to why a loan had to be presented over the weekend.


What are the implications for the Greek election on 17. June?

  • We’re assigning an equal probability that sentiment from this bank bailout adds positive support (messaging) for the pro-austerity New Democracy and the anti-austerity Syriza.
    •  New Democracy may position that Greece cannot “survive” without the help from Troika, and therefore must do everything to remain in the Eurozone.
    • Syriza may position the bailout demonstrates that the Greeks have called the Eurocrats’ bluff, namely that austerity is conditional to stay in the Union.
  • By law we will see no election opinion polls heading into Sunday’s vote. We still expect a victory by a coalition of New Democracy, however Saturday’s bailout news simply puts one more hitch in this highly uncertain and close election. 


“We’re building it up, to break it back down”


This weekend’s actions prove yet again how committed Eurocrats are to keeping the Eurozone project alive, without having a credible roadmap to do so. In short, we expect more “bailout band-aids” ahead as politicians refuse to let sovereigns or their banks fail. We expect risk, as we’ve seen over the last two years, to ping-pong around Europe. Is Italy next?


We’re highly aware that we cannot get in front of Eurocrat actions –witness this weekend – its critical to signal just how strong the resolve of Eurocrats is to keep their jobs. We’ll continue to monitor for any signs of a third LTRO, the re-engagement of the Securities Market Program, or any other non-standard measures that could have significant implication for markets.


However, our fear is that the backbone of the Eurozone is so compromised that despite all that is being built up to support these countries, the Union is doomed to fail. Here we’ll caveat the statement by saying that a fiscal Union alongside the existing monetary Union is a necessary must, however such a transition will be trying given the cultural resolve not to give up fiscal sovereignty to Brussels.


If market expectations continue to be set for a solution yesterday, we expect much disappointment ahead, and a very long road if Europe can shore up the imbalances across its weaker members to find a productive path forward. 



Matthew Hedrick

Senior Analyst


  • The average age of a cruiser has fallen significantly since 1986 and has hovered between 46 and 52 the last few years
  • The aging of the population means that a higher % of the population is approaching the core cruiser age
  • Among cruisers, the largest age segment remains +60s but, unlike casino demographics, the younger generations are cruising


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