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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 15, 2012


As we look at today’s set up for the S&P 500, the range is 34 points or -1.44% downside to 1310 and 1.12% upside to 1344. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

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EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 6/14 NYSE 1229
    • Up from the prior day’s trading of -1219
  • VOLUME: on 6/14 NYSE 779.39
    • Increase versus prior day’s trading of 10.22%
  • VIX:  as of 6/14 was at 21.68
    • Decrease versus most recent day’s trading of -10.67%
    • Year-to-date decrease of -7.35%
  • SPX PUT/CALL RATIO: as of 6/14 closed at 1.23
    • Down from the day prior at 2.08 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.61
    • Decrease from prior day’s trading at 1.64
  • YIELD CURVE: as of this morning 1.32
    • Down from prior day’s trading at 1.35 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, June, est. 13 (prior 17.09)
  • 9am: Total Net TIC flows, April, no est. (prior -$49.9b)
  • 9am: Net Long-Term TIC Flows, April, est. $45b (prior $36.2b)
  • 9:15am: Industrial Production, May, est. 0.1% (prior 1.1%)
  • 9:15am: Capacity Utilization, May, est. 79.2% (prior 79.2%)
  • 9:15am: Manufacturing Production, May, est. -0.1% (prior 0.6%)
  • 9:55am: University of Michigan Confidence, June, est. 77.5 (prior 79.3)
  • 1pm: Baker Hughes rig count 

GOVERNMENT:

    • President Obama travels to Chicago
    • Mitt Romney begins bus tour in New Hampshire
    • EPA, following court order, expected to announce proposal for new rule on soot pollution
    • House meets in pro forma session; Senate in session
    • Senate Finance meets on tax reform, energy policy, 10am
    • FERC, NRC meet on nuclear power, cybersecurity, station blackout rulemaking and power-grid reliability, 9:30am

WHAT TO WATCH:  

  • EU Leaders to call for “further urgent measures” to aid growth
  • Yammer agrees to be bought by Microsoft for >$1b: WSJ
  • Hong Kong Exchanges agrees to buy LME for $2.2b
  • Russell Indexes posts updates to list of additions/deletions for reconstitution
  • U.S. industrial production probably cooled in May
  • Safeway to hold call today on financial strategy
  • Greek Election, G-20 Summit, Fed Meeting: Week Ahead June 16-23  

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

COMMODITIES – thank God we covered all our shorts there ahead of proactively predictable central planning behavior; rallies in Oil, Gold, Copper look like those in European Equities, right to the walls of immediate-term TRADE resistance as the USD moves to immediate-term TRADE oversold at $81.83; very dangerous spot for Correlation Risk to come back on in a hurry. 

  • Gold Traders Bullish as Hedge Funds Increase Wagers: Commodities
  • HKEx to Buy LME for $2.15 Billion in First Commodity Venture
  • Copper Set for First Weekly Gain in Seven on Stimulus Outlook
  • Oil Gains a Second Day on Stimulus Speculation, OPEC Output Call
  • Gold Set for Best Run Since August on Stimulus Bet, Greece Vote
  • Soybeans Rise on Demand Gain From U.S. Processors and Importers
  • Cocoa at a Four-Month High as Ivory Coast Supply May Be Limited
  • Malaysia Rejects Bid to Cancel Lynas Rare-Earth Refining Permit
  • China Said to Buy 1 Million Tons of U.S. Cotton for Reserves
  • Bernanke’s Inflation Validated as Commodities Retreat With Hawks
  • Petrobras Worst Big Oil Bet on Deepwater Disappointments: Energy
  • Iron Ore to Slump as China Slows, Eurofer Says: Chart of the Day
  • Oil Rout Has China Hoarding Most Since Olympics: Energy Markets
  • Hedge Funds Increase Wagers on Gold Rally
  • OPEC Decision Puts Onus on Saudi Arabian Cuts If Prices Fall

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CURRENCIES

 

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EUROPEAN MARKETS


EUROPE – now that the central planning “smoothing” mechanism has backstopped markets for another 12 hrs of trading, pretty much every single European squeeze index (Spain, Italy, Greece, etc.) has rallied right back to a wall of immediate-term TRADE resistance, and so has the Euro at 1.26; into the “event” we are at the end of the runway; not good.

 

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ASIAN MARKETS


ASIA – interestingly, but maybe not surprisingly, Japan didn’t go up on that “news” – what will be left over for them after Geithner, the IMF, and Europe blows whatever bullets they have left on Greece/Spain/Italy? Rest of Asia was eerily mixed (China +0.5%, KOSPI -0.7%).

 

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MIDDLE EAST


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The Hedgeye Macro Team



The Wall

“Would it be excessive of me to ask you to save my life twice in a week?”

-Tyrion, Game of Thrones

 

I was speaking at a Canadian Economic Development dinner last night. At the end of my presentation I opened it up for the customary Q&A. Most of the questions were concerned with where Oil and Metal prices could go when Bernanke and Geithner run out of US Dollar Debauchery bullets.

 

Whenever talking about mean reversion and/or tail risks, the most obvious two-word risk factor that I explain (that neither Berrnanke or Geithner ever mention) is CORRELATION RISK. After I walked through that, a nice Scottish-Canadian man stood up and said, “this is more of a statement than a question – you are scaring the hell out of us.”

 

I politely replied (he was Canadian remember), “after what happened again out there into the US market close today, you should be scared.”

 

Back to the Global Macro Grind

 

Yesterday’s stock and commodity markets were trading off into the close, and then completely reversed course to the upside after our overlords floated a headline to the market that central planners were “prepared to take coordinated action.”

 

Whew, thank God for that!

 

Fear is what central planners are feeding you. Without fear-mongering the citizenry, they can’t print, bail, and print. Without fear of being held accountable for their own policy moves (Growth Slowing, equity market outflows, crashing market prices, and no political re-election) they wouldn’t be making these ridiculous short-term decisions.

 

At this point, it’s clear that they have gone over The Wall. They cannot go back. And no, that doesn’t mean that it ends well when they realize what’s on the other side either.

 

In HBO’s latest mini-series hit, Game of Thrones, The Wall separates the known (centrally planned kingdom societies) from the unknown. It’s the perfect metaphor for how conflicted and compromised Keynesian politicians must feel right here and now in 2012. They fear what they cannot see. They fear letting free market prices clear.

 

We let losers win until The Wall no longer holds. In the meantime, Mr Market is already in motion in taking down the Old Wall.

 

If you are afraid of a small part of The Wall coming down this weekend, you should be – because now these market morons have ramped expectations (market prices) right back up to the walls of Hedgeye’s immediate-term TRADE lines of resistance.

 

What does that mean?

 

That means that if market prices fail, again, at this interconnected wall of resistance, there is very little left in terms of Big Government Intervention catalysts and/or downside market price supports.

 

Across countries, commodities, and currencies, here are your immediate-term TRADE walls of resistance:

  1. SP500 = 1344
  2. Russell2000 = 775
  3. Euro Stoxx50 = 2179
  4. CRB Commodities Index = 280
  5. Japan’s Nikkei225 = 8731
  6. Shanghai Composite = 2348
  7. South Korea’s KOSPI = 1897
  8. Germany’s DAX = 6281
  9. Spain’s IBEX = 6797
  10. Greece’s ATG Index = 664
  11. Oil (Brent) = $104.87
  12. Gold = $1645
  13. Copper = $3.44
  14. 10yr UST Yield = 1.73%
  15. EUR/USD = $1.27

If, by chance, The Wall of resistance to do more of what has not worked is overcome, beyond that is another wall – The Wall of intermediate-term TREND resistance. Economic gravity is thick.

 

It remains unclear if these people making these short-term political decisions to manipulate market expectations have any idea about what I am talking about. It remains unknown if they ever had a proactive process of preparation to meet the challenges that remain outside The Wall of their leadership’s groupthink. It is a problem – it is them.

 

Fortuitously, in anticipation of some version of this political gong show, I got longer earlier this week. Don’t expect me to keep a 67% Cash position into this weekend though. I only have 4 SHORT positions left in the Hedgeye Portfolio. Expect that number to go up, maybe a lot, too.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $95.90-98.71, $81.73-82.36, $1.24-1.27, and 1, respectively.

 

Happy Father’s Day Dad – best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Wall - Chart of the Day

 

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HedgeyeRetail COTD: Pricing Decelerates

Consumer prices for apparel took a notable reversal relative to costs in the recent month. It’s not a full-out Bear move. But it is a definite item that anyone that keeps models on companies in this space needs to watch.

 

After accelerating for 3 months in a row, the year over year growth in apparel CPI slowed sequentially in May +4.45% vs. +5.12% in April. This is an important call-out, because as of last month, import cost trends continued to decline, while consumer price changes set 30-year highs. Now we have consumer prices moving in the same direction as unit costs. Of course, it does not get truly bearish until the CPI falls below the import cost change. No one in their right mind is planning for this – it’s not the kind of thing you plan for given that it is usually a function of irrational competitive behavior or a sequentially weakening consumer (or both). But given where margin expectations are for some companies, we think that the change in these two Macro metrics is more important now than at any point since the recession.

 

HedgeyeRetail COTD: Pricing Decelerates - CPI COTD


JUST DO IT: Investing in NKE for the long haul

Nike has been the darling of both the retail and institutional crowd for some time now but with Wednesday’s sell off, we expect this stock to be bearish over the next two months or so. Too much volatility and the sell off hasn’t completed in full just yet.

 

JUST DO IT: Investing in NKE for the long haul - 2NKE EPS chart

 

But over the long term, specifically our three-year TAIL duration, there is much to get excited about. Hedgeye Retail Sector Head Brian McGogh thinks there’s a mismatch as to why the consensus owns Nike, versus why it should own Nike. Here are three important catalysts to keep in mind that will affect earnings to the upside:

 

  • European Football: While America isn’t too keen on “soccer,” Europe and the rest of the world go nuts over Euro 2012. It’s seriously the biggest sporting event in the world going on this year, save for the Olympics which are an unjustifiable catalyst.
  • FlyKnit Technology: People get excited over new technologies in apparel. This is an excellent new product and platform for Nike and they’ve got the manufacturing process down solid. It hits stores next month and people are ready to buy. But the hype shouldn’t be factored into a near-term position. This is an investment that will matter over the next two to three years. 
  • The NFL Deal: Though the news is a bit old by now, it’s still a very important win for Nike. They reap the benefits at an accelerating rate and come football season, you’ll be seeing a lot more swoosh.

QUANTIFYING THE INFLATION TRADE ACROSS ASIA AND LATIN AMERICA

CONCLUSION: Our analysis shows that the post-QE/OpTwist returns of USD-based investors in Asian and Latin American equity markets were neither a function of that index’s/economy’s exposure to rising commodity and/or asset prices; nor were those returns a function of performance in past iterations of Fed easing. Thus, we would argue that outperformance in the next iteration of Fed easing (if any) will come down to identifying and taking advantage of idiosyncratic factors across the individual economies.

 

Dollar down; stocks, commodities and EM FX up. That’s the consensus reflation trade that has suddenly become the predominant bull case throughout the global investment community. As we have been saying since 1Q11, the reflation trade becomes the Inflation Trade as rapid commodity price gains perpetuate faster rates of reported inflation and slower growth across the global economy.

 

As completely detrimental as that is to any “long term” investment strategy, the reality of the situation is that most institutional investors have to chase short-term performance in one form or another. As such, if the Fed uses the recent string of anemic domestic employment growth and slowing [headline] inflation to signal or implement QE3-4 (it’s hard to keep track) next week, we would not be surprised to see another short-lived “risk” rally to another lower long-term high across global equity and commodity markets.

 

Turning to Asia and Latin America, we’ve taken the liberty to quantify the effects of the last three iterations of the Federal Reserve’s Policies to Inflate on their financial markets for any investors who may be looking to hit up the ol’ well once more. Our hypothesis was that those countries whose benchmark equity index was most exposed to the Inflation Trade would experience outsized returns relative to the group in both their stock market (faster earnings and economic growth) and local currency vs. the USD (capital flows; policy tightening speculation) on a S/T TREND duration (3MO). Moreover, we expected performance during these periods of reflation to be both positively and tightly correlated to the aforementioned exposure.

 

Using a simple linear regression analysis, we were able to dispel both components of our hypothesis, as outperformance of a given country’s stock market and local currency was not necessarily a function of its index’s (an admittedly loose surrogate for “economy”) exposure to the Inflation Trade; nor were returns always positively correlated across iterations.

 

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The key takeaway here is that there is hardly any relationship to be derived, suggesting that either A) country-specific fundamentals (i.e. GROWTH/INFLATION/POLICY) were the key determinants of performance or B) returns were more a function of performance in past iterations (i.e. “going back to the ol’ well”). To test the latter theory, we regressed returns of QE2 against those of QE1 and the returns of Operation Twist with those of QE2. In short, our findings here would suggest that this wasn’t the case.

 

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All told, our analysis shows that the post-QE/OpTwist returns of USD-based investors in Asian and Latin American equity markets were neither a function of that index’s/economy’s exposure to rising commodity and/or asset prices; nor were those returns a function of performance in past iterations of Fed easing. Thus, we would argue that outperformance in the next iteration of Fed easing (if any) will come down to identifying and taking advantage of idiosyncratic factors across the individual economies.

 

Below is a full performance table of the countries included in our sample.

 

Darius Dale

Senior Analyst

 

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