“First rule is to be able to play tomorrow.”
That’s what Warren Buffett said on May 5th at the Berkshire Hathaway 2012 Annual Meeting. While you don’t hear him focus the marketing message on risk management like he used to, it was nice to hear him highlight a version of his longstanding Rule #1 of investing – “Don’t lose money.”
The preface to his comment was addressing how early he was telling you to buy stocks during the thralls of 2008. “In October 2008, I wrote that article, should have been a few months later, but stocks were cheap.”
Not to keep score, but it wasn’t until 6 months later that “cheap” stocks got a lot cheaper. I’m not Buffett. I am just a small town Canadian who has never received a bailout dollar and would rather retire before accepting one. I went to 96% Cash in Q3 of 2008 and 91% cash yesterday. I may not be the best player in this game, but I will Play Tomorrow.
Back to the Global Macro Grind…
With the SP500 recovering from its early session lows yesterday, US Equity Volatility (VIX) dropped -13.2% on the day and the US stock market moved to a 3 week closing high.
Was it a bird, a plane – or another iQe4 upgrade rumor? Could it be Geithner, Bernanke, or Obama? Sadly, being able to Play Tomorrow also requires an acute sense of hearing. Can you hear the bailout whispers now?
No one ever went broke booking gains, so instead of joining the circus, that’s what I’ll continue to do across asset classes on up-moves to lower highs. I’m not getting wacky net short. I’m just getting out.
After yesterday’s sales of the US Dollar, German Bunds, US Treasuries, Cattle, and Pigs (the COW ETF), here’s where the Hedgeye Asset Allocation Model stands for this morning’s US open:
- Cash = 91% (up from 61% yesterday)
- US Equities 9% (all Consumer Staples – XLP)
- International Equities = 0%
- Fixed Income = 0%
- Commodities = 0%
- International Currencies = 0%
Why sell everything other than US Equities (I might sell those this morning too)?
A) I have absolutely no idea what Bernanke (Fed) and Geithner (Treasury/IMF) are going to do next
B) If you gave me the whisper (inside information), I wouldn’t know what the market’s reaction would be to it either
That, in a nutshell, is also why I’m going to stop hiring for the next couple of months.
You see, I not only run my mouth, but I run my own business. I backstop the company’s credit line. I know what meeting a payroll meant during the thralls of 2008, and I’m not going to be the greater fool rolling the bones on my firm and family’s future for the sake of other people’s short-term political pressures now.
But that’s just me.
I know there are many more important people in many higher places in this country that need to get paid. I’m not the only person who gets that. So have at it boys, centrally plan away.
President Obama is no one’s fool. His economic advisors have reminded him that if he gets the short-term moves in the stock market right, he’ll get the election right. In this morning’s Hedgeye Election Indicator (Chart of The Day), you can see that:
- Obama’s odds of re-election bounced by +200bps week-over-week to 56.1%
- Obama’s odds of re-election are now at their highest level in nearly a month
- Obama’s odds of re-election are still down, hard, from their peak (March 26th) of 62.3%
Obama gets this. If he has his boys continue to debauch the US Dollar in the short-term, both commodities and stocks will like that. The People will have to take that in the pump, but that doesn’t really matter – because Bernanke says that’s “transient.”
Something else (that was not so funny) also happened on the way to the US Political Forum on March 26th. Both the Russell2000 (broad measure of US stocks) put in its YTD high and the US Equity Volatility Index (VIX) put in its YTD low.
Which begs the question– why am I not at 96% Cash again?
At 18.22 the VIX is immediate-term TRADE oversold at another higher-low. At 1344 and 772, the SP500 and Russell2000 aren’t yet immediate-term TRADE overbought. But they will be today. Both are also making lower long-term highs (on no-volume).
No Trust; No Volume. So we’ll see what this morning brings. Either way, and no matter what they throw at us next, we will be positioned to Play Tomorrow.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1, $95.07-98.26, 81.59-82.16, $1.24-1.26, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – June 19, 2012
As we look at today’s set up for the S&P 500, the range is 24 points or -1.55% downside to 1324 and 0.24% upside to 1348.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: on 6/18 NYSE 539
- Down from the prior day’s trading of 1149
- VOLUME: on 6/18 NYSE 707.28
- Decrease versus prior day’s trading of -53.26%
- VIX: as of 6/18 was at 18.32
- Decrease versus most recent day’s trading of -13.22%
- Year-to-date decrease of -21.71%
- SPX PUT/CALL RATIO: as of 6/18 closed at 1.51
- Down from the day prior at 1.72
CREDIT/ECONOMIC MARKET LOOK:
TREASURIES – you can whip the manic equity guy around on no-volume (down -38% volume study yesterday was awful), but you can’t budge bonds. 10yr down again to 1.58% this morning and the Yield Spread is about to snap +130 wide again. Not good for the Financials – it wasn’t yesterday either.
- TED SPREAD: as of this morning 38
- 3-MONTH T-BILL YIELD: as of this morning 0.09%
- 10-Year: as of this morning 1.57
- Unchanged from prior day’s trading
- YIELD CURVE: as of this morning 1.29
- Unchanged from prior day’s trading
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am/8:55am: ICSC/Redbook weekly retail sales
- 8:30am: Housing Starts, May, est. 721k (prior 717k)
- 8:30am: Building Permits, May, est. 730k (prior 723k)
- 10am: JOLTs Job Openings, April, est. 3685 (prior 3737)
- 11am: Fed to buy $1.5b-$2b notes in 8/15/2018-2/15/2031 range
- 11:30 am: U.S. to sell 4-week bills
- 4:30pm: API inventories
- FOMC Meeting, Day 1
- U.S. Federal Open Market Committee policy makers begin two- day meeting in Washington to decide on interest rates, 10am
- Mexican President and G-20 summit host Felipe Calderon may hold late-afternoon press conference on meeting’s final day
- House, Senate in session
- Joint Economic Committee holds hearing on economic impact of ending funding for certain government data, 2:30pm
- Senate Finance hears from former White House Budget Director Alice Rivlin on looming fiscal crisis, 10am
- CFTC Commissioner Bart Chilton delivers keynote address at Mutual Fund Directors Forum policy conference, 7pm
WHAT TO WATCH:
- JPMorgan CEO Jamie Dimon testifies at House cmte hearing
- U.S. Federal Open Market Committee begins two-day meeting
- Greek parties to form group to renegotiate bailout terms; borrowing costs fall at 91-day bill auction
- Microsoft unveils Surface tablet computer, taking on IPad
- Oracle rises after earnings beat estimates on software sales
- German investor confidence dropped more than forecast in June
- G-20 leaders hold a 2nd day of meetings in Mexico, to urge euro-area govts to take all steps to protect currency union
- China leads 12 nations helping boost IMF’s firewall to $456b
- CBS billboard unit worth a look: Clear Channel Outdoor CEO
- Insight said to top $25.50/shr offer to buy Quest Software
- Danone cuts profitability goal on southern Europe, costs
- France plans 3% div. tax to be paid by cos., Les Echos says
- China said to order checks on maturing bonds to avoid defaults
- FedEx (FDX) 7:30am, $1.92
- John Wiley & Sons (JW/A) 8am, $0.73
- Jefferies Group (JEF) 8am, $0.27
- Discover Financial Services (DFS) 8:30am, $1.00
- Barnes & Noble (BKS) 8:30am, $(0.91)
- Jabil Circuit (JBL) 4:02pm, $0.64
- Adobe Systems (ADBE) 4:05pm, $0.59
- La-Z-Boy (LZB) 4:05pm, $0.26
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
OIL - both WTIC and Brent act horribly ahead of what is supposed to be another Bernanke Bailout tomorrow; consensus better watch what they are begging for here as Dr Copper also disagrees (down -0.4% this morning and still in a Bearish Formation); Gold has had a good move front-running Fed expectations, but now bumps up against a wall of resistance at $1642.
- Rubber Glut Extends Bear Market as Bridgestone Wins: Commodities
- Corn Set for Biggest Two-Day Advance Since April on U.S. Weather
- Robusta Coffee Declines as Slowing Economies May Erode Demand
- Oil Declines for a Second Day on Europe Concern, Iranian Talks
- Copper Swings Between Gains and Declines as Spain Sells Debt
- Gold Seen Gaining an Eighth Day as Europe Crisis Spurs Demand
- Australia Sugar Exports at 3-Year High to Boost World Supply
- Korea Boosts Corn Imports From South America as Real Slumps
- Oil Supply Falls on Refinery Demand in Survey: Energy Markets
- Uralkali Rating to Pave Way for Debut Eurobonds: Russia Credit
- Australia to Boost Beef Supplies as Herd Climbs to 37-Year High
- Itochu Mirrors Xstrata in Trader to Miner Shift, Seeks Copper
- India’s Gold Imports Seen Lower as Record Price Cuts Demand
- Oil Supply Falls on Refinery Use in Survey
- GDF Suez Quits Europe as Belgium Plans to Shut Reactors: Energy
- BlackRock’s Hambro Says Mining Dividend Crusade Reaping Rewards
- Global Economy to Curb Wool Demand Even as China Boosts Supplies
GERMANY – just an outright nasty ZEW (German expectations rpt) this morning at -16.9 for June (vs +10.8 in May) tells you all you need to know about #GrowthSlowing (at an accelerating rate) in one of the few remaining countries that didn’t have a big growth problem. Sold our German Bunds on green yesterday as growth tends to trump all other risk management factors at the turns.
The Hedgeye Macro Team
President Obama’s reelection chances improved to 56.1%, the highest level in nearly a month, thanks largely to a strong performance by the US stock market, according to the Hedgeye Election Indicator (HEI). It also marks the first time since late April that the President’s reelection chances improved on a week-on-week basis, according to the HEI.
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.
President Obama’s reelection chances reached a peak of 62.3% on March 26, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.
This announcement that JCP President Michael Francis is leaving the company after less than 9 months on the job is not only embarrassing, but it might have severed the last shred of credibility Johnson had with Wall Street.
After the close, JCP announced that Michael Francis -- President and head of merchandising -- is leaving the company 'effective today'. There's been a lot of moving parts in the JCP ranks, but this one is a disaster. Francis just joined from Tar-jay 8 1/2 months ago. He's been one of the two key operating people that flanked Ron Johnson on stage in the past two investor meetings.
Make no mistake, this is an unmitigated disaster, for four reasons. 1) Francis just hired a merchandising organization. Now he's out. What does that tell the troops as it relates to organizational stability? 2) He probably did not get canned because 'he was smoking plan.' 3) What happened to a long-term plan? 4) ) Most notably, this blows Johnson's credibility, which was already hanging by a thread after how poorly he handled the 1Q release, and sold stock before the event.
One thing we'll give Johnson is that he sure is decisive. He made a mistake, and he's fixing it -- quickly. But this was a big mistake...and one that he paraded around to customers, investors, and future employees. This was a biggie.
We have keep ourselves honest and look at this and think that anyone who was hanging on to any shred of this as a turnaround has to throw in the towel -- thereby making 'short JCP' a consensus call. But on the other hand, the $1.40 GAAP consensus needs to come down below a buck. Until it does, this thing is flat-out expensive.
We continue to believe that this is all about duration. Johnson is paid to get this right in another 5-years. That might or might not happen. But we think the real call relates to the impact JCP will have on the retail ecosystem while it evolves. Today's move sends an ugly sign to Wall Street, but an even uglier one to vendors. KSS and Macy's must be licking their chops.
Here's a couple of interesting YouTube-style sound bites from the analyst Meeting that took place just 1 months ago on May 15.
- Johnson "...Michael [Francis] and I are looking forward to sharing our vision with you [later in the meeting]."
- Francis: ... our merchants have totally embraced the new direction. We have a lot of them here today, but they are loving the chance to compete on product. They never sit in a room – 40% of the time last year was what's the price tomorrow, what's the price next week? Never happens. The only question is what's the next great product we can develop? How do we present it better? How do we get it in store on the right inventory? How do we win on merchandise? And the teams are doing a fabulous job.
[Hedgeye Note: Guess not...]
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