November Retail Sales data rose by the lowest percentage in 2 years, and it still looks great!

People looking for a negative story in today’s retail sales data from Brazil had an easy time finding one. The ( by now completely stale) numbers show that retail sales in total only grew by 5.3% Y/Y * three months ago -which was seized upon by Brazil Bears as a sure signal of pain to come for an economy were consumer spending accounts for more than half of GDP.

Taken on a relative basis however, the data released today has an altogether different complexion (see table of several key index components below). On relative basis 5.3% looks very healthy, while the 2 and 3 year growth stats are still in double digit territory. While there is no denying that automotive sales have fallen off a cliff (what in this world didn’t in November!), the near term impact on the Brazilian economy is softened somewhat by the almost complete foreign ownership of the industry there (Ford, GM , Fiat and VW combined account for over 80% of car sales with the remainder primarily divided between Japanese brands).

Obviously the Brazilian economy is going to slow in sympathy with global markets, but we stand by the argument for sustainable sales growth driven by domestic demand in Brazil even if it is merely in single digits. We are long Brazil via the EWZ etf and continue to believe that Brazil and China will outperform the rest of the developing world in the coming year.

Andrew Barber

*all data presented seasonally adjusted

European Bond Yields as Diverse as the Europeans Themselves

European Bond Yields as Diverse as the Europeans Themselves

“Things fall apart; the center cannot hold.” –William Butler Yeats

Many Europeans are asking themselves the question today, does the European Union hold up in the face of the worst recession since WWII? The downturn has ravaged budgets and credit ratings across the region.

What’s clear is that some countries will come out of this recession better than others, likely those with larger GDPs, more stable credit ratings, and have adequately stimulated their economies through fiscal and monetary packages. Certainly this is easier said than done…

What has become apparent is that the ECB has not been able to limit collective inflation in the zone, which it set out as a defining principle when the Union was envisaged. Currently the divergence of bond yields across the Euro zone display that certain countries stand to lose more, as their credit ratings are downgrade and yields tick upwards.

For example, Greece’s credit rating was downgraded this week by Standard & Poor’s and Portugal, Spain, and Italy are also under threat. The downgrade has inflated Greek bond yields to record highs. This translates to investors becoming more discerning about who they lend to. After all, shrinking economies force governments to intervene, which in turn increase budget deficits and potential credit risk. A country like Germany with a strong credit rating has relatively little risk, yet one must consider the risk-reward on higher yielding bonds for a country like Greece.

Additionally, because borrowing costs differ per country, ECB cuts in the interest rate have an uneven impact on the Euro area.

As risk managers, we must proactively prepare for tail risk. As it relates to European investing, we need to seriously consider the idea that the EU could splinter should the ECB fail at limiting inflation. In a scenario in which the EU unravels, it is likely that the strong get stronger and the differentiated countries become even more critical in the search for European alpha.

Matthew Hedrick

SP500 Levels Into The Close...

We have ourselves a worrisome quantitative picture that, well… EVERYONE is worried about.

I have outlined my updated levels below. If the low end of the range holds, the bullish intermediate “Trend” of higher lows in the SP500 will remain intact. Combine that New Reality with lower highs in volatility (VIX), and a breakdown and close in the VIX below 46.67, and you have the recipe for an Obama short squeeze.

You know I am not short that Obama option, and I don’t think your should be either. The step ups in my SP500 levels on a close above 886 are steep.

BUY “Trade” = 818
SELL “Trade” = 880

Keith R. McCullough
CEO & Chief Investment Officer


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Eye On India: We Remain Bearish...

Wholesale Inflation continues to fall as fast as it rose last year…

Weekly WPI data released by the Ministry of Commerce and industry yesterday arrived at 5.28% -down from last week’s 5.91%, signaling that the trajectory of falling inflation on the subcontinent has yet to change.

The real test for the coming weeks is whether WPI declines will taper off in reaction to the relative buoyancy of several key commodities in recent weeks. The wholesale price index, represents a basket of 447 items within the three sub-indices; manufactured goods, accounting for 63.7%, primary articles at 22%, and food and energy at 14.2%. Plainly speaking, if metal and energy products begin to show signs that they are finding their feet but the corresponding WPI inputs continue to fall off it will quickly become clear how significant a factor domestic demand contraction is.

Part of our India thesis has always been that the majority of the population there, particularly the rural poor who did not share in the prosperity of the recent decade, will be unable to make up for cooling external demand nor do we believe that any public works projects or other measures enacted by Prime Minister Singh’s government will be enough to stem the tide. The reversal of foreign investment, the decrease in equity issuance and a massive national deficit will neuter any impact of the second monetary and fiscal stimulus package announced on January 2nd.

As always however, we are data dependent and stick to our process: If the data suggest that the stimulus is working then we will we rethink our stance. We Shorted IFN into strength on Tuesday and again today. For the time being, we continue to see the Indian economy as one of the weakest hands at the table among the major Asian economies.

Andrew Barber

The Consumer's Expectations Continue to Side With a Better Obamerica!

The Lehman, I mean Barclays, “economist’ was on Bloomberg TV the other day talking about the “conference board’s” lows in consumer sentiment. This consensus is not only pervasive, but its inaccurate.

At 61.9 for January, this morning’s Michigan Consumer Confidence survey came in better, yet again, on a month to month basis (see chart). Consumer confidence in this country has been improving right alongside the timing of Obama’s Presidential victory and the “re-flation” of the US stock market from its November 20th low.

Stock markets are the most stealth leading economic indicators we follow. The US stock market is up +13% from its freak-out lows. China and Brazil continue to make higher lows on selloffs – there is leadership in this world, you just have to look beyond Citigroup’s boardroom to find it. In the face of this Crisis of Credibility, what Americans need most isn’t another bailout – been there done that. All they need is the confidence to entrust their life savings with the financial system. This morning’s report is one more step in a better than bad direction toward that goal.

Keith R. McCullough
CEO & Chief Investment Officer

Sully's Don't Crash

Sully's Don't Crash - asset allocation011609

“I’ll study and get ready… and then, the chance will come.”
-Abraham Lincoln

“Sully” Sullenberger was the pilot of US Airways flight 1549. Sully is what America has always been about – achieving greatness when faced with the darkness of adversity. Make no mistake, this Californian proactively prepared for the risks associated with flying. In fact, he did so for 40 years -  a former U.S. Air Force fighter pilot, Sully served as an instructor and Air Line Pilots Association (ALPA) safety chairman, accident investigator, and national technical committee member. As the reactive investment bankers of horse and buggy whip thought processes past were crashing on Wall Street yesterday afternoon, Sully was landing safely just down the river.

At lunchtime yesterday, while Sully was going through the paces of his pre-flight process, the SP500 was credibly signaling a potential crash. As the US market broke down through what I had in my model as a 2 standard deviation 1 week move, trading down intraday to 818, my Partner, Todd Jordan asked me what I thought. With the SP500 -13% lower than where it had traded just one week ago, I said “Todd, if this market closes here, the only thing we have left is hope.” Todd said, well that’s not good, “because hope is not a process.” I agreed.

Hope is not an investment process, but that does not mean that it ceases to exist. When managing risk, you have to always consider both what no one thinks can happen and what people hope will happen. That’s the only objective way to move forward  - because no matter where stock market prices go, there you are.

With the SP500 breaking through my 825 level, I immediately ran the math on a 3 standard deviation move, and sent an intraday note to our Macro clients flashing that crash level being in play down at the 776 line. While that was only -5% lower versus where we were trading, it was a full -18% lower than where those late to the 1st Obama December rally got piggy chasing in the first week of January. Was 776 probable? All prices are – and having seen the financials (XLF) already having crashed in 2009 to date, I was very much worried.

In addition to my SP500 red alert, my other 2 macro lines in the sand (VIX 54.86, Gold $809/oz) were under assault. I haven’t been glued to my screens like I was staring at them yesterday since September. The big difference between January 15th and September, of course, was that I was no longer 96% in cash. If we broke, I was going to feel it, big time.

Fortunately, Sully landed the plane, and everyone survived. Metaphorically, into the close the SP500 felt like it was rising as fast as that plane was coming down. The VIX backed off my line, and gold revived itself. This morning the VIX is at 51 and gold trading comfortably above support at $824/oz. I feel better, because on the margin, I couldn’t have felt worse.

Is it tough waking up trying to call global markets every day? You bet your Madoff it is. When I was growing up, I always wondered what my Dad must be thinking when he was waking up for his 6am shift. He is a professional firefighter, and his priority is to serve and protect – while I never thought our careers would be similar, I guess I should always remind myself to never say never.

I haven’t been paid Wall Street compensation in the last 6 months, but I certainly feel blessed with the life lessons of accountability and responsibility. When I wake up today, I feel like some people depend on me to manage risk. Even if I am not the “smartest” man on Wall Street, and if only I do this for a certain few, I feel like I am doing the right thing.

Doing the right thing when nobody is looking is what “Sully” was doing. On one shiveringly cold New York City afternoon, his blue skies turned dark – but he didn’t panic - he didn’t dial in for a bailout either. He just did what he proactively prepared himself to do, and he executed. After the plane landed, he walked the plane, end to end, twice – just to make sure everyone was safe… that’s the kind of American I can trust in.

The #1 and #2 read stories on Bloomberg this morning are about planes that crashed – Bank of America and Citigroup. These two Destroyers of Capital are finally on the tape this morning with some of the worst numbers that you’re ever going to see. Pandit and Lewis have managed through this crisis as close to the antithesis as Sully’s process gets. Is this a surprise? No. This is what Wall Street groupthink trained these men to do. There never was a proactive risk management plan – and now Americans have to bail them out, or we are all going down hard.

On July 11th 2008, I wrote an Early Look titled “What Is  A Crash.” At the time, I took a lot of heat from people who I thought were my friends in this business – and in hindsight it all makes sense. A crash is what happens when something happens that no one can afford to predict. Never forget that most of Wall Street is a compensation structure – because the Street can’t afford to agree that the “improbable” is probable, doesn’t make their thought process right. When faced with the reality of the improbable occurring, people and compensation structures crash.

Other than Investment Banking Inc. having crashed, the Russians are crashing. As hard as it may be to swallow those two considerations in the same sentence, it remains The New Reality of 2009. Amidst a global re-flation of stocks worldwide this morning, there is only one market that is threatening to make lower lows, and that’s the Russian Trading System. Alongside the ruble having crashed (down -27% since oil peaked) at 566, the RTSE is testing its October 24th freak-out low of 549. Yes, America’s stock market narrowly avoided another crash versus expectations yesterday, but the XLF etf and RTSI index have not.

Meanwhile the Chinese stock market is up +5% in the last three days, making a bid for another breakout to new 3-mth cycle highs, and so are stocks on the Bovespa in Brazil, which close up another +3.1% yesterday.

Around the world, uncorrelated performance is manifesting itself across sectors and styles. If you are buying into the horse and buggy whip old boy network models of zero transparency and accountability past, I am proactively predicting that you will crash. If you are buying American - “Sully” style - you should be proud of what you own, and smiling as we head into Obama’s Presidency Day weekend.


Sully's Don't Crash - etfs011609


Daily Trading Ranges

20 Proprietary Risk Ranges

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