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TODAY’S S&P 500 SET-UP – June 26, 2012

As we look at today’s set up for the S&P 500, the range is 13 points or -0.66% downside to 1305 and 0.33% upside to 1318. 



SECTORS – most important risk management point in our S&P Sector Studies last night was mean reversion – leaders (Tech and Consumer) are now flagging the same risk signals as the losers (Energy and Industrials). It’s just one of the many signals that tell me earnings season will be as bad as the companies are already whispering (73 SP500 companies already guide down).










  • ADVANCE/DECLINE LINE: on 6/25 NYSE -1657
    • Down from the prior day’s trading of 1140
  • VOLUME: on 6/25 NYSE 753.75
    • Decrease versus prior day’s trading of -52.22%
  • VIX:  as of 6/25 was at 20.38
    • Increase versus most recent day’s trading of 12.53%
    • Year-to-date decrease of -12.91%
  • SPX PUT/CALL RATIO: as of 6/25 closed at 1.86
    • Up from the day prior at 1.65 


  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.63
    • Increase from prior day’s trading at 1.60
  • YIELD CURVE: as of this morning 1.34
    • Up from prior day’s trading at 1.31 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: ICSC/Redbook retail sales
  • 9am: S&P/CS 20 City M/m, April, est. 0.3% (prior 0.1%)
  • 9am: S&P/CaseShiller Home Price Index, April, est. 134.85 (prior 134.1)
  • 10am: Consumer Confidence, June, est. 63 (prior 64.9)
  • 10am: Richmond Fed Manufacturing Index, June, est. 3 (prior 4)
  • 11am: Fed to purchase $4.5-$5.5b notes in 8/15/2020-5/15/2022 range
  • 11:30 am: Treasury to sell $25b 52-wk bills, 4-wk TBA
  • 1pm: Treasury to sell $35b 2-yr notes
  • 4:30pm: API inventories 


    • House, Senate in session
    • OECD releases survey of U.S. economy, 10am
    • Senate Banking Cmte hearing on how to empower and protect military servicemembers in the consumer finl mktplace, 10am
    • National Research Council holds conference on NASA’s strategic direction, with space agency officials, 8am


  • Rupert Murdoch is said to consider splitting News Corp. into two, one focusing on publishing, the other entertainment
  • Moody’s downgrades 28 Spanish banks on debt risk
  • Apple’s bid to limit Google’s use of certain patents as a tool to block imports of the iPhone and iPad may be getting traction at a U.S. trade agency
  • EU President Van Rompuy’s report on the future of the euro includes the option of a “phased” introduction of common debt
  • Facebook appointed COO Sheryl Sandberg to board, naming 1st female dir.
  • U.S. Congress said to consider delaying automatic federal spending cuts until March 2013
  • Russell announces final 2012 membership lists for indexes
  • Encana is investigating a news report of e-mails between it and Chesapeake Energy regarding land-lease bidding in Michigan
  • Vivendi to appeal $956m verdict in a lawsuit over its 2001 purchase from Liberty Media of its stake in USA Networks
  • Spain sells EU3.08b of bills vs maximum target EU3b; sells 6-month bills at 3.237% vs 1.737% in May
  • Italy sells zero 2014 bonds at 4.712% vs 4.037% on May 28
  • Europe’s financial crisis isn’t affecting the ability of speculative grade U.S. companies to meet debt obligations, keeping the default rate below the historical average: Moody’s
  • BP sold stakes in 2 North Sea fields to Mitsui for $280m in cash
  • Corn climbs to 7-mo. high
  • KKR raises $4b for investments in infrastructure, energy
  • Madoff customer pool is poised to swell to $7.3b by July
  • U.K. posts larger budget deficit than economists forecast in May
  • HSBC lowered its projection for China’s economic expansion this year to 8.4% from 8.6%


    • Robbins & Myers (RBN) 8:30am, $0.90
    • H&R Block (HRB) 4pm, $2.07  



COPPER – the Doctor has been signaling #GrowthSlowing since Feb/Mar; that has not changed here in June as Copper has tried to rally several times and failed each time at lower-highs, down another -0.4% this morning to 3.31; question is when does it have a $2 handle? Strong Dollar will deflate the commodity inflation. 

  • Cattle-Hide Economy Slumping as Goldman Sees Rally: Commodities
  • Oil Trades Little Changed as Storm Threat to U.S. Supply Fades
  • Corn Climbs to Seven-Month High as Dry Weather Parches U.S. Crop
  • Cocoa Rises on Speculation Ivory Coast Rains Will Cause Disease
  • Russia Increases Gold Reserves as Ukraine, Kazakhstan Add Metal
  • Gold Set to Decline on Concern Europe’s Crisis Will Boost Dollar
  • Copper Seen Rising for Second Day as China Demand May Strengthen
  • KKR Raises $4 Billion for Investments in Infrastructure, Energy
  • Gasoline Supplies Gain for Second Week in Survey: Energy Markets
  • Rice Crop in India at Record to Spur Exports for Second Year
  • ETFs Passive No More in Challenge to $7.8 Trillion Active Funds
  • Paris Rapeseed Set to Gain on Moving Average: Technical Analysis
  • Tropical Storm Debby Edges Eastward Toward Florida’s Gulf Coast
  • Mitsubishi’s $5.4 Billion Copper Bet Sparks Codelco Fight
  • Iron Ore Set for Monthly Advance as China Stimulus Boosts Demand
  • China’s First Wind-Farm Lull Limits Outlook for Sinovel: Energy 










ITALY – one of the foundations of Keynesian central planning is the belief that governments can “smooth the business cycle”; how’s that working out? Italian Retail Sales plummeting (-6.8% y/y) and Italy’s CDS rising back up to 590 this morning as Italian Bank funding issues come back to the table (Monti Pasche, 3rd largest Italian bank); MIB remains broken/crashing.














The Hedgeye Macro Team

President Obama's Reelection Chances

President Obama’s chances of being reelected in November climbed 2% week over week amid improving performance in the stock market and Supreme Court rulings according to the Hedgeye Election Indicator (HEI). This is the second consecutive week of an uptick in reelection performance for President Obama, whose odds of reelection now stand at 56.3%.


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.



President Obama's Reelection Chances - HEI June26

India FDI Inching Closer to Reality


It looks like India is inching closer to easing its policy on foreign direct investment (FDI) – a shift that would be positive for WMT and other global retailers. But, we’ve been down this road before.

It’s been nearly two-years since the Department of Industrial Policy and Promotion put forth a proposal regarding FDI in multi-brand retail in July 2010. Then last November, a proposal to allow up to 51% FDI in multi-brand retail was approved only to be subsequently shelved following political upheaval.

While the implications for India and global retailers alike remain largely unchanged from when we wrote on the issue last fall, two key factors at play increase the likelihood of government action: 1) the Presidential election takes place July 19th, and 2) an additional ~8% devaluation in the rupee since FDI reform was parked at year-end. While jockeying headed into the election could produce a multitude of outcomes, the reality is that the two are closely intertwined as the government is looking to encourage foreign flows to India in order to buoy the currency.

As for what this means for retail, here’s some context from our November note:

The Indian government has approved a policy to allow 51% FDI in multi-brand retail and 100% FDI in mono-brand retail in an effort to help buoy the currency. This effectively opens the door to one of Retail’s most attractive international markets to (aspiring) global retailers. (Hedgeye note: the policy for 100% FDI in mono-brand retail has been rolled out, it’s the multi-brand policy that was not)

Previously, multi-brand retailing was forbidden in India and the country restricted mono-branded retailers to 51% ownership requiring a local partner. The new shift in policy no longer blocks the likes of Wal-Mart, Carrefour, or Tesco from entering the market and enables mono-brand retailers to pursue more aggressive self-funded expansion plans (i.e. Nike, VFC, etc…).

As a point of reference, the Indian retail sector is currently worth approximately $450-$500Bn in USD, but has been growing at a HSD-LDD digit rate over the last few years One recent study called for the market to double by 2015.

Sounds like a lot, but keep in mind that India’s per capita GDP stands at US$1,410, while China currently sits at about $4,428. So perhaps not a stretch. No, India is not China, and vice/versa. There are distinct geographical, cultural and ideological differences that make them both distinct.

Also, keep in mind that with just ~6% of India’s retail distribution organized (i.e. not via stalls, etc.), it will take years for investment from global players – especially multi-brand retailers – to establish adequate supply chains to make  meaningful progress so we need to be mindful of near-term expectations.

But 10-years ago, no one cared about China. It was not every other word out of a CEO’s mouth because the core markets are too mature to grow. The companies that are successful there today are the ones who invested when no one cared.


While India accounts for roughly 1% of the global luxury market compared to China at closer to 10%, the opportunity for global retailers is clearly evident. Several companies like VFC, SHOO, and others have already established a foothold with local partners. For a company like VFC, which has clearly outlined its plan to grow sales in India from ~$50mm in 2010 to over $200mm by 2015 accounting for a mere 20bps of growth annually, this announcement could accelerate efforts in the region. Either way, we expect India to quickly become part of the expansion dialog among retailers – particularly in light of slowing growth across much of Europe and China.


Casey Flavin


India FDI Inching Closer to Reality - India GDP



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NKE: Farewell, Olympic Trade

For 9 out of 10 of the past Olympic sessions, there has been the infamous “Nike trade.” Essentially, this involved NKE stock outperforming the S&P 500 by several percentage points in the run up to and during the Olympics. The streak continues into a six month span after the end of the Olympics as well.


But now, it appears that the trade has been discovered by the masses and the spread has eroded completely. NKE now UNDERPERFORMS the S&P 500 by 200 basis points (+3% versus +5%).  Throughout history, NKE outperformed the S&P 500 by an average of about 18% in 9 out of the 10 recent Olympic event years we mentioned. This is now a thing of a past.



NKE: Farewell, Olympic Trade - NKE Olympics

HedgeyeRetail Visual: NKE Olympic Trade Not Consensus After All?

We all know about the Nike ‘Olympic Trade.’ Furthermore, we think that once ‘seasonal trade’ gets to a point where it is so widely known, it should probably cease to exist. But the reality is that it still tends to come and go like clockwork.


That is, until this year. As of today, NKE underperformed the S&P YTD by 2 points (NKE +3%, SP500 +5%). But looking through history, NKE outperformed the S&P500 by an average of ~18% in 9 out of the 10 recent Olympic event years. The only time the trade did not work was in Nagano, Japan, showing how much more important this trend is for Summer Olympics vs. Winter.


Most interesting to us is that the opportunity continues for 6-months after the event as well. Over the past three Summer Games, we’re looking at about a ~13% move vs. the S&P during the window following the event.


After going through this analysis, it suggests to us that ‘The Nike Olympic Trade’ is far less consensus than we’d otherwise have thought. 


HedgeyeRetail Visual: NKE Olympic Trade Not Consensus After All? - NKE tables


HedgeyeRetail Visual: NKE Olympic Trade Not Consensus After All? - NKE chart


  • A continuing recovery in the replacement market, coupled with a growing number of new openings and expansions should create a favorable fundamental backdrop for the slot manufacturers for the next few years
  • We estimate that slot shipments to North America will grow to 90k in 2012 and surpass 105k in 2013- representing a material increase over the past 3 years where slot shipments have teetered in the 62-71k range
  • Mid-to-high single digit replacement growth should be supported by aging slot floors and a more competitive environment driven by new openings.  Growth in new and expansion units will be propelled by Canadian RFP's, new casinos/slot tracks opening up in Ohio, and VLTs in IL 


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