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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 28, 2012


As we look at today’s set up for the S&P 500, the range is 16 points or -0.89% downside to 1320 and 0.31% upside to 1336. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 6/27 NYSE 1589
    • Up from the prior day’s trading of 833
  • VOLUME: on 6/27 NYSE 684.49
    • Decrease versus prior day’s trading of -3.90%
  • VIX:  as of 6/27 was at 19.45
    • Decrease versus most recent day’s trading of -1.37%
    • Year-to-date decrease of -16.88%
  • SPX PUT/CALL RATIO: as of 6/27 closed at 1.56
    • Up from the day prior at 1.55 

CREDIT/ECONOMIC MARKET LOOK:


USA – got “de-coupling”, c’mon already. The Bond market has had this right for a long time, and the 10yr has it right again this morning, looking to break 1.60% again as the Yield Spread (10s-2s) threatens to break-down to new YTD lows. Yield Spread is down -7bps wk-over-wk. Bank earnings (cash, not trading condors) going lower. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.60
    • Decrease from prior day’s trading at 1.62
  • YIELD CURVE: as of this morning 1.30
    • Down from prior day’s trading at 1.31 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP Q/q, 1Q revised, est. 1.9% (prior 1.9%)
  • 8:30am: Personal Consumption, 1Q rev., est. 2.7% (prior 2.7%)
  • 8:30am: GDP Price Index, 1Q revised, est. 1.7% (prior 1.7%)
  • 8:30am: Core PCE QoQ, 1Q revised, est. 2.1% (prior 2.1%)
  • 8:30am: Initial Jobless Claims, June 23, est. 385k (prior 387k)
  • 8:30am: Continuing Claims, June 16, est. 3280k (prior 3299k)
  • 9:45am: Bloomberg Consumer Comfort, June 23 (prior -37.9)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas change
  • 11am: Kansas City Fed Manf. Act., June, est. 4 (prior 9)
  • 11am: Fed to sell $8-8.75b notes in 11/15/2014-6/15/2015 range
  • 11:30am: Fed’s Pianalto speaks in Cleveland
  • 1pm: Treasury to sell $29b 7-yr notes
  • 7pm: Fed’s Fisher speaks in Aspen, Colorado, on U.S. economy 

GOVERNMENT:

    • U.S. Supreme Court will issue its health-care ruling, 10am
    • House, Senate in session
    • Senate Commerce Committee holds a hearing examining whether online advertising industry self-regulation of consumer privacy is providing adequate protections, 10am
    • House Financial Services subcommittee holds hearing, “Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money” 2pm
    • The American Enterprise Institute for Public Policy Research
    • holds a discussion on “Do Money Market Funds Create Systemic Risk?” 2pm
    • SEC Chairman Mary Schapiro to testify before House Oversight subcommittee hearing on Jobs act, 9:30am
    • Interior Dept to announce final 5-year program for offshore oil, gas dev.; Secretary Ken Salazar holding conf. call at 3pm
    • CFPB releases report on reverse mortgages 

WHAT TO WATCH:  

  • News Corp. board said to approve plan to split up company
  • Google unveils $199 tablet in bid to vie with Apple, Amazon
  • Apple said to prepare iTunes changes to improve storage, sharing
  • Watch suppliers, rivals as GOOG unveils ASUS-designed tablet
  • Europe’s leaders today cap their latest effort to check the financial crisis that claimed Cyprus this wk as its 5th victim
  • Nine of the biggest banks are set to deliver plans this wk for how their businesses could be unwound after a collapse
  • Peter Madoff to plead guilty to fraud in brother Bernard Madoff’s Ponzi scheme
  • Amazon.com said to add social features to digital games for tablet
  • T-Mobile USA CEO Philipp Humm will quit, leaving Deutsche Telekom’s U.S. division in search of a replacement as it tries to recover from a failed sale to AT&T last yr
  • AMR says ruling on voiding union contracts delayed by pilot vote
  • Veolia sells U.K. water unit for $1.9b to reduce debt
  • Fed to boost Operation Twist with QE3 jolt: Bank of America
  • Euro-area June eco. confidence falls to 89.9, est. 89.6, is lowest since Oct. 2009
  • Italy sells 2022 bonds to yield 6.19% vs 6.03% on May 30; sells 2017 bonds to yield 5.84% vs 5.66% on May 30
  • U.K. 1Q GDP falls 0.3% in line with previous estimate
  • South Korea cut growth est. for this yr to GDP may expand 3.3% vs Dec. est. +3.7%, announced 8.5t won ($7.4b) of spending
  • Lending to Europe puts U.S. home loan banks at risk, says audit 

EARNINGS:

    • Family Dollar Stores (FDO) 7am, $1.07
    • MSC Industrial Direct (MSM) 7:30am, $1.11
    • Shaw Communications (SJR/B CN) 8am, $0.43
    • Worthington Industries (WOR) 8:15am, $0.52
    • Empire (EMP/A CN) 8:50am, $1.16
    • Accenture (ACN) 4pm, $0.99
    • TIBCO Software Inc (TIBX) 4:04pm, $0.23
    • Research In Motion (RIM CN) 4:15pm, $(0.07)
    • Nike (NKE) 4:15, $1.37

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • Glencore Courts Qatar as Xstrata Tweaks Merger Pay: Commodities
  • Corn Extends Biggest 4-Day Rally in 14 Months as U.S. Crops Wilt
  • Oil Drops in London on Speculation Europe’s Outlook Will Worsen
  • Sugar Ends Rally as Surplus Overwhelms Demand; Coffee Declines
  • Copper Seen Falling as German Unemployment Fans Crisis Concern
  • Gold Erases Gains in London as Dollar’s Strength Erodes Demand
  • Oil Over $100 Seen After Worst Quarter Since ‘08: Energy Markets
  • Koreans Await Monsoon Rains to Break Worst Drought in a Century
  • Corn Peak in 1988 Drought Hints Rally May End: Chart of the Day
  • Hog-Herd Expansion Signaling Losses After Corn Surge Boosts Cost
  • World’s Largest Atomic Plant to Be Started, Tepco Says: Energy
  • Chinese Steel Prices Drop to Two-Year Low on Weakening Demand
  • Thailand Seeks Rubber-Export Limits With Indonesia, Malaysia
  • Monsoon Worst Since 2009 Threatening Crop Prospects in India
  • Indian Exchange Seeks to End Guar Futures Ban Before Sowing 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


GERMANY – been calling this out this week, and it’s really obvious this morning – Germany has more risk now (to the downside) than Spain on our TRADE/TREND equity market signal. After failing at its TRADE line yesterday (6259), the DAX is back into a Bearish Formation, down -1.3%, leading European losers this morning.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – someone needs to tell the Chinese that the Italians are on it, because the dudes in Shanghai are freaking right out at this pt, pounding the Shanghai Comp to fresh new lows (down another 1% last night; down 10.5% since May 4th). *Reminder – any reactionary Chinese stimulus only amplifies #GrowthSlowing.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

 

The Hedgeye Macro Team


WEEKLY COMMODITY CHARTBOOK

Corn and wheat prices increased sharply week-over-week as hot and dry conditions persist across the corn belt fueled speculation that crop yield estimates for the United States would be revised lower when the next USDA WASDE report is released on July 11th. 

 

General Overview


A government meteorologist was quoted in the press today as having said that this year’s weather pattern, which settled into the Great Plains and the Southwest last year and has spread into the Corn Belt, resembles those of 1988.  With corn stockpiles already low, grain prices could have room to run.  Overall over the past week, despite the dollar gaining slightly versus a week ago, commodity prices we follow that pertain to the restaurant space moved higher.  The standouts on a year-over-year basis are chicken wings and wheat on the upside and coffee and dairy, on the downside.

 

WEEKLY COMMODITY CHARTBOOK - commod table

 

Commodity News

 

Beef prices are likely to find support this summer from the dry and hot conditions and the derivative impact on feed costs and herd sizes.  Consumer prices for beef at retail continue to move higher than overall food costs.

 

Chicken supplies remain tight but, on a year-over-year basis, USDA data released today shows that the supply of egg sets is declining by 2% compared to 6% declines seen as recently as April. 

 

WEEKLY COMMODITY CHARTBOOK - egg sets wing prices

 

 

Correlation Table

 

WEEKLY COMMODITY CHARTBOOK - correl

 

 

Charts

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

WEEKLY COMMODITY CHARTBOOK - corn11

 

WEEKLY COMMODITY CHARTBOOK - wheat1

 

WEEKLY COMMODITY CHARTBOOK - soybeans

 

WEEKLY COMMODITY CHARTBOOK - live cattle

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

 

WEEKLY COMMODITY CHARTBOOK - chicken wings

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

WEEKLY COMMODITY CHARTBOOK - milk

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst



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Euro Yank

“Go ahead, yank.”

-Margaret Hastings

 

So, I’m bearish. And I really want to know why the bulls are still bullish. If the bull case at  the Q1 top was ‘growth is back, earnings are good, and stocks are cheap’, their entire thesis has to have changed.

 

Sadly, with Growth Slowing, earnings at risk (73 of the S&P’s 500 companies have already guided lower), and “cheap” getting cheaper, we all know what the bull case is now – bailouts. When centrally planned, those are bearish long-term, too.

 

If you are like me, publically admitting you are bearish on both the immediate and long-term durations, why wouldn’t you have a big Cash position here? Even for central planners in the post 49BC era, economic gravity has proven to be hard to stop.

 

Back to the Global Macro Grind

 

On the morning of the 19th European Bailout Summit, Global Equity and Commodity markets are red and the Euro is getting yanked right back to $1.24.

 

Imagine that, after 18 attempts these people think we are all dumb enough to believe that this is going to be resolved. *Long-term Risk Manager Note: piling more debt and leverage on top of this sick puppy is only going to prolong the pain.

 

That’s what she said.

 

Corporal Margaret Hastings is one of the American heroes in the book I am finishing this week, Lost in Shangri-La – “The True Story of Survival, Adventure, and The Most Incredible Rescue Mission of World War II.”

 

The aforementioned quote comes from the point in the story where she was down to weighing about 90lbs, badly burned, and dealing with life threatening gangrene. The paratrooper medic was babying her wounds and she promptly reminded him that “If I were back at Fee-Ask, the GI medic would yank the bandages off and then scrub my legs with a brush.”

 

God Bless America’s bravest.

 

The world can learn a lot from realists who aren’t trying to prolong the inevitable. If you can’t handle the idea of letting free-market prices clear, the market’s underlying wounds do not care. Eventually, they need to be addressed. At this point, doing more of the same to perpetuate debt mounting and Growth Slowing has reached the height of political cowardice.

 

Stock, Commodity, Currency, and Fixed Income markets get that. That’s why, when I take a step back and look at the context of these no-volume rallies like we had yesterday, I get more concerned, not less.

 

Looking at the internals of the SP500 yesterday, here are the key points:

  1. PRICE – both TRADE (1336) and TREND (1365) lines of resistance remained intact
  2. VOLATILITY – both TREND (18.22) and TAIL (14.26) lines of support remained intact
  3. VOLUME – yesterday’s volume was one of the worst (on up days) of the year

On that last point, I have been measuring average down day volume versus up day volume in Q2 as a proxy for both conviction and money flows. Yesterday’s volume was down a shocking -28% versus the average down day volume of the last 6 weeks.

 

The other obvious point about yesterday’s rally was that the nasty stuff was up the most. In other words, the worst performing Sector (Energy is down -7.4% YTD) led low-volume gainers, whereas one of the best performing Sectors (Consumer Discretionary is +10.5% YTD) led decliners.

 

This daily observation is very short-term, but it certainly rhymes with my basic long-term conclusion that bailouts will only structurally slow growth at an accelerating rate. Up Energy/Food price days slow real (inflation adjusted) economic growth.

 

Whether central planners targeting “asset price inflation” get that or not yet remains the most obvious question Romney should be asking Obama, repeatedly, during the Presidential Debate. If I were Romney, I’d label Bernanke as Obama (and Bush’s) guy. I’d also constantly pound on the point that the Europeans are now behaving like Hank Paulson and Bernanke did.

 

What happens when the Europeans eventually release their Paulson/Geithner “bazooka” anyway?

  1. The Euro could easily snap $1.22 and put “parity” back in play
  2. On that, the US Dollar is going to rip – say $84-85 on the US Dollar Index
  3. Commodity prices (and the equity markets priced off their top-line assumptions) will keep getting rocked

Maybe we get that at the 23rd Summit?

 

This folks is what Paulson/Geithner/Bush didn’t understand about free market prices in 2008, so don’t expect Geithner/Hollande/Obama to get it now. After the 2008 $800B Bazooka was deployed, that’s why Paulson yanked himself towards a garbage can for immediate-term relief.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1, $88.16-93.39, $82.23-82.91, $1.24-1.26, 6085-6259, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Euro Yank - Chart of the Day

 

Euro Yank - Virtual Portfolio


THE M3: NO CHANGE IN IVS

The Macau Metro Monitor, June 28, 2012

 

 

NO CHANGES ON VISA RULES:  MACAU GOV'T Macau Business

The Macau Government Tourist Office says it has received no notice of any changes on visa issuing by mainland authorities.  The comment came after a report over the weekend by Macau Daily News suggesting that mainland authorities were tightening Individual Visit Scheme visas.  “We have not received any notice on China tightening visa issuance to visitors traveling to Macau,” said Gigi Chiu, spokeswoman for the Macau Government Tourist Office.


SBUX: THE $100MM+ ACQUISITION?

Given recent acquisitions by Starbucks, it seems that management sees baked goods and pre-prepared cold drinks as being significant drivers of Starbucks stores’ comparable sales growth going forward.

 

We have had reservations about the La Boulange acquisition from the day the news was released.  Our view then was that expanding the La Boulange brand throughout the Starbucks stores' national footprint would be a capital intensive venture with less-than-certain results.  Our stance has not changed in the interim.  A post published on Monday by reputed baker Maury Rubin on his blog, City Bakery Daily, described the Starbucks-La Boulange deal as being “one for the ages” for those “on the ground in bakery land”. 

 

Starbucks’ rationalization of the acquisition centered on the following points:

  • We see an incredible opportunity to bring the artistry of the best French bakery product to the U.S. marketplace in a similar way that Starbucks bought the romance of the Italian espresso bar to many American coffee consumers for the first time.
  • With this acquisition, we will make an investment in our core part of our business, while also building and romancing the La Boulange brand into the nation's best premium retail bakery cafe experience.
  • Our key strategic goal will be to introduce artisan bakery products under the La Boulange brand into our stores in the U.S., giving customers more reasons to frequent and enjoy their experience during multiple day parts and as a result, drive incrementality within existing and new stores.

Mr. Rubin’s post on City Bakery Daily makes several assertions that seem to bring many of the underpinnings of Starbucks’ above statements into doubt.  His writing suggests that there could be some logistical impediments to Starbucks’ realizing its vision of La Boulange being the nation’s best premium retail bakery café brand.  Here is one paragraph that highlights one important issue facing Starbucks’ vision for the bakery brand.

 

“Many years ago, when Starbucks first moved into New York City, they asked if City Bakery would consider being a supplier of baked goods. I was completely interested, until I learned the required delivery schedule: orders needed to ship to a central location by 6pm to be sold the next day. In our bakery, then as now, we bake every thirty minutes all morning long. The goal is to have pastry on our counter that was in the oven within the hour when bought. For Starbucks, we would need to have baked 15-18 hours before the fact.”

 

Clearly, the implication is that for the La Boulange brand to become synonymous with quality, distinguished from other brands of baked goods offered in cafe settings, significant investment will be required.  Mr. Rubin calls it a “Marshall Plan-like approach” in terms of investment in operations.  Our view is that Starbucks is not going to retrofit its stores to bake on site; Mr. Rubin notes that he recently read that the average operating profit margin for bakeries nationally is 3.5%.  The final sentence of Mr. Rubin’s post asks the question all investors in Starbucks need to be focused on; “with $100 million already spent [on La Boulange], will it cost Starbucks tens of millions more to actually get the quality they seek into customer's hands?”

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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