prev

Play Tomorrow

This note was originally published at 8am on June 19, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“First rule is to be able to play tomorrow.”

-Warren Buffett

 

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:

  1. Cash = 91% (up from 61% yesterday)
  2. US Equities 9% (all Consumer Staples – XLP)
  3. International Equities = 0%
  4. Fixed Income = 0%
  5. Commodities = 0%
  6. International Currencies = 0%

Why sell everything other than US Equities (I might sell those this morning too)?

 

That’s simple:

 

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:

  1. Obama’s odds of re-election bounced by +200bps week-over-week to 56.1%
  2. Obama’s odds of re-election are now at their highest level in nearly a month
  3. Obama’s odds of re-election are still down, hard, from their peak (March 26th) of 62.3%

Now what?

 

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 $1617-1640, $95.07-98.26, 81.59-82.16, $1.24-1.26, and 1324-1348, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Play Tomorrow - Chart of the Day

 

Play Tomorrow - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 3, 2012


As we look at today’s set up for the S&P 500, the range is 36 points or -2.09% downside to 1337 and 0.55% upside to 1373. 

                                            

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 07/02 NYSE 1255
    • Down from the prior day’s trading of 2281
  • VOLUME: on 07/02 NYSE 736.11
    • Decrease versus prior day’s trading of -32.74%
  • VIX:  as of 07/02 was at 16.80
    • Decrease versus most recent day’s trading of -1.64%
    • Year-to-date decrease of -28.21%
  • SPX PUT/CALL RATIO: as of 07/02 closed at 1.65
    • Up from the day prior at 1.35 

CREDIT/ECONOMIC MARKET LOOK:


TREASURIES – the bond market doesn’t have to chase performance like the entire equity community seems to; Treasuries saw yesterday’s ISM bomb (49.7 June vs 53.5 in May) for what it was #GrowthSlowing; that’s our only big Macro long position right now – long the Long Bond (TLT). 

  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.60
    • Increase from prior day’s trading at 1.59
  • YIELD CURVE: as of this morning 1.31
    • Up from prior day’s trading at 1.30 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: ICSC/Redbook retail sales
  • 9:45am: ISM New York, June (prior 49.9)
  • 10am: Factory Orders, May, est. 0.1% (prior -0.6%)
  • 11:30am: U.S. to sell 4-week bills
  • 4:30pm: API inventories
  • 5pm: Total Vehicle Sales, June, est. 13.9m (prior 13.73m)
  • 5pm: Domestic Vehicle Sales, June, est. 10.87m (prior 10.75m) 

GOVERNMENT:

    • House, Senate not in session
    • President Obama returns to White House from Camp David
    • IMF issues statement for annual report on U.S. economy, 10am 

WHAT TO WATCH: 

  • Barclays CEO Diamond Quits After Record Libor-Rigging Fine
  • Regulators Grappling With Libor Probe Said to Seek More Time
  • Banks required to submit so-called living wills to FDIC, Federal Reserve by yday, summaries available by today: JPM, BAC, C, GS, MS, BCS, DB, CS, UBS
  • SEC’s Schapiro has deadline of today to respond to House questions on Facebook IPO
  • Microsoft writing down $6.2b after AQuantive deal struggles
  • U.S. June auto sales: June SAAR could match May’s 13.8m pace
  • Fiat to Raise Chrysler Stake to 61.8% in Push Toward Full Merger
  • Ireland Plans Market Return With EU500 Million T-Bill Sale
  • Boeing Sees Jet-Market Growth Slowing as Jumbo Demand Dwindles
  • Slovenia Heads for Sixth Euro Bailout Request to Aid Banks 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • France Beating U.S. in Wheat Exports After Drought: Commodities
  • Europe Burns Coal Fastest Since ’06 Boosting U.S., EON: Energy
  • Gasoline Set for $3 Fuels Obama Election Defense: Energy Markets
  • Commodities Advance to One-Month High on Stimulus Speculation
  • Oil Rises on Global Stimulus Speculation, Iran Supply Concern
  • Copper Reaches Seven-Week High as Central Banks May Add Stimulus
  • Japan May Reduce LNG Spot Purchases in July on Surge in Price
  • U.K. Natural Gas Advances for a Third Day as Dutch Flows Decline
  • Saudi Arabia Set to Cut Extra Light Oil Premium to Heavy Crude
  • Sugar Rises on Speculation Supply Will Be Limited; Cocoa Gains
  • Deutsche Bank Cuts Oil-Price Forecasts on Demand Outlook
  • Silver Futures May Rise 25% on Double Bottom: Technical Analysis
  • New Life for North Sea Oil Hinges on Coal Gas in $8 Billion Bet
  • Tanker Glut Expands as U.S. Drives Billion Fewer Miles: Freight
  • Oil Rebounds on Stimulus Speculation, Iran
  • Gold Climbs on Speculation Central Banks to Seek to Spur Growth
  • Corn Rallies as Heat Wave Hurts Crop Conditions Across Midwest

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


EURO – this $1.25 line is an important one to keep your eyes on; we’re either going to see another drop to $1.23 or a rip to $1.27 – either should happen in a hurry. We have no idea what the next central planning catalyst is, but clearly bailouts are the new bull case.

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


GERMANY – the DAX and MIB Indexes look like better shorts than Spain’s IBEX right here and now. We aren’t short either, but may be by day’s end as both the DAX and MIB are testing my intermediate-term TREND lines of 6581 and 14,498, respectively. We’d like to see them both fail there before we move.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


President Obama’s Reelection Chances

President Obama’s chances of being reelected in November climbed 1.3% week over week to 57.6%. What this election will boil down to is twofold: the outcome of the current crisis in the Eurozone and the performance of the stock market heading into November. This is the third consecutive week of an uptick for President Obama. Globally interconnected risk continues to live on and will remain a dominant theme in the months to come.

 

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 Jul2


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

HedgeyeRetail Visual: Oh SNAP!

 

Growing SNAP participation has been a significant tailwind for dollar stores over the last 5-years – that is likely to change by year-end. For this and other factors, we've been growing incrementally more bearish on both DG and FDO.


Since 2007, Supplemental Nutritional Assistance Program (SNAP) - aka the federal Food Stamp Program participation rates have jumped 6pts to a 30-year peak at 15%. However, more notable is the slowing rate of participation growth. In fact, given the current rate of average sequential deceleration over the last 12-months of ~0.6%, SNAP participation growth will turn negative starting January 2013. Not good for the dollar store players (DG, FDO, DLTR) that are sitting at peak margins.

 

HedgeyeRetail Visual: Oh SNAP! - SNAP Part

 

 


JAPAN’S TANKAN SLEEPER HOLD

CONCLUSION: Because we think the BOJ will keep its balance sheet on hold over the immediate-to-intermediate term, as well as our models pointing to a negative inflection in Japanese growth in 3Q, we are inclined to short Japanese equities over the intermediate term – ideally nearer to TREND resistance on the Nikkei 225 Index/on any pending TRADE line breakdown.

 

Not to be confused with something better reserved for an ultimate fighting octagon, the title of this note suggests that we think the solid Tankan report out of Japan overnight is additive to our view that the BOJ will maintain its reluctance to pursue incremental monetary easing over the immediate-to-intermediate term (next meeting JUL 11-12). Jumping back to the BOJ’s own Tankan Survey, the survey results suggest that the intermediate-term outlook for the Japanese economy is quite positive – at least relative to both conditions and expectations 3-6MO ago. 

  • 2Q Tankan Survey:
    • Large Manufacturers:
      • Sentiment: -1 from 4
      • Outlook: 1 from -3
    • Large Non-Manufacturers:
      • Sentiment: 8 from 5; highest since 2Q08
      • Outlook: 6 from 5; highest since 2Q08
    • All-Industry FY CapEx Growth Guidance: 4% from -1.3%; highest since 4Q07! 

JAPAN’S TANKAN SLEEPER HOLD - 1

 

JAPAN’S TANKAN SLEEPER HOLD - 2

 

Our view that the BOJ is unlikely to ease in the immediate term stands in contrast to a growing consensus view that the BOJ is looking to expand its balance sheet at the current juncture – irrespective of the data!:

 

“I expect the BOJ to ease in July even after a slightly better Tankan. I don’t think it’s that relevant right now to what the BOJ is trying to do, which is to reach its inflation target. We have two new members from the private sector. They are much more sensitive to market sentiment.”

-Naomi Fink, head of Japan strategy at Jefferies Japan Ltd.

 

While we agree with Fink’s view that the new members on the BOJ board heighten the probability of BOJ balance sheet expansion (we made that call back on MAR 2nd), we think there is a case of Duration Mismatch to be exploited here, as both recent economic and financial market trends, as well as the BOJ’s own commentary are likely leading indicators of further BOJ inactivity for the time being.

 

From an economic data standpoint, recent trends in Japan’s external sector, consumer sector and manufacturing/production sector are quite positive, on balance, though it is fair to note that the most recent of the data points do show negative inflections in  the survey data (PMI, Economy Watcher’s) and in Capacity Utilization. With that being said, however, it is our view that the BOJ’s inability to meet its Asset Purchase Program targets in 10 straight operations and its own guidance from its previous meeting (APP left unchanged in JUN) will combine with the Tankan Survey results to overshadow the aforementioned inflections and keep them on hold for now.

 

“Japan is expected to return to a moderate recovery path as overseas economies emerge from the slowdown.”

-Statement from the JUN BOJ Monetary Policy Meeting

 

JAPAN’S TANKAN SLEEPER HOLD - 3

 

JAPAN’S TANKAN SLEEPER HOLD - 4

 

JAPAN’S TANKAN SLEEPER HOLD - 5

 

JAPAN’S TANKAN SLEEPER HOLD - 6

 

A chart of Japan’s 5yr breakeven inflation rate – the slope of which having materially inflected in recent weeks – tells you all you need to know about expectations in Japan’s bond market for further BOJ balance sheet expansion over the immediate-to-intermediate term.

 

JAPAN’S TANKAN SLEEPER HOLD - 7

 

In light of our below-consensus expectations for global growth – particularly in economies where Japan is exposed to on the export front (China = 19.4%; US = 15.7%), we think the  BOJ remaining on hold is marginally positive for the Japanese yen. That view is consistent with what we’ve been publishing in our recent notes on Japan, namely highlighting our anticipation of JPY strength on a TRADE and TREND basis within the context of our TAIL-duration bearish thesis on the currency (vs. the USD). Unless this time is different, further yen strength from here will be yet one more bearish factor for Japanese equities over the intermediate term (in addition to a negative inflection in growth in 3Q and delayed implementation of further monetary easing – i.e. no more “drugs” for now).

 

JAPAN’S TANKAN SLEEPER HOLD - 8

 

JAPAN’S TANKAN SLEEPER HOLD - JAPAN

 

All told, because we think the BOJ will keep its balance sheet on hold over the immediate-to-intermediate term, as well as our models pointing to a negative inflection in Japanese growth in 3Q, we are inclined to short Japanese equities over the intermediate term – ideally nearer to TREND resistance on the Nikkei 225 Index/on any pending TRADE line breakdown. Our risk management levels are included in the chart below.

 

Darius Dale

Senior Analyst

 

JAPAN’S TANKAN SLEEPER HOLD - 10


Q2 2012 HOTEL TRANSACTIONS

Still treading water


 

M&A and Other Trends for Q2 2012

  • Q2 2012 US hotel transaction volume was a meager $1.5 billion, up from Q1 2012's $1.0 billion, but down significantly from Q2 2011's $4.0 billion.  
    • The number of US hotel transactions in Q2 2012 almost double that in Q1 2012
    • US average price per key (APPK) in the Upper Upscale segment rose 24% QoQ
    • Non-US APPK in the Upper Upscale segment jumped because of the sale of Novotel Nathan Road Kowloon Hong Kong, the largest single hotel transaction in Hong Kong recorded in the last 11 years
    • All of the luxury transactions occurred outside of the US
  • There were four portfolio deals including Blackstone's purchase of Accor's Motel 6 unit
  • According to Fitch, May hotel delinquency rate was 11.15%, higher than April's 10.20%.  The higher hotel delinquency rate was partly due to the inclusion of the Marriott Waikiki to the hotel index.  The delinquency rate remains below the 14% seen in Q3 2011.

 

Q2 2012 HOTEL TRANSACTIONS - hotel1

 

Q2 2012 HOTEL TRANSACTIONS - hotel2

 

Q2 2012 HOTEL TRANSACTIONS - HOTEL1.5

 

Q2 2012 HOTEL TRANSACTIONS - hotel3


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

next