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TAIL Risk: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU), Short Industrials (XLI) and Energy (XLE)

 

Our fundamental research view has not changed = #GrowthSlowing. Our quantitative risk management view has.

 

What’s new (as of now) is that our immediate-term TRADE line of 1335 broke. That puts out long-term TAIL line of 1286 back in play. And when I say that, I mean over the intermediate-term (because the intermediate-term TREND remains broken too).

 

Across risk management durations, here are the lines that matter to me most: 

  1. Intermediate-term TREND resistance = 1365
  2. Immediate-term TRADE resistance = 1335
  3. Long-term TAIL support = 1286 

After 6 consecutive down days (50 point SP500 drop), you don’t want me to tell you what happens if 1286 breaks. We can only digest so much bad news at once.

 

In the meantime, keep managing the risk of the intermediate-term range with a bearish bias. There’s a loose TRADE line of support at 1324 that should insulate trading 1, for today/tomorrow.

KM

 

Keith R. McCullough
Chief Executive Officer

 

TAIL Risk: SP500 Levels, Refreshed - SPX


WEEKLY COMMODITY CHARTBOOK

Despite dollar strength, some commodities surged higher over the past week.  Accelerating grain prices will likely push beef costs higher over the longer term as cattle farmers struggle to rebuild herds that were slashed by the effects of last summer's drought.  Continuing hot weather across the U.S. is likely to mean sustained higher protein prices and margin pressure for restaurant companies like BWLD, TXRH, CMG, WEN, and others that purchase some or all of their protein via the spot market.  

 

Chicken, rice, coffee, and dairy all moved higher week-over-week while soybeans, corn, and grains gave back some of the strong gains they have posted recently.  Food processor stocks have been heavily impacted by the move higher in grain prices and we expect a derivative impact for companies with margins sensitive to grain prices.  Chicken wing prices surging 1.6% over the past week is also a derivative of corn gaining almost 40% over the past month. 

 

The USDA’s WASDE report, which was published yesterday, was the looming cloud that speculators were boosting grain prices ahead of.  Corn estimates for this year were lowered to 12.97 billion bushels on 88.9 million harvested acres, implying 146 bushels per acre versus the 14.79 billion bushels and 166 bushel per acre estimate from last month’s WASDE report.  Persistent hot and dry weather across the corn belt could keep corn prices elevated and prolong the misery of cattle farmers facing increased costs.  Analysts are even highlighting a possibility of $10 corn. Meatingplace.com reported the predictions, which were expressed during Tuesday’s panel discussion at the Chicago Mercantile Exchange (CME) ahead of the USDA’s World Agricultural Supply and Demand Estimates report released on Wednesday.

 

Beef prices may be down year-over-year, currently, but we would expect sustained elevated prices if more favorable conditions do not return so that farmers can rebuild their already-decimated herds. This would be negative for TXRH, CMG, WEN & JACK.

 

WEEKLY COMMODITY CHARTBOOK - commod

 

 

GAS PRICES

 

WEEKLY COMMODITY CHARTBOOK - gasoline prices

 

 

CORRELATION

 

WEEKLY COMMODITY CHARTBOOK - correl

 

 

CHARTS

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

WEEKLY COMMODITY CHARTBOOK - wheat

 

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

 

<chart12>

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


SO THAT'S WHY I GOT A $24 EXCALIBUR OFFER

Even after adjusting for low Baccarat hold, May Strip numbers were ugly.  This comes on the day I received an offer from Excalibur for a $24 hotel room.

 

 

Nevada just announced gaming revenues for May.  While the Locals market grew, Strip GGR fell a whopping 18% YoY.  The bulls will no doubt point to low Baccarat hold of roughly 8% versus normal of around 12%, but slot hold was very high: 8.0% versus normal of 7.3%.  Normalizing hold yields negative GGR growth of -11%.  This is even worse than the mid-single digit drop we were expecting and below investor expectations of a slight increase.  MGM's numbers look like they will need to come down and we were already below the Street.

  • Slot handle fell 7% off of a relatively easy comp
  • Slot win lost 3% despite higher than normal hold
  • June hold may be below normal due to end of month on Saturday
  • Bacc win fell 47%, on hold of 8.2% (TTM: 12.5%); baccarat volume fell 22%
  • Table win ex bacc fell 18% on below average hold of 10.3%;
  • Table volume ex bacc grew 2%
  • Hold-adjusted total win was -11%

There is a bit of a divergence here with the Las Vegas Locals market which actually increased 7%.  Probably a positive for BYD.


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JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS

Claims: Does Not Compute 

The headline print is that seasonally adjusted initial jobless claims fell 24k in the most recent week to 350k. Meanwhile, rolling claims fell 10k WoW to 377k. We wouldn't get too excited about this print for a couple reasons.

 

First, consider the distortion that's being created by the automakers. As we noted in our post last week, Ford announced earlier this year their intentions to idle 13 manufacturing plants for just one week instead of the typical two. Workers are allowed to collect benefits during this recurring annual furlough. This has the effect of making jobless claims appear significantly stronger than they are. 

 

What's interesting about this morning's number is that the non-seaonally adjusted print was higher WoW by 70k. We show this in the first chart below. That compares with an average increase of 45k in the comparable week over the last five years. As such, it's a bit of a head scratcher how the SA print came in as well as it did. We would expect an extremely sharp reversal over the next two weeks. You can see this in our second chart below. Look at the last two weeks in the current year and look at the comparable periods in prior years.

 

On a YoY basis, NSA claims continue to improve at ~8%. This is the most straightforward measure of evaluating the underlying trend.

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - Ford 2

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - Raw

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - Rolling

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - NSA

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - NSA rolling

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - S P

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - Fed

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - YoY

 

The 2-10 Spread

The 2-10 spread tightened another 8 bp WoW to 124 bps, as the ten-year treasury yield fell 11 bps to 152 bps. 

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - 2 10

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - Subsector Performance

 

JOBLESS CLAIMS: BIG DISTORTIONS PAINT A BLEAK PICTURE FOR NEXT TWO WEEKS - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 

 


ECB Overnight Deposits Plummet!

No Current Positions in Europe


Conclusion: the deposit level inflection is noteworthy, yet a long way from a signal of credit expansion

 

There was a notable inflection in deposits held at the ECB’s overnight window yesterday, the first day the central bank’s recently announced 0.00% deposit rate went into effect. As we show in the chart below, deposits fell from €808.5B on Tuesday to €324.9B on Wednesday (down -60%), according to the most recently reported figures from the ECB.

 

ECB Overnight Deposits Plummet! - aa. overnight

 

As a reminder, on 7/5 the ECB also cut the interest rate on the main refinancing operations by 25bps to 0.75% and the interest rates on the marginal lending facility by 25bps to 1.50%.

 

While on the margin, the decline in deposits, if sustained, could be a positive signal that funds are being “put to work” for broader public and private lending, we think the "pass-through" is inconclusive and that collectively the rate cuts issued by the ECB offer little incremental stimulus given how low rates already are. 

 

Our view is that encouraging more borrowing through cheaper money is not the solution to Europe's problem of over-indebtedness.

 

To this end, we see the EUR/USD cross challenged over the intermediate term as there are no major planned catalysts on the calendar. Our call-out in the chart below is that the cross just broke through our TREND support line of $1.22. While we don’t see the cross going to parity, as we’d expect Eurocrats to step in to prevent it, the most recent news that Germany’s Constitutional Court could push out a ruling on the ESM and the fiscal pact until the fall (versus the original target of July 1), could add much consternation to the cross and European capital markets over the intermediate term. Our immediate term TRADE range is $1.21 - $1.24.

 

ECB Overnight Deposits Plummet! - aa. eur

 

 

Matthew Hedrick

Senior Analyst


The End Game

RIA DAILY PLAYBOOK     

FOR RELEASE ON THURSDAY, JULY 12, 2012

 

The End Game - client talking points

 

 

FRONT RUN ‘EM

Since we’re not a prop shop, bank or broker-dealer, we can say what we want. Since 2007, people have been complaining about “the machines.” Yes, we live in an era of electronic trading. If you’re sick of getting smoked by the competition, we recommend hiring brilliant people to help build machines that can front run the “other” machines. Seriously – think about it.

 

SUPER MARIO BAILOUT

Mario Monti is basically bailing on Italy and wants no part of the tidal wave of bailouts that are about to engulf the nation. Can you blame him? Politicians love this sort of short term accountability game. Italy makes Spain look like a walk in the park and will really be the country that makes headlines.

 

FLIGHT TO SAFETY

The 10-Year Treasury yield is astonishing. People cannot get enough of this thing. Yields hit a fresh new low of 1.49% this morning and that sucks for financials.

 

 

The End Game - asset allocation

 

 

The End Game - assets July11

 

 

<chart 4>

 

PSS WORLD MEDICAL (PSSI)

The bulk of the bad news is on the table following disappointing F2012. Rebased F2013 estimates far more reasonable, and revenues should be supported by our expectations for rising physician utilization, and in the near-term, a flu season that is shaping up as a considerable tailwind.

                             

TRADE: LONG

TREND: LONG

TAIL: NEUTRAL

 

HCA (HCA)

SS volume accelerated in 1Q12 and employment remains a tailwind to both admissions & mix. We expect acuity to stabilize and births and outpatient utilization to accelerate out of 1Q12, while supply cost management continues as a margin driver and acquisition opportunities remain a source for upside.

 

TRADE: NEUTRAL

TREND: LONG

TAIL: NEUTRAL

 

UNDER ARMOUR (UA)

The company continues to control its own destiny through investments in all the right areas. We think 30%+ top line and EPS growth for 5+ years. One of its failures, however, has been in penetrating markets outside the US. That will happen. But for now, its failure is a competitive advantage in the face of a strengthening dollar. We like it in sympathy with a LULU sell-off.

 

TRADE: LONG

TREND: LONG

TAIL: LONG

 

The End Game - three for the road

 

Tweet of the Day: “Can you do math? @Wolfrum Spain GDP Sept 2010 +0.4% vs -0.4% March 2012 --- Ireland GDP Sept 2010 +1% vs +1.2% March 2012 #Bloomberg”          -@Convertbond       

 

Quote of the Day: “The We do not write because we want to; we write because we have to.” –W. Somerset Maugham

 

Stat of the Day:  Greece Unemployment Rate 22.5% APR vs 21.9% MAR

 

 

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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