SP500 Levels Into The Close...

Despite all of the intraday day noise… there is one macro factor that continues to dominate the US stock market – it’s inverse relationship with the US Dollar. At this point, all I think we need is the US$ Index to stop going up, and stocks can work, for an immediate term “Trade” to SPX 838 …

Interestingly, my models have chugged out a support level for the SP500 that is higher than what I had earlier this morning. There is a margin of safety building at the 808 line (see chart), and that’s only -1% lower from where the market is trading here at 3PM EST. This creates a tolerable risk/reward for me to start covering/buying.

Volatility as measured by the VIX, is up another +5% right now at 47.04, but will be overbought, from an immediate term perspective, at 49.88. So give me a US$ that stops going up, SPX 808, and VIX 50, and I cover/buy.

Keith R. McCullough
CEO & Chief Investment Officer

Chinese Yuan: The Chart That Hasn't Come Down...

Quite often in global macro, a picture can be more powerful than prose. This is one of those pictures.

Why am I calling it out right here and now? Well, the Chinese Yuan traded down overnight to 6.85, putting it down, yes DOWN, for the year to date. While a -0.4% YTD decline is nothing in the context of the currency volatility that we have seen across global macro, the point here is one that matters on the margin. On an annualized basis, this currency hasn’t depreciated since the peg was removed in 2005 (see chart).

This is one surefire way for the Chinese to stimulate export demand. It’s also a leading indicator for more Chinese interest rate cuts to come. Altogether is a new and emerging factor in our multi-factor macro model. We will be expanding upon the consequences of a weaker Yuan later in the week.

Keith R. McCullough
CEO & Chief Investment Officer

Chinese Propaganda Beating America's?

There was an article this weekend from Xinhua titled "Big Chinese firms squeeze payroll of top executives to cope with crisis." At least these guys are proactively managing the process of damage control! (see below)

Special Report: Global Financial Crisis
BEIJING, Feb. 1 (Xinhua) -- More Chinese firms are slashing executive pay and practicing tighter budgets to get through the economic crisis, the State-owned Assets Supervision and Administration Commission of Shanghai said Saturday.

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Eye on Washington: Stimulus Duration Likely to Extend Further

In a note last week entitled “Obamerica: The Honeymoon is Over” we highlighted President Obama’s inability to get a single vote from Republicans in the House for the stimulus bills despite a week of vigorous lobbying. Nonetheless, given the Democratic majority, the bill passed and is now in the Senate, where its future, at least in the current form, seems questionable.

Senate Republican Leader Mitch McConnell made a statement Sunday implying the bill would go down in defeat if it wasn’t stripped of unnecessary spending and focused more on housing issues and taxes. McConnell also went on to specifically challenge Obama’s ability to manage his Democratic colleagues in Congress when he said in an interview:
"I think it may be time ... for the president to kind of get a hold of these Democrats in the Senate and the House, who have rather significant majorities, and shake them a little bit and say, “Look, let's do this the right way”. I can't believe that the president isn't embarrassed about the products that have been produced so far."

While President Obama and Vice President Biden seem to be posturing to suggest they will get at least some Republican support for the bill in the Senate, the Republican Party appears very well organized in opposition to this bill. Senator Jon Kyl from Arizona, who is the No. 2 Republican Senate, backed up McConnell with even stronger words when he stated:
“When I stay start from scratch, what I mean is that the basic approach of this bill, we believe, is wrong.”

Given that the Republicans currently have 41 seats in the Senate, they do have the ability to stop the bill, so it is likely that the bill will change in form, and perhaps dramatically. Ultimately, the investment implications are that approval of the bill will likely be pushed out and with it the duration of the investment catalyst(s) relating to the bill.

Interestingly, the Republicans are continuing to focus on creating the image that President Obama is unable to manage his former Democratic colleagues in the House. They are placing the blame on Democrats in the House for the impractical and unwieldy nature of the bill, but implying that Obama should have managed them better in the process.

That may be partially true, but the reality is that President Obama, due to no action of his own, has in both Nancy Pelosi and Harry Reid two teammates that seem somewhat unwilling to create legislation that would garner bipartisan support. In Reid specifically, President Obama also has a Senate Leader that seems unwilling to cede much influence to the President, which was highlighted by his January 9th comment,”I don’t work for Obama”. Indeed.

Daryl G. Jones
Managing Director

The US Stock Market Needs Bad Data

At 35.6, this morning’s ISM report for January was better than expected, but that’s actually bad… because it’s US Dollar bullish. The US$ index is +0.37% and the SP500 is -0.34%. This inverse correlation remains very tight.

What’s good for the dollar is bad for the US stock market. What we really need are some horrendous economic reports, so that Senators and Congressmen can freak out reading yesterday’s news, and force a socialist de-valuation of our currency.

Until the US$ stops going up, I don’t see stocks going anywhere but down.

Keith R. McCullough
CEO & Chief Investment Officer


“What is defeat? Nothing but education; nothing but the first steps to something better.”
-Wendell Phillips
Pittsburgh Steelers linebacker, James Harrison, had to learn defeat before he found his Super Bowl victory last night. The NFL’s Defensive Player of the Year was cut by the Steelers on three separate occasions and, at one point, almost went back to being a bus driver.
How sweet victory was for this 242 pound linebacker after running back the longest interception in Superbowl history. As Harrison was lying exhausted on his back in the end zone John Madden’s comment summed it up – “no matter what this replay reveals, you gotta give this guy a touchdown.”
To truly appreciate victory, one has to be educated by defeat. The US stock market was reminded of as much this past month. In the end, it was actually the worst January ever. Yes, ever, is a long time. The Steelers record setting 6th Superbowl victory comes on the heels of a record setting SP500 performance for January of down -8.6%. This miserable defeat was actually a good margin past the prior record of -7.7% in January of 1970.
Interestingly, on a peak to trough of the month basis, the SP500 dropped from 934 on January 6th to 805 on the 20th – that was a -13.8% smashing… then it rallied +8.5% straight up and into a recklessly CNBC instigated “bad bank bailout” lower high of 874 (which we sold into and took our cash position to 82%), before being clobbered by the reality of a broken quantitative “Trend” – make no mistake, this tape remains fundamentally and quantitatively broken. That’s why I moved our Asset Allocation model to 86% cash on Friday.
Our Hedgeye Asset Allocation model finished down -1.74% for the month (no stocks, just ETFs). While I am sure that wasn’t the worst performance in the league, I am not pleased with it. No excuses – we move forward into February. In order to proactively look forward, I always take the time to look back. Looking back at January a few very important “Trends” (intermediate term) re-established themselves.
For the US stock market, the most negative Trend that re-emerged in January was the strengthening of the US Dollar. The greenback “re-flated” to the tune of almost +6%, and in terms of historical monthly moves go, that was a big one. As we shift into an Illiquidity Crisis from the Liquidity Crisis of October/November, US cash is asserting itself as king. Those who own both the liquidity and duration associated with their investments are winning. Those who are levered up long and illiquid are losing.
For global equities, there are positives and negatives emerging out of The New Reality that all equity markets no longer auto-correlate. This is also a function of the Illiquidity Crisis, and you can see this in terms of how global equity markets traded again overnight. China, which re-opened post the Chinese New Year break, closed up another +1% last night, taking the Shanghai Stock Exchange to 2,011, and +10.5% for 2009 to date. Meanwhile, stocks in India got smoked, closing down another -3.8% on the session, taking their year to date losses to -6%. “Chindia” does not exist. China owns liquidity – India does not.
In the game of geopolitics, “Putin Power” is also losing its liquidity. The Russian Trading System is getting pulverized again right now, trading down another -5% this morning in the face of a domestic currency crisis. Russia is the only major economy whose stock market is trading below the October lows, and it’s trading a good clip below it at that (-7.5%). Without petrodollars, Putin’s liquidity goes away.
European stock markets continue to swoon as their Illiquidity Crisis continues to manifest. Nine out of the top ten credit default swap moves in 2009 (at the country level) are European countries for a reason. Spain is #3 on that list, behind Ireland and Belgium, and Spanish stocks are getting whacked for another -3% down move so far to kick off the week. To speculators formerly known as Spanish bulls, wasn’t levering up your economy fun? Leverage works both ways folks…
Not all markets in global equities are going down. Alongside this impressive Chinese move, the Brazilian stock market (which we are long in the Asset Allocation portfolio via EWZ), is up +4.5% for 2009 to date. On Friday with the SP500 down another -2.3%, Brazil outperformed again, flashing a positive divergence and losing only 83 basis points on the day. Brazil has an organic domestic growth engine that seems to be pushing forward, without using excess leverage. Imagine that…
Back to the USA, importantly, we are seeing a very welcomed steepening of the yield curve. This morning’s spread between 10 and 2 year US Treasury yields has widened once again to +191 basis points. This is a very positive development for those who are liquid (borrow short, lend long), and a dangerous one for anyone locked in that Illiquidity trade that Barron’s gave us the knucks with on this weekend’s cover (private equity “Ka-boom”).
As cost of capital on the long end of the curve continues to rise, and access to capital continues to tighten (for those who were addicted to borrowing it), look for more winners and losers to emerge. The defeat that you’re seeing out there in this interconnected global marketplace is real, and it will be a long long time before some of these leverage only compensation structures are allowed to return to prime time.
While hope is not an investment process, at this stage of the game I can only hope that Americans have been educated by all of this – after another crushing month in our stock market, “education is nothing but the first steps to something better.”
Best of luck out there this week.


Education - etfs020209

Hedgeye Statistics

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

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