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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 20, 2012


As we look at today’s set up for the S&P 500, the range is 13 points or -0.86% downside to 1406 and 0.06% upside to 1419. 

                                            

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 08/17 NYSE 706
    • Decrease versus the prior day’s trading of 1327
  • VOLUME: on 08/17 NYSE 675.67
    • Increase versus prior day’s trading of 13.41%
  • VIX:  as of 08/17 was at 13.45
    • Decrease versus most recent day’s trading of -5.88%
    • Year-to-date decrease of -42.52%
  • SPX PUT/CALL RATIO: as of 08/17 closed at 1.77
    • Up from the day prior at 1.07 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 35
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.84%
    • Increase from prior day’s trading of 1.81%
  • YIELD CURVE: as of this morning 1.55
    • Up from prior day’s trading of 1.52 

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Chicago Fed Nat Activity Index, July (prior -0.15)
  • 11am: Fed to purchase $4.25b-5b notes 8/31/2018-8/15/2020
  • 11:30am: U.S. Treasury to sell $32b 3-mo., $28b 6-mo. bills
  • 4pm: Weekly crop report 

GOVERNMENT:

    • House, Senate not in session
    • U.S. presidential election fundraising deadline
    • FERC meets on natural gas, electricity market coordination in U.S. Northeast, 9am
    • AICPA holds 2012 National Governmental Accounting & Auditing Update Conference
    • ITC judge hears testimony in LG’s patent case against Osram over light-emitting diodes, 9am
    • ITC announces whether it will review judge’s findings that VirnetX couldn’t file a complaint against Apple because it lacked ownership control of a patent, 5pm
    • Samsung Electronics asks U.S. appeals court to let it continue selling Galaxy Nexus smartphone while waiting outcome of Apple patent-infringement trial next year, 2pm

WHAT TO WATCH: 

  • Aetna said to have agreed to buy Coventry for $5.7b: WSJ
  • Best Buy said founder Richard Schulze declined board offer to conduct due diligence; WSJ, NYT report BBY has picked Carlson CEO Hubert Joly as new CEO
  • Prudential Financial said to emerge as lead bidder for Hartford’s indiv. life insurance unit, which may fetch ~$1b
  • Home sales, durable-goods orders probably climbed in July
  • American Airlines flight attendants’ voted yesterday to approve new contract with cost cuts
  • Apple, Samsung made no progress toward narrowing dispute over smartphone, computer tablet patents, in report to court Aug. 18, increasing chances jury will decide matter starting Aug. 21
  • Berkshire Hathaway unit agreed to acquire U.S. unit of Clal Insurance Enterprise Holdings for $221m
  • Moody’s, S&P lost bid for dismissal of fraud claims in suit by investors
  • Google’s Motorola Mobility unit said Aug. 17 filed new patent-infringement case against Apple at ITC
  • EU leaders plan talks to bolster Greece, sovereign bonds
  • China new-home prices rise in more cities after rate cuts
  • CME said planning Europe exchange to compete w/ Eurex, Liffe
  • Facebook failed to persude judge to approve $20m settlement on lawsuit over “sponsored stories”
  • Netflix CEO plans to take on BSkyB’s dominance in streaming films by outbidding Sky for Hollywood studio movie rights: Sunday Telegraph
  • BOK Financial said it bought Milestone; terms undisclosed
  • GM recalling ~249,260 vehicles over concern fluid may enter driver’s door; Fisker Automotive plans to recall all its $103k Karma sedans to fix flawed cooling fan linked to Calif. fire
  • “The Expendables 2,” distributed by Lions Gate, led U.S., Canadian box offices with sales of $28.8m
  • U.S. sector previews: Energy, Finance, Industrials, Tech, Rates, Real Estate, Media/Entertainment, Health, Consumer, Transports

EARNINGS:

    • Lowe’s Cos (LOW) 6am, $0.70
    • Corinthian Colleges (COCO), 7:45am, $0.11
    • Urban Outfitters (URBN) 4pm, $0.33
    • Nordson (NDSN) 4:30pm, $0.99

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Speculators Hold Wagers at 11-Month High Amid Rally: Commodities
  • Merkel’s Green Shift Forces Germany to Burn More Coal: Energy
  • Oil Trades Near Three-Month High as Euro Leaders Ready for Talks
  • Rubber Set to Drop 25% on Bearish Momentum: Technical Analysis
  • Crop Outlook Seen Eroding as July Heat Compounded Drought Damage
  • U.K. Natural Gas Surges as Demand Increases on Belgian Exports
  • Copper Declines on Speculation China Will Hold Off From Easing
  • Corn Gains as U.S. Rain Too Late to Boost Drought-Damaged Yields
  • Rubber Drops for First Day in Four as Chinese Demand May Slow
  • Gold Seen Rising on Speculation a Weaker Dollar Will Spur Demand
  • Hedge Funds Slash Gas Bets as Bullish Party Ends: Energy Markets
  • Lonmin Says 30% of Workers Return After Ultimatum Issued
  • CME Planning Europe Exchange to Compete With Eurex, Liffe
  • Swine Fever’s Spread Threatens EU, According to Russian Watchdog
  • Speculators Hold Wagers at 11-Month High
  • Rubber Seen Dropping as Chinese Inventories Set to Equal Record
  • Sugar Rebounds on Speculation Prices Fell Too Far; Cocoa Rises

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


CHART DU JOUR: SEQUENTIAL LIFT

Takeaway: We expect sequential improvement in monthly Macau trends

Macau GGR monthly projections

 

  • We think July was the near-term bottom with only 1.5% YoY growth
  • September and October should be bang up months with the opening of the 2,500 Sheraton rooms at Sands Cotai Central and the associated marketing
  • Investor sentiment should improve around the market and LVS as its share should continue to rise.

 

CHART DU JOUR: SEQUENTIAL LIFT - macau projections


THE WEEK AHEAD

The Economic Data calendar for the week of the 20th of August through the 24th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - WeekAhead

 


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

IL VLT UPDATE

Takeaway: IL soon to be a big market for IGT

IL ESTABLISHMENT LICENSING PROGRESSING IN-LINE WITH OUR RECENTLY RAISED EXPECTATIONS

 

 

Yesterday, the Illinois Gaming Board released a list of all licensees as of August 16th.  The list included 180 licensed establishments, implying approval of an incremental 92 establishments in August.  This implies an acceleration over the 70 licenses granted in July.  To date there have been no established licenses revoked and only 8 establishment have been denied licenses. Currently there are 1,770 pending establishment approvals. 

 

Starting in September, the authorities will actively pursue enforcement against locations operating “grey” machines with locations found in violation of the law charged with Felony action.  Therefore, the increased number of locations licensed in August was in line with our expectation of an acceleration of approvals for legal machines. 
 

Each location can have a maximum of 5 machines so 180 approved locations implies a current maximum market size of 900. We expect that about 1,000 VLT's will get shipped to IL in the September quarter with IGT shipping the majority of those machines. Our best guess is that 3,000 VLTs will be shipped to IL in 2H2012, and by the end of 2013, the market should comprise of about 10,000 units.  Given that we are just in the 3rd month of establishments approvals, its too early to say whether these estimates will come to fruition. We expect that the majority of VLTs will be for sale, with manufacturers providing financing to the route operators.  We are hearing that ASP's should be in the mid to high $12k range. 

 

DETAILS ON PENDING APPLICATIONS: 

  • Distributor: 4 (Cadillac Jack IL, Gametech International, Golden Route, PDS Gaming-IL)
  • Manufacturer: 3 (Cadillac Jack, Gametech, Golden Route)
  • Supplier: 7 
  • Technicians: 35 
  • Terminal handlers: 159 
  • Terminal operators: 17
  • Establishments: 1,770 pending 



The Effect Of Jobless Claims On The XLF

Takeaway: Looking at the $XLF and the past two years of jobless claims, there's a shocking lack of correlation.

 

If you go back to 2007 and look at the relationship between jobless claims numbers and the Financial Sector SPDR (XLF), there’s not to discuss. Relatively little correlation, nothing to write home about. See the chart below for a visualization:

 

 

The Effect Of Jobless Claims On The XLF  - XLF Jobs

 

 

Now, if you examine the last two years only, you’ll find a more shocking correlation – zero. That’s right, jobless claims and the XLF have had zero correlation over the last two years. What does this mean? It means that even though jobless claims have improved over the last 104 weeks, moving from roughly 488k to 355k, there has not been a higher move in financial stocks.

 

 

The Effect Of Jobless Claims On The XLF  - XLF 2years

 

 

As Hedgeye Financials Sector Head Josh Steiner points out:

 

For reference, that same move has driven a 302 point rise in the S&P 500 (+27.4%). Financials have been and should be more sensitive to changes in jobs than other sectors as their primary P&L driver is credit, which reflects frequency and severity of loss. Frequency of loss is driven by newly unemployed people, which is reflected in initial jobless claims.”


Big Bonds

BIG BONDS

 

 

CLIENT TALKING POINTS

 

BIG BONDS

Keith appeared on CNBC’s Fast Money Halftime Report yesterday and discussed why he’s shorting the S&P 500. In a nutshell, August feels a lot like March. And In March, we went bearish on stocks and bullish on bonds. Thus, we are a buyer of Treasuries and have maxed out our fixed-income asset allocation to 33%. It’s increasingly looking like we’re due for a reversal in equities, especially with the VIX coming precariously close to 13. Short SPY, Long TLT is the name of the game.

 

 

MITT’S OUTCOME

Our Director of Research Daryl Jones wrote an interesting piece this morning comparing the (slight) edge that President Obama has compared to Mitt Romney in terms of the polls and the electoral college. The battleground states that Romney will essentially need to win include: Colorado, Florida, Iowa, Nevada, New Hampshire, North Carolina, Ohio, Virginia, and Wisconsin. Wisconsin may come easier with the addition of Ryan to the ticket. Jones sees voter engagement as a key factor that gives Republicans an edge. This election cycle, the Republicans are certainly giving it their all in an effort to get Romney into office.

 

A USA Today / Gallup poll earlier this week which showed that 74% of Republicans are thinking “quite a lot” about the election, while only 61% of Democrats are doing the same. You never know, but that could make all the difference.

 

 

CAN YOU FIX SPAIN?

Doubtful. Though the 2-year bond yield slide a few basis points (see our State of the Day below), there’s no economic growth occurring in the country. The IBEX is up +7% over the last three days and is up a whopping +30% in less than a month. That’s short term market rallying, but Keynesian stimulus can only go so far for so long. Spain’s long-term TAIL risk line remains intact at 7835 (resistance).

 

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ASSET ALLOCATION

 

Cash:                  Flat

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat   

 

 

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TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

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THREE FOR THE ROAD

 

TWEET OF THE DAY

“We have to find ways to encourage non-violence, compassion and respect for others’ rights to achieve a better world in the future.” -@DalaiLama

 

 

QUOTE OF THE DAY

“We do not know what we want and yet we are responsible for what we are - that is the fact.” – Jean-Paul Sartre

                   

 

STAT OF THE DAY

Spain’s two-year note yield slid 24 basis points, or 0.24 percentage point, to 3.75 percent


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