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The Reversal: SP500 Levels, Refreshed

Takeaway: With global growth slowing, this isn’t the place to chase low volume equity rallies.

POSITIONS: Long Healthcare (XLV), US Dollar (UUP), Flattner (FLAT), Longer Term Treasury Bond (TLT), Short Euro (FXE), France (EWQ) and SPY

 

Midmorning today, it looked like the bulls were once again fully in charge of the SP500.  The index traded through 1,425 and appeared to be on pace to close at a new yearly high . . . and then we reversed.  From the highs of the day, the SP500 is now off 0.85%.

 

In our models, this type of a move is significant.  It is called an “outside day” and occurs when the market tests the prior closing high, fails, and then closes below the prior closing high.  In this case, that prior closing high is 1,419.

 

In the chart below, we’ve highlighted our current risk management levels.  The sell TRADE line is at 1,419, the buy TRADE lines is 1,410, and the buy TREND line is down at 1,384.  In essence, if 1,410 doesn’t hold . . . look out below.

 

We’ve been clear on our view that with global growth slowing, this isn’t the place to chase low volume equity rallies.  In particular, chasing equities at a time when the VIX is sub 15 has been exactly the wrong call over the last three years.  Currently, the VIX is up 7.4% on the day to 15.07.

 

For those looking to add some short exposure to your portfolios, we are currently short these individual stock names in the Virtual Portfolio:

 

  • Freeport-McMoran Copper and Gold (FCX);
  • Caterpillar (CAT);
  • United Airlines (UAL);
  • Dominoes Pizza (DPZ);
  • American Express (AXP);
  • MGM Resorts (MGM); and
  • Morgan Stanley (MS).

Ping if you want to talk to one of our Sector Heads on these names. 

 

Daryl G. Jones

Director of Research

 

The Reversal: SP500 Levels, Refreshed - SPX


Saving Europe

SAVING EUROPE

 

 

CLIENT TALKING POINTS

 

SAVING EUROPE

Tons of rumors coming out of Europe this morning. But that’s really all you need is one good, juicy rumor to save the day. In this case, it’s that Germany will go out buying unlimited peripheral debt in order to stabilize the Eurozone. Der Spiegel also reported that Germany was looking for way to cap yields on Spanish and Italian debt. This is all pretty ridiculous. Let’s sit back and see what happens. Without a doubt, US equities will respond positively to the news.

 

 

BUBBLING CRUDE

WTI crude futures are up on the NYMEX – more than 1.6% as of writing sending oil to $97.60 a barrel. The race to drive oil prices back up is upon us apparently. We never understood the hysteria surrounding why traders and investors want higher food and fuel prices. But one thing is certain: if you get the dollar right, you get a lot of other things right. And with the dollar down this morning, this move in oil makes sense and will continue higher should the dollar drop further.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  Flat   

 

U.S. Equities:   Flat   

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: UP   

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE INC (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • 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

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“We're about due for a $GS super-spike oil note up here.. $255 Brent here we come” -@HedgeyeENERGY

 

 

QUOTE OF THE DAY

“It's all right letting yourself go as long as you can let yourself back.” – Mick Jagger

                   

 

STAT OF THE DAY

$17. The record price of soy beans per bushel as commodity prices shoot higher.

 



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Fore!

“Golf is a game in which one endeavors to control a ball with implements ill adapted for the purpose.”

                -Woodrow Wilson

 

Yesterday I took a few of my colleagues out to play in a charity golf tournament at The Course at Yale.   For those of you who haven’t played it, the Yale course is not for the faint of heart.  It has some incredibly challenging holes replete with hazards in the most untoward places.  The more we became engrossed in golf yesterday, and marginally removed from stock market operating, the more I actually began to see the parallels between the two.

 

Now as anyone will tell you, I am far from a great golfer.  But just as a broken clock tells time twice a day, every round I pull a few shots out of thin air that make me look like a veritable Arnold Palmer, albeit a younger and more Canadian version.  In between my great shots, of course, were many less than spectacular shots.  The bad shots, though, made me think more strategically about the game and I realized that if I could stay out of trouble – avoid the sand traps, out of bounds, and water hazards – I could still score reasonably well.

 

In short, the key parallel between golf and investment management: avoid the looming hazards and you will remain competitive.  The caveat to this point is that in golf there are hazards that are not so obvious to the casual observer.  The wild card hazard yesterday on the course was my colleague, and Hedgeye’s Asia Analyst, Darius Dale.

 

Darius is a novice golfer but was a lineman in college and still has the strength of a few normal men.   Needless to say, when he winds up on the tee, it’s best to hide behind your cart if you are within a few fairways.  Being the risk manager he is, Darius is not afraid to yell - fore!  Collectively, we appreciated this risk management aspect of his golf game.

 

Speaking of avoiding hazards, the rumors coming out of Europe this morning imply that the Europeans hope to avoid any future sovereign debt sand traps.  This morning the Telegraph is reporting that Jorg Asmussen, Germany’s director at the ECB, is supporting unlimited purchases of peripheral debt.  This plan is in line with Draghi’s plan, though is in conflict with the German Bundesbank.  This article also re-stated the report from Der Spiegel on the weekend that suggested the ECB was studying plans to cap Spanish and Italian yields.  (It seems both Greece and Portugal have been all but forgotten!)

 

Purportedly, the key criteria to trigger this plan is a formal request from Spain for a bailout from the EFSF/ESM and agreeing to the fiscal terms therein.  On a positive note, the market appears to be of the view that Spain will get onside as the Spanish bond auction yesterday was seemingly successful.  Specifically, Spain sold its maximum target of €4.51 billion of 12-18 month bills this morning. The 12-month average yield was 3.070% versus 3.918% on July 17th, 18-month average yield 3.335% versus 4.242% on July 17th.  Further, the bid-to-cover was a veritably euphoric 2.4x.

 

In the Chart of the Day today we show Spanish 10-year yields going back one year.  The Spanish 10-year has backed off of its highs, so it seems that the rumors the ECB may change the lay of the course and bring out some bigger clubs (The Bazooka Driver?), which have had at least a marginally positive impact on Europe’s debt woes.  The history of the last couple of years has indicated that any proposed solution in Europe has typically been short term in nature and never quite as good as the rumors in Der Spiegel.  Of course, perhaps this time is truly different . . .

 

Switching clubs briefly, our Energy Analyst Kevin Kaiser recently did an update on the key factors he sees as supporting the price of oil and wrote the following:

 

“The fundamentals (read: supply and demand) warrant lower oil prices, but expectations for easier monetary policy and fears of supply disruptions (geopolitical risk) have lifted prices recently.  Note that the oil market has shrugged off actual data in favor of events that may or may not occur – the Fed has not gone to QE3, Europe has yet to implement a comprehensive solution to its debt crisis (if there is one), and there has been little aside from increased rhetoric out of Iran and Israel – yet oil continues to trade higher in expectation of some or all of those events.” 

 

On the last point, it seems the rhetoric is at the very least heightening, especially according to reports from The Times of Israel this morning.   Well it is quite possible this is saber rattling by the Israeli government, the report was very specific and as such we wanted to highlight it below (emphasis ours):

 

“Israel’s Prime Minister Benjamin Netanyahu “is determined to attack Iran before the US elections,” Israel’s Channel 10 News claimed on Monday night, and Israel is now “closer than ever” to a strike designed to thwart Iran’s nuclear drive.

 

The TV station’s military reporter Alon Ben-David, who earlier this year was given extensive access to the Israel Air Force as it trained for a possible attack, reported that, since upgraded sanctions against Iran have failed to force a suspension of the Iranian nuclear program in the past two months, “from the prime minister’s point of view, the time for action is getting ever closer.”

 

Asked by the news anchor in the Hebrew-language TV report how close Israel now was to “a decision and perhaps an attack,” Ben-David said: “It appears that we are closer than ever.”

 

Obviously, the Israel government makes statements to the media for strategic reasons and much of this could well be rhetorical.  That said, one thing I’m pretty sure of is that at a VIX of 14.02, the tail risk of an Israeli strike on Iran is not even remotely priced into the U.S. equity markets.  To some, my emphasis on the article above may be construed as fear-mongering, but in reality it is just like golf – you need to be aware of the hazards on the course.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $113.21-115.49, $82.21-82.81, $1.22-1.24, 1.74-1.88%, and 1, respectively.

 

 

 

Keep your eye on the ball,

 

Daryl G. Jones

Director of Research 

 

Fore! - Chart of the Day

 

Fore! - Virtual Portfolio


Comanche Market

This note was originally published at 8am on August 07, 2012 for Hedgeye subscribers.

“… and meant, anyone who is against me all the time.”

-S.C Gwynne

 

That’s what the white guys in New Mexico “translated in various ways (Cumanche, Commanche), but eventually as “Comanche.” It would take the Spaniards years to figure out exactly who these new invaders were.” (S.C. Gwynne)

 

As I come to the end of what’s been a wildly educating experience reading Gwynne’s Empire of The Summer Moon, it’s twisting so many thoughts in my head that I don’t particularly know what I’m allowed to write about it. So I’ll just stop there.

 

All I can tell you is that as a professional short seller of everything US Dollar debauchery and centrally planned markets, I’m getting really comfortable having all of the same people against me all of the time. Their moves are becoming blatantly predictable.

 

Back to the Global Macro Grind

 

Against me? How about +25% at the pump against you? That’s what the price of Brent Oil has done since it bottomed at the end of June. With the US Dollar down now for 3 consecutive weeks, the purchasing power of your currency is once again under enemy attack.

 

Enemy? Who is the enemy? Is it Johnny Hilsenrath with his now almost daily Dollar debauchery articles in the Wall Street Journal? Or is it his editor? Or is it his editor’s brother’s boss who just plowed back a $35,000 plate at Obama’s CT dinner last night?

 

Whoever you are, market prices can see you now.

 

Got causality (begging for more Qe policies) that are driving immediate-term market price correlations? Here’s an update on that (USD versus Big Macro stock and commodity market moves in the last 3 weeks):

 

  1. Brent Oil vs USD = -0.74
  2. SP500 vs USD = -0.90
  3. EuroStoxx600 vs USD = -0.92

 

That’s right folks. Today’s centrally planned market is American-European. How else can Italy deliver a -2.5% year-over-year GDP disaster for Q2 2012 this morning (and 36% youth unemployment), and have their stock market “up” on that? Dollar down this morning.

 

Devaluing your currency is cool though, right? Look at how well life is going in Venezuela after Chavez devalued The People’s currency by 50%. The stock market  in Venezuela leads the world YTD at +110% YTD (not a typo). How screwed up is that?

 

President Obama and his centrally planned stock market advisors have figured this out. If the US stock market goes up, his chances of winning the Presidential Election go way up. In this morning’s Chart of The Day, we show you that in our Hedgeye Election Indicator:

 

  1. Obama’s chances went up +110 basis points wk-over-wk
  2. At 58.7% probability, this is the highest we’ve scored Obama’s chances since mid-May
  3. Unless the US Dollar stops going down (and US stock stop going up), Obama could run the tables

 

Now isn’t that a tad perverse? Burn The People’s hard earned currency at the stake, keep rates of return on hard earned Fixed Incomes at 0%, and pretend that jamming them with $4.50/gallon at the pump isn’t going to leave a mark on the 99%’s dinner table tonight.

 

#nice

 

Unfortunately, the globally interconnected growth signals around the world get that Down Dollar, Up Oil is only going to perpetuate the world’s biggest problem (#GrowthSlowing) further.

 

Here’s your latest real-time signaling on the Global Macro front:

 

  1. Chinese Stocks (Shanghai Composite) whimpered in day 2 of the “stock market rally”, closing up +0.13%, failing at resistance
  2. South Korea’s leading indicator (KOSPI) barely banged out a green close last night, closing +0.05%, failing at resistance
  3. Dr. Copper, one of the world’s best growth indicators, was down -1.7% last week, and remains broken this morning at $3.40

 

Those are just growth signals though (Asia, demand, etc.). But who needs those when we can chase Energy and Basic Material stocks in order to keep up with the SP500’s “being up” +1% already for August?

 

We’ve seen this movie before. Month by month, we’re killing whatever trust remains in our said “free” markets. Like the devastation of what was a wild, yet free, Comancheria, a centrally planned life ends in tears for many, and smiles for some.

 

Eric Rosengren, inflation is not growth.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and the SP500 are now $1591-1624, $106.40-110.84, $82.05-82.84, $1.23-1.24, 782-803, and 1374-1408, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Comanche Market - Chart of the Day

 

Comanche Market - Virtual Portfolio


Idea Alert: The Bear Thesis On Cat

Takeaway: Multi-decade highs in mining/resources investment leave CAT vulnerable to a slowdown in its most profitable division.

Levels:

CAT’s TAIL remains broken = 94.27

No TRADE support to 88.04

 

 

The Resources Cycle May Be Turning Against CAT

  • Recent Results Signal Weakness: CAT’s 2Q earnings report showed that implied orders had declined year-over-year as backlogs were drained.  The company “beat” in the quarter, but only by recognizing revenue on previously accumulated orders.
  • Resources Equipment Important: Resources investment may be set to weaken, given what appears to be slowing developing market growth.  Should that occur, CAT’s most profitable could see meaningful declines.
  • Industry Structure:  While CAT is a strong competitor in an industry with a healthy structure, recent competitive entry by emerging market rivals like SANY and Zoomlion is not positive.  Should demand slowdown in key Asian markets, the additional competition would not be helpful.  Typically, we look for weaker industry structures on the short side.
  • Valuation:  If the resources investment cycle does turn against CAT, the cyclically-adjusted valuation would be shown to be meaningfully lower than current levels.  CAT does not appear to offer a wide enough discount at current levels to provide compensation for this risk, in our view. 
  • Risky US Construction Exposure: CAT is frequently owned for exposure to a rebound in developed market construction.  While CAT would benefit from higher construction equipment sales, the risks on the resources investment front far exceed the benefits of a cyclical rebound in developed market construction activity.

 

If History Rhymes, CAT Could Decline Significantly If Resources Investment Stalls

Idea Alert:  The Bear Thesis On Cat - 1

 

 

Second Quarter Results Showed Implied Order Declines

Idea Alert:  The Bear Thesis On Cat - 2

 

 

CAT’s Stock Tends To Follow The Backlog

Idea Alert:  The Bear Thesis On Cat - 3

 




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