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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 22, 2012


As we look at today’s set up for the S&P 500, the range is 10 points or -0.30% downside to 1409 and 0.41% 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 08/21 NYSE -344
    • Decrease versus the prior day’s trading of -343
  • VOLUME: on 08/21 NYSE 640.96
    • Increase versus prior day’s trading of 16.39%
  • VIX:  as of 08/21 was at 15.02
    • Increase versus most recent day’s trading of 7.13%
    • Year-to-date decrease of -35.81%
  • SPX PUT/CALL RATIO: as of 08/21 closed at 1.10
    • Down from the day prior at 2.44

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 33
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.78%
    • Decrease from prior day’s trading of 1.80%
  • YIELD CURVE: as of this morning 1.50
    • Down from prior day’s trading of 1.51

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: MBA Mortgage Applications, Aug. 17 (prior -4.5%)
  • 10am: Existing Home Sales, July, est. 4.51m (prior 4.37m)
  • 10am: Existing Home Sales, July, est. 3.2% M/m (prior -5.4%)
  • 10:30am: DoE Inventories
  • 2pm: FOMC Meeting Minutes

GOVERNMENT:

    • House, Senate not in session
    • SEC holds meeting on disclosure rules regarding conflict minerals, payments to governments made by resource extraction issuers, 10am
    • Federal Reserve Bank of Chicago President Charles Evans holds press briefing at U.S. embassy in Beijing, 11:30pm
    • U.S. Census Bureau holds webinar on foreign trade rules, with ombudsman Omari Wooden, 1pm
    • Commerce Dept.’s National Telecommunications and Information Administration meets on consumer data privacy codes of conduct concerning mobile application transparency, 9:30am
    • NRC, FEMA hold conference call to discuss emergency preparedness plans at U.S. nuclear power plants, 2pm

WHAT TO WATCH: 

  • Verizon Wireless said to be planning to sell Nokia with Microsoft’s Windows 8 software this year
  • UPS extends offer period for TNT to Nov. 9 from Aug. 31
  • Dell says PC business deteriorated more than expected
  • RBS said to be probed by U.S. over Iranian sanctions
  • Carl Icahn withdraws offer to take CVR Energy private
  • Jury in Apple, Samsung patent trial begin deliberations
  • ATP wins prelim. approval for bankruptcy financing
  • Sales of existing U.S. homes probably climbed 3.2% in July
  • Exxon, BHP, other energy, mining firms may need to report what they pay each country they tap resources from under rule SEC has votes to adopt
  • BHP delays $68b of project approvals, profit plunges
  • Sirius directors sued by investors for failing to defend co. from potential takeover by Liberty Media
  • IAC/InterActiveCorp said to have offered more than $300m to buy About.com, topping bid from Answers Corp.
  • Allianz trims asset-mgmt unit targets on Europe debt crisis
  • Microsoft, Samsung may face greater scrutiny of labor practices as Apple’s biggest supplier improves conditions at its Chinese plants
  • Japan swings to trade deficit as Europe drags down exports
  • Wet Seal hired financial advisers, adopted poison pill
  • SEC should approve Nasdaq’s proposal to pay firms $62m for losses suffered in Facebook’s IPO, Citadel said
  • Electronic Arts’s PopCap Games fired ~10% of staff

EARNINGS:

    • Express (EXPR) 7am, $0.17
    • Chico’s FAS (CHS) 7:15am, $0.30
    • American Eagle Outfitters (AEO) 8am, $0.21
    • Eaton Vance (EV) 8:40am, $0.47
    • International Rectifier (IRF) 4pm, $(0.15)
    • Kayak Software (KYAK) 4pm, $0.24
    • Hain Celestial (HAIN) 4pm, $0.45
    • Synopsys (SNPS) 4:05pm, $0.50
    • Prospect Capital (PSEC) 4:05pm, $0.40
    • Guess? (GES) 4:05pm, $0.51
    • Hewlett-Packard (HPQ) 4:05pm, $0.98
    • Semtech (SMTC) 4:30pm, $0.41
    • Heico (HEI) 4:40pm, $0.41

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

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: IGT BUYBACK

A pictorial view

 

  • IGT bought back 110 million shares over the past 8 years, or almost 30% of the outstanding shares
  • The buyback has been very accretive to EPS but hasn’t done much for the stock.  The stock is at the low end of its 8 year range and 76% off its high in early 2008
  • Nevertheless, we are currently projecting almost 25% EPS growth in FY2013 which, if achieved, would likely result in significant share appreciation – the one advantage of low expectations

 

CHART DU JOUR: IGT BUYBACK - IGT


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


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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.

 



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


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