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TODAY’S S&P 500 SET-UP – September 25, 2012

As we look at today’s set up for the S&P 500, the range is 16 points or -1.02% downside to 1442 and 0.08% upside to 1458. 













  • ADVANCE/DECLINE LINE: on 09/24 NYSE -586
    • Decrease versus the prior day’s trading of 526
  • VOLUME: on 09/24 NYSE 625.57
    • Decrease versus prior day’s trading of -65.42%
  • VIX:  as of 09/24 was at 14.15
    • Increase versus most recent day’s trading of 1.22%
    • Year-to-date decrease of -39.53%
  • SPX PUT/CALL RATIO: as of 09/24 closed at 2.59
    • Up from the day prior at 1.21 


TREASURIES – as wrong as we were that Bernanke couldn’t go to infinity is as wrong as his market call looks all of a sudden, especially in the eyes of who has had #GrowthSlowing nailed for all of 2012 (the bond market); 10yr UST yield literally straight down since peaking post Bernanke Sept13 day from 1.89% to 1.69% last (Yield Spread at 2wk lows).

  • TED SPREAD: as of this morning 27.09
  • 3-MONTH T-BILL YIELD: as of this morning 0.11%
  • 10-Year: as of this morning 1.69%
    • Decrease from prior day’s trading of 1.71%
  • YIELD CURVE: as of this morning 1.43
    • Down from prior day’s trading at 1.45 

MACRO DATA POINTS (Bloomberg Estimates)

  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 9am: S&P/Case-Shiller 20 City (M/m) SA, July, est. 0.8%
  • 10am: Conference Board Consumer Conf. Index, Sept., est. 63.2
  • 10am: Richmond Fed Manuf. Index, Sept., est. -6 (prior -9)
  • 10am: House Price Index (M/m), July, est. 0.6% (prior 0.7%)
  • 11am: Fed to purchase $4.5b-$5.5b notes due 11/15/2020-8/15/2022
  • 11:30am: U.S. to sell $40b 4-week bills
  • 1pm: U.S. to sell $35b 2-year notes
  • 4:30pm: API inventories


    • Obama set to speak at United Nations
    • IMF releases portions of Global Financial Stability Report, including “The Reform Agenda: An Interim Report on Progress Towards a Safer Financial System,” 10:30am
    • DARPA program manager Richard Ridgway discusses military’s use of mobile hotspot technology at Military Antennas Summit, 8am
    • FCC Chairman Julius Genachowski discusses broadband challenges at Vox Media event, 10:30am


  • Apple’s use of thin display seen driving iPhone 5 supply shortfall
  • Spain sells EU4b of bills meeting maximum traget
  • Schaeffler sells $2b stake in Continental to cut debt
  • Billionaire Ellison increases Oracle credit line to $4.5b
  • Digital Domain sale to Chinese-Indian venture approved by court
  • Diego in talks to buy United Spirits stake: WSJ
  • Nasdaq, Amazon to partner on cloud storage of financial data
  • Foxconn resumes production at China plant after worker brawl
  • Warner Music says Cohen resigns as CEO of recorded music
  • Providence Equity Partners sells stake of under 10%: WSJ
  • BAE CFO Lynas said to hold same role in proposed EADS merger
  • AT&T to market business mobile security to consumers in 2013
  • Chevron under EPA probe for avoiding refinery monitors in 2009
  • California offers lowest interest rate in $1.75b bond sale


    • FactSet Research Systems (FDS) 7am, $1.17
    • Vail Resorts (MTN) 7:30am, $(1.56)
    • Carnival (CCL) 9:15am, $1.43
    • Synnex (SNX) 4pm, $0.93
    • Jabil Circuit (JBL) 4:02pm, $0.58
    • Copart (CPRT) Post-Mkt, $0.33



OIL – getting a +0.5% bounce this morn, but remains a bearish TAIL risk situation in our signaling model as long ast $111.44 Brent remains resistance; interesting that the US equity futures aren’t up w/ oil up; EUR/USD down again trumping that, as it should. 

  • Oil Rises in New York on Speculation Last Week’s Drop Overdone
  • Pork Supply Shrinks to Lowest Since 1975 on Drought: Commodities
  • Copper Stockpiles in Shanghai Bonded Warehouses Seen at Record
  • Silver in ETPs Set for Record as Central Banks Ignite Demand
  • Soybeans Set to Rebound From Six-Week Low on Importer Purchases
  • Kazakhstan Expands Gold Reserves as South Korea Buys 16 Tons
  • Palm Oil Snaps Five Days of Losses as Declines Deemed Overdone
  • Oil Supply Rises Third Week Post Isaac in Survey: Energy Markets
  • Bearish Bets on Potash Decline at Fastest Pace Ever: Options
  • Iron Ore’s Rebound Poised to Peter Out on Weak Demand, ANZ Says
  • Western Europeans Munch the Most Chocolate Globally, U.K. Leads
  • Einhorn’s Losing Gold-Miner Strategy Endorsed: Chart of the Day
  • Japan’s Nuclear Exit Extending Record Profit for Golar: Freight
  • Pork Supply Shrinks to Lowest Since 1975
  • Copper Advances in London After Report of Stabilization in China









GERMANY – the Germans, meanwhile, told the French to go fly a kite this weekend on timing and are “now losing patience with Spain”; Merkel comments have dominated my tweet-stream sources since 430AM EST as European stocks move back to their lows; ITALY is down -4.7% (MIB Index) since Bernanke’s Infinity & Beyond say (Sep13).














The Hedgeye Macro Team

CAT Letting Us Down Easy? Opaque Guidance Cuts At CAT’s Analyst Meeting

Takeaway: $CAT cut 2012 and 2015 guidance without a lot of specifics. Management may be trying to lower expectations into 3Q results and guidance.


 Letting Us Down Easy:  Opaque Guidance Cuts At CAT’s Analyst Meeting

  • 2012 Guidance Cut?:  Management hinted that 2012 sales would "come off" by about $2 billion.  That is not positive for 3Q and 4Q sales and EPS.  This feels like management is trying to lower expectations gradually so 3Q earnings and guidance are not too surprising.  We will be watching to see if consensus estimates come down for 2H 2012 and 2013.
  • 2015 Guidance Cut: We are not sure that a guidance outlook into 2015 is particularly relevant, but it does appear that CAT is trying to lower expectations.  Management insisted that the cut from $15-$20 in 2015 EPS to $12-$18 in 2015 EPS was not a guidance cut.  We do not yet follow that logic, but note that the range is wider.
  • Expecting a Downturn? CAT seems to be expecting an end market downturn and seemed to feel defensive about being prepared for it. Aside from excess inventories and recently added capacity, I guess CAT is “prepared.”
  • “The Company Is In Cyclical Businesses”:  CAT’s cyclicality is a key part of our thesis, which is that you shouldn’t buy cyclical companies at peak margins and sales.  Mining capital spending should be a cyclical, sub-GDP growth industry.
  • Chinese Construction Off 40%: That is not a number I have heard before, but it is pretty spectacular and is consistent with what we have seen in Chinese construction materials prices.
  • CAT Overview: Please see our more detailed review of CAT in our Black Book and Conference call at CAT’s Deep Cycle and Flash CAT Call Replay.

President Obama’s Reelection Chances

After reaching an all time high of 63% last week, President Obama’s chances of being reelected held flat week-over-week.  Since tops are processes, not points, we believe there’s room between now and November for the President to gain (or lose) a few percentage points. The ball is very much in Mitt Romney’s court right now.


Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.


President Obama’s reelection chances reached a peak of 63% on September 17, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.


President Obama’s Reelection Chances  - HEI

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Are Poll Skews the Ultimate November Surprise?

Takeaway: Most polls currently favor Obama, but his true tailwind may well be that Democrats are oversampled in many prominent polls.

Last week we held a conference that outlined our key scenarios for the upcoming Presidential and Congressional elections.  We based these scenarios on a multifactor analysis of polls, electronic markets, and economic models.  Our key conclusions were that the highest probability outcomes in order were:

  1. Democratic President, Republican House, and Democratic Senate
  2. Democratic President, Democratic House, Democratic Senate
  3. Republican President, Republican House, Republican Senate

Since our call last week, President Obama’s chances of re-election have only increased on Intrade and are now north of 70%.  This is Obama’s highest level on Intrade this electoral cycle.  Intuitively, this makes sense as Intrade typical trades off of the national polls and the positive spread for Obama has been widening.


In our national poll aggregate, the race was effectively tied on September 6th 2012 at 46.7 to 46.7.  This coincided with the end of the Republican convention.  Since then Obama has widened out his margin and currently has a lead of +3.7.  This is beyond the margin of error in most polls.  Currently, the benefit of a convention bounce is now likely out of Obama’s numbers, which suggests, in theory, that he has now opened a sustainable edge over Romney.


Are Poll Skews the Ultimate November Surprise? - 44. 1


Historically, the polling at this point of the election cycle has been very accurate for assessing a final outcome.  Since 1936, of the 19 candidates who led in the polls at the point, 18 won the popular vote and 17 won the electoral college (Al Gore was the lone exception here).   As well, as Nate Silver touched upon in his insightful blog today, there is typically no tendency for races to shift to the challenger at this point in a Presidential election.


At face value, the state of the race does not look great for the Republican faithful as an Obama victory appears increasingly likely.  This, of course, assumes one thing, namely that polls are an accurate reflection of the actual electorate.  Increasingly, there is a view that many polls are skewed based on abnormally high Democratic turnout in 2008.


Based on the exit polls in 2008, there were approximately 7% more Democrats in the electorate.  This is really no surprise given the disenchantment with the Bush years and the excitement around then Senator Barack Obama’s candidacy.  Given that most voters vote along party lines, this edge in Democrats ultimately equated very closely to Obama’s edge in the popular vote at +7.6 in 2008. 


As we mentioned last week, there is some evidence that turnout this election could favor the Republicans and that more of the electorate identifies themselves as Republicans versus 2008.  Rasmussen actually runs a monthly poll on voter identification and in the September 1st release found that 37.6% of Americans consider themselves Republicans.  This is the highest reading in this poll since it began in 2002. In November of 2008, this poll had a +7.6% edge for Democrats over Republicans.


Are Poll Skews the Ultimate November Surprise? - 44. DJ 


An example of recent poll that utilizes skew towards Democrats is the Reason-Rupe public opinion survey released on Friday.  The poll found that 48% would vote for Obama and 43% would vote for Romney.  Interestingly, the poll also found that 28% of those polled viewed themselves as Republicans and 36% polled viewed themselves as Democrats for a staggering 8% advantage for the Democrats.  Assuming the Rasmussen party ID poll is accurate, the Reason polls and other polls may potentially be overstating voter turnout by party.   By non-skewing the Reason poll, Romney basically takes an almost 3 point lead.


In the most recent national poll from Politico, 43% of those polled identify themselves as Democrats and 40% identify themselves as Republicans. The Obama edge in the poll is . . .  you guessed it . . . +3.  The nature of the sample and the weighting it gives either party is ultimately consistent with the outcome and headline number of the poll.


In the table below, we’ve highlighted a break out of voter ID from the Associated Press poll which shows this point in detail.  The Likely Voter survey showed that Democrats had an edge of +1 over Republicans in poll, probably a reasonable sample. This breakdown effectively matched the results of the poll which gave Obama a +1 edge.  In the registered voter category, Democrats had a +7 point edge.  To the extent that a pollster, such as Gallup, is still using registered voters it is likely to overstate the results for Obama.


Are Poll Skews the Ultimate November Surprise? - 44. 3.


If Republicans maintain their edge in voter ID polls and national polls continue to oversample Democrats, the ultimate surprise in November could well be failure of polls and a surprise showing by the Republicans versus the expectations of pollsters.  The aforementioned poll from Rasmussen will be a key tell in this regard given its predictive ability on voter ID in 2008 and 2010.


Daryl G. Jones

Director of Research


EUR/USD: What Lies Ahead?

Now that summer has come to a close and eurocrats are back from vacationing, we can trust that the Eurozone will be ripe with turmoil soon again. As we look at our quantitative setup for the EUR/USD, we're about to see if it breaks our TRADE level of support at $1.29. After that, $1.26 is the next level of support and after that...well...



EUR/USD: What Lies Ahead?  - 44. eur



Lots of news revolving around Europe's crisis, but the big issue at the moment is the new banking union proposal, which has Germany and France becoming nitpickish over timetables and terms of agreement. From Senior Analyst Matthew Hedrick:


"On a "single supervisory mechanism" of banks in the Eurozone, Germany remains reluctant to cede control of its banking sector.  It wants the new regulator to concentrate only on the region's biggest banks, perhaps an estimated 20-25 banks. Specifically, Germany's public-sector banks oppose regulation citing a lower-risk business model. The Germans are setting an expectation that an agreement may not come until next year. On the other hand, the French, in line with the European Commission (EC) positioning, want all banks in the Eurozone (~6,000) to be supervised by the ECB and are signaling that an agreement can be reached over a shorter time horizon than the Germans."


We'll keep an eye on the EUR/USD as more news and events unfold this week, including the German bond sale on Wednesday and Italian bond sale on Thursday.

EUR/USD: At A Tenuous Price With Catalysts Coming

Takeaway: beware that if $1.29 breaks, the next line of support doesn’t come until $1.26.

Positions in Europe: Short EUR/USD (FXE); Long German Bonds (BUNL)


In the chart below we outline our trading levels on the EUR/USD as we head into the week. Our quantitative levels suggest that the cross is broken on the long term TAIL line and that if its immediate term TRADE support level of $1.29 breaks, the next level of support is $1.26. Currently the EUR/USD is at $1.2911.


This weekend was packed with noise. The Germans and French in particular continue to be at loggerheads on the timetable and terms of a banking union.


On a “single supervisory mechanism” of banks in the Eurozone, Germany remains reluctant to cede control of its banking sector.  It wants the new regulator to concentrate only on the region's biggest banks, perhaps an estimated 20-25 banks. Specifically, Germany’s public-sector banks oppose regulation citing a lower-risk business model. The Germans are setting an expectation that an agreement may not come until next year. On the other hand, the French, in line with the European Commission (EC) positioning, want all banks in the Eurozone (~6,000) to be supervised by the ECB and are signaling that an agreement can be reached over a shorter time horizon than the Germans.


This indecision on a banking union was quickly met with rumors of the expansion of the ESM from €500 Billion to €2 Trillion, however without detail on how this expansion would be covered. The ESM is expected to come online on October 8th and we think the rumors reflect the market’s belief that the current size of the ESM is far insufficient to deal with the default and/or bailout needs of Italy and Spain, especially as the EFSF, the only remaining bailout facility (short of a blank check from the IMF), is nearly depleted if it is decided that funding for Spain’s €100 Billion bank recapitalization comes solely from it.


Below are a few calendar catalysts to note in the coming week that could influence the cross.


Wednesday (9/26)

Greece’s two biggest union have called a 24hr general strike to protest austerity.


Germany to sell 5 Billion of 10YR bonds.


Thursday (9/27)

Spain’s cabinet is expected to approve the 2013 budget.


Italy sells bonds.


Friday (9/28)

Spain will release results of stress test on banks (estimates between €60-100 Billion for bank recapitalizations).


France presents the country’s 2013 Budget.



EUR/USD: At A Tenuous Price With Catalysts Coming - 44. eur


Matthew Hedrick

Senior Analyst

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