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BEARISH: SP500 LEVELS, REFRESHED

Takeaway: Don’t be a hero; let process, not emotions determine you next move(s).

Sadly, the US equity market and global economy remains at the perfectly frustrating whims of our central planners in Washington D.C. On the realization that a CY12 Fiscal Cliff compromise is unlikely to be agreed upon, stocks are broadly selling off. Looking to the S&P 500 Index specifically, the market is now bearish from a TRADE and TREND perspective on our quantitative factoring with no support to our TAIL line of 1,371.

 

Across our core risk management durations, our updated levels for the SPX are:

 

  • Bearish TRADE = 1430
  • Bearish TREND = 1419
  • Bullish TAIL = 1371

 

At Hedgeye, we remain firm believers of the reflexive relationship between PRICE and economic fundamentals. In that vein, the current quantitative setup of the US stock market tells us that:

 

  1. We are likely to go over the Fiscal Cliff – whatever that means (more on this later); and
  2. The underlying momentum of the US and global economy is stabilizing and poised to gather steam.

 

Regarding point #1: Unlike the credibility of the Old Wall’s legacy media sources, the US economy won’t run into the proverbial wall on JAN 1st, 2013. In fact, the full economic impact of tax hikes and sequestration will be lagged and cumulative throughout CY13. Consider it more like running up a steep hill, rather than falling off a cliff, per se.

 

Additionally, any negative impacts can be retroactively adjusted for if and when a compromise is reached – likely no later than MAR, according to our latest in-depth analysis of the debt ceiling and the implications therein for Fiscal Cliff negotiations: “DEBT CEILING UPDATE: WILL SANTA’S SACK BE FILLED WITH COAL?” (NOV 16). That could turn out to be a boon for 2Q13 GROWTH, especially if 1Q13E comes in slower than initially anticipated.

 

Regarding point #2: We continue to get data both domestically and internationally that supports our baseline fundamental view that global GROWTH is stabilizing, which is better than slowing and not as good as accelerating. To juxtapose:

 

  • The supertankers within my geographic coverage areas (i.e. China and Japan) both showed weak DEC PMI data out this morning; moreover, Japan’s NOV Industrial Production data supports our view that the country’s recession will extend into 4Q12; while
  • The little boats that tow the larger boats into and out of the docks (pardon my lack of boating jargon) within my geographic coverage areas (i.e. Singapore and Hong Kong) confirmed with their NOV Industrial Production, Trade and PMI data that the global economy is, in fact, leaving the dock – albeit at a very measured pace.
  • The latest US Housing Price and Home Sales data suggests a formerly key component of the US economy is roaring back and poised to accelerate in 2013; while
  • Yesterday’s domestic Consumer Confidence bomb and generally disappointing Retail Sales figures during the Holiday Season are major causes for concerns as it relates to the sustainability of any domestic economic recovery.

 

How does one balance good and bad data in their head, while at the same time remaining sane enough to make capital allocation decisions? That’s easy: tune out the noise and listen the PRICE signals. For now, those signals suggest defensive positioning is warranted. Conversely, a close above 1,419 would suggest the opposite is true. Whatever you do, don't make it any more complicated than that.

 

Have a great weekend,

 

Darius Dale

Senior Analyst

 

BEARISH: SP500 LEVELS, REFRESHED - SPX


HOUSING: FULL STEAM AHEAD FOR PENDING HOME SALES

Takeaway: Pending home sales rose further in November, which, in turn, raises our expectations for future home price appreciation.

Housing Demand Continues to Grow

November's Pending Home Sales data was surprisingly strong. While it didn't eclipse expectations by much, the 1.7% MoM increase comes on the heels of an unusually strong 5.0% MoM increase in October. Our demand model for projecting future home price changes uses pending home sales to forecast price changes 18 months out. Based on this morning's reading, we're increasing our expectation for upside to +18.1% (from +17.1%) over the next 18 months, or roughly 1%/month. Currently, prices are rising at a rate of 60 bps per months.

 

HOUSING: FULL STEAM AHEAD FOR PENDING HOME SALES - Pending Home Sales ST

 

HOUSING: FULL STEAM AHEAD FOR PENDING HOME SALES - Pending Home Sales LT

 

Joshua Steiner, CFA

 

Robert Belsky


FL: Bear Growls

Takeaway: FW numbers definitely look sufficiently beared-up for FL this week. The flag is still yellow – not red. But we’re watching.

Footwear numbers definitely look sufficiently beared-up for FL this week. Total footwear dollars were down 6% for the week – marking the fifth consecutive deceleration in top-line on a trailing 3-week basis. We usually delineate between performance and non-performance, but even these numbers are ugly, with the weakest Performance sales trends since April. The spread between Performance and Non-Performance is also at its lowest range since September.


These numbers matter given that December accounts for about 12% of annual sales for Foot Locker and ~50% of Q4. It’s going to take a lot more than this for us to turn the yellow flag to red, as inventories – at least for the time being – are very clean. But given the pervasive view that the ‘sneaker cycle’ is going against us, this data is hardly comforting to the bull case.

 

 

FL: Bear Growls - FW Mo SalesPerc


We think that ultimately in this space ‘the tail wags the dog’ and that that the R&D cycle will fuel earnings upside. But we need to continue to see this in weekly sales results to be proved correct.

 


FL: Bear Growls - FW App 1yr trends

 

FL: Bear Growls - FL TTT


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Holiday Sales: Golf Claps?

Looking at data from ICSC, holiday sales for this year are essentially in line with last year’s numbers. A bit on the weaker side and while not terrible, it’s nothing to get excited about. In each of the past two years, we saw an increasing decline in sales 3-4 weeks before the Christmas holiday, but then ‘catch up’ in the 1-2 weeks prior to the big day. With one week left in December, retailers will need to blow their numbers out of the water in order to impress. 

 

Holiday Sales: Golf Claps? - ICSC

 

Holiday Sales: Golf Claps? - ICSC2


Washington Playbook

Client Talking Points

The Grinches

Even with Christmas over and done with, the Grinch is still around. Instead of looking like a hairy, green monster with devilish eyes, he now looks a lot like the political class of America. Does anyone actually believe that President Obama and Congressional Democrats and Republicans will come to a solidified agreement by the deadline of December 31? Doubtful. What a way to bring in the New Year, right? Higher taxes and a bunch of politicians who don’t actually serve the public’s needs. Shameful. 

China's Bottom

In other news, it looks like China’s begun the bottoming process in commodities. Iron ore and rebar, two indicators of construction and the economy that we are fond of keeping an eye on, have had a strong quarter in terms of price appreciation. Growth is now stabilizing instead of slowing, this time on a global playing field. You’ve seen the housing market recovery and commodity drop out in the United States, now it’s time for other countries to give it a shot.

Asset Allocation

CASH 58% US EQUITIES 18%
INTL EQUITIES 12% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
NKE

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“Better later than never @pdacosta: Spain's PM says does not rule out asking for European aidreut.rs/V8Rw5x” -@Nouriel

QUOTE OF THE DAY

“Everything of importance has been said before by somebody who did not discover it.” -Alfred North Whitehead

STAT OF THE DAY

The Financials Select SPDR ETF (XLF) is up +25.46% year-to-date, one of the best performing sectors in the market. Comparatively, Technology (XLK) is up only +12.69% for the same time period.



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