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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 30, 2013


As we look at today's setup for the S&P 500, the range is 21 points or 1.05% downside to 1492 and 0.34% upside to 1513. 

                                                                                                                              

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.73 from 1.72
  • VIX  closed at 13.31 1 day percent change of -1.92%
  • 10YR – what a rip! 10yr yields finally grab the 2% line and swallow it, 2.03% this morning and signaling immediate-term TRADE overbought (yields); asset allocators have to be very defensive now that we have a full month of stocks crushing gold/bonds.

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications (prior 7.0%)
  • 8:15am: ADP Employment Change, Jan., est. 165k (prior 215k)
  • 8:30am: GDP QoQ (annualized), 4Q, est. 1.1% (prior 3.1%)
  • 8:30am: Personal Consumption 4Q, est. 2.1% (prior 1.6%)
  • 8:30am: Core PCE QoQ 4Q, est. 0.25% (prior 0.25%)
  • 10:30am: DoE Energy Inventories
  • 1pm: U.S. to sell $29b 7-yr notes
  • 2:15pm: FOMC Rate Decision

GOVERNMENT:

    • Senate in session, House not in session
    • Senate Judiciary Cmte holds hearing on gun control, with witness including Mark Kelly, husband of former Rep. Gabrielle Giffords; Wayne LaPierre, executive VP of NRA
    • World Bank President Jim Yong Kim addresses conference on anti-corruption, global development, 9am

WHAT TO WATCH

  • Price, timing to be in focus at BlackBerry 10 event
  • U.S. economy probably slowed as spending gain drained stockpiles
  • Pfizer will evaluate whether to divide drug units, CEO says
  • Asian stocks rise to 17-mo high as euro rallies to strongest since 2011
  • Chesapeake CEO McClendon to leave after Icahn, Southeastern push
  • Dell founder said to seek majority control using personal funds
  • Apple fails in bid to increase $1b patent verdict against Samsung
  • Facebook seen reporting faster sales growth on mobile-ad demand
  • Boeing probe seeks data on battery failures before fire
  • Kinder Morgan buys Copano for $3.2b to add gas assets
  • Amazon rises after margin improvement
  • TARP watchdog spars with Treasury on Ally Financial exit plan
  • Morgan Stanley cross-asset strategist Gregory Peters exits firm
  • Ipsen may seek U.S. acquisitions and partnerships, CEO says
  • Toyota recalls almost 1.3m vehicles globally on airbags, wipers
  • Spain’s recession deepens more than forecast as cuts in budget curb demand
  • Oil service companies plunge in Europe as Saipem cuts earning forecast
  • Beijing smog prompts Apple, JPMorgan to distribute face masks to employees

EARNINGS:

    • ADT (ADT) 6am, $0.42
    • Evercore Partners (EVR) 6am, $0.52
    • CGI Group (GIB/A CN) 6:30am, C$0.45
    • MarketAxess Holdings (MKTX) 6:30am, $0.36
    • Northrop Grumman (NOC) 7am, $1.74
    • L-3 Communications (LLL) 7am, $2.12
    • Booz Allen Hamilton (BAH) 7am, $0.37
    • Bank of Hawaii (BOH) 7am, $0.90
    • Rockwell Automation (ROK) 7am, $1.26
    • Valley National Bancorp (VLY) 7am, $0.19
    • Wisconsin Energy (WEC) 7am, $0.41
    • Marathon Petroleum (MPC) 7:03am, $2.10
    • MeadWestvaco (MWV) 7:25am, $0.18
    • Hess (HES) 7:30am, $1.21
    • Silicon Laboratories (SLAB) 7:30am, $0.58
    • Southern (SO) 7:30am, $0.40
    • Manpower (MAN) 7:30am, $0.77
    • Boeing (BA) 7:30am, $1.18 - Preview
    • CommVault Systems (CVLT) 7:40am, $0.32
    • New York Community Bancorp (NYCB) 8am, $0.30
    • Hudson City Bancorp (HCBK) 8am, $0.12
    • Phillips 66 (PSX) 8am, $1.69
    • BOK Financial (BOKF) 8am, $1.26
    • Haemonetics (HAE) 8am, $0.54
    • TCF Financial (TCB) 8am, $0.18
    • Health Net (HNT) 8:15am, $0.38
    • Avery Dennison (AVY) 8:30am, $0.49
    • SEI Investments Co (SEIC) 8:30am, $0.32
    • Cullen/Frost Bankers (CFR) 9am, $0.93
    • ConocoPhillips (COP) 4pm, $1.42 - Preview
    • Qualcomm (QCOM) 4pm, $1.12
    • TFS Financial (TFSL) 4pm, $0.02
    • Align Technology (ALGN) 4pm, $0.22
    • Knight Transportation (KNX) 4pm, $0.22
    • AvalonBay Communities (AVB) 4:01pm, $1.39
    • Electronic Arts (EA) 4:01pm, $0.56
    • Amdocs (DOX) 4:01pm, $0.70
    • Las Vegas Sands (LVS) 4:01pm, $0.60
    • Tractor Supply Co (TSCO) 4:01pm, $1.03
    • Allegiant Travel Co (ALGT) 4:01pm, $0.70
    • ServiceNow (NOW) 4:02pm, $(0.04)
    • Facebook (FB) 4:05pm, $0.15
    • JDS Uniphase (JDSU) 4:05pm, $0.14
    • Citrix Systems (CTXS) 4:05pm, $0.84
    • CACI International (CACI) 4:05pm, $1.63
    • Cadence Design Systems (CDNS) 4:05pm, $0.19
    • Cabot (CBT) 4:05pm, $0.76
    • Acxiom (ACXM) 4:05pm, $0.16
    • Fair Isaac (FICO) 4:05pm, $0.73
    • Tetra Tech (TTEK) 4:05pm, $0.40
    • Intersil (ISIL) 4:05pm, $0.05
    • Fusion-io (FIO) 4:05pm, $0.08
    • Ameriprise Financial (AMP) 4:05pm, $1.47
    • Capstead Mortgage (CMO) 4:10pm, $0.33
    • Duke Realty (DRE) 4:11pm, $0.27
    • Fortinet (FTNT) 4:15pm, $0.15
    • Skyworks Solutions (SWKS) 4:30pm, $0.54
    • Concur Technologies (CNQR) 4:30pm, $0.30
    • MKS Instruments (MKSI) 4:30pm, $(0.00)
    • ST Microelectronics (STM IM) 4:34pm, $(0.07)
    • Murphy Oil (MUR) 5pm, $1.36
    • Triumph Group (TGI) 5pm, $1.42
    • EverBank Financial (EVER) 5pm, $0.31
    • Crown Holdings (CCK) 5:02pm, $0.54
    • Atwood Oceanics (ATW) 5:05pm, $0.92
    • Vanguard Health Systems (VHS) 5:05pm, $0.17
    • Regency Centers (REG) 5:15pm, $0.58
    • SL Green Realty (SLG) 6pm, $1.15
    • Kirby (KEX) 6pm, $0.85
    • MPLX (MPLX) NA, $0.22
    • Owens-Illinois (OI) Post-Mkt, $0.37
    • Methanex (MX CN) Post-Mkt, $0.55
    • Kilroy Realty (KRC) Post-Mkt, $0.62

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


OIL – our model says Brent Oil > $115/barrel is a new problem for Global Consumption, and the market is testing that level today; Consumer Discretionary stocks (XLY) were the only red sector in the US yesterday; our growth expectations start to see headwinds w/ Oil +7.5% higher vs where we started making the #GrowthStabilizing call in Nov-Dec.

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


ASIA – when it gets almost as good as it can get (in the moment) it looks like Asia did last night: Japan +2.3% to overbought (+28.3% Nikkei since Nov13!), Shanghai Comp +1% (+21.6% since Dec3!), and the KOSPI recovered TREND line support (1959) closing +0.43% at 1964. Headlines getting frothy right on time.

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 


JAN IL LICENSING UPDATE

IL January approvals are solid albeit a deceleration from December

 

 

On January 28, the Illinois Gaming Board (“IGB”) released a list of all licensees, which included 1,143 licensed establishments, implying the approval of 188 incremental establishments, a deceleration from December, but still a solid month.  January compares to 350 grants in December and 105 in November.  To date, there have been no establishment licenses revoked and 35 establishments have been denied licensure. One terminal operator had its license revoked along with 22 terminal operators and 1 manufacturer that have been denied licensure.  Currently, 2,500 establishments are pending approval, a 1% decline from December and a 6% decline from peak in November.  IGB appears to be cutting into the backlog.

 

Each location is allowed a maximum of 5 machines so the 1,143 approved locations imply a current maximum market size of 5,715.  On October 10th after 3 weeks of testing, the IGB allowed 65 establishments to go live with VLT gaming.  In the September quarter, BYI and WMS recognized several hundred game sales into IL.  In the December quarter, most suppliers will recognize revenues associated with placements in this market.  The only company to report, IGT recognized revenue on 1,100 VLTs sold to IL in the December quarter, 200 of which were shipped in the September quarter.

 

Our sources tell us that as of December 31st there were 2,855 VLTs installed in IL which is-in line with our running estimate of 3,000 VLTs shipments into IL in 2H2012.  We also stand by our prior estimate of a 10,000 unit market by the end of 2013.  We expect that most of the VLT sales (upwards of 75%) will come with some sort of financing, but most will be accounted for as for-sale machines.

 

Our understanding is that ASPs should be around $12k range.  The consensus is that VLTs will win about $100 on average per day, with a large range depending on the location.  We believe that distributors receive a 10-15% cut of the purchase price as their commission, with the big suppliers paying on the low end of that range and some of the smaller guys paying at the higher end of that range.  Typically, distributors take the machines on a consignment basis, meaning that suppliers cannot recognize revenues until the machines are placed in the establishments.

 

DETAILS ON PENDING APPLICATIONS:

Distributor:  3

Manufacturer:  3 (including Speilo and Konami)

Supplier:  5

Technicians:  29

Terminal handlers:  143

Terminal operators:  14

Establishments:  2,500 pending



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Wind and Rain

“Wind extinguishes a candle and energizes fire.”

-Nassim Taleb

 

On my way to Kansas City, Missouri last night I started reading Taleb’s new book, Antifragile. The aforementioned quote is the opening sentence to his prologue. It’s an interesting introduction. He uses a basic contrast of a few elements, and makes up a new word (what he calls the opposite of fragility).

 

While Taleb doesn’t market himself this way, there is a lot of Chaos Theory at the core of his framework. From an economic policy perspective, he is anti-academic dogma, anti-government, etc. “This is the tragedy of modernity: as with neurotically overprotective parents, those trying to help are often hurting us most.” (pg 5) And I’ll obviously second that.

 

Having not read it yet, the questions I have with this highly-promoted book are threefold: 1. Is there anything new here that I can apply to my risk management process? 2. Is it a book for market practitioners or an attempt to become academic in its own right? and 3. Will it help me save and make people money? I’ll review it and let you know.

 

Back to the Global Macro Grind

 

After seeing both the SP500 and Russell2000 close at fresh YTD highs yesterday (all-time high for the Russell) and then seeing China and Japan close at new highs again overnight, the question is: was being long stocks and out of Gold, Bonds, etc. just dumb luck?

 

Well, Nassim says, “I’d rather be dumb and antifragile than extremely smart and fragile, any time.” But I don’t think any man, woman, or child aspires to be dumb, do you? Thinking you are smarter than the Mr. Market – well, that’s an entirely different problem.

 

The most brainless/emotionless risk management exercise I can do to assure myself I am no smarter than anyone else, is shut up and listen to the price/volume/volatility signals in my Global Macro model. Here’s what they are signaling today in the USA:

  1. US Stocks (SP500) immediate-term TRADE overbought in the 1 range
  2. US Equity Volatility (VIX) immediate-term TRADE oversold in the 11.98-12.04 range
  3. US Dollar Index immediate-term TRADE oversold at $79.41
  4. US Treasury Yields (10yr) immediate-term TRADE overbought at 2.04%

These immediate-term signals are A) contextualized by my intermediate-term TREND and long-term TAIL durations and B) augmented by my research team’s fundamental updates (we have a morning meeting every day at 830AM EST).

 

In Asian Equities, the most important immediate-term TRADE signals this morning are as follows:

  1. CHINA – Shanghai Composite +1% overnight to immediate-term TRADE overbought at 2391
  2. JAPAN – Nikkei225 +2.3% overnight to immediate-term TRADE overbought at 11,124
  3. S.KOREA – KOSPI +0.43% overnight, recaptures TREND support (1959) but remains below 1976 TRADE resistance

In Europe:

  1. EURO – versus the USD, the Euro is immediate-term TRADE overbought at $1.35
  2. GERMANY – the DAX is immediate-term TRADE overbought at 7887
  3. ITALY – the MIB Index (equities) snapped immediate-term TRADE support of 17,714 this morning

All the while, Oil prices are testing an important breakout level of $114.79 (Brent). Wind and fire, meet another element: rain. Oil prices rising from these levels will be a brand new headwind to Global #GrowthStabilizing.

 

So, there’s a lot going on out there – but there always is.

 

Markets don’t care about your positions or processes. That’s why they tend to impose the most amount of pain on most of the people, all at the same time. That’s also why studying the Behavioral side of markets is as important as considering their fractal dimensions.

 

Got pain? Perma stock market bears are going to need a heck of a lot of rain to tone down this bullish bonfire. For 2 months The Pain Trade has been to the upside in stocks (and to the downside in Treasury Bonds).

 

That’s not new. Waking up to snow this morning in Kansas City is new. So I had to A) adapt or B) freeze when I walked over to Sonic to get breakfast.

 

Every day we are offered an opportunity to Embrace Uncertainty and risk adjust our decisions accordingly. If we’re scared of Black Swans and/or uncertain about our process’ ability to absorb uncertainty, I guess Taleb would say we aren’t antifragile.

 

One way to not be emotionally fragile is to keep moving.

 

Now that this morning’s Consensus Signal of The Day pinned a new high (II’s Bull/Bear Spread moves to +3,200 basis points wide to the Bullish Side – it was only 960bps wide in mid-November), you can sell some stocks at our immediate-term TRADE overbought signals. It may not be Taleb’s answer to the game – but for me, it’s just another solid risk adjusted decision to make.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1, $112.71-114.79, $3.65-3.72, $79.41-79.98, $1.33-1.35, 89.88-91.66, 1.92-2.04%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Wind and Rain - Chart of the Day

 

Wind and Rain - Virtual Portfolio


THE M3: TAIWAN GAMING DRAFT; MPEL SR NOTE OFFERING

The Macau Metro Monitor, January 30, 2013

 

 

GAMING LAW DRAFT TO BE SENT TO EXECUTIVE YUAN: MOTC HEAD China Post

A gaming law draft will soon be sent to the Executive Yuan, Minister of Transportation and Communications Mao Chi-kuo announced yesterday.  Mao said that the draft was based on a premise of strict regulation of gaming businesses that will be legally allowed once the legislation is passed at the Legislative Yuan.  There are two laws in the draft, according to Mao.  One is “Tourism Casino Management Regulation” and another one is called the “Gaming Management Bureau Organization Act.”

 

Administrative Deputy Minister Chen Jian-yu of the Ministry of Transportation and Communications (MOTC) said that many departments under the MOTC proposed different options during the discussion regarding the amendment.  “One of the departments proposed an idea that the future gaming authority could be under the supervision of the MOTC or under another ministry....We hope to attract international gamblers to the casinos instead of domestic gamblers,” said Chen

 

MCE FINANCE LIMITED ANNOUNCES PRICING OF SENIOR NOTES OFFERING MPEL

The offering consists of US$1,000 million aggregate principal amount of 5.00% senior notes due 2021.  The notes were priced at 100.00% of par and MCE Finance intends to use the net proceeds from the offering (i) to repurchase in full MCE Finance's US$600 million 10.25% senior notes due 2018 issued on May 17, 2010 and fund the related redemption costs, and (ii) the entire remainder of the net proceeds thereafter for the partial repayment of RMB2.3 billion (equivalent to US$364.9 million) 3.75% bonds due 2013 issued by Melco Crown Entertainment on May 9, 2011.

 

MPEL will not be a guarantor for the notes.  Approval in-principle has been received for the listing of the notes on the Singapore Exchange Securities Trading Limited (the "SGX-ST"). 


Consensus War

This note was originally published at 8am on January 16, 2013 for Hedgeye subscribers.

“The time had come for the Anglo-Americans to fight; to not fight was to lose the war…”

-William Manchester, The Last Lion

 

In the summer of 1942, Hitler “finally moved fourteen divisions against Sevastopol… and took the city in twenty-three days.” Since Sevastopol was the “largest Soviet naval fortress on the Black Sea” (The Last Lion, pg 546), this mattered to the Americans, big time.

 

Big is as big does, and the world’s Currency War (Rickards) is getting big. While I am not trying to equate the human devastation of WWII with what’s being driven by economic central planners today, I think it’s fair to use historical metaphors that draw on global conflict. In today’s case, every country’s politicians are fighting for themselves.

 

Whether these academic bureaucrats want to admit the scope of their experimentation or not, Keynesian Policies To Inflate via sovereign Currency Debauchery are both causal in their intentions and correlated in their impacts on real-time market prices.

 

Back to the Global Macro Grind

 

This morning I woke up to one of those aha moments where the German enemy was on the ground (snow in CT) and the Russians were coming. Well, sort of. I actually love all types of snow, other than the yellow kind.

 

What the Italians and Russians don’t like is their currency going straight up into the right. South Koreans don’t like it either. Maybe the only country that loves it is Canada – maybe that’s because they are one of the few that recognizes it as winning.

 

Russian Central Bank First Deputy Chairman (fancy titles over there), Alexei Ulyukayev, explicitly called this a “Currency War” today in Moscow and went on to add that “Japan is weakening the Yen and other countries may follow.”

 

Ya think?

 

This isn’t new. It’s going to be a new global consensus however. And I think that’s what makes 2013 as exciting (and trade-able) a year as I can remember. If you don’t have a multi-factor process that incorporates countries, currencies, policies, etc. built into your process however, you might think I am right out to lunch.

 

Well, if you trade currencies and bonds like you trade stocks, your lunch might get eaten too. These markets are much more glacial than the high-frequency insider trading networks that have developed in small cap equities. Maybe that’s why some of the largest macro hedge fund gurus have retired. The Global Macro game of risk doesn’t really have the inside trade anymore.

 

When it comes to leveling the playing field and democratizing access to market edge that is legal, I am all in. What is your edge today isn’t what it was 5, 10, and 30 years ago. I think today’s market edges live and breathe at the intersection of Behavioral Economics and Chaos Theory (math).

 

How do we risk manage this?

  1. The process starts and ends with Embracing Uncertainty – anything can happen, literally, any hour of the day
  2. We let the signal (market price/volume/volatility) tell us where to swing at high probability pitches
  3. We then either confirm or disconfirm the quantitative signal amidst #OldWall’s qualitative research noise

Any hour of the day? Yes, of course. If you have half of America begging for centrally-planned markets, what kind of market do you expect? So don’t whine about it – understand it, and play the game that’s in front of you.

 

Yesterday’s intraday signal (on the selloff to the lowest intraday price we have seen in a week) was to cover shorts and buy Best Ideas on the long side. So this is what we did on the cover/buy front:

  1. We bought Apple (AAPL) at immediate-term TRADE oversold
  2. We covered Metals (XME) at immediate-term TRADE oversold
  3. We covered Phillip Morris (PM) at immediate-term TRADE oversold
  4. We bought Singapore (EWS) at immediate-term TRADE oversold

That doesn’t mean we love Apple (AAPL) long-term here (see chart). It just means what it means – we are at war with consensus and our quantitative process was signaling immediate-term exhaustion on the sell side of a stock that we risk manage like an ETF.

 

Before I get AAPL geniuses in a heat about that, here are the last 3 big signals our process has delivered:

  1. June 1, 2012 at $571.86 = BUY  
  2. September 28, 2012 at $677.74 = SELL
  3. December 17,2012 at $502.50 = BUY

No research. Just math, and some behavioral context.

 

How many people in our profession thought/think that it’s their own unique, non-inside info, qualitative research edge that made them “smart” being long AAPL? I don’t know. All I know is that a lot of hedge funds have gone away for doing the inside info thing, and a lot more research-only funds that don’t have a quantitative risk management overlay get mad at me.

 

That’s progress.

 

So is fighting for something you believe in. I believe in evolving this profession. I believe in playing by the rules. I believe in transparency, accountability, and trust.

 

Keep fighting the good fight.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1644-1681 (Gold fails at TRADE resistance), $109.33-111.48 (Oil broke its TAIL line again), $79.29-80.08 (USD holds TAIL support again), 1.31-1.34, $88.06-89.88 (Yen oversold), 1.81-1.85% (Treasuries overbought), and 1465-1477, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Consensus War - Chart of the Day

 

Consensus War - Virtual Portfolio


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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