prev

More Bullish: SP500 Levels, Refreshed

Takeaway: Above 1519 (weekly closing high), the US stock market is more bullish; below it, less bullish. Risk changes fast.

Tops are processes, not points.

 

That’s certainly not to say we’ve reached the peak of the domestic equity market, however.

 

Rather, it’s a less-than-subtle reminder – especially to all those who are trying to make their respective careers by calling for what could eventually amount to the third major top in the US equity market of the past ~13 years – that risk can get exhausted in both directions – particularly when the fundamental research signals continue to confirm the price trends.

 

On the fundamental research front, the recent string of domestic economic data has been quite confirming of our 1Q13 Macro Themes – particularly our #GrowthStabilizing and #HousingsHammer views:

 

  • ISM Manufacturing PMI: 54.2 in FEB from 53.1 in JAN; New Orders up +4.5ppts. MoM to 57.8
  • ISM Non-Manufacturing PMI: 56 in FEB from 55.2 in JAN; ; New Orders up +3.8ppts. MoM to 58.2
  • Conference Board Consumer Confidence Index: 69.6 in FEB from 58.4 in JAN
  • University of Michigan Consumer Confidence Index: 77.6 in FEB from 73.8 in JAN
  • Correlogic Nationwide House Price Index: +9.7% YoY in FEB from +9.7% in JAN; the +11.3% rate of YoY appreciation in non-distressed properties was the fastest pace since 2009

 

As a reminder, the key takeaways from the aforementioned themes were (as it pertains to domestic financial markets):

 

  • LONG Domestic Equities (up over +8% YTD)
  • SELL/SHORT Fixed Income (UST 10Y yield up around +14bps YTD)
  • LONG US Dollar (DXY up around +3% YTD)
  • SELL/SHORT Commodities (CRB Index down more than -1% YTD)

 

For now – and ostensibly forever – sticking to the #process trumps making newsy, analytically-reckless market calls. Moreover, our #process is specifically designed to help our clients accomplish three things:

 

  1. Manage immediate-term market risk;
  2. Front-run intermediate-term trends; and
  3. Contextualize long-term cycles with a broad range(s) of economic history.

 

Process is king and our process continues to support maintaining a bullish bias on the US equity market.

 

Darius Dale

Senior Analyst

 

More Bullish: SP500 Levels, Refreshed - SPX


Auto Sales: The Housing Effect

The rebound in automobile sales has felt very slow, but looks sharp on the chart below.  With housing rebounding and employment generally improving, consumer durable sales have improved.  Note that the series is only about 15% away from its historical average on a monthly SAAR basis. Interestingly, the uptick in auto sales coincides with the recovery in the housing market. New home sales also have a long way to go before they reach even low historical norms, but housing is on the road to recovery and has been a key component of our macro global growth thesis.

 

Auto Sales: The Housing Effect - r6 normal

  

Auto Sales: The Housing Effect - r7 normal

 


Putting The Pieces Together

Client Talking Points

Dealing With It

Yesterday, we bought Chinese equities via the Morgan Stanley China A Share Fund (CAF) ETF. While the position ended up going against us, we did our homework and still believe that being long Chinese equities makes sense from the TREND and TAIL durations that we work with. With China targeting +7.5% GDP growth and CPI at +3.5%, our thesis is emboldened by these numbers. The waiting game can be hard to deal with sometimes, but you have to know when to suck it up and play the cards you're dealt.

Asset Allocation

CASH 42% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

"We didn't know that Vornado was going to sell 9mm shares, but clearly someone did yesterday $JCP" -@HedgeyeDJ

QUOTE OF THE DAY

"You can pretend to be serious; you can't pretend to be witty." -Sacha Guitry

STAT OF THE DAY

Dow Jones Industrial Average just 36 points away from all-time closing high of 14,163.


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.



Command and Control

“How do you tell a communist? Well, it’s someone who reads Marx and Lenin.  And how do you tell an anti-Communist? It’s someone who understands Marx and Lenin.”

-Ronald Reagan

 

As Hedgeye has grown over the past five years, we’ve gone from a ramshackle group of less than ten to a team that is fifty or more with a view to a much higher employee count as our growth continues.   For those of us that started here near day one, it has been an exciting and fulfilling experience.

 

Many of you that have started you own businesses know full well the management challenges associated with growth – compensation plans, career paths, titles, HR meetings, committees, and so on.  I can’t speak for Keith, but there are certainly times where I wish I could channel my inner Karl Marx and completely control our day-to-day functions.   That, of course, would be a disaster because our company, like most companies, benefits greatly from disparate opinions and personalities.

 

The caveat to that last point of course is China - a country that has seen fabulous growth and development with top down controlled management.  In 1978, China was one of the poorest countries on the planet with a GDP of roughly one-fortieth of the United States.  As Xiaodong Zhu, a Professor of Economics at the University of Toronto, writes:

 

“Since then, China’s real per capita GDP has grown at an average rate exceeding 8 percent per year.  As a result, China’s per capita GDP is now almost one-fifth the U.S. level and at the same level as Brazil.  This rapid and sustained improvement in average living standard has occurred in a country with more than 20 percent of the world’s population so that China is now the second-largest economy in the world.”

 

If President Ronald Reagan were alive today, it would be interesting to hear his assessment of the Chinese economic miracle.  Despite his, and many a dour assessment of Communist economies, China has certainly proven the critics wrong. 

 

In the short term, yesterday certainly provided some fuel to the proverbial fire for those negative on the Chinese economy this year. China’s CSI 300 index was down -4.6%, its biggest drop since November 10th, the Shanghai Composite was down -3.7% (the most since August 11th), and the Shanghai Property index was down -9.3%.  The decline in the property index was hit on reports that Beijing has introduced new property curbs calling for higher down-payment requirements, higher interest rates on second home mortgages and a 20% tax on individual profits from property sales.

 

One of the top ideas in our recently launched Best Ideas product was China, via the closed end fund CAF.  Given the performance of Chinese equities noted above, this position is now against us, but our Senior Analyst covering Asia, Darius Dale, addressed this directly yesterday in a note titled, “China Pukes”.  As Darius wrote:

 

“In short, while we think this latest round of tightening measures is definitely impactful, they are not nearly as negative as we initially feared. The heightened concerns mostly stem from the new 20% capital gains tax on existing home sales; prior to Friday’s announcement, existing home transactions were taxed at a rate of 1-2% of the sale price.

 

To some extent, today’s “puke” instructs us that our initial interpretation of the tightening measures was not bearish enough. That said, however, rather than react to headline-grabbing 1D % change moves, we turn to our quantitative factoring for true guidance.

 

On this metric, the Shanghai Composite is still healthily bullish from an intermediate-term TREND perspective and continues to support our bullish intermediate-term fundamental bias on Chinese equities. If, however, the now-confirmed immediate-term TRADE breakdown is but a leading indicator for further breakdowns, then we’d happily abandon our bullish bias upon confirmation of that signal.”

 

In the Chart of the Day, we highlight our quantitative levels that still support being long of China.  In fact, news this morning from China’s Premier Wen last “state of the country address” in which 2013 GDP growth was set at +7.5% and CPI at +3.5% bolsters our thesis.  On the latter point, if CPI actually declines from 4.0%, which commodities support, this is positive for our thesis, especially if combined with what we believe will be a sandbagged GDP number.

 

The other interesting call-out from Wen’s speech is that China intends to raise its budget deficit by 50 percent to boost consumer spending.  Longer term structural deficit spending is not something that we find overly appealing, but this is likely supportive for GDP targets in 2013.

 

Changing gears, from an asset allocation perspective, even as many are starting to call for a rotation into bonds, the U.S. 10-year Treasury is holding its 1.84% line. As a result, we continue to see a rotation out of the “end of the world” trade of long gold and treasuries and into U.S. equities in 2013.  There are very large bond investors that disagree with our call, but as always – watch what they do and not what they say.

 

Since we are on the topic of China, I wanted to end with a quote from Thomas Friedman that on some level summarizes the future:

 

“When I was growing up, my parents told me, finish your dinner. People in China and India are starving. I tell my daughters, finish your homework. People in Indian and China are starving for your job.”

 

Indeed.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1, $109.01-112.68, $3.48-3.55, $81.68-82.39, 91.89-94.79, 1.84-1.93%, 12.57-15.61, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Command and Control - Chart of the Day

 

Command and Control - Virtual Portfolio


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next