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Tough Spot: SP500 Levels, Refreshed

Takeaway: Sometimes my risk management signals front-run what will become my fundamental research views. Sometimes they are head-fakes.

POSITION: 9 LONGS, 6 SHORTS @Hedgeye

 

The research reasons for taking down my gross long exposure into last week’s highs, and not ramping that up (yet) again here on red aren’t there. The risk management signals are. Sometimes my signals front-run what will become my research. Sometimes they are head-fakes.

 

That’s what makes this 1557 level a tough spot. It’s my immediate-term TRADE line – is it support (Friday and Tuesday) or is it resistance (Monday and Wednesday)? Inquiring stock market operating minds want to know (including my own). I don’t know.

 

Away from 1557, across my core risk management durations here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1601
  2. Immediate-term TRADE support = 1540
  3. Intermediate-term TREND support = 1515

 

In other words, even if 1557 snaps, we have a big landing area of support (where I wrote a note titled “Buyem” at 1540 a few Friday’s ago). So what to do now? Just wait and watch – I think the market does a pretty good job telling us where to make the big moves.

 

#StrongDollar, Down Gold/Oil/Copper is a fantastic pro-growth research signal for Consumption assets. Our Q2 Global Macro Themes deck goes through the research views on that. This note is all about the risk management levels, what I am thinking right now, and why.

 

KM

 

Keith R. McCullough

Chief Executive Officer

 

Tough Spot: SP500 Levels, Refreshed - SPX


Morning Reads From Our Sector Heads

Keith McCullough (CEO):

 

Carney to Leave Canada Policy Unchanged in Final Forecast (via Bloomberg)

 

Josh Steiner (Financials):

 

Bond Hedge Fund 5:15 Capital to Close Down, Return Money (via Bloomberg)

 

Fed doves stand by stimulus, though one has bright outlook (via Reuters)

 

Rob Campagnino (Consumer Staples):

 

Hedge funds' gloom on ags reaches record high (via Agrimoney)

 

Todd Jordan (GLL):

 

Carnival to spend millions to make ships more reliable (via USA Today)

 

Brian McGough (Retail):

 

Target’s Pricing Strategy: One Penny Higher Than Wal-Mart (via Sourcing Journal Online)

 

Macy's Appeals Martha Decision (via WWD)

 

Howard Penney (Restaurants):

 

New Salads and Cool Wraps at Chick-fil-A Starting April 29th (via GrubGrade)

 

Analyst's upbeat on Buffalo Wild Wings (via Nation's Restaurant News)

 

Kevin Kaiser (Energy):

 

Commodities Traders Brace for Transparency While Staying Private (via Bloomberg)

 

Matthew Hedrick (Europe):

 

Brazil inflation: Surging tomato prices create political headache (via BBC News)

 





 



Getting Longer

Client Talking Points

Can It Hold?

1556 is a line we've been watching in the S&P 500. If this line can hold after today, we'll likely buy the index. There is no resistance all the way up to 1601. That's a lot of room to grow. Volume is up, volatility is down and the S&P is holding steady. These three factors make for a perfect storm of sorts that allows us to start getting long stocks and specifically, the S&P 500.

Keeping Focus On Consumption

We remain bullish on consumption and bearish on commodities. The fact of the matter is that there is an exodus in commodities and investors and traders sell the sector in an attempt to preserve capital. The people who fled commodities and will move into things like equities and treasuries. As commodity prices go down and your family sees the benefits of lower gas prices and cheaper food at the grocery store. They WILL buy more when prices come down and that in help drives global growth.

Asset Allocation

CASH 31% US EQUITIES 20%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 28%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.

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

"Aussie Dollar failing at 20mda resist and breaking 50mda support. Policy can't fight move in copper, PGMs. CAD + AUD to test May '12 lows" -@timseymour

QUOTE OF THE DAY

"There is always more misery among the lower classes than there is humanity in the higher." -Victor Hugo

STAT OF THE DAY

Germany auctions 10-year bonds at record low yield of 1.28%.


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THE M3: TAIWAN CASINO TAX; MACAU SLOT/TABLE COUNT

The Macau Metro Monitor, April 17, 2013

 

 

CASINO WINNINGS TAX-FREE FOR 20 YEARS: MINISTRIES Taipei Times

There will be no tax imposed on casino winnings for the first 20 years following the establishment of casinos in Taiwan, Minister Yang said.  Yang, in charge of drafting a bill stipulating regulations for the operation of casinos, said that the bill was expected to be approved by the Cabinet by the end of this month and referred to the legislature for deliberation.

 

The government is required to draft the legislation by the tenets contained in the Offshore Islands Development Act.  Independent Legislator Chen Hsueh-sheng has been applying pressure on the issue since the passage of a referendum to allow a casino to be built in Matsu, his constituency, in July last year.

 

At an inter-governmental agency meeting, the Ministry of Finance (MOF) finally gave its consent to the tax exemption after the Ministry of Transportation and Communications (MOTC) insisted it was necessary.

 

A Cabinet official, who asked to remain anonymous, said that an idea is being floated among officials to allow casinos to be built within the planned “Free Economic Pilot Zones,” a project to test incremental economic and trade liberalization.  Gambling on Taiwan proper is prohibited by the Criminal Code, but the Offshore Islands Development Act exempt the outlying islands from this ban.

 

NUMBER OF GAMING TABLES AND SLOT MACHINES IN 2008-2013 DICJ

Table and slot count at the end of Q1 2013 was 5,749 and 16,406, respectively.


Macro Evolution

This note was originally published at 8am on April 03, 2013 for Hedgeye subscribers.

“The book of nature is written in the language of mathematics.”

-Galileo

 

More so than in any other year since we started the firm (2008), we are getting tons of questions from clients about our process – specifically, how we’ve applied breakthroughs in modern chaos theory (fractal math) to our global macro risk management process.

 

What’s interesting about answering these questions is that there is no silver bullet book you can read. No, they don’t teach this in business school (yet) either. I built the process on mathematical principles that are relatively new. When I want to consider evolving the process, I don’t read Jeremy Siegel – I dive into behavioral science, applied math, big history/data, etc.

 

Of the top 3 books that have inspired me on the interconnectedness of the Global Macro ecosystem, Eric Chaisson’s Cosmic Evolution (2001) is one of them. If you are looking to learn about my framework, all you have to do is read his Preface and Prologue. Unless you are in the business of not constantly re-learning how to operate in markets, I guarantee you can’t put this book down after 20 pages.

 

Back to the Global Macro Grind

 

Change is good. So is being long gamma. Convexity in market pricing works on the upside too. And being long a market that continues to make higher-lows (on no-volume down days), and higher-all-time-highs on up days, works for me.

 

Much to the Crisis-Mongering and bit-coin advertising business chagrin, the SP500 made another fresh all-time closing high yesterday at 1570. That puts the SP500 up +10.1% for the YTD.

 

But, but (the most commonly used word when I keep telling people I am bullish on Asian and US Equities), “look at copper, coal, corn and…” Yes, precisely – that’s why we think both US Consumption Growth and Consumption oriented Equities are going higher.

 

To review how the Macro Evolution gods have scored the YTD, there are massive divergences developing between:

 

A)     Consumption assets

B)      Commodity assets

 

And no, an asset doesn’t have to be an asset class – that’s what people call something like Gold, after it’s gone up for 12 straight years. For the YTD, being long Gold (or Gold Miners) is what I call a liability.

 

#StrongDollar is driving this – there are both positive and negative correlations associated with this breakout in the US Dollar Index. For starters, let’s look at Countries (major macro equity Style Factor):

  1. US Equities (SP500) +10% YTD vs Brazil (Bovespa) -10% YTD
  2. UK (FTSE) +10% YTD vs Russia (RTSI) -6% YTD

So, Russia is not Brazil, but both are in an irrelevant #OldWall acronym (BRIC), and neither of these stock markets like it at all when Metal, Food, and Oil prices deflate.

 

In fact, this morning there’s a headline on Bloomberg that says “Gazprom Falls Under $100B, Putin Frets.” I know, poor Putin. But seriously, who the hell cares about Russians fretting over US Consumption taxes at the pump and their Cypriot laundry?

 

Enough about that – let’s look at the US Equity market and dig down beneath the ecosystem’s crust to look at another important quantitative Style Factor – Sector Style Risk:

  1. US Healthcare Stocks (XLV) +17.2% YTD
  2. US Consumer Staples (XLP) +15.1% YTD
  3. US Consumer Discretionary (XLY) +11.8% YTD
  4. US Basic Materials Stocks (XLB) +2.4% YTD

Yes, ‘one of these things is not like the other, one of these things just doesn’t belong’ (when you are modeling fractals you can go right batty at night, so listen to Romper Room tunes and you’ll be fine).

 

One of these things (Basic Materials) is being impacted by who wins/loses under a pervasively #StrongDollar macro environment.

 

But, but –

 

1.       “Copper and Coal and Corn going down is a bearish demand signal …”

2.       “Consumer Staples outperforming is a defensive signal… “

3.       “Italian Elections, Cypriot Chariots of Fire, and North Korean Chubby Wubby, are big risks…”

 

C’mon man. Let’s get real here.

  1. Commodity Deflation = good for corporate input prices and real (inflation adjusted) consumption growth, globally
  2. Consumer Staples companies (especially Food, Restaurants, etc.) have massive y/y margin expansion opportunities
  3. Crisis-Mongering about Korea? Join the club – CFTC SPY net long position hitting YTD lows as Treasuries net longs ramp

I know I’m whipping around and ranting a bit – but if you truly believe in Embracing Uncertainty like we do, you want to do more of that – especially when our globally interconnected signals do.

 

Contingency – randomness, chance, and stochasticity – pervades all of dynamic change on every spatial and temporal scale… science today is no longer in the prediction business… evolution predicts little of the future, yet strives to explain much of the past.” –Chaisson

 

Changing our positioning as the ecosystem does. Macro Evolution, Hedgeye-style.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1569-1602, $109.11-111.54, $82.58-83.49, 93.07-96.04, 1.84-1.94%, 12.15-13.41, 933-955, and 1559-1576, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro Evolution - Chart of the Day

 

Macro Evolution - Virtual Portfolio



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