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MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD

Takeaway: The short-term setup for Financials is negative, but the intermediate/longer term outlook remains bullish.

Key Takeaways:

 

* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.2% upside to TRADE resistance and 1.7% downside to TRADE support.

 

U.S. Financial CDS -  U.S. bank swaps continued to widen last week, albeit at a low-to-mid single digit basis point rate. This brings the month-over-month change to +18 bps for MS, +13 bps for BAC and +11 bps for JPM and GS. Overall, swaps widened for 18 out of 27 domestic financial institutions.

 

* Chinese Steel – Steel prices in China fell 1.4% last week, or 50 yuan/ton, to 3595 yuan/ton. Both the short-term and intermediate term trends in Chinese steel prices are negative. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

Euribor-OIS Spread – The Euribor-OIS spread was essentially unchanged at 13 bps last week.

 

Sovereign CDS – European sovereign swaps were largely uneventful last week with the only notable move coming from Portugal, tightening by 17 bps. Japanese sovereign swaps tightened 4 bps to 67 bps.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Negative / 3 of 12 improved / 7 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Positive / 6 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 15 2

 

1. U.S. Financial CDS -  U.S. bank swaps continued to widen last week, albeit at a low-to-mid single digit basis point rate. This brings the month-over-month change to +18 bps for MS, +13 bps for BAC and +11 bps for JPM and GS. Overall, swaps widened for 18 out of 27 domestic financial institutions.

 

Tightened the most WoW: XL, CB, ACE

Widened the most WoW: MBI, GNW, MS

Tightened the most WoW: GNW, AXP, XL

Widened the most MoM: MBI, MMC, SLM

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 1

 

2. European Financial CDS - European bank swaps were modestly wider last week. Societe Generale widened by 14 bps to 202 bps, while Banco Popolare widened 38 bps to 592 bps.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 2

 

3. Asian Financial CDS - Indian bank swaps widened by 5-6 bps last week while the only notable move in China or Japan was Nomura widening by 10 bps.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 17

 

4. Sovereign CDS – European sovereign swaps were largely uneventful last week with the only notable move coming from Portugal, tightening by 17 bps. Japanese sovereign swaps tightened 4 bps to 67 bps.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 18

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 3

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 4

 

5. High Yield (YTM) Monitor – High yield rates rose 1.9 bps last week, ending the week at 5.67% versus 5.65% the prior week.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1793.5.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 6

 

7. TED Spread Monitor – The TED spread rose 1.4 basis points last week, ending the week at 22.8 bps this week versus last week’s print of 21.4 bps. The TED spread has remained relatively range bound for the past month.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -2.6 points, ending the week at 7.2 versus 9.8 the prior week.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was essentially unchanged at 13 bps last week. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Deposits were lower by 4.8bn Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 1 bp, ending the week at 65.7 bps. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We are currently tracking the 16-V1 series. 

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 11

 

12. Chinese Steel – Steel prices in China fell 1.4% last week, or 50 yuan/ton, to 3595 yuan/ton. Both the short-term and intermediate term trends in Chinese steel prices are negative. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened another 2 bps to 150 bps. 

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.2% upside to TRADE resistance and 1.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 14

 

Joshua Steiner, CFA


Expectations Management

This note was originally published at 8am on April 08, 2013 for Hedgeye subscribers.

Las Vegas is busy every day, so we know that not every man is rational.”

–Charles Ellis

 

Today at 11am, we are going to be joined via conference call by Dr. Richard Peterson of MarketPsych Data.  He will be giving a presentation called, “Behavioral Markets: Quantifying the Psychological Drivers of the Global Economy.”  Over the course of the past 9 years, Peterson and his team have been developing sentiment based investment models based on global news and social media sources.

 

Their underlying technology scours 1,000s of data sources (in natural languages) and then assigns scores for various indicators.  These scores are then updated by the minute to create an ongoing data feed, which can provide a real time assessment of sentiment in over 200 countries stock markets, 60 commodities, 30 currencies, and 40 industries.

 

The key reason that Peterson believes his models can highlight inflection points in markets, via blog and news sources, is based on science.  In effect, intense emotions direct attention to vivid events and catastrophic consequences.  As a result, the reasoning prefrontal cortex is taken offline and probability assessments are distorted.  To Ellis point in the quote above, men and women are not always rational.

 

In his presentation today, Peterson will walk us through his process and analysis, and then get into the outputs of his model on various time frames and over various asset classes.  Many of his investment conclusions we agree with, but others stand in contrast to our models and analysis.  This last point should make this morning’s discussion a lively one.

 

The dial-in information for the call this morning is 1-800-434-1335 and conference code is 141433. The materials can be downloaded at 10:00am following the link docs.hedgeye.com/BehavioralMarkets_04.08.13.pdfWe hope you can join us for the call to get a sense for how a true behavioral finance practitioner quantifies expectations in markets.

 

Related to gauging the market sentiment, Friday’s labor report was a bomb by almost any estimation.  Non-farm payrolls increased by a mere 88,000 in March versus 190,000 expectations and a 268,000 increase in February.  Most disconcerting was the internal participation rate, which measures the percentage of total eligible employees that are in the labor force.  We highlight this in the Chart of the Day with a look at long term labor force participation rates, which is now at its lowest level since 1979.

 

Clearly, muted employment growth is a potential risk to growth accelerating in the U.S. , so we are and will be monitoring this data closely.   The response on Friday from the SP500 was somewhat muted as the market was down -0.47% and remains up on the year just under +9%.  In terms of sector divergence on Friday, the worst performing sector was Technology -0.8% (and +3.1% on the year) and remains NEGATIVE in our quant models on the shortest duration.   The best performing sector on Friday was Utilities +0.43% on the day and +13% on the year.

 

As usual, we are seeing the interconnected follow through this morning from global markets as Taiwan is down -2.4%.  Taiwan is an important geography in the global technology food chain, so is seeing some of the follow through from U.S. technology stock weakness on Friday.  As well, having been closed since Wednesday, both the bird flu fears are being reflected in the Taiwanese market as is an increase in North Korean sabre rattling.

 

The latest from North Korea this morning is that there are signs the country is preparing for a fourth nuclear test.  This is based on South Korean intelligence that is showing increased movement of vehicles and personnel at Punggye-ri.   This is the site on North Korea’s northeast coast where the previous three nuclear tests occurred.  The prior three detonations occurred in 2006, 2009 and February 12th of this year.  Clearly, any additional detonation would be a notable acceleration of activity.

 

In terms of positives related to the North Korean situation, they received their strongest, although also most subtle rebuke, over the weekend from the Chinese.  Chinese President Xi Jinping was speaking at the three-day Boao Forum for Asia and said:

 

“No one should be allowed to throw a region and even the whole world into chaos for selfish gains.”

 

This is notable in that there is strong support for North Korean within the Chinese People’s Liberation Army, so Jinping is going out on a limb.

 

The head of the International Monetary Fund Christine Lagarde went less out on a limb when she strongly encouraged Japanese monetary actions over the weekend and called the latest move from Japan a “welcome step”.  Her statement is a precursor to newly anointed Treasury Secretary Jack Lew’s first strip to Europe where he is expected to encourage, are you ready for this, more government spending.  Keynesians of the world unite!

 

In the short run, accelerating government spending in Europe would have the likely side effect of expanding deficits.   This morning, we can actually see real time the impact of not reducing spending in Europe on government bond yields.  Portugal’s Supreme Court rejected cuts in state and pensions and cuts in public sector wages and as a result peripheral bond yields are spiking with Spain and Italy backing up 4.7% and 4.3%, respectively.

 

Given all of the negative global macro events on the horizon this morning, we have a number of potholes to seemingly avoid so that domestic equity returns can continue their upward climb.  The caveat being that the chief risk may be staring at us in the mirror.  As Benjamin Graham once said:

 

“The investor’s chief problem – and even his worst enemy – is likely to be himself.”

 

Indeed.

 

Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1548-1595, $104.18-108.31, $82.48-83.44, 94.62-98.71, 1.71-1.85%, 12.31-14.55, and 1547-1573, respectively.

 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Expectations Management - Chart of the Day

Expectations Management - VP

 



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Inflation Trepidation

“Our trepidation about Volcker’s appointment was later justified.”

-Jimmy Carter

 

That’s what the outgoing President of the United States had to say about Paul Volcker because, “on Thursday, September 25, 1980, the Federal Reserve Board had approved by unanimous vote a one percentage-point increase in the discount rate to 11 percent.”

 

“Former Fed Chairman, William McChesney Martin led the counter attack. He termed Carter’s comments “deplorable”… a “serious and unfortunate thing”, and added … partisan politics ought not to be around the Dollar.” (Volcker: The Triumph of Persistance, pg 190)

 

Of course, by the time Carter was losing the election markets were already front-running the US shift in monetary policy. After hitting an all-time high in January of 1980 ($850/oz), Gold didn’t see those highs again for 3 decades. For Gold Bulls, that was a long-time to average down.

 

Back to the Global Macro Grind

 

To be balanced, according to the Gold Bulls of 2013, this time is different. Rather than acknowledging that the market has already discounted the greatest combination of deficit spending and money printing in US history, they’re digging in.

 

Gold isn’t trading on what they think it should trade on – it’s trading on both absolute and relative expectations vs the US Dollar:

 

1.   ABSOLUTE: On the monetary policy side, no iQe5 upgrade of Gold is coming out of Jackson Hole this year (Bernanke isn’t even going to be there). And on the fiscal side, sequestration combined with US Consumption #GrowthAccelerating, is USD bullish.

 

2.   RELATIVE: Japan is going to print to infinity and beyond and the probability of the Europeans cutting to 0% is rising. Both are bullish for the US Dollar relative to the Yen and the Euro. What’s bullish for the USD remains bearish for Gold.

 

Last week was another reminder of that:

  1. US DOLLAR = +0.9% on the week (up for the 7th week in the last 10 and +4% for 2013 YTD)
  2. CRB Commodities Index = -1.4% on the week (down for the 8th week in the last 10 and -4% for 2013 YTD)
  3. GOLD and SILVER = down -7% and -13% last week, respectively (taking Gold’s YTD decline to -16.9%)

All the while, the Gold Bulls continue to say almost the opposite of what we have been ranting about for 6 months. Paulson & Co. wrote to their investors that central bank “stimulus will eventually lead to inflation.” But that’s my point, eventually already happened.

 

We already had the greatest commodity inflation in world history. If the most asymmetric long-term move in all of Global Macro continues higher from here (#StrongDollar), this will continue to be an epic #CommodityDeflation, not inflation.

 

Don’t take my word for it – ask Mr Market, what was priced in when Bernanke said he’d go to infinity and beyond (6 months ago)?

  1. Silver is down -29% in the last 6 months
  2. Rubber is down -25% in the last 6 months
  3. Japanese Yen is down -25% in the last 6 months 

Again, if you get the US Dollar right, you’ll get a lot of other big things right. There are plenty of other ways to make money on this other than being short Gold and Copper Miners (we remain short Freeport, FCX, btw):

  1. Emerging Markets (EEM)
  2. Russian Stocks (RSX)
  3. Peruvian Stocks (EPU)

Peruvian stocks? You have to be kidding me Mucker. Who the heck do you think you are making calls on Peru – what’s next, Peruvian Par Bonds? Ha! Actually Peru just dipped inside of Russia for the world’s 2nd worse performing stock market YTD (Cyprus is the worst at -15%).

 

The reason why you shouldn’t have your 401k choking on Peru is the same as why you shouldn’t have it stuffed with Gold, Silver, or Corn. Peru a commodity economy (85% of exports) and its stock market is 37% indexed to Basic Material and Energy stocks.

 

As a point of reference, only 13% of the SP500 is in Basic Materials and Energy.  And we don’t want you to be long those S&P Sectors (XLB and XLE) either. Energy (XLE) led USA’s losers last week at -4.4%, only to be outpaced by Russian stocks (on the downside) at -4.9%!

 

How important is it for a Global Macro investor to get the world’s reserve currency right? Is it all interconnected? If you invest in Global Macro, do you have to get growth and inflation right too? We think the answers to these basic questions are self evident. That’s why we built our proprietary Growth/Inflation/Policy (GIP) Model.

 

That’s also why our views on growth and inflation have been different from consensus for a long time now. We get the #GrowthSlowing via US Dollar Debauchery inflation call (it’s a call we made consistently from 2007-2012). And when you see this week’s US preliminary GDP Growth print (Friday), sequentially in Q113 you’ll see #GrowthAccelerating as #CommodityDeflation takes hold too.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST 10yr Yield, VIX, and the SP500 are now $1, $96.02-101.62, $82.41-83.14, 97.12-101.06, $1.29-1.31, 1.68-1.76%, 14.05-18.69, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Inflation Trepidation - Chart of the Day

 

Inflation Trepidation - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 22, 2013


As we look at today's setup for the S&P 500, the range is 36 points or 1.49% downside to 1532 and 0.82% upside to 1568.       

                                                                                                                        

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.50 from 1.48
  • VIX closed at 14.97 1 day percent change of -14.75%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed Nat Activity Index, March (prior 0.44)
  • 8:30am: Fed’s Dudley speaks at economic conference in New York
  • 10am: Existing Home Sales, March, est. 5m (prior 4.98m)
  • 11am: Fed to purchase $3b-$3.75b notes in 2019-2020 sector
  • 11:30am: U.S. to sell $32b 3M bills, $28b 6M bills
  • U.S. Weekly Rates Agenda                               

GOVERNMENT:

    • ITC may issue decision in Apple-Google patent dispute
    • Senate Judiciary Cmte holds a hearing on legislation that would set up criteria for those now in U.S. illegally as step toward citizenship
    • Secretary of State John Kerry attends NATO foreign ministers summit in Brussels
    • Martin Dempsey, chairman of Joint Chiefs of Staff, visits Beijing as U.S. seeks greater Chinese pressure on N. Korea
    • Washington Week Ahead

WHAT TO WATCH

  • IMF talks over wknd included fight over new debt targets
  • S&P early victory in U.S. ratings fraud suit seen as unlikely
  • Dealers say no end to QE in 2013, Hatzius sees ’16 rates rise
  • ABB to buy Power-One for $1b to add solar inverters
  • ANA to finish 787 battery repairs by May after FAA approval
  • Elan board unanimously rejects Royalty Pharma takeover offer
  • Sales of U.S. existing homes probably climbed for 3rd month
  • THQ files bankruptcy plan paying creditors from asset sales
  • Bernanke to miss Jackson Hole symposium on schedule conflict
  • Allstate said to seek offers for Lincoln Benefit business
  • BP may delay development of GoM Mad Dog 2 oil field
  • Netflix seen cracking down on acct sharing to bolster profit
  • Argentina bondholder rejection sets up U.S. court ruling
  • China Premier Li urges focus on rescue as quake toll mounts
  • Mining in region was halted, Xinhua said; Toyota temporarily stopped production at Chengdu plant
  • “Oblivion” is top weekend movie with $38m in NA sales
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • Weekly Eco Preview: Growth in U.S. probably picked up in 1Q
  • GDP, Apple, Exxon, BOJ, Iron Man 3: Wk Ahead April 22-27

EARNINGS:

    • Hasbro (HAS) 6:30am, $0.04 - Preview
    • Bank of Hawaii (BOH) 6am, $0.87
    • Caterpillar (CAT) 7:30am, $1.38 - Preview
    • Halliburton (HAL) 7am, $0.57 - Preview
    • NVR (NVR) 8:50am, $7.86
    • Lennox International (LII) 8am, $0.27
    • Six Flags Entertainment (SIX) 8am, $(1.75)
    • BancorpSouth (BXS) 4pm, $0.21
    • Hexcel (HXL) 4pm, $0.41
    • Swift Transportation (SWFT) 4pm, $0.16
    • United Stationers (USTR) 4pm, $0.55
    • Woodward (WWD) 4pm, $0.60
    • Canadian National Railway (CNR CN) 4:01pm, $1.21 - Preview
    • Ameriprise Financial (AMP) 4:05pm, $1.57
    • Illumina (ILMN) 4:05pm, $0.38
    • Netflix (NFLX) 4:05pm, $0.20 - Preview
    • Rogers Communications (RCI/B CN) 4:05pm, C$0.77 - Preview
    • Zions Bancorporation (ZION) 4:10pm, $0.40
    • Rent-A-Center (RCII) 4:15pm, $0.87
    • Texas Instruments (TXN) 4:30pm, $0.30
    • Brookfield Canada Office (BOX-U CN) 5pm, C$0.39
    • Packaging of America (PKG) 5pm, $0.56
    • Crane (CR) 5:15pm, $1.03
    • IDEX (IEX) 5:22pm, $0.71
    • BBCN Bancorp (BBCN) Aft-mkt, $0.27
    • MB Financial (MBFI) Aft-mkt, $0.42
    • Pennsylvania REIT (PEI) Aft-mkt, $0.43

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Advances for Fifth Day in Longest Winning Streak This Year
  • Hedge Fund Gold Wagers Defy Worst Slump in 33 Years: Commodities
  • Brent Below $100 a Fifth Day as U.S. Funds Reduce Bullish Bets
  • Copper Falls as Lower Imports Into China Stoke Demand Concern
  • Sugar Falls as Investor Buying Fails to Spur Rally; Cocoa Gains
  • China Sugar Stockpile Plan to Reduce Need for Imports, Jia Says
  • Corn Slumps to One-Week Low on Demand Concerns for U.S. Grain
  • Thai Sugar Premium Drops as Futures Rise in New York: Green Pool
  • Shanghai Gold Exchange Benchmark Contract Volume Jumps to Record
  • Bullish Crude Wagers Drop the Most in Two Months: Energy Markets
  • Singapore’s SGX Said to Gauge Demand for LNG Futures Trading
  • Tata Faces Crisis as $20 Billion Spent on Water: Corporate India
  • WTI Crude May Rebound in Weekly ‘Triangle’: Technical Analysis
  • N.Z. Set for More Rainfall as Residents Assess Weekend Damage

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7A

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 


Investing Ideas Newsletter

Takeaway: Current Investing Ideas CAG, DRI, FDX, HOLX, MPEL

 

Investing Ideas Updates:

CAG: Consumer Staples sector head Rob Campagnino is less concerned about ConAgra’s earnings report and continues to like this name, in large part because of its sensitivity to declines in commodity prices.  With the CRB commodity index well off its October 2012 and trending towards the lows of last June, Hedgeye continues bearish on the outlook for commodities.  This resonates in the private label food business, which CAG has just expanded through a substantial acquisition.  The private label business is primarily exposed to the costs of its inputs – by definition, consumers don’t buy no-name products out of brand loyalty.  Campagnino notes that continued declines in commodity prices contribute to substantial expansion of CAG’s profit margins. (Please click here to see the latest Stock Report on CAG.)

 

HOLX: Health Care is not immunized to earnings any more than other sectors.  Sector head Tom Tobin notes weak results so far this earnings season.  Poor admissions results from Health Management Associates (HMA), HCA Holdings (HCA, formerly Hospitals Corporation of America) and weak lab volumes from Quest Diagnostics (DGX) indicate Hologic may report weak diagnostics revenues.  Based on the way health care stocks have reacted to earnings reports so far this earnings season, this may be a non-event.  Certainly for investors holding HOLX for longer-term profits, Tobin remains bullish.  His fundamental case remains strong: a replacement cycle in mammography equipment, acceleration in doctor visits, and especially Tobin’s unique analysis pointing to a rise in birth rates, reversing a 40-year decline. (Please click here to see the latest Stock Report on HOLX.)

 

DRI: Restaurants sector head Howard Penney says the “win-win set up” remains intact at Darden Restaurants.  Penney remains critical of DRI management which “continues to fall short of the standards we believe the investment community is demanding.”  But, he says, “equity holders shouldn’t panic.”  Penney says sequential improvement in industry trends should bail out the company’s business through the rest of this year, giving holders breathing room while we wait for a likely group of activists to emerge.  Finally, at these prices the dividend yield is around 4% - much more than Treasury Secretary Jack Lew is paying these days! (Please click here to see the latest Stock Report on DRI.)

 

FDX: Industrials sector head Jay Van Sciver is skeptical on this week’s downgrades by analysts followingFederal Express.  Says Van Sciver, “FedEx Ground is using its structural advantages to take market share from UPS,” but other Wall Street analysts prefer FDX’s “Big Brown” competitor.  Van Sciver believes this could be because UPS is simpler to understand – not a compelling case for investment.  This is like the joke about the man looking for his lost car keys under a streetlamp.  “Did you lose them here?” asks his friend.  “No,” replies the man.  “I lost them across the street, but there’s a lot more light here.”  Analysts are downgrading FDX now that it’s down almost 20% off its highs.  Van Sciver tweeted “Looking at impact of mix shift is looking at yesterday’s news – actually, last year’s news.  #oldnews.”  And he points to concerns about the impact of the new Teamsters’ contract on FDX.  Note to other analysts:  FDX is non-union, giving them a huge labor cost advantage over UPS on ground.  Van Sciver’s long-term bullish case for FDX remains in place. (Please click here to see the latest Stock Report on FDX.)

 

MPEL: Melco Crown Entertainment remains Gaming, Lodging & Leisure sector head Todd Jordan’s favorite name “with the catalyst of a terrific first quarter earnings release looming.”  Jordan shared his projections this week, looking for net revenue that’s 3% above Wall Street consensus projections – and $267 million of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, a widely-used measure of basic operational profitability of a company) – 5% ahead of consensus.  Jordan says “another strong quarter should bring the company closer to gaining the respect that it deserves from the investment community.”  Jordan looks forMPEL to “transition from a trading vehicle to a core long-term holding” for large institutional holders, adding a further boost to multiple expansion. (Please click here to see the latest Stock Report on MPEL.)

 

 

Investing Ideas Newsletter - Screen Shot 2013 04 20 at 7.50.03 AM

 

Macro Theme of the Week – Buggin’ On Gold

All that glisters is not gold: In “Merchant of Venice,” the winner of Shakespeare’s challenge gets to marry the wealthy and alluring Portia, while the losers must foreswear marriage and remain celibate forever.  That’s a big wager – but no bigger than those recommending you dive into the (increasingly less-) precious metal today.

 

Hedgeye CEO Keith McCullough tweets, “Hedgeye is putting together a list of un-accountable pundits who had you buy Gold $1755 and $AAPL $702 in SEP2012.”  (Follow Keith @KeithMcCullough.)  Keith is more than justified as the Hedgeye Macro team has been consistently bearish on gold for over a year.  Meanwhile the price of gold has seen a 26% peak-to-trough decline going back to 2011 highs.  That’s a Crash in anyone’s book.

Factors driving the decline in gold:

  • Strong US Dollar – Gold is a haven, as in “any port in a storm.”  But the dollar is recovering from a decade of decline and starting to turn up. Recent central bank moves to flood their markets with local currency only help make the dollar look better.  The Bank of Japan (BoJ) just announced a plan to inject 500 trillion Yen into the economy – that’s about US$ 1.4 trillion today, but you’d better look quick, because the week the BoJ made the announcement, the Dollar rose more than 4% against the Japanese currency and looks poised to keep going higher.
  • Economies are weak – In a world full scrambling for a crust of bread, there’s precious little demand for non-economic assets.  Right now Warren Buffett’s observations about gold make all the sense in the world: you can’t eat it, you can’t wear it, you can’t live in it.  Its only utility is to exercise the Greater Fool Theory: find a greater fool than yourself and sell it to him.
  • Value compared to what? – “Haven Assets” are considered safe because they do not behave like other assets.  In Wall Street jargon, they are “uncorrelated.”  Investors afraid of the stock and bond markets traditionally fled to the shelter of gold and silver.  In the past decade, so many investors bought so much gold – and so much more was sucked directly into the stock market in the form of various gold ETFs – that the “haven asset” now trades more like a stock.  Its market behavior has changed and may enter an extended period of adjustment.  Not only is gold no longer a Haven Asset, it’s not clear what it is.  There are very few Absolute Rules of investing, but one that has stood us in good stead is: When uncertainty rules, prices go down.  
  • Price, price, and price – Markets move on Momentum.  Rising prices beget more rising prices, while declines snowball into avalanches.  The downward move in the price of gold has taken center stage.  Price itself has become a negative catalyst, giving truth to the adage “the lower it goes, the lower it can go.”  OK, that wasn’t an adage before.  But it is now.  Gold spot prices remain in a bearish formation, based on Hedgeye’s quantitative models, and don’t look like they will recover any time soon.

All That Is Gold Does Not Glitter: In his fantasy trilogy Lord of the Rings, J.R.R. Tolkein turns Shakespeare inside out to teach that some things are more precious than they appear.   Our Macro team has identified what looks like the solid underpinnings of a return to stability in the US economy.  From an investment point of view, Stability is often more desirable than Growth.  (Remember: when uncertainty reigns, prices go down.)

This is at odds with what you will hear from most of Wall Street, where no one else seems to be embracing the notion of growth and stability coming back into the US economy.  Here are a few of Hedgeye’s main points: 

  • Housing recovery – For the first time since before the financial crisis, the value of your home and the value of your stock portfolio are rising together.  This happened when you weren’t looking.
  • Submerging markets – The BRICS are BROCEN.  Hedgeye’s Macro team says emerging markets are likely on the brink (“BRINC”…?) of the next crisis.  Brazil just raised interest rates after admitting they can’t control inflation. Russia has no economy with oil prices in decline.  And Hedgeye’s analysis pegs India as having tremendous exposure to risks from its corrupt political process and conflicted regulatory regime.
  • Classical gas – Global oil and gas trades in both the spot and futures markets settle in dollars, so a strengthening dollar drives energy prices lower.  A single consumer saving $5 a week at the pump is fairly insignificant.  But multiplied and annualized across 240 registered vehicles in the US… You do the math – all these big numbers make our head hurt. 

As a public service, we remind you that being bullish on economic growth doesn’t mean buy indiscriminately stock market at any price.  These Macro correlations are not eternal truths, they’re just what’s going on right now.  As Keith constantly reminds us, the Rule is, that the Rule is going to change.  Don’t touch that dial.

 

 

Sector Spotlight – Gaming, Lodging & Leisure

Sector head Todd Jordan saw average daily revenue at the Macau gaming tables rise in the most recent week, bolstering his outlook for a double-digit increase this month.  The gaming floors remain busy, apparently discounting the new Bird Flu scare and reports of harsh new border controls – the China Daily writes that junket operators will be criminally prosecuted if they organize a trip into Macau with more than 10 mainland citizens.

 

MGM China head Pansy Ho says Macau has cleaned up its act.  “We don’t see any of that now” she said, referring to the days of money laundering and violence when shady characters surrounded the gaming venues.  Adding to the cleanup, local operators are committing to improving air quality in gaming areas, after 28% of Macau venues failed an initial Health Ministry screen under the new smoking ban. 

 

Not to be outdone by their neighbor across the straits, Taiwan is drafting legislation to permit gaming.  A cabinet minister says the proposal includes a stipulation that there will be no tax imposed on gaming winnings for 20 years following the establishment of casinos in Taiwan.  As they say in China, “Watch This Space.”

Investment Term: Support and Resistance

 

Perhaps the most widely discussed tools of the technical analyst, Support and Resistance represent price levels where stocks tend to run out of momentum.  As their names suggest, they are levels it is difficult to break through – nearly immovable objects that stand in the way of the sometimes irresistible force of stock prices. 

 

“Resistance” represents a pattern of high prices in a trend over a discreet time frame.  Standard analytical approaches use segments such as 30 days, 50 days, 200 days, and one year.  There are problems associated with all these approaches, notably the self-delusional phenomenon known as Confirmation Bias, when we see patterns that may not exist, and which confirm our pre-existing irrational and deeply held beliefs.  If none of this makes sense to you, you may have suffered at one time from Repetitive Trading Loss Syndrome.  Don’t worry, it afflicts nine out of every ten investors.

 

In the simplest of terms, chartists draw a line connecting the peaks in price.  When the line forms a solid ceiling that prices keep hitting, but not breaking through, that price level comes to be called “Resistance.”  It is the upper price that a stock resists breaking above.

 

“Support” is the same process, only with low prices.  The support level of a stock is the price below which we should not expect the stock to trade.  Taken together, Resistance and Support levels form the Trading Range of a stock.  Like all other predictive measures of the investment markets, this works until it doesn’t.

 

Sometimes momentum builds up and stock prices shoot through the upper bound of the trading range.  This is known as an Upside Breakout, or simply a Breakout.  A Downside Breakout does the same thing, only to lower stock prices.  Breakouts can signal that the stock is setting up to establish a new trading range.  But upside breakouts can also be the sign of topping out, if they do not sustain the higher prices.  And downside breakouts can turn into capitulations, when the last sellers dump their positions.  When a stock trades through resistance it may be the signal that the very last buyer has finally bought – the stock will then have nowhere to go but down.  And a breakdown through support can signal capitulation, with the last holdouts finally selling their shares, thus enabling the stock to trend higher.

 

Breakouts can result from irrational mass behavior as investors go into a frenzy of buying or selling.  When fear becomes contagious on a trading floor, a stock can go into Meltdown – all bets are temporarily off as any semblance of rational decision making is cast aside and the markets go into panic mode.

 

A similar dynamic can take hold on the upside, as investors go into a feeding frenzy.  When a stock gets hit with a wave of panic selling, it goes into a Meltdown.  When the panic is a wave of buying, that’s sometimes known as a… Did you say “Meltup”?  Hey, you’re getting good at this!


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