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Bearish TRADE: SP500 Levels, Refreshed

Takeaway: On the way down to 1515-11529 support, I can then cover shorts and start to take up my gross long position again.

POSITION: 9 LONGS, 8 SHORTS @Hedgeye

 

On our immediate-term TRADE duration, the SP500 just failed at TRADE resistance (1557) again. On our intermediate-term TREND duration, the market still looks fine (1515 TREND support). A market that’s in this position has what we call Duration Mismatch.

 

What to do? For me the answer had to be learned over the years – but now the playbook is pretty simple: A) take down gross exposure and B) make sure my net is tight. On the way down to 1 support, I can then cover shorts and start to take up my gross long position again.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1557
  2. Immediate-term TRADE support = 1529
  3. Intermediate-term TREND support = 1515

 

Being bullish at every minute of every day is no way to live. Neither is disrespecting my signal. So I’ll let that bearish immediate-term TRADE signal override what’s becoming an even more bullish intermediate-term TREND research view (Dollar Up, Down Oil).

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bearish TRADE: SP500 Levels, Refreshed - SPX


COPPER: Sliding Lower

While gold was at the epicenter of media attention during its multi-percentage point decline last week, copper is the metal everyone should really be paying attention to. After falling -6.1% last week, copper is down -1.2% this morning to $3.11/lb. That brings the damage on copper to -15% year-to-date, as you can see in the chart below that shows the de facto standard futures contract for copper: London Metals Exchange High Grade 3-Month Copper.

 

Copper and other commodities will continue to decline in price as the great commodity bubble created by Federal Reserve Chairman Ben Bernanke and his monetary policies deflates. We remain bearish on commodities and still like our Freeport-McMoRan Copper & Gold (FCX) short. The stock is already down -1.7% this morning and has declined -21.1% over the last three months.

 

COPPER: Sliding Lower - YTD copper


European Banking Monitor: Benign

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:

 

European sovereign swaps were largely uneventful last week with the only notable move coming from Portugal, tightening by 17 bps, and the Euribor-OIS spread was essentially unchanged at 13 bps last week.

 

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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.

 

European Banking Monitor: Benign - tt. banks

 

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

 

European Banking Monitor: Benign - tt. sov 1

 

European Banking Monitor: Benign - tt.  sov 2

 

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. 

 

European Banking Monitor: Benign - tt. euribor

 

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.

 

European Banking Monitor: Benign - tt. facility

 

 

Matthew Hedrick

Senior Analyst

 


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.

Energy Crisis In Russia

Russia, being a country rich in natural resources, is feeling the pain of the declining price of crude oil. A strong US dollar has driven the price of Brent crude oil below $100 a barrel with no support until $96.02 a barrel.

 

With oil in bearish formation, that spells trouble for Russian stocks, many of which are tied to the performance of the energy markets. The RTSI index, which is already down -12.8% year-to-date, is down -1.16% this morning. Comparatively, the Energy Select SPDR ETF (XLE) was down -4.4% last week and is down -5% over the last month.

 

Energy Crisis In Russia - RTSI index


Morning Reads From Our Sector Heads

Keith McCullough (CEO):

 

Tata Faces Crisis as $20 Billion Spent on Water: Corporate India (via Bloomberg)

 

PBOC’s Zhou Says Slower Growth Needed for Restructuring (via Bloomberg)

 

Josh Steiner (Financials):

 

Wall Street betting billions on single-family homes in distressed markets (via Washington Post)

 

Cleveland Fed stress test adds housing, securitization coverage (via Housing Wire)

 

Banks pull back from risky regions (via Financial Times)

 

Jay Van Sciver (Industrials):

 

Caterpillar Reports First-Quarter Results, Revises Outlook and Announces Resumption of Stock Repurchase (via Caterpillar)

 

Brian McGough (Retail):

 

Björn Gulden Taking Reins at Puma (via WWD)

 

Teens Get Less Parental Help as Fashion Spend Dials Back (via SGI News)

 

Kevin Kaiser (Energy):

 

Halliburton Announces First Quarter Income From Continuing Operations of $0.67 Per Diluted Share, Excluding a Charge Related to the Macondo Well Incident (via Halliburton)



 

 


 


The Banker Boost

Client Talking Points

Japan's

Japan's announced a few weeks back that it would inject $1.4 trillion into the economy as a stimulus measure. In turn, stock markets ripped to the upside while the value of the Japanese Yen plummeted considerably. This morning, the tradition continues, with the Yen testing the 100 level (against the US dollar) and the Nikkei 225 hitting a fresh year-to-date high, up +1.9% to 13,568. That's the power of the Bank of Japan doing whatever it wants. In turn, the people of Japan will feel the pain when they hit the grocery store and find out that an ear of corn costs $10.

Gold Bulls

Moving on to the Federal Reserve in the United States, our central bank has made it clear there will be no QE 5 to save the day. With this being a bullish catalyst for the US dollar, gold prices continue to get whacked. Bear in mind that a dead cat bounce does not equate to a recovery. Gold can go much lower, especially as the big asset managers liquidate positions.

Asset Allocation

CASH 28% US EQUITIES 20%
INTL EQUITIES 18% 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

"Busiest week for $SPY earnings with one-third of the index reporting" -@CNBCMelloy

QUOTE OF THE DAY

"It is impossible to enjoy idling thoroughly unless one has plenty of work to do." -Jerome K. Jerome

STAT OF THE DAY

Caterpillar's (CAT) its first-quarter profit dropped to $880 million or $1.31 a share, from $1.59 billion or $2.37 a share, in the year-ago quarter. The company also cut its full-year outlook for 2013.


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