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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 13, 2013   


As we look at today's setup for the S&P 500, the range is 34 points or 1.14% downside to 1615 and 0.94% upside to 1649.

                                                                                               

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

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EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10A


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.65 from 1.66
  • VIX  closed at 12.59 1 day percent change of -4.11%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Adv. Retail Sales, April, est. -0.3% (prior -0.4%)
  • 10am: Business Inventories, March, est. 0.3% (prior 0.1%)
  • 11:30am: U.S. to sell $29b 3-mo., $24b 6-mo. bills
  • U.S. Rates Weekly Agenda

GOVERNMENT:

    • Obama meets with U.K. Prime Minister David Cameron
    • Final deadline for sending public comment to State Dept on Enbridge’s request to double volume of oil it ships through pipeline from Alberta to Wisc.
    • Senate Energy and Natural Resources Cmte holds forum on natural gas, including pipeline infrastructure, use of gas in transportation sector, w/ GE’s Water & Process Technologies BVBA CEO Steve Bolze, Northwest Natural CEO Gregg Kantor
    • Rep. Scott Garrett, R-N.J., hosts Equity Market Structure Roundtable on history of statutes, regulations governing America’s equity markets, 10am
    • Washington Weekly Agenda
    • Top IRS officials knew of Tea Party spying months pre-denial

WHAT TO WATCH

  • Lazard Capital weighs sale among options for broker
  • NY A.G. presses Apple, Google, MSFT on device thefts
  • BoNY Mellon appeals ruling on Chesapeake’s early bond call
  • China investment unexpectedly slows as output trails forecasts
  • Citigroup’s Corbat says spending needed for full recovery
  • Yellen, Geithner, Summers seen as Fed chair contenders: WSJ
  • Mosaic may unveil new buyback, dividend program
  • Commerzbank slides after report of $3.2b share sale
  • Elan to pay $1b for stake in Theravance’s royalties
  • Fed settles on plan for unwinding bond-buying program: WSJ
  • G-7 signals tolerance of yen drop for now as Japan debated
  • Retail Sales: Weekly U.S. Economy Preview
  • U.S. Retail Sales, Pakistan Vote, Cisco: Wk Ahead May 13-18

EARNINGS:

    • Stratasys (SSYS) 6am, $0.38
    • Solarcity (SCTY) 4:01pm, $(0.32)
    • Take-Two Interactive Software (TTWO) 4:05pm, $0.23
    • Enerflex (EFX CN) 4:42pm, C$0.23
    • Post Holdings (POST) 4:48pm, $0.27
    • Summit Midstream Partners (SM) 5:22pm, $0.24
    • Northern Tier Energy (NTI) 5:24pm, $1.00
    • Element Financial (EFN CN) 5:26pm, C$0.07
    • Aimia (AIM CN) 6:02pm, C$0.31
    • RenRen (RENN) 6pm, $(0.07)
    • Turquoise Hill Resources (TRQ CN) Aft-mkt, $(0.04)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Drops for Third Day as Dollar’s Strength Curbs ETP Holdings
  • Gold Bears Pull $20.8 Billion as BlackRock Says Buy: Commodities
  • WTI Drops a Third Day as OPEC Boosts Output to Five-Month High
  • Barclays Considers Hiring in U.S. Metals, Power After Reductions
  • Robusta Coffee Falls as Vietnam Drought Eases; Cocoa Advances
  • Rubber on Cusp of Bull Market With Yen Near 102 as China Imports
  • Gold Imports by India Jump as Auspicious Festival Lures Shoppers
  • Corn Gains as Persistent Rain Raises Risks for Record U.S. Crop
  • Hedge Funds Bulls Cut Bets on Natural Gas Rally: Energy Markets
  • Platinum Posts Biggest Shortage Since 2002 as Output Contracts
  • French Chef Puts Crickets on Menu in Push to Use Insects as Food
  • Dowa Boosts Silver Output for Japan Post-Quake Solar Demand
  • Ted Turner Taking Coal Funds to Create Solar Odd Couple: Energy
  • Copper Rises on Indications Chinese Demand Is Set to Strengthen

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CURRENCIES


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GLOBAL PERFORMANCE

 

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EUROPEAN MARKETS


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ASIAN MARKETS


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MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 


THE M3: SJM COTAI; GALAXY ADDED TO HANG SENG INDEX

The Macau Metro Monitor, May 13, 2013

 

 

AMBROSE SO EXPECTS APPROVAL OF SJM'S COTAI PROJECT BY JULY Macau Daily Times, Macau Business

Ambrose So, CEO of SJM, expects that their MOP20b Cotai casino-resort project will obtain formal approval by the government in 1H 2013.  So expected the authority to finalize the approval procedures within two months, and construction works are expected to start within the year, in order to complete the project by 2016-17.

 

At initial planning, So said the project would create some 500,000 square meters of floor area.  SJM said it is planning to have 700 gambling tables in its first gaming project in Cotai. So also is in discussions with SJM's director Angela Leong on how they can rent Leong's land (180,000 sq mt plot near Macau Dome on Cotai devoted to a family-focused non-gaming resort).

 

When asked about the low performance of SJM’s casinos in the first air quality test, So admitted that the company would have difficulties in making all of its casinos meet the requirements.  However, the operator will try to use supplementary facilities to improve the gaming venues’ air quality. 

 

GALAXY JOINS HANG SENG INDEX Macau Business

Galaxy will be added to Hong Kong’s benchmark Hang Seng Index with effect from June 17.  Galaxy will take the place of Esprit Holdings Ltd – a retailer and manufacturer of fashion clothing.  Becoming a member of the Hang Seng index could provide a boost to a firm’s share price, Business Daily reports.



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Fed Front-Running

“Do we really need the Fed?”

-Ronald Reagan

 

Don’t go all Democrat on me. It was just Mother’s Day and I’m still in a light-hearted Canadian mood. Remember, I am not a Republican either. Both Nixon and Carter devalued the Dollar and monetized the US Debt inasmuch as Bush and Obama have. I’m just a man in a room analyzing it all (and trying my best to front-run the Fed’s next move).

 

Front-run? Yep, this email may not make it through your compliance firewall due to the nature of its title. There are two ways to front-run the Fed: Strategy 1. By getting inside information (hire a “consultant” in Washington) or Strategy 2. By getting growth and inflation right before consensus does. We do the latter strategy.

 

The zeitgeist of American distrust in the Fed was very similar to today when Reagan wondered the aforementioned quote out loud in 1980. If you are thinking through what a post Fed slowing of bond purchases looks like, the early 1980’s aren’t a perfect fit but studying the time period helps you contextualize how to front-run a pattern of expectations shifts.

 

Back to the Global Macro Grind

 

Gold has been front-running the Fed since Bernanke said he’s print to infinity and beyond (September 2012). On the heels of John Hilsenrath’s WSJ article on Friday night, the Gold price is down another -1.3% this morning to $1427/oz. Its worst YTD start since 1982.

 

In other words, by the time the Central Planner in Chief comes to agree with economic gravity, Gold’s price inflation will be long gone. Gold’s last central planning cycle top ended in early 1980 – not 1982 (US economy started to recover in 1982). This time, Gold stopped going up 2 years before economic acceleration as well (Gold’s all-time bubble top = 2011).

 

So, to get Gold right, you need to get the rate of change in the economy right. How do you front-run economic gravity?

  1. Get the USD Dollar right
  2. Get US Consumption right
  3. Get US Treasuries right

We like to think it through in that 1-3 order actually – and that’s primarily because that’s how we have built our GIP (Growth, Inflation, Policy) Model. There is no better front-runner for the marginal rate of change in country’s fiscal/monetary policy than her currency.

 

If you disagree with that, you probably aren’t short the Yen or long the US Dollar. If you share our position on both, you probably agree that on the margin (y/y):

 

A)     US fiscal policy is tighter (sequestration) and monetary policy can’t get any looser (less bond buying than $85B/mth = tighter)

B)      Japanese monetary policy (CTRL+PRINT) and fiscal policy (about the spend their brains out) is looser

 

This makes for a phenomenal cocktail if you are bearish of the 2nd to last Fed policy bubble (Commodities). Oh, and the last of Bernanke’s Bubbles is in Treasuries, fyi.

 

We’ve been crystal clear on getting out of (and shorting) Commodities, Gold, etc. Whereas we have been quiet as of late on how to trade Treasuries in and around Bernanke’s super secret “communication” tools. We were actually bullish on Treasuries until November of 2012 because our GIP Model was still signaling #GrowthSlowing. That’s no longer the case.

 

With US Employment, Housing, and Consumption #GrowthAccelerating both sequentially from Q412 to Q113 and again here in Q213, this is what we mean by front-running the Fed. The Fed is behind us on acknowledging the market’s shift in growth expectations. Gold does not like real-inflation adjusted economic growth.

 

What we like is what the Global Macro market still likes YTD:

  1. US Dollar Index +1.25% last wk and +4.3% YTD
  2. Commodities (CRB Index) -0.7% last wk and -2.4% YTD
  3. Gold -1.9% last wk and -15% YTD

Don’t kid yourself – someone who operates under Strategy 1. of Front-Running knew that Hilsenrath was going to pop that in the paper on Friday night. Someone always knows something. Never stop respecting that.

 

If you didn’t freak-out about Sequestration or Cyprus, should you finally freak-out about this Fed policy shift? Is this the end-of-the-world trade the bears have been waiting on while not calling for it for the right reasons (#GrowthAccelerating)? What do you do now?

  1. Why not start with doing more of the same – short more Commodities, Gold, etc.
  2. Why not then cut your asset allocation to Treasuries to 0% (we did on Friday)

If you’re not going to 100% cash this morning, your 1st two go-to-moves are out and out of the bubbly stuff. Then you have to decide where you buy/sell US Dollars and US Equities. On those fronts I’ll probably:

  1. Keep buying every dip in US Dollars when it hits the low-end of our immediate-term risk range
  2. Keep risk managing the TRADE range for US consumption stocks within their bullish intermediate-term TREND

Channel your inner progressivism this morning. Do you really have to be long a 0% interest rate forever expectation? If you are long US Dollars and/or US stocks, do you really need the Fed?

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and SP500 are now $1, $100.28-105.52, $82.37-88.36, 99.04-101.93, 1.82-1.92%, 11.97-13.61, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fed Front-Running - Chart of the Day

 

Fed Front-Running - Virtual Portfolio


Defense Stocks Ignore Sequestration

Takeaway: Despite the sequestration, defense stocks are sitting near multi-year highs. Here's why and why it might not stay that way.

Here's an excerpt from a note that Industrials sector head Jay Van Sciver wrote to his insitutional clients earlier this week about the performance of  stocks in the defense sector.

 

He writes:

 

"Who would have thought that a couple of months after sequestration, many defense stocks would be sitting near multi-year highs? 

 

When consensus on a group is fairly uniform, it can present challenges and Defense has been heavily out of favor.  Easing concerns around the U.S. budget deficit and hawkish sentiment with respect to North Korea, Syria and Chinese hacking have no doubt helped boost the shares."

 

Defense Stocks Ignore Sequestration - Aerospace

 

Van Sciver continues:

 

"We would not chase defense shares here.  In a longer-term context, the post-sequestration rally is just a squiggle at the top of a defense spending driven mountain. 

 

As we understand it, much of the impact of either sequestration or whatever agreement supersedes it, should come in later years.  Further, orders received today will usually not generate revenue for months and years.  Military retirement, healthcare and other benefit costs are set to rise meaningfully in coming years, potentially crimping procurement spending. 

 

The nature of weapons seems to be shifting toward lower cost/unit unmanned drones and there are risks for contractors as this defense transformation plays out.  Reduced overseas commitments and a lack of prime contractor consolidation prospects may also be negative."

 

 


Is Obamacare Driving Hiring?

Takeaway: Here's our hypothesis why that just might be the case.

Is Obabmacare Driving Hiring?


Financials sector head Josh Steiner addressed this question in a note to institutions earlier this week. Here’s an excerpt from that note. Steiner writes:

 

“Why is the labor market showing accelerating improvement? One hypothesis we've been considering is the Affordable Care Act (ACA) impact on low-wage, high employment industries like restaurants, hotels, etc. Under ACA, i.e., Obamacare, employers with 50+ employees must provide healthcare to employees who work 30 hours or more per week. Part-time (those under 30 hours) and temp workers are exempted from the requirement. Industries like restaurants and hotels, that employ huge numbers of relatively low-wage earners, would see their costs rise materially under ACA. Not surprisingly, many employers are quietly seeking to sidestep ACA by cutting workers to sub-30 hours and offsetting the lost hours by hiring additional part-time and temp workers.

 

Anecdotally, we've been reading a lot of articles about temp agencies seeing significantly higher demand of late. We ran across one that quoted an analyst at another firm saying that when Massachusetts implemented its universal healthcare plan, growth in hiring of temp workers in the state ran at six times the national average.

 

One thing to consider is that companies are treading very cautiously here from a public relations standpoint. No employer wants to be seen as intentionally seeking to sidestep ACA requirements. So much of this is going on under the radar. As counterintuitive as it may seem, we think ACA is actually creating jobs in significant numbers, while simultaneously reducing many workers from full-time (40 hrs+) to part-time (sub 30).”

 


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