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Overbought (finally): SP500 Levels, Refreshed

Takeaway: The market is overbought and it’s a safer place to cut gross long exposure and/or start tightening your net exposure than it was last week.

POSITION: 9 LONGS, 6 SHORTS @Hedgeye

 

Finally, anywhere north of 1657, the SP500 is immediate-term TRADE overbought. I have been waiting to send you this overbought email all week – but my machine didn’t give me the explicit signal until today. I listen to my wife, and my machine.

 

This doesn’t mean I am trying to call a top. This simply means what it says – the market is overbought and it’s a safer place to cut gross long exposure and/or start tightening your net exposure than it was last week.

 

The fundament bull case of #StrongDollar hasn’t been better obviously (USD is at its YTD high here intraday), but it too is immediate-term TRADE overbought. SPX vs USD has a positive correlation on our TREND duration of +0.81.

 

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

 

  1. Immediate-term TRADE overbought = 1657
  2. Immediate-term TRADE support = 1629
  3. Intermediate-term TREND support = 1545

 

In other words, we are up on a rope. Sell some high – buyem back on red, and keep doing more of what’s been working.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Overbought (finally): SP500 Levels, Refreshed - SPX


DF – Quick Update on When Issued Trading

WWAV shares began trading “when issued” this morning, and since you don’t need a borrow on when issued shares, investors are buying shares of DF and simply selling shares of WWAV/A and WWAV/B (when issued) – both those securities are now trading at a substantial discount to WWAV regular way (WWAV/B is trading nearly a $1 below WWAV).



There is also significant volume in the DF when issued (trading at $9.15), but keep in mind that value includes the remaining 19.9% interest in WWAV that DF will seek to monetize over the next 18 months.

 

Using the most aggressive value of the DF stub obtained by looking at all these moving parts – DF regular way less the value of WWAV/B, the stub is trading at approximately $6 per share, which still only equates to 5.1x EV/EBITDA for the fluid milk business, so there is still plenty of meat on the bone.

 

For investors that are able to trade when issued securities (not everyone), purchasing DF when issued makes a great deal of sense to us at this point.  Interestingly, while acknowledging that WWAV is a difficult borrow, investors so inclined and able to do so could by WWAV/B when issued and short WWAV regular way – the two values are nearly a $1 apart and that spread will move to zero over the next week.

 

-Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst



Signs of European Strength?

Takeaway: Here's our take on the GDP numbers from Europe and what it means for the Euro and for stock markets in the region.

This note was originally published May 15, 2013 at 11:23 in Macro

European first quarter 2013 Final GDP figures were released today and confirm our call for protracted sluggishness across the region. Eurozone GDP has now contracted for sixth straight quarters and actual results for the region and major countries were lower than estimates on a quarter-on-quarter basis:  Eurozone -0.2% (est -0.1%), Germany +0.1% (est +0.3%), France -0.2% (est -0.1%), Italy -0.5% (est -0.4%).

 

Call: we expect the EUR/USD to be range bound over the intermediate term, anchored on the ECB’s backstop for the region (with long-term TAIL support at $1.22) and a TREND/TAIL line of resistance at $1.32. We think that as the market increasingly looks for another interest rate cut (which we’re not calling for over the next months as Draghi assesses the last cut), the EUR/USD may weaken as equities rise.  (This is also in line with our #StrongDollar call).

 

Signs of European Strength? - rr. eurusd

 

 

Negative France/ Positive Germany and the Periphery


We continue to wrestle with the miss-match on weak fundamental results and strong capital market performance across much of the region.

 

On the fundamental side, we highlight France as one nation that has not proven it has a credible plan of structural reforms to improve its competitiveness. We continue to think that Hollande’s budget policy of increased taxes without sufficient spending cuts and its outsized debt to GDP (now over 90%) will hamper the economy (and the region) more than it helps. That said, the European Commission is squarely on board to allow France two more years to reach its deficit reduction target level and has largely signaled a dovishness vis-à-vis further austerity. This could prove to be a tailwind.  

 

On the flip side, we like Germany on a relative basis. We see GDP gains coming in 2H and the EUR/USD price benefiting the export-heavy country. Chancellor Merkel should continue to talk-up her handling of the economy throughout the “crisis” in Europe as she prepares for re-elections in September. We see Germany playing ball in the European project (writing bailout checks if needed) versus the very adverse option of a return to a strong D-Mark.

 

Despite ongoing fundamental weakness across the periphery, we continue to believe that market participants will buy the periphery (equities and bonds) as the yield chase extends itself alongside the expectation that the ECB will backstop the Union at all costs. 

 

Sovereign bond issuance year-to-date continues to show paper being priced at lower levels, a positive sign, and in the coming months we may see steps towards setting up loan pools to small-and-medium-sized enterprises (SMEs), which would be another tailwind to a channel that is currently clogged.

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.32%
  • SHORT SIGNALS 78.48%

Euro Tail Risk

European Q1 2013 Final GDP figures were released today and confirm our call for protracted sluggishness across the region. Eurozone GDP has now contracted for sixth straight quarters and actual results for the region and major countries were lower than estimates on a Q/Q basis:  Eurozone -0.2% (est -0.1%), Germany +0.1% (est +0.3%), France -0.2% (est -0.1%), Italy -0.5% (est -0.4%).

 

Call: we expect the EUR/USD to be range bound over the intermediate term, anchored on the ECB’s backstop for the region (with long-term TAIL support at $1.22) and a TREND/TAIL line of resistance at $1.32. We think that as the market increasingly looks for another interest rate cut (which we’re not calling for over the next months as Draghi assesses the last cut), the EUR/USD may weaken as equities rise.  (This is also in line with our #StrongDollar call).

 

Euro Tail Risk - rr. eurusd

 

 

Negative France/ Positive Germany and the Periphery


We continue to wrestle with the miss-match on weak fundamental results and strong capital market performance across much of the region.

 

On the fundamental side, we highlight France as one nation that has not proven it has a credible plan of structural reforms to improve its competitiveness. We continue to think that Hollande’s budget policy of increased taxes without sufficient spending cuts and its outsized debt to GDP (now over 90%) will hamper the economy (and the region) more than it helps. That said, the European Commission is squarely on board to allow France two more years to reach its deficit reduction target level and has largely signaled a dovishness vis-à-vis further austerity. This could prove to be a tailwind.  

 

On the flip side, we like Germany on a relative basis. We see GDP gains coming in 2H and the EUR/USD price benefiting the export-heavy country. Chancellor Merkel should continue to talk-up her handling of the economy throughout the “crisis” in Europe as she prepares for re-elections in September. We see Germany playing ball in the European project (writing bailout checks if needed) versus the very adverse option of a return to a strong D-Mark.

 

Despite ongoing fundamental weakness across the periphery, we continue to believe that market participants will buy the periphery (equities and bonds) as the yield chase extends itself alongside the expectation that the ECB will backstop the Union at all costs. 

 

Sovereign bond issuance YTD continues to show paper being priced at lower levels, a positive sign, and in the coming months we may see steps towards setting up loan pools to small-and-medium-sized enterprises (SMEs), which would be another tailwind to a channel that is currently clogged.

 

For more on our outlook on the Eurozone please see last Friday’s note titled “Where’s Europe At”.

 

Euro Tail Risk - rr. gdp

 

Matthew Hedrick

Senior Analyst


Podcast: Q&A with Keith and Clients

 

Keith answers questions on professional top-callers, the importance of valuation and more.



Dollar Matters

Client Talking Points

Dollar Flexes Its Muscle

The US Dollar broke out to year-to-date highs yesterday, in a rally that Keith says is  “really starting to matter” from both correlation risk (lower commodities) and economic growth (strong consumption) perspectives. The US dollar is overbought immediate term, but the US Dollar index could push $90 in the intermediate term.

Gold Losing Luster

Gold, though, doesn’t like a strong dollar that confirms that growth is indeed accelerating. Gold is currently oversold at $1409, but Keith says gold is beginning to look like it did in the early 1980s. That’s anything but good for gold bugs.

Asset Allocation

CASH 39% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 25%

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.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 

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.

Three for the Road

TWEET OF THE DAY

“FX: Hell0 102, Burning Yen.” -- @KeithMcCullough

 

QUOTE OF THE DAY

“He who conquers, endures.” -- Perseus

STAT OF THE DAY

3.3%, the amount the S&P 500 is up so far in May


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