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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 21, 2013


As we look at today's setup for the S&P 500, the range is 31 points or 1.16% downside to 1647 and 0.70% upside to 1678.                   

                                                                                                            

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: 1.72 from 1.73
  • VIX closed at 13.02 1 day percent change of 4.58%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales
  • 11am: Fed to purchase $2.75b-$3.5b notes in 2020-2023 sector
  • 11:30am: U.S. to sell 4W bills
  • 11:30am: Fed’s Bullard speaks in Frankfurt
  • 1pm: Fed’s Dudley speaks in New York
  • 4:30pm: API energy inventories

GOVERNMENT:

    • Apple CEO Cook appears before House Permanent Subcmte on Investigations to talk about offshore profit shifting, tax code alongside Apple CFO Peter Oppenheimer and Tax Operations Head Phillip Bullock; Cook said he’d present tax code simplification ideas at hearing, 9:30am
    • IRS Acting Commissioner Steven Miller, Treasury’s IG for tax administration, J. Russell George, Former IRS Commissioner Doug Shulman testify before Senate Finance, 10am
    • CME Chairman Terrence Duffy, ICE CEO Jeffrey Sprecher testify before House Agriculture Cmte on future of the CFTC, 10am
    • Financial Industry Regulatory Authority annual conf., 9:30am
    • Congressional Progressive Caucus holds discussion on wages in federal contracts, 3pm
    • Treasury Sec. Jack Lew speaks to Senate Banking Cmte on Financial Stability Oversight Council’s annual report. 10am
    • House Financial Svcs panel hearing, “Qualified Mortgages: Examining the Impact of the Ability to Repay Rule,” 10am
    • SEC Commissioner Daniel Gallagher speaks at meeting of Women in Housing Finance, 12pm
    • House Financial Svcs panel holds hearing on Dodd-Frank’s conflict minerals provision, 2pm
    • BSA releases study on piracy’s economic impact on govts
    • NIST Director Patrick Gallagher, others testify before House Energy and Commerce Cmte on cyber threats and security, 10am

WHAT TO WATCH

  • JPM shareholders vote whether to split chairman, CEO roles
  • Apple CEO Cook, other execs testify today in D.C. on taxes
  • Sprint to give Dish nonpublic data as Softbank grants waiver
  • Clearwire holder vote on Sprint may be postponed: NY Post
  • Dish chairman Ergen said to bid $2b for LightSquared assets
  • Death toll from Oklahoma tornadoes rises to 91
  • Ex-McKinsey exec. Gupta to appeal insider trading conviction
  • Boeing open to increasing production rate for 787, CEO says
  • Microsoft to unveil new Xbox at event in Redmond, Wash.
  • IRS tax-exempt scrutiny to be subject of Senate cmte hearing
  • IRS ex-official Shulman withdraws CBOE board candidacy
  • Carnival says lower prices forced earnings forecast cut
  • Yahoo to expand in NYC with new Times Square office
  • NetJets CEO says U.S. leading demand for private flights
  • Grifols to buy 35% of Aradigm after latter’s capital increase

EARNINGS: (all times ET, times are approximate)

    • Home Depot (HD) 6am, $0.76 - Preview
    • AutoZone (AZO) 7am, $7.21
    • Medtronic (MDT) 7:15am, $1.03 - Preview
    • Dick’s Sporting Goods (DKS) 7:30am, $0.48
    • Best Buy (BBY) 7:31am, $0.24
    • Tidewater (TDW) 7:51am, $0.61
    • Saks (SKS) 8am, $0.18
    • TJX (TJX) 8:32am, $0.62
    • Intuit (INTU) 4pm, $2.93
    • Analog Devices (ADI) 4pm, $0.52
    • NetApp (NTAP) 4:01pm, $0.68
    • Compuware (CPWR) 4:05pm, $0.05

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Declines in London as U.S. Stimulus Outlook Curbs Demand
  • Platinum Buying Quickens as Gold Allure Diminishes: Commodities
  • WTI Crude Trades Near Seven-Week High as Stockpiles Seen Falling
  • Copper Swings Between Gains and Drops Amid Concern About Supply
  • Corn Declines for Second Day as U.S. Farmers Accelerate Planting
  • Palm Oil Seen Dropping by Mistry as Output, Stockpiles Climb
  • Freeport Mine Death Toll Rises to 21 as Indonesia Reviews Mines
  • Hunan Rice Sales Plunge as China Probes Cadmium Contamination
  • Crude Supplies Decline a Second Week in Survey: Energy Markets
  • Brazil Coffee Growers Seek Price Review From ICE Futures U.S.
  • Adaro Chief Says Coal at $100 a Ton New Normal: Southeast Asia
  • ThyssenKrupp Woes Tarnish 99-Year-Old Steel Baron Beitz’s Legacy
  • Gold-Silver Price Suggests Stocks to Snap Gain: Chart of the Day
  • Cocoa Gains in London as Pound Nears Six-Week Low; Sugar Falls

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 - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 



The Waterfall

“A system can become locally ordered at the expense of a global increase in entropy.”

-Eric Chaisson

 

First, my family’s thoughts and prayers go out to the those personally affected by the natural disaster in Oklahoma.

 

Last week I wrote a note titled Sovereign Yield Risk that generated a lot of feedback. Since we put the Hedgeye platform at the heart of a wide open global network, feedback has become our greatest asset. Our research team has its own internal pipes of communication, but they don’t work unless we connect them to our client pipes and the new highway of dynamic information flow: #Twitter.

 

Both information and asset allocation flows matter to us, big time. Alongside price and volatility, they are critical factors that help us risk weight the probability of new bursts of entropy into the Global Macro matrix. Japanese Government Bond Yields breaking out above our long-term TAIL risk line would qualify as a new burst; so would a move toward 2.4% in 10yr US Treasury Yields.

 

Back to the Global Macro Grind

 

The recent 1-month move in both JGBs (we’re short them) and US Treasury Yields are 2 of the 3 most important things in my notebook this morning. The 3rd is gold. And all 3 of these major macro factors are interconnected to a causal factor with a catalyst.

 

Let’s review what I am looking at this morning:

  1. Japanese Government Bond Yields (10yr JGBs) = up another +5 bps to 0.89% this morning; +31bps in the last month
  2. US Treasury Yields (10yr) = up +1 basis point this morning to 1.96%; +25bps in the last month
  3. Gold continues to crash from its 2011 #BernankeBubble top, backing off -0.5% this morning after a 1-day dead cat bounce

As always, contextualizing these moves across our multi-duration model matters too:

  1. JGB long-term TAIL risk line = 0.81% (so we’re breaking out above that)
  2. UST 10yr long-term TAIL risk line = 1.82%
  3. Gold snapped its long-term TAIL risk line of $1681 in January (not new)

You can ignore the entropy associated with 1 or 2 of these TAIL lines snapping (I hope you didn’t ignore our Gold signal 6 months ago), but it’s really hard to ignore all 3 of them; especially when the mother of all bursts of entropy (#StrongDollar) is in motion.

 

What matters most in macro is what happens on the margin. That’s why Ben Bernanke acknowledging what we have been signaling on employment, housing, and consumption #GrowthAccelerating will matter in his testimony to Congress tomorrow. That’s your catalyst.

 

To be fair to the #EOW (end of the world) guys, their thesis remains what ours was during Bernanke’s 2010-2012 QE marketing campaign. Consensus doesn’t think we will ever have real (inflation adjusted) growth in the USA again primarily because QE didn’t deliver it.

 

Ironically, but not surprisingly, the end of QE is the economic catalyst we’ve all been waiting for. #StrongDollar, Strong America.

 

To review the flow show:

 

1.       Expectations for incremental QE fade

2.       #StrongDollar manifests; Gold crashes

3.       Bond Yields rise

 

Like the thermodynamics of water flowing toward (and over) a damn, the flow show is happening in a locally ordered pattern – and the global burst of entropy (the waterfall) is going to be very hard to stop.

 

I don’t think mother Merrill explains flows this way, but that’s cool – I just want them to keep telling their clients to sell Gold, Treasuries, and Japanese Government Bonds so that they don’t get run-over by the only centrally planned bubbles that are left.

 

Mr. Macro Market gets this – look at the most recent burst of immediate-term entropy (3 week correlations): 

  1. US Dollar vs SP500 = +0.91
  2. US Dollar vs 10yr UST Yield = +0.92
  3. US Dollar vs Gold = -0.87

And since 3 weeks don’t matter to “long-term” investors, what if you contextualize 3 weeks within a 6 month TREND?

  1. US Dollar vs SP500 correlation (on a 6 month duration) = +0.79
  2. US Dollar vs 10yr UST Yield correlation (6 months) = +0.11
  3. US Dollar vs Gold correlation (6 months) = -0.78

In other words, one of these 3 things (UST Treasury Yields) does not look like the others (SP500 and Gold) on a 6-month duration, yet. But that’s precisely the risk management point – the probability of US Treasuries and JGBs correlating with #StrongDollar at an accelerating rate is now going up, not down. That’s new.

 

Can Bernanke not acknowledge both the economic growth stabilization of the last 6 months and the recent acceleration in US employment, housing, and consumption growth? Sure. I can have some IRS dude tell me the sun doesn’t rise in the East too – but that doesn’t mean I (or the market) has to believe them.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $101.27-105.31, $83.49-84.75, 101.42-104.48, 1.90-2.02%, 12.22-13.79, , and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Waterfall - Chart of the Day

 

The Waterfall - Virtual Portfolio


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Trade of the Day: UAL

Takeaway: Keith covered his short position on UAL this afternoon, booking a tidy profit.

Keith covered his short position on UAL at 1:30pm today at $34.38 a share, booking a one percent gain for his efforts.

 

Keith writes of today’s trade, “Bear scraps. Especially in this stock, I’ll take any gain on the short side I can get. We’re seven for ten shorting it in the last year – one of the toughest stocks (that) we risk manage.”

 

Trade of the Day: UAL - UAL


Bullish: SP500 Levels, Refreshed

Takeaway: The immediate-term TRADE overbought signal we issued last week didn’t last long.

This note was originally published May 20, 2013 at 10:58 in Macro

POSITION: 11 LONGS, 8 SHORTS @Hedgeye

 

The immediate-term TRADE overbought signal we issued last week didn’t last long, but the down -0.5% move we had the day after was the biggest down move in 10 days. We call these bear scraps within a very Bullish Formation.

 

Intraday Thursday was actually the 1st time I was net short (in #RealTimeAlerts) since November 29th, so I think the call got  some attention. But so should have my covering shorts and getting back to net long on Friday morning.

 

That Consumer Confidence reading (+10% m/m in May vs April was that good, and all support lines for SPY held).

 

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

 

  1. Immediate-term TRADE overbought = 1678
  2. Immediate-term TRADE support = 1647
  3. Intermediate-term TREND support = 1558

 

In other words, I listen to my wife and my machine (in that order). Overbought was as overbought did (for a day), as it will again (higher) and oversold will lower.

 

 

Keith 

 

Bullish: SP500 Levels, Refreshed - SPX


WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION?

Takeaway: We continue to hold a directionally positive outlook for global growth and a dovish outlook for global inflation (TREND duration).

SUMMARY BULLETS:

 

  • Our proprietary GIP (short for “Growth, Inflation and Policy”) model continues to signal further nirvana for global economy. Specifically, the world is projected to remain in Quad #1 – which is a state denoted by real GDP growth accelerating as CPI decelerates – for the second-straight quarter here in 2Q13E.
  • Incorrectly interpreting YTD commodity price declines – which we have repeatedly identified as a stimulus to the global economy, rather than harbinger of souring economic trends – the bears missed the turn from Quad #3 in 4Q12 to Quad #1 in 1Q13 and we think they are missing the staying power we see at the current juncture as well.
  • A counter-consensus acceleration in global growth is something we think super-sovereign bond markets are starting to focus on. If US Treasuries, German Bunds and JGBs all have one thing in common, it’s that they are allergic to economic growth (review HERE and HERE for more details).
  • Jumping over to our outlook for global inflation, we continue to view the inverse relationship between the USD and the prices of international commodities as a casual factor for the slope of reported inflation readings across the globe (on various lags, due to cross-country variance in CPI basket weightings). That relationship continues to underpin our dovish outlook for global inflation – which is perhaps the most counter-consensus economic call we have [correctly] made all year (review HERE and HERE for more details).
  • We continue to sing the praises of #StrongDollar and the associated leeway incremental commodity deflation is creating for economic growth to surprise to the upside over the intermediate term. Insomuch as #StrongDollar has been a bearish signal for regressive assets like Gold, it has become a bullish signal for pro-growth assets like equities.
  • To that tune, the US Dollar Index holds positive correlations of +0.90 and +0.80 with the S&P 500 and MSCI World Equity Index, respectively, on our immediate-term duration. That contrasts with the -0.86 and -0.61 inverse correlations it holds with Gold and the VIX, respectively, on that same duration. While these statistical relationships are more intense in recent weeks, those directional signals are consistent across the trailing six months of our cross-asset class regression analyses.

 

THE MODEL

A decade-plus of research and remodeling has helped our macro team develop a predictive tracking algorithm that keeps us 1-2 quarters ahead of the Street on any country or region’s growth and inflation trends. The model isn’t designed with the intent of playing “pin-the-tail-on-the-sell-side-donkey” from a forecasting perspective, but rather designed to proactively signal accelerations, decelerations and inflections in the rates of change (i.e. 2nd derivative) for both growth and inflation. Using the US as an example, the model backtests with an r² of 0.82 for growth and an r² of 0.69 for inflation.

 

Our macro forecasting model, which is as differentiated as anything you’ll find on the Street, has been [accurately] modeling “countries like companies” for a past ~5 years. As an aside, this practitioner’s approach to macro investing was most recently made popular by Dan Loeb at this year’s SALT conference.

 

Jumping back into it, our proprietary GIP (short for “Growth, Inflation and Policy”) model continues to signal further nirvana for global economy. Specifically, the world is projected to remain in Quad #1 – which is a state denoted by real GDP growth accelerating as CPI decelerates – for the second-straight quarter here in 2Q13E.

 

WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - WORLD

 

Incorrectly interpreting YTD commodity price declines – which we have repeatedly identified as a stimulus to the global economy, rather than harbinger of souring economic trends – the bears missed the turn from Quad #3 in 4Q12 to Quad #1 in 1Q13 and we think they are missing the staying power we see at the current juncture as well.

 

WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - CRB

 

THE SEARCH FOR CONFIRMING AND DISCONFIRMING EVIDENCE

At Hedgeye, we don’t think it’s enough to just rest on the conclusions of any model(s); rather, it ultimately pays to vet any research assumptions with confirming and/or disconfirming evidence. In this vein, the evidence continues to affirm the conclusions laid out above.

 

Looking to global growth, APR PMI data continues to signal positive sequential growth – albeit at a slightly slower rate. Specifically, the median of our 39-index sample of PMI data from all of the key countries and economic blocks was essentially flat MoM, dropping a mere -10bps to 50.8.


WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - PMI Scatter

 

Sequential gains (i.e. positive 1st derivative growth) from larger numbers bodes well for continued acceleration in the YoY real GDP growth figures (i.e. positive 2nd derivate growth), which our model is currently predicting – especially in the context of easier 1Y comps as highlighted in the aforementioned GIP chart and in the chart below. Students of Bayesian statistics understand full well that the base rate is just as important to determining the direction and magnitude of growth figures as the most recent sequential deltas.

 

WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - JPM PMI

 

A counter-consensus acceleration in global growth is something we think super-sovereign bond markets are starting to focus on. If US Treasuries, German Bunds and JGBs all have one thing in common, it’s that they are allergic to economic growth (review HERE and HERE for more details).

 

WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - 10 2

 

Jumping over to our outlook for global inflation, we continue to view the inverse relationship between the USD and the prices of international commodities as a casual factor for the slope of reported inflation readings across the globe (on various lags, due to cross-country variance in CPI basket weightings). That relationship continues to underpin our dovish outlook for global inflation – which is perhaps the most counter-consensus economic call we have [correctly] made all year (review HERE and HERE for more details).

 

WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - DXY YoY vs. CRB YoY

 

WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - CRB YoY vs. CPI YoY

 

Our dovish outlook for global inflation continues to be both perpetuated and confirmed by our quantitative risk management signals:

 

WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - DXY

 

WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - OIL

 

WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - GOLD

 

THE INVESTMENT CONCLUSIONS

All told, 2013 has been quite a year for top-calling and anchoring on mini-crises of non-epic proportions, which tells us one thing: there are large pockets of the investment community that continue to stare at the tree(s) in lieu of the forest. This is inclusive of this latest global growth scare of the past 4-6 weeks, as indicated by plummeting economic surprise indices.

 

WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - Econ Surprise

 

That being said, however, we continue to sing the praises of #StrongDollar and the associated leeway incremental commodity deflation is creating for economic growth to surprise to the upside over the intermediate term. Insomuch as #StrongDollar has been a bearish signal for regressive assets like Gold, it has become a bullish signal for pro-growth assets like equities.

 

WHAT’S OUR PROCESS SIGNALING REGARDING GLOBAL GROWTH AND INFLATION? - Oil 3M

 

To that tune, the US Dollar Index holds positive correlations of +0.90 and +0.80 with the S&P 500 and MSCI World Equity Index, respectively, on our immediate-term duration. That contrasts with the -0.86 and -0.61 inverse correlations it holds with Gold and the VIX, respectively, on that same duration. While these statistical relationships are more intense in recent weeks, those directional signals are consistent across the trailing six months of our cross-asset class regression analyses.

 

Focus on the forest, not the trees.

 

Darius Dale

Senior Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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