TODAY’S S&P 500 SET-UP – June 7, 2013
As we look at today's setup for the S&P 500, the range is 62 points or 0.96% downside to 1607 and 2.86% upside to 1669.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
There's been a big mean reversion blowout to my intermediate-term TREND line in USD/YEN. This level matters, big time. The intermediate-term TREND line is 95.66. This is a new risk to manage on a much more important duration than what I have been working on for the last 6 months (just risk managing the immediate-term TRADE range of #StrongDollar vs Burning Yen). Japanese Finance Minister Aso didn’t intervene overnight, so that’s what’s getting you this last push. If the Yen doesn’t stop going up from here, my model is going to be confused
TREND support for USD Index is 81.34. One thing that can get the dollar to bounce is a blowout jobs report this morning. It's not clear what consensus thinks about the report into the print, as that seems to change every 3 hours of trading. The last 3 hours yesterday gave us a nice rip. 1624 or higher in the SP500 puts the 2013 bears under siege again. I think both 10yr UST yields and USD will be going up at the same time if that happens.
2.02-2.22% is the immediate-term risk range for the 10yr. So at 2.05%, we’re testing the low end of that range into the jobs print. That suggests consensus expectations remain bearish on growth. A blast toward 2.22% in a day would be interesting, but not surprising. We have no edge on the jobs report, and never will. Weekly rolling NSA Jobless Claims is what matters in our model most.
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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 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.
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.
"The best thing one can do when it is raining is to let it rain."
- Henry Wadsworth Longfellow
According to Forbes, the 400 wealthiest Americans have more wealth than the bottom 150 million Americans combined.
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“And when it rains on your parade, look up rather than down. Without the rain, there would be no rainbow.”
-Gilbert K. Chesterton
It is a rainy day in the Northeast. And rain can be depressing if we let it get to us. The point that Chesterton makes above though is spot on. Without the disruption of rain, there would ultimately be no rainbow and subsequently the hope of a pot of gold.
The idea that we have to suffer through bad times to get to good times is of course a bit of a paradox. To Chesterton, who is often referred to as the “prince of paradox” this was fine. After all, he was an orthodox Christian who had friendly enemies. (He was also 6’4, wore a cape, and carried around a swordstick in his hand.)
In mathematical terms, we would probably characterize this concept of bad weather becoming good as reversion to the mean. Due to mathematical impossibilities, no price goes up forever and no price goes down forever. In the same vein, rain doesn’t last forever and when it stops the weather is typically very nice. Unfortunately for those hoping for good weather, the forecast is for showers through Tuesday of next week. But as Longfellow said:
“The best thing one can do when it’s raining is to let it rain.”
For the last week or so, the U.S. equity market has been raining on our growth is accelerating parade. So is this a temporary rainy spell and will the sunshine of a positive economic growth return shortly? Well, we certainly still believe this to be the case.
We had a good email discussion with one of our subscribers yesterday who asked us about an assertion Keith made that employment is continuing to improve. The distinction between our view and the view of much of consensus is that we believe that seasonally adjusting the employment number distorts the data series. Unfortunately for us, the market continues to cue off the seasonally adjusted number and those appear to be stagnating.
The impact over the last four years is that the seasonal adjustments have created a tailwind from September to February and a headwind from March through August. This is highlighted in the first chart below. This “seasonally adjusted” slowdown in employment has also been a headwind for the equity market for the last few years. Nonetheless, even on a seasonally adjusted basis, as highlighted by the purple line in the first chart, employment is decelerating at a slower pace than in the prior four years.
More instructive though is the second chart below, which highlights rolling initial unemployment claims that are non-seasonally adjusted. The trend here is clear, which is that employment is improving and somewhat decisively so. To the extent that the market continues to focus on the seasonally adjusted series, though, we are likely to have a few more months of employment rain. On that front, the May employment report is at 830am, so be wary as we are in the season of employment rain!
We would be remiss if we didn’t touch on Asia this morning where the storm clouds are creating a down pour on the global macro markets. For those that chased Japan into its Abenomic highs, they are now quite literally having a mother of a time. Specifically, the MOTHERS index closed down -11.5% over night and is now down -38% from its highs. (This index holds smaller companies so is naturally more volatile.)
The driver of this mother of a correction in Japan was the strength in the Yen versus the dollar. From our purview, the break through the 99 barrier seemingly triggered a massive stop loss program and, as they say, when it rains, it pours. As a result, the Yen / Dollar went from 99 to 96 in a straight line yesterday. (Some have speculated that one catalyst may have been a leaking of today’s jobs number, but who are we to distrust the government . . .!)
As it relates to the Yen, which remains one of our Best Ideas on the short side, we still think that relative monetary policy will inform the direction of the currency. As my colleague Darius Dale emphasized yesterday in a note to subscribers, the BOJ is already committed to monetizing ¥132 trillion through EOY ’14 (27.7% of 2012 nominal GDP) vs. the Fed’s $2.04 trillion (13% of 2012 nominal GDP) over the same time period – assuming the Fed continues at the current pace of $85 billion per month through EOY ’14 (an unlikely scenario in our opinion). So despite yesterday’s correction in the Yen, we think the structural bear case remains.
One important highlight in the recent action in U.S. equities is that our risk range on the SP500 has widened to 1,607 – 1,669. This isn’t terribly surprising given that volatility, as measured by the VIX, is up about 30% in the last month. For those that actively hedge or trade their portfolio, all this really means is that you need a bigger umbrella in the short term! Or as the popular band Blind Melon sings, “No Rain.”
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.58-104.73, $81.34-82.46, 95.66-103.34, 2.02-2.22%, 13.37-17.91, and 1, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
This note was originally published at 8am on May 24, 2013 for Hedgeye subscribers.
“To you from failing hands we throw the torch. Be yours to hold it high.”
-Lieutenant-Colonel John McCrae
Most of you probably haven’t played for the Montreal Canadiens, but if you had, you would know that the quote above is painted on the wall in the Canadiens locker room. The idea is that current players are expected to live up to traditions of the past. The line itself is taken from a poem called, “In Flanders Fields”, which was written by Dr. John McCrae in World War I.
McCrae enrolled at the age of 41 with Canadian Expeditionary Force following the outbreak of World War I. Instead of joining the medical corps, which he had the option to do based on age and training, he instead volunteered to join a fighting unit as a gunner and medical officer and was immediately sent to the German front in Belgium.
Flanders is a region in Belgium where Germany launched the first chemical attack in the war during the second battle of Ypres. At the conclusion of the battle, McCrae was inspired to write the poem after seeing the poppies grow on the graves of the dead at Ypres, thus the opening line of the poem, “In Flanders fields the poppies blow.” To this day, Canadians wear poppies on Remembrance Day in memory of those who died while serving in the Canadian military.
Back to the global macro grind . . .
This idea of transition from past to present is one we discussed in great detail on an expert call yesterday with Jim Rickards, the author of “Currency Wars: The Making of the Next Global Crisis”. The focus of our discussion of transition related to the Federal Reserve. Specifically, what will happen as Chairman Bernanke’s term ends in January 2014?
On a basic level, if Bernanke moves on, whoever comes in to lead the Fed will be burdened with unwinding the most dovish monetary policy in the history of central banking, including the longest run of zero interest rate policy and a quantitative easing program that is without parallel. Ultimately, the Fed will have to unwind the $3.4 trillion in securities on its balance sheet. That torch is passed to you Mr. or Mrs. Next Fed Head!
One area in which we would hope to see an improvement from the next Chairman of the Federal Reserve is in economic projections. In the Chart of the Day, we look at the U.S. GDP growth projections supplied by the Fed going back to the 2010. Here is the skinny:
If you didn’t know that economics isn’t a science, well, now you know.
In terms of improving their internal models, we may just send the new Chairman of the Federal Reserve a Hedgeye dart board and some darts. On a serious note, the fundamental problem with such shoddy projections is that the Federal Reserve is actually setting monetary policy based on these numbers, which currently involves purchasing $85 billion in securities monthly. It should be no surprise then that we have market volatility.
Speaking of central banking induced volatility, the Nikkei had a 7% intraday swing yesterday. What was the catalyst you ask? The Bank of Japan’s Kuroda came out midday and said that the “BOJ has announced sufficient monetary easing.” Obviously, the markets don’t believe him. Neither do we and therefore we are keeping our short Japanese Yen recommendation in our Best Ideas product. We are also negative on JGBs on the recent break out above 1% on the 10-year.
No surprise, the Keynesian economic standard bearer Paul Krugman is taking the other side of our research this morning in an op-ed in the New York Times and calling, “Japan the Model”. Like a fledgling hedge fund analyst that has to defend his position to the seasoned portfolio manager, Krugman finds the facts that best support his case. We behavioral economists call this framing.
Interestingly, on one hand Krugman is heralding the success of Japanese monetary policy because “Japanese stocks have soared”. Conversely though, he tells us not to worry about the recent sharp sell-off in Japanese equities when he writes:
“I’m old enough to remember Black Monday in 1987, when U.S. stocks suddenly fell more than 20 percent for no obvious reason, and the ongoing economic recovery suffered not at all.”
You can’t have your cake and eat it too Dr. Krugman!
Our ever savvy Healthcare sector head Tom Tobin offers an alternative thesis to the long decline of Japan’s economy, which is simply that over the last 50 years the population growth rate has been in steady decline. Not surprisingly, this decline in population growth has correlated very closely with GDP growth. That’s not our prognostication on the holy pages of the New York Times, but rather the simple math.
The fundamental problem that Keynesian economists who advocate printing to infinity and beyond have is that they can’t explain how printing leads to more jobs and higher employment. Simply put, that is because debasing a currency doesn’t incentivize companies to invest and hire. In fact, it does the opposite.
We are happy to continue to trade the market volatility induced by Keynesian economics, but at some point we do hope that the torch is passed on from these charlatans.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Weimar Nikkei, and the SP500 are now $1343-1424, $101.61-103.92, $83.24-84.29, 101.42-103.69, 1.95-2.05%, 13.11-15.73, 14,271-15,097, and 1634-1657, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.