TODAY’S S&P 500 SET-UP – June 14, 2013

As we look at today's setup for the S&P 500, the range is 48 points or 1.92% downside to 1605 and 1.02% upside to 1653.          










  • YIELD CURVE: 1.85 from 1.87
  • VIX  closed at 16.41 1 day percent change of -11.73%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Producer Price Index, May, est. 0.1% (prior -0.7%)
  • 8:30am: Current Acct Bal., 1Q, est. -$110.8b (pr  -$110.4b)
  • 9:15am: Industrial Production, May, est. 0.2% (prior -0.5%)
  • 9:15am: Capacity Utilization, May, est. 77.8% (prior 77.8%)
  • 9:15am: Manuf (SIC) Production, May, est. 0.1% (prior -0.4%)
  • 9:55am: UMich. cons. sentiment index, June prelim, est. 84.5
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 1pm: Baker Hughes rig count


    • Iranian presidential election will be the first since 2009, which sparked street protests amid allegations that MahmoudAhmadinejad’s re-election was the result of ballot fraud
    • 8:30am: Sen. Max Baucus, Rep. Dave Camp discuss tax overhaul efforts at CSM breakfast
    • IMF Managing Director Christine Lagarde holds press conference on U.S. economy


  • Exchanges preparing pilot programs for changing tick sizes
  • FX rates said to face global regulation after Libor review
  • U.S. agencies said to swap intelligence w/thousands of firms
  • Johnson & Johnson sells last of 25.4m shares of Elan
  • SoftBank, Sprint dismiss Dish claim to FCC of broken pledge
  • Visa sues Wal-Mart to stop co. from filing swipe fee claims
  • Marchionne said close on Fiat-Chrysler refinancing agreement
  • Airbus A350 becomes airborne as test pilots start first flight
  • Boeing seen reaping $6b/yr on 787 output rising again
  • Senate committee approves $625b defense spending measure
  • Wal-Mart says approved Ranbaxy products “safe and effective”
  • Gene patent ruling triggers race to mkt cancer risk scans
  • Bernanke, G-8 Summit, Paris Air Show, NBA: Wk Ahead June 15-22


    • Smithfield Foods (SFD) 6am, $0.43
    • NGL Energy Partners (NGL) Bef-Mkt, $1.03


  • Corn Set for Weekly Drop as Demand Slows and U.S. Crop Rebounds
  • Gold Bears Return as ETP Rout Extends to 17th Week: Commodities
  • Copper Climbs on Indications of Rebounding Economy in the U.S.
  • WTI Rises to 10-Week High Amid U.S. Growth, Middle East Tensions
  • Aluminum Fees Immune to Abenomics as Japan Buyers Don’t Budge
  • Gold Declines as Investors Cut ETP Holdings on Stimulus Outlook
  • Thailand Sets Record Sugar Production Target of 13 Million Tons
  • Rebar Trades Near Lowest Level in Nine Months on China Concerns
  • Lower Crop Prices Seen Erasing Savings in U.S. House Farm Plan
  • Nickel Glut Fuels Price Slump for LME Laggard: Chart of the Day
  • U.K. Power Price to Double German on Wind, Solar: Energy Markets
  • U.S.-Europe Diesel Flow Seen Rising Amid Output at 23-Year High
  • Oil Hunted in Mozambique After World’s Largest Gas Discoveries
  • Crop Price Decline Top Commodity Opportunity at Goldman Sachs






















The Hedgeye Macro Team











Tape(r) Worms

“Shy and proud men are more liable to fall into the hands of parasites and creatures of low character.  For in the intimacies which are formed by shy men, they do not choose, they are chosen.”

-Henry Taylor


Tapeworm infestation is not something we would wish on our worst enemies.  According to Wikipedia, tapeworm infestation is the infection of the digestive tract by adult parasitic flatworms called cestodes or tapeworms.  Typically, consuming uncooked food is the way in which tapeworm larva find their way into humans.  Once inside the digestive tract, a larva can grow into a very large tapeworm.


No doubt waking up to read about tapeworms is the last thing you need.  Alas, we couldn’t think of a more appropriate analogy given the market’s recent fascination with the potential tapering of QE by the Federal Reserve.  Yesterday, the market actually rallied on this tapering rumor based on a blog by Jon Hilsenrath in the Wall Street Journal that tapering, if it is to occur, would be a more manageable version, perhaps something akin to Taper-lite.


We haven’t been stock market operators as long as many of you, but we certainly don’t remember a period in which there has been such a fascination with, and focus on, the next move of the Federal Reserve.  But until the market host rids itself of the QE parasite, this fascination and volatility associated with the next move of the Fed is likely to continue.


Back to the global macro grind . . .


Earlier this week, we reiterated our short call on emerging markets and China with a concise presentation by our Senior Asia Analyst Darius Dale. (Email to get a copy of the presentation.)  This short call has played out positively for us and has been backed by asset flows out of emerging markets funds.  In fact, in the most recent week the exodus from emerging market funds was $9 billion, which was the third largest weekly outflow ever (after March 2007 and January 2008).


The key new research we provided in the presentation was related to short Chinese financials.  We view this thesis as three fold:

  • Credit growth is slowing – The increasing likelihood that the People’s Bank of China tightens will provide an impediment to credit growth;
  • NIM compression is occurring – Based on the current NIM spread, we think this ratio can only tighten from current levels, which will pressure bank margins; and
  • Non-performing loans are rising – Even though the data is very opaque, NPLs of 20% are a reasonable estimate given by many experts.

In the Chart of the Day, we’ve highlighted one of the more insightful charts in the presentation, which is the Chinese 7-day repo rate monthly average, which highlights how tight money is in China currently.  This rate has gone from about 3.5% in May to 5.7% in June, which is the second highest monthly rate in the last five years and a staggering shift month-over-month.  If money sustainably tightens in China, economic growth will most certainly take a hit.


Our Senior Analyst covering Europe Matt Hedrick also gave a very lengthy and thoughtful update on Europe this week (once again email if you want to see this presentation).  While we don’t see the financial sector risks in Europe that we do in China, the economic outlook does remain largely bleak in Europe. Some of the key points that we highlighted in the presentation included:

  • Fundamentals in Europe remain challenged and we should expect long-term below mean growth;
  • We see limited risk to any country leaving the Eurozone or the Euro being disbanded, so another Cyprus flare-up is unlikely;
  • The bifurcation in Europe will continue and we are fundamentally bullish of Germany and the U.K. and fundamentally bearish of France, Italy and Spain; and
  • ECB is unlikely to shift policy anytime soon, which should continue to support our strong dollar call.

A structural issue that makes it inherently difficult for Europe to recover quickly is the inflexibility of the labor force.  In the United States, labor can flow freely from state to state based on employment opportunities.   So, in theory, the U.S. would be very unlikely to have states where the unemployment rate was north of 26%, such as in Spain and Greece, and other states where the unemployment rate is below 7%, such as Germany and Denmark.


Given the inability of labor to flow easily through European borders, due to differing qualification levels, work quotas and cultural barriers, it is no surprise then that a recession in Europe should be more protracted.  The bigger issue, of course, is that it creates unemployment hot spots, such as Greece, Cyprus, and Spain, that will have an inability to re-balance their economies, except over very lengthy time periods.


This dreary global growth outlook we have continues to push us back to the one economy and stock market we remain positive on – the U.S. of A.  On that front, as it relates to macro data coming out today, the big one is Michigan Consumer Confidence which is released at 9:55am to the masses, and five minutes early for those that pay up for the early look!  Regardless of who gets it ahead of you, it will still be a decent “tell” on how the consumer is feeling.


Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.21-105.43, $80.26-80.24, 93.54-95.85, 2.07-2.27%, 15.21-1857, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Tape(r) Worms - Chart of the Day


Tape(r) Worms - Virtual Portfolio

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June 14, 2013

June 14, 2013 - dtr



June 14, 2013 - 10yr

June 14, 2013 - spx

June 14, 2013 - dax

June 14, 2013 - euro

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June 14, 2013 - VIX

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June 14, 2013 - oil

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June 14, 2013 - gold

June 14, 2013 - copper 

Macro Imagination

This note was originally published at 8am on May 31, 2013 for Hedgeye subscribers.

“I raise my flags, don my clothes
It's a revolution, I suppose.”

-Imagine Dragons


For the last five plus years, Hedgeye has delivered an Early Look to your inbox every market morning.  Primarily, it has been Keith delivering the goods with the rest of the team chipping in from time to time.  With over 1,000 Early Looks written, you would think it takes some sort of Macro Imagination to get these notes out the door every morning. 


Fortunately for us the world provides a great amount of economic fodder and this morning is no exception, but to be fair some amount of creativity is required to keep these notes at least somewhat interesting.  Moreover our research team, like your teams, requires creativity to generate interesting investment ideas.  But, what exactly is the root of creativity?


A study by Jordan Peterson of the University of Toronto found that the, “decreased latent inhibition of environment stimuli appears to correlate with greater creativity among people with high IQ.”  In layman’s terms, the research says that people whose brains are more open to stimuli from the outside environment will likely be more creative.


Conversely, the risk of too much outside stimuli is mental illness due to overload.  In this regard, the differentiator between creativity and madness is a good working memory and a high IQ. In essence, with these attributes a person has the capacity to “think about many things at once, discriminate among ideas and find patterns”.  Without them, one can’t handle the increased stimuli.


So even if we know the root of creativity and innovation, how do we accelerate it within our companies and ourselves?  Interestingly social networks may be giving us a huge leg up in this regard.  According to Martin Ruef from Stanford Business School:


“Entrepreneurs who spend more time with a diverse network of strong and weak ties...are three times more likely to innovate than entrepreneurs stuck within a uniform network."


In a nutshell, creative people are more open to outside stimuli and best leverage that creativity when exposed to broad network of loose ties. (And just think, my ex-girlfriend used to tell me I spent too much time on Facebook!)


Back to the global macro grind . . .


As I noted earlier, this morning is certainly providing a fair amount of economic fodder.  A few points to call out:

  • The Shanghai composite sold off hard into the close on chatter that tomorrow’s manufacturing PMI will come in below 50.  This is consistent with the flash PMI reading from Hong Kong and also the pattern of economic data being leaked early (we removed long Chinese equities from our Best Ideas list earlier this year);
  • Japanese equities outperformed over night, but finished down -5.7% on the week.  The more interesting data point from Japan was April CPI which came in at -0.4% and clearly signals that the Bank of Japan has more to do before sustainable inflation is generated (Short Yen remains on our Best Ideas list); and
  • Japanese government pension fund with $1.1 trillion in assets indicated it would consider increasing its allocation to equities.  To buy one asset class, another asset class must be sold.  If the action in the Japanese government bond market is telling us anything it is that this allocation is already occurring as yields on 10-year JGBs have been spiking recently.

Domestically, our thesis of economic growth going from stabilization to acceleration continues to be validated.  Market internals clearly support this as the SP500 is up more than 16% this year and the treasury market is literally at 12-month lows.  If you didn’t know, now you know . . . economic growth is good for equities and bad for bonds.


As we dig deeper in the market internals, the performance of the sub-sectors of the SP500 validate this view even more.  As of last night, the top two performing sectors in the year-to-date are healthcare up 23.3% and financials up 23.0% and the two worst performing sectors are utilities up 8.6% and materials up 9.1%.  There we have it again, the growth sectors are dramatically outperforming. 


Now if you are a thoughtful stock market operator, you probably want to call me out on something from the last sentence, which is that materials should do well in an environment in which growth is accelerating.  This is true except for the one important factor: the U.S. dollar.  In the Chart of the Day, we highlight the impact of the dollar and the associated correlations over the last 180 days, which are +0.80 with the SP500, -0.72 with the CRB index, and -0.83 for gold.  A strong dollar equals weak commodities.


This Macro theme of up dollar and down commodities is very positive for a number of sectors.  This year our Restaurant team of Howard Penney and Rory Green has done an outstanding job leveraging the macro call with their stock specific work.  One of their best ideas in my view has been a sell call on McDonald’s on April 25th and since then the stock has underperformed the market by some 800 basis points.


At the time more than 30 firms had recommendations on MCD and no one had a sell.  This is creative and contrarian research at its finest.  Needless to say, our restaurant team eats alpha for breakfast, lunch and most value meals!  Ping us at if you want access to trial our restaurant research.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, and the SP500 are $1354-1423, $101.03-103.89, $83.10-83.98, 100.31-103.71, 2.03-2.19%, 12.28-15.31, and 1641-1674, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Chief Creative Officer


Macro Imagination - Chart of the Day


Macro Imagination - Virtual Portfolio






The 3-day Dragon Boat Festival holiday ended yesterday in Mainland China.  Gongbei checkpoint recorded a steady tourist arrival during the holiday, with an average daily arrival between 260,000 and 270,000, and total tourist arrivals reached 800,000 in the three days, a slight growth compared with the same period last year.


One of the reasons for the lower tourist number compared with the May Day holiday and the National Day holidays was due to the rainy weather, which caused some of the travelers to cancel their trips. Another reason was that many Mainlanders preferred to celebrate the Dragon Boat Festival with their families as it is a traditional Chinese festival.



Macau visitor arrivals in package tours increased by 10.2% YoY to 766,971 in April 2013.  Package tour visitors mainly came from Mainland China (582,998), with 209,307 coming from Guangdong Province, followed by those from Taiwan (49,485); the Republic of Korea (35,301) and Hong Kong (32,678).


In April 2013, the hotels and guesthouses received 897,340 guests, up by 16.9% YoY.  The average length of stay of guests decreased by 0.1 night YoY to 1.3 nights.

Early Look

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