TODAY’S S&P 500 SET-UP – August 12, 2013
As we look at today's setup for the S&P 500, the range is 35 points or 0.73% downside to 1679 and 1.33% upside to 1714.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.26 from 2.28
- VIX closed at 13.41 1 day percent change of 5.34%
MACRO DATA POINTS (Bloomberg Estimates):
- 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
- 11:30am: U.S. to sell $30b 3M bills, $25b 6M bills
- 2pm: Monthly Budget Stmt, July, est. -$90b (prior -$69.6b)
- 4pm: USDA issues supply/demand forecast for grain, oilseed
- U.S. Weekly Rates Agenda
- Sec. of State John Kerry travels to LatAm
- Defense Sec. Chuck Hagel travels in Southeast Asia
- Washington Weekly Agenda
WHAT TO WATCH:
- Rockwell Collins to buy Arinc from Carlyle for $1.39b
- U.S. may announce charges this wk against former JPM traders
- Dell investor Icahn seeks fast-track status for Delaware suit
- Medtronic buys Cardiocom for $200m cash, WSJ Says
- J.C. Penney board considers options against Ackman: WSJ
- Apple to unveil next iPhone at Sept. 10 event, AllThingsD says
- Japan’s economy slowed more than forecast in 2Q
- Newcrest Mining has $5.7b full-yr loss after writedown
- NBC to announce buy of Stringwire on Monday, NYTimes says
- GM cutting presence in S. Korea amid labor costs: Reuters
- Samsung losses to Apple give iPhone maker negotiation edge
- Misra starts derivatives exchange as rival to Nasdaq, CME
- Sony’s "Elysium" has sales of $30.5m, shy of forecasts
- CFTC subpoenas metals warehousing firm, Reuters says
- Singapore cuts export forecast as China damps recovery
- Finra inquiring on role of analysts in IPO pitch meetings: NYT
- Forstmann says it’s considering sale of IMG talent agency
- Nova Capital buys Newell units for $214m, Sunday Times Reports
- U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
- North American M&A Agenda
- Canada Weekly Agendas: Energy, Mining
- U.S. Retail Sales, SAC, Cisco: Wk Ahead Aug. 10-17
EARNINGS (all times ET, times are approximate):
- Iamgold (IMG CN) 5:05pm, $0.09
- InterOil (IOC) 4:30pm, $0.03
- Legacy Oil + Gas (LEG CN) Aft-mkt, $0.08
- Northern Tier Energy (NTI) 4:47pm, $0.47
- NQ Mobile (NQ) 4:30pm, $0.20
- Sina (SINA) 4:30pm, $0.12
- Sysco (SYY) 8am, $0.54
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- China on Track to Overtake India as Gold Consumption Jumps 54%
- Hedge Funds Trim Gold Bets on Stimulus Speculation: Commodities
- Gold Climbs to Highest This Month on Dollar, Technical Level
- India Gold Premiums Seen Extending Climb to Record on Curbs
- Copper Swings Between Gains and Drops After Japanese Growth Data
- WTI Trades Near Four-Day High Amid Signs European Recession Over
- Soybeans Rise Ahead of USDA Report That May Cut Stocks Outlook
- Sugar Gains to 6-Week High as Brazil Favors Ethanol; Cocoa Falls
- Oil Traders Sell Seeing End to Fed’s Cheap Money: Energy Markets
- Platinum-Rhodium Ratio at Record High on Supply Risks: BI Chart
- Cosco Cargo Ship Sets Sail in First Transit of Northeast Passage
- German Utilities Hammered in Market Favoring Renewables: Energy
- Newcrest May Extend Cost Cuts After $5.7 Billion Full-Year Loss
- Olam Sees Potential for Indian Sugar Exports on Rupee to Surplus
- Platinum ETF Holdings Rise 45% Ytd on Supply Concerns: BI Chart
The Hedgeye Macro Team
Client Talking Points
We haven’t bought the Nikkei back just yet, but we probably will if this critical 13,331 TREND line holds. The Nikkei has of course been weak because the Yen has been strong. It’s been a counter TREND move that is starting to frustrate a lot of people. I'm getting a lot of questions on this and the US Dollar. The Yen is down -0.54% vs USD this morning.
The US Dollar was down a full 1% last week. We bought it back on that move after it signaled immediate-term TRADE oversold right around $81.11 on the US Dollar Index. This level was tested in an early June selloff in USD (then the USD made a year-to-date high by early July), so the FX market can obviously whip people around. We are trying to be patient here, instead of drawing new 3-year conclusions on a 1-month low volume, summer move.
Hedge funds cut their net long position by 27% in futures and options contracts last week to +48,103 net longs. So now Gold can go up again on that. Gold is up +1% this morning with Silver gaining +2.5%. The 10-year US Treasury yield is not budging though. So it will be important to watch Gold/10yr/USD, in unison, this week.
|FIXED INCOME||0%||INTL CURRENCIES||23%|
Top Long Ideas
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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout. An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona. The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater. Longer term, the objective is for BCN World to have six resorts. The first property is scheduled to open for business in 2016.
Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.
Three for the Road
TWEET OF THE DAY
TREASURIES: not budging despite US Equity futures down = 2.59% 10yr yield @KeithMcCullough
QUOTE OF THE DAY
Whether you think you can or you think you can’t, you’re right.
– Henry Ford
STAT OF THE DAY
$91,000,000: Facebook's COO Sheryl Sandberg sold nearly 2.4 million shares of the social network's stock last week at an average price of $38 per share for approximately $91 million.
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This note was originally published at 8am on July 29, 2013 for Hedgeye subscribers.
“An island cannot rule a continent.”
I don’t know about you, but I find myself putting most consensus channels of market and “economic” information on mute these days. Life is simpler that way. Markets can be simpler too – if you take big government politics out of them.
Thomas Paine wrote “Common Sense” anonymously in 1776. It was only 48 pages long but one of the most influential writings in US history. As US historian, Joseph Ellis, recently wrote: “both the style and the substance of Common Sense were true to its title… replicating the vocabulary of conversations by ordinary Americans in taverns and coffeehouses…” (Revolutionary Summer, pg 11)
Sometime after filling up my tank with $4.24/gallon gas this weekend, I was reading that book at home. Then I got out of my chair and glazed over Obama’s comments about the next Fed Chairman in the NY Times. He said he wants a “Fed Chairman that can step back and look at that objectively and say, let’s make sure that we are growing the economy.” Then I started laughing.
Back to the Global Macro Grind…
The final blow to anyone who is full of it is usually the truth. We see this in every aspect of our lives, so there’s no reason why any of these people who operate under the assumptions of big government Island Economics will be remembered by history any differently.
Although at varying paces, time tends to solve disconnects between fact and fiction. But in between now and then we have to deal with real-time market prices and expectations.
The expectations that the outgoing (and incoming) Fed Chairman is going to try to “grow the economy” with a weak currency are pervasive. Last week’s rumoring of either Larry Summers or Janet Yellen running the Fed had something to do with:
- America’s Purchasing Power (US Dollar) dropping -1.1% wk-over-wke
- Consensus buying the living daylights out of Gold futures and options contracts
- The net long position in Oil futures and options contracts hitting an all-time high
As history buffs like to remind short-term political types, all-time is a long time.
If the President of the United States thinks that having the all-time low (of any US President) in America’s Purchasing Power alongside the all-time high in gas prices is success, that’s just plain funny and sad all at the same time. #Half-BakedClassWarfareIsland
Mr. President, if you are more than just lip servicing people who are on fixed budgets, have Bernanke or Yellen get on 60 Minutes and announce to the world that the USA is raising interest rates next weekend. Both the Gold and Oil price will crash. And The People will like it.
Instead, here’s what futures and options contracts (i.e. our entire profession trying to front-run the Fed) are betting on:
- Total CFTC Commodities futures and options contracts were +7.4% wk-over-wk to +615,140 contracts
- Crude oil contracts were up another +10% wk-over-wk to +334,094 = all-time high
- Gold contracts ripped +26% wk-over-wk to +70,067 (up for 4 weeks in a row)
Yep. So much for the only bull case for Gold that made any short-term sense (that “everyone is short Gold”). Everyone is getting right levered long the Bernanke Bubble again! It’s still crashing YTD (-21.4%), but who cares? Isn’t this just great for the country?
To be clear, the opportunity to replace Bernanke with someone who doesn’t devalue the Dollar, monetize a record amount of US debt, and socialize crony banker losses, is one of the biggest President Obama has had in his career.
But does he get that?
I doubt it – that said, I did take my kids to see Monsters University yesterday, and that movie reminded me that there always is a chance! Meanwhile, Mr. Market is actually begging for a Fed head who gets having a #StrongDollar #RatesRising policy (i.e. a pro-growth policy):
- The Russell2000 is = +7.3% for the month-to-date, and +23.4% YTD
- Top 25% EPS Growth Stocks = +6.1% for the month-to-date, and +23.7% YTD
- Low Yield (growth) Stocks = +5.1% for the month-to-date, and +26.4% YTD
But, if Obama wants to get Summers or Yellen in there, we can always go back to the Island Economics that both he and Bush II had. How does a 0% rate of return on your hard earned savings accounts forever, $2000 Gold, and $160 Oil, sound?
Our immediate-term Risk Ranges are now as follows (*reminder: 12 Global Macro Risk Ranges are in our new Daily Trading Range product as well):
UST 10yr Yield 2.50-2.64%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
“The market is smarter than you will ever be, with its combined knowledge of all participants. Pay attention to the signs. Be quick to admit that you’re wrong. Don’t be afraid to miss something.”
-Yra Harris, Praxis Trading
That quote comes from my “other” favorite book on markets, Inside the House of Money, which is a series of candid interviews with a number of highly-regarded Global Macro Risk Managers (Daniel Kahneman’s Thinking, Fast and Slow forms the other half of my 1A/1B compromise). Harris – a veteran of the trading floor pits at the CME for over three decades – had that to say about the merits of gleaning critical information from market prices.
I make it a point to pay as little attention as humanly possible to the #OldWall’s financial media outlets, so I don’t know much about Mr. Harris’ current views and biases on the markets. I do, however, know that we @Hedgeye subscribe to the same philosophy of recognizing that we’re not smarter than the market. Indeed, having been football or hockey jocks at an institution like Yale has taught us all we needed to learn about not being the “smartest guy in the room”.
Whether you’ve watched us compete in this game for the past five years or you’ve been trialing our research for five days, you’ll quickly arrive at the conclusion that last price tends to dictate our interpretation of the fundamentals. But, obviously, markets oscillate on a day-to-day and week-to-week basis, so we employ a three factor (i.e. price, volume and volatility) quant model to contextualize market trends across three distinct investment durations:
- TRADE: 3 weeks or less
- TREND: 3 months or more
- TAIL: 3 years or less
If a particular security or asset class is Bullish TRADE (i.e. last price is above the TRADE line), we’d argue that the market is in agreement with the positive fundamental view(s) emanating from the bull camp with respect to the most immediate-term of durations. The same can be said of Bullish TREND setups vis-à-vis the intermediate-term duration and Bullish TAIL setups vis-à-vis the long-term duration. The inverse of this interpretation (i.e. Bearish TRADE/TREND/TAIL) holds true as well.
We believe that it is our job as macro analysts to collect and piece together any relevant economic data with the intent of forming a fundamental view on a particular market or asset class. Often times, however, our biases don’t agree with said market’s risk management setup – i.e. the research is bullish when the market setup is bearish, or vice versa.
Prior to putting any risk on, investors generally have the option of dismissing the aforementioned setup as “being early” – at least until they get tapped on the shoulder! When, however, the position is already on the tape and has positive P&L and it starts to trend counter to one’s preexisting and subsequently reconfirmed fundamental view, we’d argue that said investor is late – i.e. he or she is #MissingSomething with respect to the fundamental story.
To better illustrate this lesson in Global Macro Risk Management, let us turn to a discussion of our preexisting bullish bias on the dollar-yen cross with respect to the intermediate-term TREND and long-term TAIL durations and on the Japanese equity market with respect to the intermediate-term TREND duration.
We’ve been out front of consensus making these calls – very loudly in the yen’s case – since SEP and NOV of last year, respectively, but, for those of you who may be new to the thesis, our subsequently reconfirmed fundamental view is as follows:
- While enthusiasm for the Abenomics agenda may come and go in the immediate-term, we believe investors are broadly underestimating the structural impact of imposing a +2% inflation target and +3% nominal growth target in Japan. To put that in context, the trailing 10Y averages for these metrics are -0.1% and -0.5%, respectively. Japanese policymakers have a lot of hay to bale on the monetary easing front if they are to even sniff their lofty targets within the proposed 2Y time frame.
- Assuming Japanese policy stays the course and our view that the US economy has finally turned the corner from a growth perspective is ultimately proven prescient, a compressing real interest rate differential will also put pressure on Japan’s currency from a capital flows perspective. Consensus expects real 2Y JGB rates to hit -2.5% by EOY 2014 (down meaningfully from -0.4% by EOY 2013); this compares to a forecast of -1.3% for real UST 2Y rates by EOY 2014 (down slightly from -1.1% by EOY 2013). More importantly, this inflection is also being confirmed in the swaps market: 2Y swap rates in Japan are now trading at -1.57% on a real basis (subtracting the 2Y breakeven rate from the swap rate); that compares to -0.88% for the US. As recently as mid-MAR, those metrics were meaningfully inverted at -0.10% and -1.98%, respectively!
- In the context of intermittent spikes in volatility in the bond and forex markets, we have maintained that the risk-adjusted outlook for Japanese stocks is decidedly less sanguine than consensus assumes given the reflationary tailwind of currency debasement. The caveat here is that this headwind can be offset via absolute returns that are now likely to be increasingly predicated on economic and fiscal reforms (corporate tax cuts, labor market deregulation, fiscal consolidation, etc.), as well as large-scale portfolio rebalancing by Japanese households. To that tune, only 6.8% of Japanese household financial assets are held in equities vs. 14.4% for the Eurozone and 32.8% for the US.
In spite of what we’ve outlined as arguably the most credible and well-articulated bull case for both the USD/JPY cross and Japanese equities, both are broken from an immediate-term TRADE perspective and flirting with breakdowns on our intermediate-term TREND duration as well. The risk management levels to watch on that front are as follows:
- USD/JPY (last price = 96.77): Bearish TRADE = 97.72 and Bearish TREND = 97.13 (a few days young; needs to hold below TREND for a few weeks to confirm the move… if confirmed, we would certainly alter our fundamental bias)
- Nikkei 225 (last price = 13,519): Bearish TRADE = 14,091 and Bullish TREND = 13,336
Profit taking, generally disappointing 2Q earnings and waning international investor sentiment for Abenomics are all credible theses that support a Bearish TRADE setup in both markets. We haven’t come across anything credible that would fundamentally support a confirmed Bearish TREND setup in the USD/JPY cross, which we believe will continue to determine the direction of the Nikkei until it eventually becomes obvious to Japanese equity investors that inflation is not growth (the trailing 1Y and 3Y correlation coefficients between these two markets are +0.96 and +0.97, respectively).
But, as highlighted above, just because we haven’t formed a coherent fundamental story that supports the quantitative risk management setup in both markets does not mean the underlying fundamentals themselves cease to exist. So either we’re #MissingSomething or this is all just one big head-fake as weak hands are shaken out of the trade.
Let us know what you think.
Our immediate-term Risk Ranges are now as follows:
UST 10yr Yield 2.57-2.73%
Keep your head on a swivel,
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