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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 12, 2013


As we look at today's setup for the S&P 500, the range is 30 points or 1.35% downside to 1748 and 0.34% upside to 1778.               

                                                                                                                

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1A

 

THE HEDGEYE DAILY OUTLOOK - 2A

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10A                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.44 from 2.44
  • VIX closed at 12.53 1 day percent change of -2.87%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus Optimism, Oct., est. 93.5 (pr 93.9)
  • 7:45am: ICSC weekly sales
  • 8:30am: Chicago Fed Nat Activity Index, Sept., est. 0.15
  • 8:55am: Johnson/Redbook weekly sales
  • 11:30am: U.S. to sell $33b 3M bills, $29b 6M bills
  • 1pm: Fed’s Lockhart speaks on economy in Montgomery, Ala.
  • 1pm: Fed’s Kocherlakota speaks in St. Paul, Minn.
  • 1pm: U.S. to sell $30b 3Y notes

GOVERNMENT:

    • Senate Commerce, Science and Transportation Cmte votes on FTC nominee Terrell McSweeny
    • CFPB Director Richard Cordray reports to Congress
    • 1pm Transportation Sec. Anthony Foxx, HUD Sec. Shaun Donovan unveil Location Affordability Portal, which will help consumers calculate combined costs of housing, transportation
    • 1pm: Sen. Elizabeth Warren, D-Mass., delivers keynote speech at event co-sponsored by Roosevelt Institute, Americans for Financial Reform
    • 2pm: Bloomberg Government holds webinar on heath care exchanges
    • 2pm: Sec. of State John Kerry hosts swearing-in for U.S. Ambassador-designate to Japan Caroline Kennedy
    • 2:30pm: Senate Banking Cmte hears semi-annual report from CFPB Director Cordray
    • 4pm: Quinnipiac Univ. Polling Institute holds news conference on new poll on President Obama, Congress, health care

WHAT TO WATCH:

  • Liberty Global said to be in talks to buy Intel’s TV service
  • Apple may try to beat record $1b Samsung patent verdict
  • Citigroup, BNY Mellon records sought by IRS in ZKB probe
  • Sports agency IMG said to cut list of bidders as TPG out
  • Tyco said to be in talks to sell Korean security unit: WSJ
  • Apple says iPad mini w/high-definition screen can now ship
  • Boeing to weigh all options for 777X if union rejects deal
  • Indonesia unexpectedly raises key rate to shore up rupiah
  • U.K. inflation slows more than forecast to least in a year
  • U.K. RICS house-price index hits 11-yr high on Help to Buy
  • Debit cards end two-decade streak of U.S. gains against credit
  • Pentagon contracts fell 66% in Oct. as shutdown deepened cuts

AM EARNS

    • DISH Network (DISH) 6am, $0.43 - Preview
    • DR Horton (DHI) 6am, $0.40 - Preview
    • EchoStar (SATS) 6am, $(0.06)
    • Gran Tierra Energy (GTE) 6am, $0.21
    • Lexicon Pharmaceuticals (LXRX) 6am, $(0.05)
    • Yingli Green (YGE) 6am, ($0.25)
    • Rockwood Holdings (ROC) 6:30am, $0.47
    • NRG Energy (NRG) 6:56am, $0.80
    • AECOM Technology (ACM) 7am, $0.79
    • Dean Foods (DF) 7am, $0.14
    • First Majestic Silver (FR CN) 7am, $0.14
    • Sarepta Therapeutics (SRPT) 7am, $(0.61)
    • Shoppers Drug Mart (SC CN) 7:30am, $0.81
    • Argonaut Gold (AR CN) 7:30am, $0.03
    • Dendreon (DNDN) 7:30am, $(0.34)
    • Ariad Pharmaceuticals (ARIA) 7:35am, $(0.44)
    • NuStar Energy (NS) 9:02am, $0.27
    • NuStar GP Holdings (NSH) 9:09am, $0.32

PM EARNS:

    • MarkWest Energy Partners (MWE) 4:01pm, $0.24
    • MBIA (MBI) 4:01pm, $0.15
    • NQ Mobile (NQ) 4:02pm, $0.27
    • Babcock & Wilcox (BWC) 4:09pm, $0.55
    • Medivation (MDVN) 4:10pm, $(0.25)
    • SINA/China (SINA) 4:30pm, $0.32
    • Taro Pharmaceutical Industries (TARO) 5:05pm

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • U.S. Demand to Export Crude Seen Soaring Amid Hydrocarbons Boom
  • Iron Ore Rallying as Cargoes to China Reach Record: Commodities
  • WTI Crude Declines From November High as Stockpiles Seen Rising
  • Gold Swings Near Three-Week Low on Outlook for U.S. Stimulus
  • Copper Drops as Investors Await China Policy Meeting’s Outcome
  • Corn Touches Two-Week High as Crop Forecast Less Than Estimated
  • Cocoa Rises on Buy Orders Amid Shortage Forecast; Robusta Falls
  • Iran’s Full Return to Oil Market Remains Perilous, Barclays Says
  • Orange Juice’s Double Bottom Signals Rally: Technical Analysis
  • Shanghai Rebar Little Changed as Investors Await Party Plenum
  • Gasoline Supplies Probably Fell for Fifth Week: Energy Markets
  • EON Qatari LNG Contract Seen as Trend for Shorter-Term Contracts
  • Blackstone to Billionaires Boost Ship Bets on U.S. Fuel: Freight
  • U.S. to Become Top Oil Producer by 2015 on Shale Boom, IEA Says

THE HEDGEYE DAILY OUTLOOK - 5A  2

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6A  2

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3A

 

THE HEDGEYE DAILY OUTLOOK - 4A

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7A

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8A

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9A

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 



Correlated Causations

“Ignorance more frequently begets confidence than does knowledge; it is those who know little, not those who know much, who so positively assert that this or that…”

-Charles Darwin

 

Having fun out there yet?

 

If like us, your conviction on what an appropriate gross and/or net exposure should be has wavered in recent weeks, Darwin’s quote probably resonates with you. With respect to financial markets, I, for one, don’t understand how anyone could’ve had enough conviction to positively assert anything beyond a simple “I don’t know” in recent weeks, but that’s just me. What do I know?

 

Without speculating on the level of ignorance (or lack thereof) implied by the views of any market participant(s), we continue to tip our hat to the “QE is effective; see, I nailed it all along” community – if for nothing other than their unwavering confidence.

 

Does QE actually “work”, however? Moreover, how does one go about determining its effectiveness? This debate really centers on the question we asked in the video we published earlier last week:

 

“Does the price of money determine the pace of economic activity or does the pace of economic activity determine the price of money?”

Without getting all philosophical before breakfast, our answer to that question was simply, “It’s reflexive.”

 

Considering, it would seem that trying to determine the causality behind the demonstrable acceleration in economic growth we’ve witnessed in the YTD is little more than a fool’s errand. Was QE responsible for producing economic growth or were expectations of QE’s eventual demise the stimulus the economy needed?

Sourcing the data, the reflexive relationship between the US dollar, US interest rates and the slope & magnitude of real GDP growth is almost impossible to disregard without being completely subjective or grossly qualitative. Whether you’re looking at the current economic cycle or the past three decades of economic cycles, the data speaks for itself:

  • 2013: In calculating monthly averages for the DXY and UST 10Y Yields, we see that the USD and US rates were most strong (on a YTD percentile basis) in the JUL/AUG/SEP periods. Coincidentally, that’s precisely when the ISM Non-Manufacturing and Manufacturing surveys, Conference Board Conference Board Consumer Confidence Index readings and the NFIB Small Business Confidence Index readings were also recording their strongest levels in the YTD (on a percentile basis). Moreover, the slope of the DXY and UST 10Y has tracked the slope of the aforementioned high-frequency growth data nearly perfectly in the YTD.
  • 1 (trailing 30Y): In calculating quarterly averages for the DXY and UST 10Y Yields, we see that concomitant QoQ appreciations in both indicators are closely associated with both relatively rapid economic growth and periods of #GrowthAccelerating. Specifically, Real GDP growth has averaged +4.2% on a QoQ SAAR basis in #StrongDollar + #RatesRising periods; that compares to +2.4% for #WeakDollar + #RatesFalling periods. From a 2nd derivative perspective, GDP growth tends to accelerate +23bps on average in the former environment and decelerate -23bps on average in the latter environment.

To our knowledge, qualitative assertions have yet to trump basic arithmetic in any debate.

 

The more we reflect and debate internally as a team, the more we find ourselves squarely in the camp of: “Who cares about causality anyway?” As investors, all we really want to do is isolate the signals – be they quantitative or fundamental – that give us the best probability of being right on the slope of growth, inflation and/or policy.

 

From there, we can begin to speculate in financial markets using reasonably accurate assumptions for what we believe to be the three most important factors in determining asset prices.

With respect to financial markets, what matters most is what everyone thinks everyone else thinks about QE and the only way to record any consistency or accuracy in attempts to measure that is to set aside our own dogmas.

 

In short, we do not think it is helpful to engage in the debate surrounding the causal impact of QE upon the economy. In our view, it is impossible to determine causality without being qualitative or subjective because we don’t have accurate data about the expectations and intentions of all the agents that make up an economy.

As such, all we can really do as investors is interpret the signals as they come and play the ball as it lies. Focusing our attention on anything else is a clear deviation from the task at hand (i.e. making money).

 

Regarding the task at hand, we do know that QE and its associated expectations are causal to the prices of many assets globally. As such, the name of the game remains isolating the signals that give us the best forward-looking read on growth, inflation and/or policy – or the eventual tapering of said policy:

  • Quantitative: Solid comeback for the US Dollar Index right to our TREND line of 81.39 resistance this morning; will it hold? US Treasury rates (10Y Yields) – which are now trading demonstrably above their 2.63% TREND line – are suggesting a DXY breakout has become an increasingly probable event.
  • Fundamental: Analyzing economic data like a Fed Head would imply tapering is a spring of 2014 event at the earliest. Moreover, the lack of liquidity in the bond market should take a mid-to-late-DEC tapering squarely off of the table: primary dealer inventory is -73% off its 2007 highs and equivalent to a mere 0.8% of outstanding US corporate credit vs. a peak of ~4% in 2007. Please note our emphasis on the word “should”, as what we think the Fed should do and what the Fed does are quite often two very different things.
  • Correlation Risk: While three days does not a trend make, very immediate term correlations are signaling what may be a return to the pro-growth trade of #StrongDollar + #RatesRising = positive US equity beta amid decidedly negative EM beta that has: A) dominated much of the past year; and B) was interrupted by a return to the post-crisis playbook of “QE = short US dollars; buy everything else” in the weeks since SEP 18 (i.e. the day of the Fed’s “no taper” surprise). See the Chart of the Day for more details.

So what do investors do with all of these convoluted signals? In a phrase: #GetActive. If you’re not yet familiar with our call for active mangers to outperform over the both the intermediate term and long term, please ping us for a review of our 4Q13 Macro Themes.

 

Indeed, it would seem that stock-picking will become increasingly important as we start to move away from what has been an elongated period of minimal return dispersion at the sector level – likely due to the strong performance of typically low-beta, high-yielding sectors in an era of institutionalized yield chasing.

 

For those of you who are keen to add new techniques to your analytical toolkit, we’ve built a model that backtests exceptionally well in screening for prospective alpha at the single security level. For more on that, please CLICK HERE for the data and CLICK HERE for the accompanying manual. Email us if this is something you’d like to discuss further.

 

Our immediate-term Risk Ranges are now:

 

UST 10Y Yield 2.64-2.79% (bullish)

SPX 1 (bullish)

VIX 12.29-14.55 (bearish)

USD 80.93-81.53 (neutral)

Pound 1.58-1.60 (bullish)

Gold 1 (bearish)

 

Keep your head on a swivel,

 

DD

 

Darius Dale

Associate: Macro Team

 

Correlated Causations - Chart of the Day

 

Correlated Causations - Virtual Portfolio


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Sorry, America

Client Talking Points

US Dollar

A solid comeback this morning for the US Dollar right to my TREND line of $81.39 resistance. So will it hold? If it does, and Janet Yellen loses Bernanke’s (perceived) control of the bond market, this is going to get really gnarly. Fast. #StrongDollar + #RatesRising is what I loved for all of 2013. (Gold loathed it). That was until Bernanke opted for the epic no-taper blunder.

ASIA

Look at the divergence born out of a #StrongDollar move. Over in Japan, the Nikkei loved it. It was up +2.2%. Why? Because it loves Burning Yen vs USD. And Emerging Asian Markets like India (-1%) and Indonesia (-1.4%) didn’t like it at all. Don’t forget what a pervasively #StrongDollar got you in July – a currency crisis in some of these Emerging Market markets (and inflation).

MBS Bubble

2008 Oil Bubble... 2011 Gold and Foreign Currency Bubbles... 2012 Food Bubble... 2013 stock market bubble... Just how many bubbles can Ben Bernanke foment under his Fed watch? The next one to pop is the one no one can get out of...MBS. And that’s why this Andrew Huszar Wall Street Journal Op-Ed article is so timely. Finally! Someone explaining the truth of Too Big To Fail bond positions.

Asset Allocation

CASH 62% US EQUITIES 6%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
DAX

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.

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. 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.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

At the $SPY high yesterday volume had almost vanished; breadth was bad too @KeithMcCullough

QUOTE OF THE DAY

Failure is not fatal, but failure to change might be. -John Wooden

STAT OF THE DAY

Obamacare has reached only about 3% of its enrollment target for 2014 in 12 U.S. states where new online health insurance marketplaces are mostly working smoothly, according to a new report. States with functioning exchanges have signed up 49,100 people compared with the 1.4 million people expected to be enrolled for 2014, according to Avalere Health. (Reuters)


THE M3: RUSSIAN ARREST; CHUI ADDRESS

THE MACAU METRO MONITOR, NOVEMBER 12, 2013

 

 

PARTNER IN LAWRENCE HO'S RUSSIAN INVESTMENT ARRESTED Macau Business

A Russian newspaper, Kommersant, reported on November 7 that Oleg Drozdov had been detained for investigation by Russian law enforcement.  It’s reportedly regarding alleged malpractices by a business called OOO Vladivostokservis and relates to the construction of a solid waste treatment facility in Vladivostok in the Russian Far East.  The investigation relates to events in 2009 and 2010 and is said to involve 367 million roubles (US$11.2 million, or 89.72 million patacas). 

 

Summit Ascent - a company controlled by Lawrence Ho - said it was paying US$9.02 million for 46% of Oriental Regent Ltd, a holding company that currently owns 50% of First Gambling Company of the Far East LLC.  First Gambling in turn has a gaming licence in Primorye, the Russian Far East province of which Vladivostok is the capital. Melco International Development Ltd – which also holds a stake in MPEL – would pay US$980,392 for a 5% stake in Oriental Regent.


Drozdov is an indirect minority shareholder in Oriental Regent. He controls 30% of it via Elegant City Ltd, a British Virgin Islands company that is in turn wholly owned by Mr Drozdov.

 

The estimated total investment for the first phase of the casino resort complex to be constructed at an ‘Integrated Entertainment Zone’ in Primorye – next door to China’s northeastern Heilongjiang province – is about US$130 million.  It will have a 119-room hotel, approximately 800 slot machines, 25 VIP gaming tables and 40 mass-market gaming tables.

 

PUBLIC ADDRESS 2014: GOVT TO PUSH CASINOS TO PROMOTE MORE RESIDENTS TO MANAGEMENT POSITIONS Macau Business

Macau CEO Fernando Chui said the government would push large companies, including the six gaming operators, to promote more residents to management positions.  He did not set any minimum ratio for Macau residents in these posts.  The government will continue to “firmly” ban migrants from working as casino dealers.  Chui did not clarify if the government is planning to ban non-local croupiers by law, as requested by several labour unions.

 

Macau SMEs will get some help in expanding to Hengqin Island, as there are plans to create an area only for Macau businesses at the new Chimelong theme park, scheduled to open next month.

 

The cash handout scheme will continue in 2014, handing even more money to both permanent residents and non-permanent residents.  Permanent residents will receive a record MOP9,000, while non-permanent residents will get MOP5,400. Last year, permanent residents received MOP8,000 and non-permanent residents MOP4,800.


November 12, 2013

November 12, 2013 - Slide1

 

BULLISH TRENDS

November 12, 2013 - Slide2

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November 12, 2013 - Slide4

November 12, 2013 - Slide5

November 12, 2013 - Slide6

 

BEARISH TRENDS

November 12, 2013 - Slide7

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November 12, 2013 - Slide11

 


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