TODAY’S S&P 500 SET-UP – February 12, 2014
As we look at today's setup for the S&P 500, the range is 98 points or 4.93% downside to 1730 and 0.45% upside to 1828.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
This note was originally published at 8am on January 29, 2014 for Hedgeye subscribers.
“Daddy, that looks like bird poop.”
Nah, he wasn’t talking about the complexion of yesterday’s stock market bounce or Obama’s class warfare speech. My son was talking about the risk-on trade my 2.5-week old baby girl placed all over my shirt last night.
Risk happens fast, and slow.
Back to the Global Macro Grind…
Given that the Russell 2000 hit an all-time high on January 22nd, I think most of you will agree that the “risk-on” trade in being long of big US equity beta happened pretty fast.
The speed of an information surprise (real-time prices) to the downside can kill both confidence and returns. And I think this is what will keep volatility above @Hedgeye TREND support (VIX TREND = 14.91) for longer than consensus might think.
While consensus isn’t as bullish as it was 4 weeks ago, here’s one way to contextualize sentiment:
As for the Bears, there still are none that survived all of 2013. By the time it was all over, very few long-only managers were allowed to remind clients they’d been bearish for the last 12 months. Even after last week’s -2.6% drop in the SP500, Bears went from 15.1% to 15.3%. I know, #scary.
Unlike the last three 3-4% US stocks market corrections that we told you to buy, this one has a glaring difference – rather than accelerating both month-to-month and quarter-over-quarter, on the margin, US growth is slowing.
Slowing? Yes. And very evidently so in some of the big stuff that matters:
And sure, people who are in the business of being bullish will give you plenty of excuses (including the weather) as to why slowing is occurring, but few made the call 2-4 weeks ago when the call needed to be made.
No thanks. Did consensus seriously think all these dysfunctional emerging market countries could try what we did (burn their currencies) and not see local inflation rise, consumption growth slow, and social unrest rip?
NEWSFLASH: devaluing the purchasing power of The People is called inflation.
And inflation pays the rich and starves the poor.
Obviously that whole money printing and political power thing (which crushes upward mobility in a society) didn’t make it into last night’s State of The Storytelling. But I digress.
Political digressions, transgressions, and obfuscations aside, what markets cannot seem to get away from is this thing called economic gravity. So let’s try an if/then risk management exercise. If…
Then… the stock market sees multiple compression. Period.
If stagflation gets really amped up (think 1970s when American socialists perpetuated it through things like currency devaluation, price controls, and government spending), stock market multiples really get whacked.
Sorry Abby (as in Goldman’s Cohen, who says the SP500 is going to 18x EPS = 2088 this year). If inflation continues to ramp and growth continues to slow, you might have to slap a lucky 13 on that super-duper-magic-market-multiple thing you do.
Actually, god just called and told me 13 “feels a little low.” How about 14x the 2014 consensus EPS = 1624? Jack, that would look and feel like bear poop to me.
Our immediate-term Macro Risk Ranges (with bull or bear TREND in brackets) are as follows:
UST 10yr Yield 2.72-2.80% (bearish)
SPX 1771-1819 (bullish)
Shanghai Comp 1984-2071 (bearish)
VIX 14.91-18.55 (bullish)
USD 80.16-80.79 (bearish)
Pound 1.64-1.66 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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Hotel shopper growth a little disappointing in Q4 but meta hit neutrality in December
Q & A
Takeaway: "If you're lower income right now, you can only go to a government-run exchange," - Gary Lauer, EHTH CEO
EHTH's CEO was on CNBC today (link) discussing the status of the Government Health Insurance Exchanges. An interesting takeaway was the above quote, which is somewhat surprising since EHTH is a web-approved broker; meaning it is authorized to sell subsidized plans in the 36 states where the federal government is running the exchange.
The issue is functionality. EHTH and other web-approved brokers can't interface with the federal exchange due to technical issues; therefore it can't sell subsidized plans.
As we laid out in our Best Ideas EHTH Short Call today, subsidy-eligible individuals represent a major attrition risk for EHTH. In the table below, we quantify the size of the subsidy-eligible population among existing Individual & Family Plan (IFP) members using Census data. We estimate that at least 45% of existing IFP members are eligible for subsidies. If EHTH can't sell subsidized plans to its existing members, it will lose many of those members to the exchanges.
This is just one of the issues facing EHTH's IFP segment in 2014. We go into greater detail during our Best Ideas Call. If you would like access to the replay, please let us know.
Hesham Shaaban, CFA
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