TODAY’S S&P 500 SET-UP – February 14, 2014
As we look at today's setup for the S&P 500, the range is 122 points or 5.67% downside to 1726 and 0.99% upside to 1848.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.42 from 2.42
- VIX closed at 14.14 1 day percent change of -1.12%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Benchmark revisions of Producer Price Index
- 8:30am: Import Price Index m/m, Jan., est. -0.1% (pr 0.0%)
- 9:55am: UofMich. Confidence, Feb. preliminary, est. 80.2
- 11am: Fed to buy $1b-$1.25b in 2036-2043 sector
- 1pm: Baker Hughes rig count
- President Barack Obama meets w/Jordan’s King Abdullah II
- U.S. federal agencies open with two-hour delay
WHAT TO WATCH:
- More snow for U.S. Northeast after 14,000 flights grounded
- AIG boosts div., buybacks as CEO Benmosche eliminates jobs
- Twitter insiders get first chance to sell shrs as lockup ends
- Sony’s PlayStation 4 retakes lead over Microsoft’s Xbox One
- Kennedy Wilson Europe to raise $1.2b in property IPO
- Rakuten to buy Viber Internet messaging app for $900m
- Brightoil in talks w/Anadarko, Newfield on China ops: Reuters
- Pershing, Trian other funds face 13F disclosure deadline
- Toyota’s Prius keeps top Calif. sales rank as Tesla moves up
- Euro-area economy grows more than forecast on Germany, France
- European banks avoiding risky-loan disclosure brace for review
- China banks’ bad loans reach highest since financial crisis
- China inflation stays subdued as producer prices drop
- Fed Minutes, Carney, EU Talks, Olympics: Wk Ahead Feb. 15-22
- NOTE: No U.S. Daybook Monday due to President’s Day holiday
EARNINGS (all times ET, times are approximate):
- Allete (ALE) 8:30am, $0.82
- Brookfield Asset Management In (BAM/A CN) 7:01am, $0.51
- Campbell Soup Co (CPB) 6:30am, $0.73 - Preview
- Coty (COTY) 6am, $0.29
- DTE Energy Co (DTE) 7:15am, $0.96
- Enbridge (ENB CN) 7am, C$0.45 - Preview
- Hyatt Hotels (H) 7:30am, $0.20
- Interpublic Group (IPG) 7am, $0.59
- ITT (ITT) 7am, $0.47
- JM Smucker (SJM) 7am, $1.68 - Preview
- LifePoint Hospitals (LPNT) 6:30am, $0.80
- Lincoln Electric Holdings (LECO) 7:30am, $0.86
- Scripps Networks Interactive I (SNI) 7am, $0.97
- TRW Automotive Holdings (TRW) 7am, $1.64
- Ventas (VTR) 7:01am, $0.43
- VF (VFC) 7am, $0.84 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Gold Extends Climb Above $1,300 as Investors Boost SPDR Holdings
- Palm Imports by India Slump to Lowest Since April on Reserves
- Natural Gas Heads for Weekly Gain as Cold Erodes Stockpiles
- Copper Advances as Economic Growth in Europe Exceeds Estimates
- Soybeans Climb for a Second Day on Chinese Demand Indications
- Coffee Declines in London to New York With Brazil Rainfall Seen
- Rebar in Shanghai Advances as Chinese Steel Output Declines
- Silver Trades Above 200-Day Moving Average for 1st Time in Year
- Impala Platinum Sees Strike Lasting to May as Talks Stumble
- Sugar Traders Bullish for Second Week on Dry Weather in Brazil
- Frozen Peach Trees Help U.S. Southeast Orchards Amid Storm Chaos
- Derailment in Pennsylvania Adds to Scrutiny of Crude Shipments
- Iran Nuclear Talks Resume as Companies Prepare for Market Access
- Palm Reserves in Indonesia Seen at 19-Month Low; Prices Advance
The Hedgeye Macro Team
This note was originally published at 8am on January 31, 2014 for Hedgeye subscribers.
“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.”
Valuation is an analytical staple in deciding whether an asset, company or asset class should be bought or sold. The challenge with valuation? As a decision making tool, the inputs are often more important than the outcome. Regularly on Wall Street, especially when some of the large investment banks are involved, valuation becomes an even more amorphous thing.
Yesterday our CEO Keith McCullough discussed price targets for the S&P 500 in 2014 (see video "Is Consensus Too Bullish?") that are being established by some of our peers and the arbitrariness of the multiples being applied to come up with the target. Now to be fair, coming up with a view on the future price of a market is difficult at best because as Einstein notes all the factors that matter “cannot necessarily be counted”. (In part, this is why we stay away from precise long-term price targets on the broad market.)
Valuing a company has its challenges as well. Take for instance the Kinder Morgan companies, which are a massive group of pipelines, terminals and oil and gas productions assets cobbled together by billionaire Rich Kinder over the years. We are currently short $KMI and $KMP on our Best Ideas list because we, simply put, think the company is grossly overvalued.
I won’t steal his thunder but my colleague Kevin Kaiser will be giving an update on his short thesis on Kinder Morgan today at 1pm EST and his presentation starts with the following views on valuation:
- “Cheap” is a LONG WAY DOWN. We believe Fair Values are:
- KMI: $15 - $20/share
- KMI Warrant: near $0
- KMP/KMR: $30 - 40/unit (Preferred Way to Play This)
- EPB: $25 - 30/unit
As always valuation is an opinion, but this opinion is way outside of consensus and likely worth considering if you are invested in or looking at Kinder Morgan. Please email firstname.lastname@example.org for details.
Back to the Global Macro Grind...
In my inbox last night was a summary note on the equity markets that was titled, “Equities Explode.” I’m hoping it was a tongue in cheek title because up 1.1% on less than impressive volume was far from an explosion. In the Chart of the Day today, we take a look at the last three weeks and highlight the point of accelerating volume on market down days.
The equity bulls are trying to regain the market’s upward momentum, but meanwhile the bond bulls have just experienced the euphoria of a meaningful move in rates. Since January 2nd the 10-year bond yield has declined from +3.0% to the most recent yield of +2.7%, for a +12% expedited move down in the last twelve days. So, now the Fed has finally starting tightening by the way of tapering, why are yields falling?
Simply put, economic growth is decelerating in the U.S. and Mr. Market is beginning to price this in. As a result, the SP500 is down -2.9% on the year and the VIX is up +26.0%. We see these market signals even more glaringly in sector performance. The only sectors that have had positive performance in the year-to-date are healthcare up +1.8% and utilities up +2.1%. Meanwhile the most negative two sectors in terms of performance are staples down -4.7% and energy down -4.6%.
In a recent book by Frank Partnoy, he shows that decisions of all kinds, whether “snap” or long-term strategic, benefit from being made at the last possible moment. The art of knowing how long you can afford to delay before committing is at the heart of many a great decision—whether in a corporate takeover or a marriage proposal.
The reality in the investment management business though is that you literally can’t wait until the last minute unless you have unlimited duration on your capital, like say Warren Buffett. The rest of us market minions actually have to try and stay ahead of market moves and shifts in economic outlook. This is why in our macro process identifying economic and market changes on the margin is so critical, and why long term valuation targets can be so misleading.
The question of course is whether it is possible to front run (legally) moves in the market. For example, did any of the bulls on Japanese equity shift quickly enough in 2014 to avoid the almost -9% drawdown in the Nikkei in January? Perhaps, but unlikely. After all it is human nature to value and project things for perpetuity based on the most recent data points.
An example is Kinder Morgan using $95 oil in their projections for oil or European bears projecting an abject failure of European markets when the sovereign debt turmoil was at its worst. On the last point, the healing of Europe and European credit markets has been staggering over the past few quarters.
Currently, the Spanish 10-year yield is +3.73% and the Italian 10-year yield is +3.85%, which are literally the lows for the Eurozone. This morning Italy also sold five year notes at a record low yield of 2.43% with a bid/cover of 1.49 versus a bid/cover 1.28 on December 30th.
This rampant improvement in European sovereign debt obviously begs the question of whether we are closer to the bottom then the top in European debt. But one thing is for certain, if the European debt markets are again working fluidly, it is positive for corporations that need to borrow to grow. It also begs the question of whether a short European debt and long European equities play is the best relative value play around. But, as they say, valuation shmaluation!
Our immediate-term Global Macro Risk Ranges are now:
SPX 1755-1809 (bearish)
Nikkei 14738-15411 (bearish)
VIX 15.31-20.41 (bullish)
USD 80.17-81.19 (neutral)
Gold 1231-1272 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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Takeaway: Be careful out there.
Editor's note: This is a recap of CEO Keith McCullough's market thoughts as shared no-holds-barred on Twitter today. To learn more about how you can subscribe to our services click here.
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It was a fun day for us. While I was wrong on the market call, I was really right on the stocks. I thought this market was going to crack (maybe it still will). But I do think wrong sometimes.
Our shorts have been working out extremely well during an up tape. Twitter (TWTR) and Whole Foods (WFM) are two examples. (Check out WFM after hours down 20%. Two of our analysts nailed this short two weeks ago on HedgeyeTV.) Speaking of short calls, our energy analyst Kevin Kaiser absolutely tagged Boardwalk Pipeline Partners (BWP) the other day. The stock is down over 40% this week. The “Hedgeye Short-Selling Machine” is grinding. Great job by all of our analysts. I am nothing without my team.
On a more somber note, the US Dollar continues to lose credibility. It’s actually sad to watch. You can thank the Fed for that.
Does anyone truly believe this whole “Down Dollar, Down Rates” thing is going to end well for America? If you do, I'm guessing you're smoking some of that funny stuff now legal in Colorado.
Oil inflation? It looks primed to rip the economy another new one. The Fed would do well to take a page out of the Bank of England’s playbook. Carney’s Pound continues to crush Yellen’s Dollar.
This time last year, I was extremely bullish on US #GrowthAccelerating because it was “Dollar Up, Rates Up.” That was unmistakably a pro-growth signal – what’s going on now is a slow-growth one.
Some Quick Thoughts:
- Financials (XLF) look identical to the S&P 500 – it needs to go a lot higher to change my market view.
- Gold ripping new highs is a very bearish growth signal.
- Flat to down YTD for the US stock market is the new perma bull up.
- If you're a bullish momentum monkey, just buying the market because it’s up, well I guess that's why you’re a monkey.
Look, I get the whole catalyst that allowing Janet Yellen to torch America's currency inflates stocks. Just don’t confuse that with the America that you want.
Join the Hedgeye Revolution.
Takeaway: Inflation is likely to lead to stock market multiple compression, the very opposite of what most Wall Street strategists are calling for.
Editor's note: This is an excerpt of an article written by Hedgeye Managing Director Moshe Silver just published on Fortune.
FORTUNE – Believe it or not, commodity prices are breaking out right now as other inflationary pressures continue to build. Don't believe it? Take a look at gold prices. They have already risen over 7% year-to-date as the S&P 500 has fallen 1.5%. Meanwhile, the CRB Commodity Index is up 4% year-to-date.
Something is stirring here and it doesn't have the whiff of deflation.
If U.S. Federal Reserve Chair Janet Yellen decides to "rescue" equity markets by reversing the central bank's plans to scale down its bond purchases, the impact could knock down the U.S. Dollar and trigger investors to chase yield, which would drive up inflation hedge assets and likely spark another round of growth-slowing commodity inflation.
After peaking in 2011-2012, commodity prices cratered in 2013. Because of last year's price declines, period-to-period comparisons are especially sensitive, so even a moderate commodity price increase looks inflationary year-over-year. This is an optical effect, not yet an economic reality. But policy – and market panics – are made in response to how things appear, not how things actually are.
Hedgeye CEO Keith McCullough says we are unlikely to see 2011-2012 style actual inflation (which the Fed did not see at the time.) But, as people perceive the rise in commodity prices alongside decelerating growth and declining stock prices, there will be speculation that the Fed will again loosen policy to support flagging growth. If Yellen reverses plans to scale down the Fed's bond purchases, a process dubbed, 'tapering,' your stocks will lift temporarily. But globally the dollar will suffer, causing inflation to rise faster.
Click here to continue reading at Fortune.
Takeaway: The labor market data slowed again in the most recent week, adding to a string of data pointing in the same direction.
#Deceleration: Par for the 2014 Course
We profiled the deceleration in the Retail Sales data this morning - Here.
Inclusive of this week’s data, the trend in the high frequency labor market data is telling a similar story as seasonally-adjusted rolling claims rose again WoW and the rate of improvement in the rolling average of YoY non-seasonally adjusted claims decelerated 70bps to -5.0%.
As we highlighted last week, its important to remember that initial claims can’t show “accelerating improvement” in perpetuity – the rate of improvement will inevitably converge towards zero as we approach the historical, frictional floor at ~300K in the seasonally adjusted series.
Its notable, however, that the claims data has deteriorated even as we’ve moved into the period of peak, positive seasonality. Any softness in the underlying trend will be (optically) exaggerated as seasonality again reverses into 2Q14.
Elsewhere, and on the constructive side, bloomberg’s weekly read on the consumer showed confidence ticking up 2.4 pts WoW to -30.7, the highest reading in a month. After a discrete breakout in 2013, confidence has been middling the last couple months with readings mixed mixed across the primary survey’s.
Dollar Down, Rates Down, Utilities leading and yield chase/inflation hedge assets (Gold/REITS/CRB) outperforming today….also par for the 2014 course.
Below is the detailed breakdown of this morning's claims data from the Hedgeye Financials led by Joshua Steiner. If you would like to setup a call with Josh or Jonathan or trial their research, please contact
- Hedgeye Macro
INITIAL CLAIMS: The Labor Market Slows Further ...
Last week we profiled the labor market beginning to show modest signs of cooling off. This week's data marks a continuation of that trend. Our preference remains to look at the trend in the year-over-year rate of change in the rolling NSA initial jobless claims.
We look for signs of acceleration or deceleration and treat that as a referendum on the marginal strength of the economy. This week, that measure showed 5.0% y/y improvement. Here's how the last five weeks now look, ordered from oldest to most recent: -8.5%, -7.9%, -7.3%, -5.7%, -5.0%.
Clearly the trend over the past month has been one of a slowing rate of improvement. This doesn't mean that the economy isn't still progressing and jobs aren't still being added, but it does mean that the rate at which those things are happening is slowing down. Credit-sensitive financials should take note.
Prior to revision, initial jobless claims rose 8k to 339k from 331k WoW, as the prior week's number was revised down by 0k to 331k.
The headline (unrevised) number shows claims were higher by 8k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3.5k WoW to 336k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.0% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -5.7%
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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