TODAY’S S&P 500 SET-UP – August 1, 2014
As we look at today's setup for the S&P 500, the range is 41 points or 0.35% downside to 1924 and 1.78% upside to 1965.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Guidance again disappointing especially after factoring in the property tax benefit. And the real flow through on higher YoY Borgata revenues was actually not good
Q & A
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We booked a fifth consecutive gain on the long-side this week in livestock (ETF: COW) after buying on the oversold signal late last week.
Between the cattle shortage in the United States, scandal in China, and PedV virus affecting some 4,700 farms nationwide, both markets have skyrocketed to all-time highs this year amid a longer-term trend of much higher meat prices:
Five year changes:
While both have run significantly this year, a price divergence has emerged between the two over the last month. Basis between front and 4th,5th,6th contract months suggest the market expects much lower prices for both by next summer:
The USDA extended a conditional license to utilize a vaccine for the PedV virus that usually kills 100% of the baby pigs in an infected farm. Harrisvaccines in Ames, Iowa is responsible for developing the vaccine and will be allowed to test its effectiveness. The market has reacted to its positive outlook. Lean Hogs spot contracts are down -12% since the news broke on the 15th of July, and the forward curve flattened. The vaccine is expected to be tested on the sows with the hope that they build the anti-body to disinfect the milk passed along to piglets. Despite the sell-off in hogs:
Supply disruptions in livestock year-to-date have led to a divergence from some of the more observable correlations in the commodity complex our team has flagged to support our big-picture macro themes. The negative correlation to the dollar is not AS pronounced in Hogs and Cattle, but the strength of the dollar is always a catalyst for the consumer (and thus everything priced in dollars).
With a seemingly improving labor market, a pull-back in commodity inflation, and the increase in revolving consumer credit, we need to continue seeing sequential improvement in these three areas for evidence of material improvement in the consumer spending picture. The livestock market is certainly expecting a pullback....
Hog prices have outpaced cattle YTD, +38% YTD and +19% respectively, but as mentioned, the market has converged over the last month. Lean Hog spot reached a high of $133.80 USD/lb. on July 15th and has since pulled back over -10%.
Yesterday marked a YTD and all-time high in cattle prices ($159.85 USD/lb.) A few of the outliers potentially fueling the move are included below. (Note: We’re looking to the market for buy signals in these commodities without edge on a fundamental call moving into the fall at this point):
Takeaway: We warned you.
Rising global risk and fear rattled markets, body-slammed stocks and sent the VIX soaring up over 26% today.
The macro team at Hedgeye has been banging the drum on volatility for weeks. As CEO Keith McCullough has said on more than one occasion recently, “volatility basically bottomed on July 7th around 10—it’s never held below 10, ever.”
In fact, this move in volatility was one of our top three quarterly macro themes. See below.
#VolatilityAsymmetry: Across global financial markets, measures of volatility are at historically-depressed levels. While low levels of volatility aren't necessarily a timely harbinger of financial market calamity in and of themselves, other signals - such as the economic cycle rolling over and pervasive complacency among investors and corporations - would seem to suggest we are well into the latter innings of this bull market.
Click below to watch the video on one of our top three quarterly themes #VolatilityAsymmetry:
Hedgeye CEO Keith McCullough discusses #VolatilityAsymmetry, one of our top quarterly macro themes during our July 11th conference call with institutional subscribers. The presentation detailed what we believe are the three most important macro trends.
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