prev

In Secular No-Confidence Do Americans Trust?

The Reuters/University of Michigan preliminary index of consumer sentiment climbed to 56.6 from 56.3 in February. Importantly, the index reached a 28-year low of 55.3 in November. The consumer confidence index is holding its 28-year low, reflecting mounting job losses, a declining economy and asset deflation. Correct! Right now there is no reason for anybody to feel good about anything.

There was also no reason for anyone to feel good in 4Q74 and 1Q80 either, the other periods in America’s history when the index was this low (see long term chart below). The other common denominator between today and the other two confidence recessions is the lack of confidence in leadership.

In 1974, the country was gripped by the Watergate scandal, which created a nightmare that I hope we never see again. In late 1979 and early 1980, the US was being governed by Jimmy Carter, who did not instill confidence anywhere on the planet. On President Carter’s watch, we witnessed the Iranian crisis and the US boycotted the summer Olympics in Moscow. By the end of 1980, Carter was voted out of office and the Reagan revolution began.

Today’s crisis started under President Bush’s presidency, which saw the melt down of the US Financial System and the end of the Great Consumer Credit Cycle. Now the Republicans were voted out of office and it is President Obama’s turn to set the country’s course of action.

With confidence holding at 28-years lows, will the Obama administration’s policies set the tone for recovery or further failure? Or is there another leg down regardless of what Obama does? Only time will tell, but I’m leaning toward an improvement in confidence from here. History’s behavioral patterns find a way of rhyming.

This part bears repeating from my thoughts from yesterday. In this environment the consumer is increasingly rethinking or being more thoughtful with his/her purchases. Consumers are more focused on needs over wants…… Job insecurity and other macro factors have definitely caused consumers to pinch on spending, but importantly, yesterday’s better than expected retail sales number indicates there is still some level of spending.

What are more important are the behavioral changes to the pattern in consumer spending. You can bet consumers will be more thoughtful when spending their hard earned buck. Most are likely to consider each purchase more carefully and be more price conscious even when it comes to non-discretionary spending. It’s likely that discretionary spending will suffer disproportionally, particularly as it relates to purchasing high-end goods, as sticking to a budget will become the “new normal” and large credit card balances will be considered a sin.

Howard Penney
Managing Director

Bloated Bear: SP500 Levels, Refreshed

This was, by all measures, a wonderful week. We picked up a pile of points being long the “Buy for a Trade” range that we established in the shaded green zone (see chart below). Cramer was taken down a few notches by the transparency/accountability rules of The New Reality (thank you Jon Stewart). And, generally speaking, the world just seems like a better place…

As volatility (VIX) has broken down, and volume accelerated, what we have accomplished this week is the formation of what I see as a very trade-able Bear Market range. In Bear Markets, rather than the Fast Money Bull ones, you simply buy low and sell high. No, you don’t need Donny Deutch’s mauve dress shirt and Charlie Gasparino’s IQ (check them out yapping at each-other on CNBC right now) to figure this out. Maybe the next bull market begins when GE’s financial comedians are off the air – definitely not now.

In the chart below I have shifted our buying range up to the 656-710 SP500 zone. The dotted white line at 710 is what we call the Shark Line – bad things happen to traders, depending on their being long or short, above/below that line. This week, the Shark ate the shorts.

The dotted red line up at 765 in the SP500 is the immediate term Trade line where the Bear Market Rally is Bloated. As we approach that pain threshold for the consensus short sellers (like we did this morning), I’ll be making sales. I re-shorted the Dow (DIA) this morning. I have dropped my Asset Allocation to US Equities down from 24% on Monday, to 4% today. On the way back down to 710, I might buy things back, but patiently…

Have a great weekend,
KM

Keith R. McCullough
CEO & Chief Investment Officer

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Question: Could DKS' Comp Expectations Have Bottomed?

Comp guidance is in for 2009, and FL is predictably unclear. I'm more interested in HIBB and DKS. Check out the gaping hole between comp trajectories for each of them on a 1 and 2-year basis in the charts below. My usual cynical self would point to HIBB being unrealistic. But the reality is that I think it is doable. That leads me to ask the question as to whether the gap between the two is justifiable? True that DKS has Golf Galaxy, which is dogging it. But that does not have enough juice to drag down the comp by 8-10%. I haven't been a fan of DKS in a long long time. In fact, I never have been. But could they finally have set the bar low enough to start beating again? I'm starting to think that the answer is Yes.

Think BRAC not BRIC!

We’re seeing our reflation theme heating up in Brazil, Russia, Australia, China (BRAC anyone?) as our global Macro factors line up with our US Dollar call, “breaking the buck”.

Our thesis on the USD is concise—if the Obama administration can devalue the dollar, global equities can break out to the upside and commodities can reflate from their bombed out lows. Commodity reflation will benefit commodity-rich BRAC countries, especially with geographic proximity to China to feeds its internal growth.

We’re already seeing confirmation this week that the buck is breaking. Over the last three days the USD is down -2.1%, the SP500 is up +10.7%, and commodities have received a material lift: oil had a huge move yesterday up +10.56% (etf USO closed at +7.34%) and copper has shot up 8.1% month-to-date, closing up 2.33% yesterday.

The Macro team has been stressing the importance of President Obama shaking hands with the client—China. After Geithner’s blunders in addressing the Client’s stance on its currency, it’s now clear that China wears the pants and therefore will set the Yuan at whatever level it sees fit versus the basket of major currencies.

In today’s Early Look, Howard Penney furthered this point, noting that the number one story on Bloomberg today says that the Premier of China, Wen Jiabao, is “worried” about China’s holding of US Treasuries and wants assurance that the investment is safe. Our assessment is that Wen Jiabao wants the USD to weaken to inflate assets domestically, which will make USD denominated debt more attractive to foreigners. Logical, non? If investors return to US Treasuries, bonds will rise and reverse the current uptick in yields.

If we return to Brazil, Russia, Australia, and China, these commodity-driven economies have the Macro set-up to benefit from US assets inflating for these countries will benefit on commodity reflation; and especially Australia and Russia with proximity to China can benefit in feeding the country the raw materials it needs for internal growth. On aggregate, this set-up on an intermediate Trend perspective (3+ months) will encourage global reflation. We’re getting incrementally bullish! But don’t be that guy/gal buying high and selling low. We have had a big run-up in prices here and suggest you wait patiently, for your entry point – that’s if you’re not already there!

Look for us to use the following ETF plays: Brazil (EWZ); Russia (RSX); Australia (EWA); and China (CAF).

Matthew Hedrick
Analyst

HIBB 4Q Interim Call Nugget

"I'm happy to report that first quarter to date has been very strong." Mickey Newsome.
This is one of the most upbeat calls I've heard this year.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next