POSITION: Long Consumer Discretionary (XLY), Long Healthcare (XLV)
I covered my short position in SPY this morning and bought Consumer Discretionary (XLY), taking my asset allocation in the Hedgeye Asset Allocation Model to US Equities up from 3% (on yesterday’s open) to 9%.
With the EUR/USD oversold on a catalyst (EU Summit) we were calling for, everything has a time and price. As the US Dollar strengthens, US Consumer Confidence continues to strengthen (Michigan Consumer Confidence reading was up to 67.7 in DEC vs 64.1 in NOV). Like it did in our US Consumption models in 2009, Deflating the Inflation has its perks.
I know the Keynesians want exports. I just want them to go away. This is not an export economy. It’s a Consumption economy. And whoever figures out that political message first will start to get the political economy right too.
Across all 3 durations in our risk management model, I stand by the note I wrote on Wednesday:
- On up days towards long-term TAIL resistance (1270) = sell/short
- On down days towards immediate-term TRADE support (1231) = buy/cover
It’s a multi-factor, multi-duration view. It’s what we do. And it should continue to help you think about doing what seems logical in this environment of Big Government Intervention and Volatility – buy low and sell high.
Keith R. McCullough
Chief Executive Officer
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.
THE HEDGEYE BREAKFAST MONITOR
Comments from CEO Keith McCullough
Consensus expectations for a European solution were what failed this week – this will take time.
- CHINA – just a market mess in Asia overnight led by what we know - an acceleration in Growth Slowing in China – Industrial Production came in at +12.4% (lowest report since 2009) and inflation dropped, sequentially, inline w/ our model’s estimate at 4.2%. Deflating The Inflation (positive) will take time too. Chinese stocks hit a 33 month low (down -24.5% from YTD high).
- GERMANY – the most important Global Macro factor to solve for when analyzing a country = GROWTH. The Bundesbank cut their Growth estimate huge this morning for 2012 to 0.6% (from 1.8% prior). European Stagflation is what kills Equity multiples, and there is no central plan that can stop gravity (Growth Slowing). Next line of DAX support = 5776.
- RUSSIA – I’ve been up for 2 hrs and have yet to see or hear someone mention that the Russian stock market is crashing (that doesn’t mean it ceases to exist) – down -4.3% this morning and down -33.5% from YTD high confirming 2 Big Mac-ro calls we had yesterday: A) Strong Dollar and B) Cutting our Asset Allocation to Commodities back to 0%. Brent Oil snapped its TAIL line of $110.42.
With US Stocks down for both November and December, Santa is going to have to have one heck of a rally in the next 2 weeks for us to be wrong. I am hearing that central planners are considering moving the date on Christmas however.
SP500 support 1231; TAIL resistance 1270. Manage your risk around that range.
YUM: Yum! Brands was upgraded from Market Perform to Outperform at Bernstein.
WEN: Wendy’s tweet related to the annual promotion the company does to raise money for the Dave Thomas Foundation for Adoption was the most retweeted tweet in 2011.
This note was originally published at 8am on December 06, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“During the great plague of London, in 1665, the people listened with avidity to the predictions of quacks and fanatics.”
That’s one of my favorite quotes from one of my favorite economic history books – “Extraordinary Popular Delusions and the Madness of Crowds.” It serves as a healthy reminder that the psychology of the market can remain unhealthy, until it snaps.
Oh snap. After the US stock market puts on an +8.5% (99 point) move in less than a week, how dare the hockey head at Hedgeye Risk Management say sell!
How dare I say sell in February or April 2011 at SP500 1340 or 1363? How dare I not align my 2011 GDP estimates with Keynesian Quacks? How dare I do any globally interconnected work and say sell into year-end?
Oh, the almighty “year-end rally.” This is the stuff of savants. All it requires is the most elephantine intellects created on earth to summarily conclude that it has to happen – with other people’s money!
I was on the road in NYC seeing clients yesterday and that was a question I got in every meeting – why can’t we have a year-end rally?
My answer: why not?
After being down from April to September, US stocks rallied to a lower-high in October. After being down over -7% in a straight line for 4 weeks in November, stocks rallied to another lower-high on the last day of the month. After starting off down for December, heck, it made another lower-high yesterday too. Hallelujah, Yes We Can rally, baby!
Hopefully that’s as fanatic as I have sounded all year. I needed to get that off my chest.
Back to the Global Macro Grind…
Rather than get sucked into the speculation that European central planners are going to be able to suspend economic gravity this Friday, here’s what the rest of the world’s interconnected market is telling us this morning:
- Australia is seeing growth’s slowdown accelerate on the downside here in December and cut interest rates to 4.25% overnight
- Australian stocks ultimately went down -1.3% on the “rate cut” news as Growth concerns trump policy moves
- China’s stock market closed down again overnight, taking the Shanghai Composite below its pre-rate cut level from last week
- Hong Kong’s stocks market fell another -1.2% overnight as it remains in crash mode (down -22.4% from its 2011 high)
- Singaporean stocks fell another -0.6% after reporting a recessionary PMI for NOV of 48.7 (down vs 49.5 in OCT)
- EUR/USD fails, again, at all of our risk management levels of resistance (immediate-term TRADE resistance = $1.36)
- French Bond Yields (10yr) make another higher-low, holding the important 2.89% level of TAIL line support (3.29% last)
- German Bund Yields (10yr) make higher-lows as well and rally back up to 2.24% (+18bps over US Treasuries)
- France’s CAC40 rallies to another lower-high and remains bullish TRADE (3071 support); bearish TREND (3402 resistance)
- Italy’s MIB Index rallies to another lower-high and remains bullish TRADE (15,169 support); bearish TREND (18,925 resistance)
- US Dollar Index remains in a Bullish Formation with TRADE line support at $77.71, keeping the Correlation Risk obvious
- US Treasury rates on the long-end of the curve continue to signal that US Consumption Growth slows as inflation rises
- SP500’s immediate-term rally post “coordinated easing” has been exactly the same amount of S&P points as the SEP2008 rally
- SP500 is immediate-term TRADE bullish (1234 support) and long-term TAIL bearish (1270 resistance)
- Equity Volatility (VIX) is immediate-term TRADE bearish (30.12 resistance) and long-term TAIL bullish (22.98 support)
But, but, can’t we rally into year-end?
Let me look at the casino futures and give you an answer for the next 3 hours of trading…
But to where? And, more importantly, then what? The typical Perma-Bull market operator has fed off of this thing that The People of the United States of America have a say in called inflows – as in the amount of money Americans are willing to invest in their 301k.
In addition to A) Shortening Economic Cycles and B) Amplifying Market Volatilities, the other major unintended consequence of Big Government Intervention in markets has been the loss of trust The People have in free-markets.
Call me a quack, fanatic, or Mucker this morning and I’ll be totally cool with all 3 as long as that puts me in preservation of capital mode as the Street gets paid to suspend disbelief that a 1-week Keynesian Santa rally is real.
My immediate-term support and resistance ranges for Gold (broken TREND line support this morning), Brent Oil (broke TAIL line support this morning) and the SP500 are now $1720-1743, $109.06-110.42, and 1234-1260, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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