TODAY’S S&P 500 SET-UP – October 1, 2013
As we look at today's setup for the S&P 500, the range is 27 points or 0.39% downside to 1675 and 1.22% upside to 1702.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.30 from 2.29
- VIX closed at 16.6 1 day percent change of 7.37%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am: ICSC weekly sales
- 8:55am: Johnson/Redbook weekly sales
- 8:58am: Markit US PMI Final, Sept. (est. 53.1)
- 10am: Construction Spending M/m, Aug. (est. 0.4%, pr 0.6%)
- 10am: ISM Manufacturing, Sept. (est. 55.0, prior 55.7)
- 10am: ISM Prices Paid, Sept. (est. 55.0, prior 54.0)
- 4:30pm: API weekly oil inventories
- Obamacare insurance marketplaces open for enrollment, whether or not federal govt shuts down
- U.S. Supreme Court may say whether it will consider Argentina’s appeal of lower-court decision on debt payments
- Microsoft holds discussion on changes in immigration policy that would benefit the economy, with Labor Dept Chief Economist Jennifer Hunt, 8:30am
- World Bank President Jim Yong Kim will speak about global poverty, bank’s efforts to end most extreme forms by 2030 a week before the bank’s annual meeting, 11am
- Officials from Comcast, Cisco and Toyota testify before House Subcmte on Communications and Tech hearing on using spectrum in the 5 GHz band, 10:30am
WHAT TO WATCH:
- U.S. govt. shutdown idles 800k as Congress spars on Obamacare
- ROUNDUP: U.S. shutdown begins as deadlocked Congress flails
- Shutdown confrontation may take momentum from standoff on debt
- Cameron says U.S. government shutdown is risk to world economy
- Shutdown would cost U.S. economy $300m/day, IHS says
- Health exchanges begin enrollment, some delays expected
- JPMorgan employee said to be cooperating in U.S. RMBS probe
- Labor Day quirk hit auto sales for Sept., analysts say
- Google said to avoid U.S. antitrust challenge over Waze deal
- Google offer paves way for end to antitrust clash: Almunia
- Activision may seek shareholder vote on Vivendi buyout
- Dish reaches extension w/ Disney, avoids ESPN/ABC blackout
- Wells Fargo agrees to $869m settlement with Freddie Mac
- Toyota loses bid to get acceleration-injury suit thrown out
- CFTC enforcement chief David Meister to step down this month
- China Sept. manufacturing index rises less than forecast
- Euro-Area jobless rate unexpectedly declines
- Abe confirms Japan to compile JPY5t stimulus plan
- KKR buys 10% of appliance maker Haier in biggest China deal
- Cooper Tire shrholders vote to accept merger with Apollo Tyres
- Amazon to hire 70,000 seasonal workers to meet holiday demand
- Intel’s Eric Huggers seen as Hulu CEO candidate: N.Y. Post
- Indigo Partners agrees to buy Frontier Airlines: WSJ
- Intel to buy Sensory Networks for about $20m: WSJ
- Actuant (ATU) 7:25am, $0.50
- Acuity Brands (AYI) 8:25am, $1.02 - Preview
- Global Payments (GPN) 4:01pm, $0.95
- Walgreen (WAG) 7:30am, $0.73 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Copper Falls on Concern U.S. Government Shutdown to Sap Demand
- Biggest Raw-Materials Rally of Year Seen Stalling: Commodities
- WTI Crude Drops a Third Day as U.S. Government Shutdown Begins
- Gold Futures Fall Below $1,300 an Ounce on Comex
- Soybeans Drop on Higher U.S. Supply as Corn Hits Three-Year Low
- Sugar Falls After Rally Before Record Delivery; Coffee Advances
- India’s Gold Imports Seen Declining on Curbs to Contain Deficit
- Coffee Held by Vietnam Farmers Climbs to Highest Since 2009
- Brazil Sugar Exports to China Advance to Record, ITC Data Show
- Exploding Fuel Tankers Driving U.S. Army to Solar Power: Energy
- Diesel Tankers Turning Profitable After Five-Year Rout: Freight
- Saudi Arabian Oil Output Soars to Highest on Record: BI Chart
- Chile, Peru Dominate New Copper Supply as Africa, Asia Trail
- Stocks Rally Most Since ’12 in Quarter, Beating Dollar, Bonds
- MKS Sees Its Physical Gold Sales Reaching Record on Asia Demand
The Hedgeye Macro Team
Client Talking Points
This is key: Both the US Dollar Index and the USD vs YEN are trading at critical lines of support ($79.21 is the long-term TAIL risk line for US Dollar Index and USD/YEN TREND support is 97.71). So, which way do we go from here? It's gravity (Friday jobs report) vs government now (Bernanke/Congress). It ought to get interesting.
The bond market is ignoring the government gong show and shutdown noise and looking forward (as usual) to the jobs report. If 2.55% TREND support on the 10-year holds (2.65% and #RatesRising this morning) and that jobs report is a big one, look for big time volatility in bonds to remain.
Front month fear is now officially back above my immediate-term TRADE breakout line of 14.64. So I’m watching that as closely as I am 1686 support (now resistance) in the S&P 500. Since the Bernanke Fed has successfully confused the entire market on the taper, this upcoming jobs report really matters this time. I will let Mr. Market tell me where to go next.
|FIXED INCOME||0%||INTL CURRENCIES||16%|
Top Long Ideas
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
TWEET OF THE DAY
So is the next market catalyst Congress savings us from themselves, again? @KeithMcCullough
QUOTE OF THE DAY
The best minds are not in government. If any were, business would steal them away. -Ronald Reagan
STAT OF THE DAY
$300,000,000: A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc. While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers. (Bloomberg)
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Looks can be deceiving. Fundamental incongruity with MGM's stock move?
- Despite the headline 20% growth in Strip revenues and 56% in Baccarat revenues (due to high hold) in August, Baccarat volumes remain a concern
- Remember, throughout the downturn, Baccarat volume outperformed and kept Vegas barely afloat
- Baccarat volumes have fallen 5 straight months YoY, which hasn’t happened since April 2003. Operators we spoke to failed to supply any good answers.
- We are becoming increasingly concerned that Strip fundamentals are lagging MGM’s stock move (we’ve been on the right side of that trade). Slot volumes (still the most important metric) remain challenged and if this recent Baccarat trend is sustainable, investors may start scratching their head about MGM’s 76% YTD move.
This note was originally published at 8am on September 17, 2013 for Hedgeye subscribers.
“The great thing about fact based decision is that they over rule the hierarchy.”
Jeff Bezos knows a thing or two about making decisions. In 1994 after making a cross country drive from New York to Seattle, he made the decision to write up a business plan. To undertake this cross country drive, he made a decision to leave a “well-paying” job. The little company that Bezos was developing a business plan for was Amazon.com and the rest, as they say, is history.
At the time, Bezos combined two facts that helped him overcome the establishment. The first was that the internet was growing in leaps and bounds. The second fact was that the U.S. Supreme Court had ruled (in Quill Corp V. North Dakota) that online retailers would not have to collect sales taxes in states where they lacked a physical presence.
This series of decisions paid off handsomely for Bezos as he is now worth an estimated $25.2 billion. Meanwhile his company Amazon.com has a market capitalization of more than $135 billion and generates more than $65 billion in annual revenues. Frankly, it kind of makes me want to quit my job and go for a drive!
Former Harvard President Larry Summers made a big decision late Sunday to withdraw his name from consideration to replace current Federal Reserve Chairman Ben Bernanke. Now technically speaking, the fact that five Democrats intended to vote against him in committee kind of forced his hand, but nonetheless a decision was made.
In the short run, Mr. Market viewed this development as somewhat positive as stocks were up broadly with the SP500 up 0.57%. (Strangely, the bell weather master limited partnership, Kinder Morgan Partner (KMP), underperformed and was down -1.50%.) President Obama then chose to come out and spoil the Wall Street party as Obama indicated he will not negotiate an extension of the U.S. debt ceiling as part of the budget fight.
Slight digression, yes the debt ceiling debate is looming again. As Yogi Berra said, this is déjà vu all over again. You may recall, in 2011 Congress raised the debt ceiling to $16.7 trillion, an increase of over $2 trillion. Currently, based on projections from the Treasury department, the federal government could hit the debt ceiling as soon as mid-October.
In the chart of the day, we highlight a chart from the Bipartisan Policy Center that shows that the debt ceiling is likely to be breached to between October 18th to November 5th. Technically speaking, the United States hit its debt limit on May 19th, but as my colleague Christian Drake has written about, via a number of extraordinary measures, the ceiling has been extended, but these measures will run out at some point in the time frame noted above at which point the federal government will only have enough tax revenue to cover about 68% of its bills.
Incidentally, and for those that don’t have their calendars in front of them, the “X-date” is just over a month away. And just think, most investors are worried about who is going to be the next Chairman / Chairperson of the Federal Reserve! Given the uncertainty around the direction of policy, a looming fiscal crisis, and the fact that U.S. equities have performed quite well in the year-to-date, it should be no surprise that some savvy investors like Stan Druckenmiller are indicating they are largely underinvested.
We certainly get the risks, but one point that has and will continue to benefit equities, is bond outflows. Since May we have seen $116 billion fixed income fund outflows, which is the largest absolute bond outflow in history.
Interestingly though, as our Financials team pointed out yesterday, as a percentage of beginning fixed income assets-under-management, the current 2013 draw down is the smallest in history on a percentage basis. The 2013 running outflow has been just 2.9% of outstanding bond funds, well below the past outflows in 2003-2004 where 5.0% of outstanding bond funds were redeemed and the 14% of bond funds that were drawn down in the 1994-1995 outflow. So while there are certainly risks looking for equities, the continuation of bond outflows will be a meaningful tailwind.
Nonetheless, many of the large investors we speak with remain focused, and rightfully so, on the direction of leadership at the Fed. Given this focus, I thought I’d highlight a few fun facts about the Fed:
1) The greatest long term period of economic growth in the United States was between the Civil War and 1913 when there was no Fed.
2) Prior to the creation of the Federal Reserve, the estimated rate of inflation in the United States was 0.5% and it is estimated to be at 3.5% in the ensuing century.
3) The permanent income tax was introduced in the same year as the Federal Reserve.
4) In 1913, Congress promised that if the Federal Reserve Act was passed it would eliminate the business cycle.
5) The value of the U.S. dollar has declined, by some estimates by more than 95% since the Fed was created.
6) There have been 10 recessions since 1950 (arguably many Fed induced).
I borrowed some of these points above from a blog called End of the American dream and, as we touched up on in the past, it kind of begs the question, as Bezos would say, as to whether the best fact based decision is to overrule the Federal Reserve hierarchy in its entirety. Based on the points above, ending the Fed wouldn’t be the worst decision the Federal Government ever made.
Our immediate-term Macro Risk Ranges are now as follows:
UST 10yr Yield 2.80-2.98%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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