Yesterday, the S&P pushed to a new a high for the year, closing up 0.4% on yesterday’s trade line of 1,118.  In very light pre-holiday trading, volume declined 5.6% day-over-day and the breadth of the market narrowed.  The MACRO calendar drove yesterday’s optimism on the better-than-expected housing data, which sparked a rally in the homebuilders and housing-leveraged stocks.  Countering that optimism was another downward revision to Q3 GDP. 


The higher beta small-cap names continue to outperform with the NASDAQ and Russell 2000 rising 0.7% and 0.8%, respectively.  The VIX continues to be broken on all three durations (TRADE, TREND and TAIL), breaking below 20.00 yesterday to close down 4.6% at 19.54. 


There continues to be a breakdown in the inverse correlation between US equities and the dollar that has dominated the MACRO landscape in 2009.  The Dollar index has increased for the past seven days and the S&P has now been up for the last three.  The Dollar index is up 0.71% in the past three trading days and the S&P 500 is up 1.99%.


Housing-related stocks were among the best performers yesterday with the XHB +2.25%.  The main driver of yesterday’s performance was a better-than-expected existing home sales number.  The NAR reported that existing homes sales rose 7.4% month-over-month in November to a 6.54M annual rate; the highest since February of 2007. Total inventories fell 1.3%, while the months’ supply dropped to 6.5 from 7 in October (single-family months' supply fell to 6.2 from 6.8).  Notable gainers in the group included builders KBH +6.9%, PHM +4.7% and TOL +4.5%.


Yesterday, the three best performing sectors were Technology, Consumer Staples and Materials.  Increased earnings expectations helped the Technology (XLK) sector outperform the S&P 500 by 0.4%.  The bright spot was the semi space with the SOX +0.6% yesterday.  Two standouts were AMKR and JBL, which both posted guidance ahead of Street expectations.


The momentum behind the RECOVERY trade has helped Materials (XLB) outperform, but has left the Industrials (XLI) behind.  The Road& Rail (R), Air Freight (FDX) and Machinery (FLS) were among the laggards.  The best performing stock was FLIR Systems, up 3.5% on the day. 


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 16 points or 0.5% upside and 1.0% downside.  At the time of writing, the major market futures are slightly higher.


The CRB improved by 0.04% yesterday; grains, Energy and Livestock all traded higher on the day.


In early trading, crude oil held steady above $74 a barrel in New York before a U.S. Energy Department report on inventory levels.  The report today is expected to show oil inventories shrank by 1.6 million barrels in the week ended Dec. 18, according to the median estimate by Bloomberg.  The Research Edge Quant models have the following levels for OIL – buy Trade (70.49) and Sell Trade (74.52).


Gold declined for the third day in London.  Gold declined by 0.3% to 1,080.  The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,071) and Sell Trade ($1,151). 


Copper rose in London on speculation that demand in China and the U.S. will strengthen.  Also, the dollar decline has created an arbitrage opportunity for Chinese speculators.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.09) and Sell Trade (3.15).


Howard Penney

Managing Director









Cotton: Back on the Front Burner

Cotton is back up to $0.76/lb after following the market up from the March 9th lows, though with a more notable 90% move off the bottom. Definitely not a good event for most components of the apparel/footwear supply chain, especially given that petro-based inputs are clocking similar gains. On a combined basis, these two represent roughly 20-25% of the underlying cost of goods sold for most apparel/footwear units at retail. This gets more pronounced as we get closer to the point of origination as opposed to consumption (i.e. it is near 50% of COGS for a wholesaler, and 75% for a bricks, mortar, and sweat manufacturer).  We can argue six ways til Sunday about who bears the cost of this, but 1) it won't be the consumer, and 2) the fact is that it is a suck of capital out of the supply chain.


Here's Keith's take on cotton prices based his factor models.

KM: In my model I have the DJ UBS cotton index and the BAL (ipath etf)… BAL literally just broke its TRADE line at 36.40; bullish TREND line all the way down at $34.39… looks like a lot of the emerging markets actually.


Earlier today someone pointed to a 10-year chart and made the case as to how unlikely it was that we breach new highs (implying that the ride is over). I wonder if people made that case in the early 1990s before cotton raced up to a $1.15 peak?  Something to watch as the year draws to a close.


Cotton: Back on the Front Burner - 12 22 2009 3 46 43 PM


Today, the second revision to 3Q09 Gross Domestic Product was released and showed a downwardly-revised annualized real growth rate of 2.2%, reduced from the second estimate of 2.8% and the initial estimate of 3.5%.  This followed a 0.7% decline in reported 2Q09 GDP.  The vast bulk of the growth comes with a significant cost to tax payers and remains dependent on short-lived stimulus programs, like housing.


Consumers, like the “piggy bankers,” are benefitting from the free money policies of the FED and the government stimulus programs.  The NAR reported today that sales of existing U.S. homes rose to the highest level since February 2007.  Existing home purchases increased 7.4% to a 6.54 million annual rate from a revised 6.09 million pace the prior month.  The median sales price declined 4.3%.  A sustained recovery in housing and the economy depends on low interest rates and a resumption of job growth. 


As you can see from the chart below, lower mortgage rates have helped sales of existing homes!  But that could change!


Right now, yields on mortgage securities have climbed from 3.9% on November 30th to 4.5% today, the highest level in four months.  The implications are that the market is responding to the acceleration in housing despite the fact that rates are rising.  It’s possible that higher rates will slow the housing numbers down. 


We continue to argue that the FED is behind the curve and that interest rates are likely headed higher in Q1.  At the very least, the FED will be altering it official “verbiage” that will signal rates are headed higher.   


Looking ahead, the "advance" estimate of 4Q09 GDP growth is scheduled for release on January 29th.  Consensus estimates are for continued, positive quarter-to-quarter real growth of 3%.  For 2010 the consensus has GDP growth of 2.6%.  How the 4Q09 estimates hold up will depend on initial reporting of December employment, retail sales, industrial production and housing data due to be released in January. 


While some parts of the economy are showing some bottom-bouncing, if you eliminate the non-recurring, short-lived spikes from temporary stimulus measures, there is little or no GDP growth.  The upturn in real GDP growth reflected the following three factors; all are a result of temporary stimulus measures:


  • Spending for new cars and trucks was particularly strong, reflecting the federal “cash for clunkers” program that was in effect during July and August.
  • Export and inventory investment also contributed to the upturn.  The three week dollar rally will slow this factor down.
  • Residential housing rebounded due to the home buyer tax credit. The current program expires April 30, 2010.


Despite all of this good news, the Rasmussen daily Presidential Tracking Poll is reporting that the Obama Presidential Approval Index stands at -21, the lowest approval Index rating for Obama since he has become president. 


The market is making a new high today on the strength of the economy and more people disapprove of the way Obama is handling things.  What is wrong with this picture!



Howard W. Penney

Managing Director




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Chart of the Week: Piggy Banker Spread

When Matt Hedrick signed up to wear the Hedgeye Risk Management jersey, I don’t think he thought he was going to be charting our fundamental views in pink. Get used to it Matt - really rich piggy bankers wear pink.


The chart below has a very high correlation with banker bonuses. Not only is this morning’s Piggy Banker Spread the widest it has EVER been, Bernanke’s banker bonus inspiration outruns Greenspan’s by a considerable margin. That’s saying something!


Academic types call this the yield spread. This is the difference between 10-year and 2-year US Treasury yields. This is also the difference between what American savers earn on their fixed incomes and what the bankers borrow to them on their loans. Iggy piggy, indeed…


While 10-year yields have been busting a move to the upside ever since the November US employment report, they have been making a series of higher-lows since this time last year. The long term TAIL for long term interest rates, in our risk management speak, is BULLISH.


If you are looking for another opinion on this, ask a sell-sider who is pleading for perpetual short rates of ZERO. Goldman’s David Kostin has a 2010 Fed funds target of ZERO and a 2010 forecast for 10-year yields of 3.3%.


Warning: that GS estimate is what Washington’s economic groupthink team of Larry Summers, Timmy Geithner, and Christina Romer call a “blue chip” estimate.


Today’s marked-to-market price for 10-year yields is 3.71% and, for the bankers at GS at least, this chart definitely tickles them pink.



Keith R. McCullough
Chief Executive Officer


Chart of the Week: Piggy Banker Spread  - PiggyFinal


Casual Dining – November Trends

Malcolm Knapp reported last Friday that casual dining same-store sales declined 4.6% in November with traffic down 4.4%.  These were surprisingly strong numbers with comparable sales growth improving nearly 180 bps sequentially from October on a 2-year average basis and traffic getting better by more than 150 bps (helps to explain the group’s 6.2% move over the last two days and moving higher again today). 


Making these results even stronger is the fact that November was the first month in 2009 when both average check and traffic 2-year average trends improved on sequential basis.  On a 1-year basis, traffic has gradually gotten less bad in 2009 with November coming in -4.4% versus -10.5% in December 2008.  At the same time, average check has weakened and even turned negative in May and has remained negative through November.  Seven consecutive months of average check declines is significant as the industry had not reported one month of negative average check growth prior to May 2009 going back through 2000.  Lower average checks are a sign of increased industry discounting.


Malcolm Knapp pointed out that although traffic growth continued to outperform same-store sales growth by 0.2% in November, it was the first month since April when not all of the weeks of the month followed this trend and it was also the lowest level of outperformance over that same timeframe.  To that end, Malcolm Knapp stated, “The level of discounting fell in November as wholesale food costs increased 1.29% for the month vs. the prior month, October.”  His statement only increases my conviction that restaurant operators cannot afford to continue to discount to the same extend they have in 2009 as food costs move higher in 2010.  That being said, I thought this lower level of discounting would translate into bigger traffic losses.  This was not the case in November.  As I already said, both average check and traffic ticked up in November on a 2-year average basis.  We will have to wait and see if the November trends are sustainable.  For reference, DRI said last week that industry trends continued to get better in December but would not clarify whether the improvement was on a 2-year basis or a 1-year basis (the latter would be less impressive).

Confidence in the Slush

Today’s release of German Consumer Confidence from GfK yields two observations: Germans are neither overly optimistic, nor glaringly negative on current and future economic expectations. This rhymes with our call that macro headwinds are still bearing down on confidence in Germany, and throughout the Eurozone. The chart below shows that while consumers’ economic and income expectations rose for the December survey, the overall index of sentiment (January) and consumers’ propensity to spend deteriorated.


While one survey doesn’t make a thesis, it contributes to evidence that the threat of future joblessness is still weighing on German sentiment. And the trend appears similar throughout much of the Eurozone. Consumer confidence in Denmark fell to -3.6 in December from -2.4 in the previous month in a survey yesterday, which contributed to the underperformance of its equity market (OMX Copenhagen) in yesterday’s close versus an otherwise positive close for most Western European equity markets, including the DAX that climbed to a YTD high and today further inched upwards.


Although German labor market conditions improved in the Fall, which has helped to stabilize the unemployment rate, and despite Chancellor Merkel’s recent extension of state-subsidized part-time work program for another year, the survey suggests that other concerns, including expectations of price inflation, especially energy prices, persist. With major stimulus programs (including a robust cash-for-clunkers program) in the rear view, consumers may shun spending to increasing savings, which could diminish growth prospects from private expenditure next year. 


Although forecast for modest GDP growth next year, we expect German’s  robust industrial and manufacturing export base to lead Eurozone economies as its major trading partners heat up.  In recent weeks we’re seeing a trend of outperformance from the DAX over the FTSE.  At times this year we’ve traded Germany on the long side via the etf EWG and the UK on the short side via EWU.


We’re currently not invested in Europe and happy to stand out of the way of a fairly long list of countries (including Ireland, Spain, UK) whose future growth is threatened by ballooning debt balance sheets, among other structural issues; certainly Greece has made the most recent splashes on this front.


Matthew Hedrick



Confidence in the Slush - gfk


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