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US STRATEGY – DC Fallout

US equities were weaker for a third straight day on Friday.  Last week’s three-day, 5.1% losing streak was the first for the S&P since November 20th, while the index posted its biggest weekly decline since the week-ended October 30th.

 

Stocks were rocked by the heightened regulatory scrutiny on the financial sector out of Washington and concerns about tightening moves in China.  The latter was putting significant pressure on the RECOVERY trade.   Lastly, the uncertainty surrounding Bernanke's confirmation added to the negative sentiment. 

 

The VIX was up 52.48% last week, the biggest weekly spike since October 2008 and finished at its highest level since November 4th. The Hedgeye Risk Management models have the following levels for VIX – buy Trade (22.51) and Sell Trade (29.59).

 

The Technology (XLK) was the worst performing sector on Friday.  The semiconductors sold off sharply with the SOX down 5.3% on the day.  AMD traded down 12.4% and was the worst performer in the group despite its better-than-expected Q4 results and relatively upbeat commentary about demand.  On Friday, GOOG declined 5.7% despite earnings and revenues that came in ahead of expectations. 

 

The Financials (XLF) was the second worst performing sector on Friday declining 3.3%.  The weakness was attributed to concerns surrounding the Obama administration's increased regulatory reforms.  On Friday, regulators shut down banks in Florida, Missouri, New Mexico, Oregon and Washington.  So far in 2010 nine banks have failed, following 140 closures in 2009.

 

While the Materials (XLB) outperformed on a relative basis on Friday it was the worst performing sector last week declining 6.4%.  The sector is underperforming as China is embarking on a tightening process.

 

As we look at today’s set up, the range for the S&P 500 is 46 points or 1.0% (1,080) downside and 3.2% (1,126) upside.  At the time of writing the major market futures are trading higher on the day.  

 

Last week copper prices fell for the second straight week, as concerns about demand from China as the tightening process continues to be played out.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (3.31) and Sell Trade (3.46).

 

In early trading today Gold is trading higher after declining 3.3% last week.  Like copper, gold has traded down for the past two weeks.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,085) and Sell Trade (1,116).

 

In early trading, crude oil is trading flat after declining 2.0% on Friday.  Crude has also declined for the past two weeks, on the back of a slowing China and increased supplies.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (74.11) and Sell Trade (76.77).

 

Howard Penney

Managing Director

 

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The Week Ahead

The Economic Data calendar for the week of the 25th of January through the 29th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - cal1

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Risk Management Time: SP500 Levels, Refreshed

On accelerating volume studies, the SP500 has finally broken my immediate term TRADE line of 1126.

 

At the same time, the VIX is breaking out to the upside above both my immediate term TRADE (19.69) and intermediate term TREND (22.48) lines. It’s not time to get emotional here. It’s risk management time.

 

Part of managing risk is not blowing out your long exposure with the monkeys on today’s intraday lows. Part of it is not stepping up buying everything on every down tick of the way either. Most of it is watching and waiting.

 

I’m watching the intermediate term TREND line of support for the SP500 very closely. In the chart below, that’s the solid green line down at 1095. We need to close below that line (and hold below that line) for my intermediate term bullish view on US Equities to change. That does not mean I am bullish at every price and every duration.

 

We have a 52% Cash position in our Asset Allocation Model and only a 6% allocation to US Equities. If 1095 holds, I’ll be stepping up that US Equity exposure. In the meantime, I am going to watch, and wait.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Risk Management Time: SP500 Levels, Refreshed - km22


Picture of The Day: He's Interviewing

Sometimes a picture can capture much more than prose. This picture tells you who is in, and who is out, of the new populist club. Timmy better start interviewing.

 

President Obama is speaking just outside of Cleveland right now making statements like “I will continue to work for you” and “I win, when you win”…

 

As I stated in this morning’s missive, Obama Needs A Win. Odds are heightening that the loser is on the left side of this picture. Firing Geithner would be US Dollar bullish, and I remain bullish on a continued Buck Breakout here in Q1 as a result.

KM

 

Picture of The Day: He's Interviewing  - obama

 


TRLG: Reflecting on the Subtlety

As I combed through my notes from the ICR Exchange, I came across a subtle, but relevant call-out that was overlooked in the two-day confluence of buy-siders, sell-siders, bankers, and CEO’s. (For what it’s worth, there were more bankers than Sell Side analysts – that’s sad). During  the breakout session for True Religion, there were many questions surrounding the company’s retail growth, salesforce transition, new hires, lower price point offerings (aka “cleaner looks”), and the state of the wholesale business. 

 

Aside from some fashion commentary regarding the validity of the term “Jegging” (think skinny jean meets legging), the most interesting comment came from the CFO.  He stated that he was surprised at the level of discounting on the company’s premium denim over the holiday period at major wholesale customers.  Without getting specific on which retailers were promotional (it has to be any combination of Saks, Neimans, and Nordstrom), he also went on to say the company doesn’t really engage in “markdown” allowances so it shouldn’t be an issue.  Fair enough.  But, the real issue lies in the fact that the retailer(s) pulled the promotional trigger to sell the $250+ denim.   If you believe discounting was a byproduct of slower product sales, then this may be something to watch as Spring rapidly approaches.

 

In addition, we’ve seen this film before. A brand that thinks it walks on water says ‘we don’t pay for markdowns’, but the reality is that the consumer votes with its wallet, and the CFO validated it in breakout discussions. So let me get this straight… we’ve got a high-end denim brand that is underperforming at a time when peers in other luxury categories are showing signs of life. This is at the same time the company is downshifting in price point as it expands into a lifestyle model, and it is opening up more of its own shops due to a weaker ‘pull model’ in the wholesale channel.  I know the stock already crashed and burned, but are we the only ones that are concerned that we’re still looking at a company with 25.6% EBIT margins, and only a 1.4% marketing ratio? I repeat… only 1.4% of sales goes towards marketing. That might be fine when you sell a hundred million in revs to a few customers, but is low by a factor of 2-3x if the company really wants to make the jump to a sustainable growth trajectory at respectable and consistent margins.

 

 

-Eric Levine

 

 

 


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