US STRATEGY – Objects are closer than they appear

In the business world, the rearview mirror is always clearer than the windshield.

-Warren Buffett


As I said on Thursday, the initial estimate of GDP is the most heavily rigged and politicized data point put out by the government.   Friday’s headline GDP number of 5.7% was a very strong number, but the advanced number is more about politics than reality about the strength of the US economy.  More importantly it’s looking in the rear-view.   


The markets were lower on Friday after rising initially from the strong GDP number.  The REFLATION trade continues to unwind with the strength in the US economy, which is dollar bullish.  The Dollar index was up 0.71% on Friday and is now up 2.06% year-to-date.  The Hedgeye Risk Management models have the following levels for DXY – buy Trade (77.87) and Sell Trade (79.51).  With our “Break-out Buck” theme we are dollar bullish in 1Q10. 


Also on the MACRO front there were other bullish economic data points out on Friday.  The January Chicago Purchasing Managers Index was 61.5 vs. consensus at 57.2 and the final January University Michigan Confidence reading was 74.4 vs. consensus at 73.0.


The Greece debacle continues to live on.  The reports of EU willingness to consider providing relief to Greece met “Europeans Pointing Fingers” (see or 1/29 post) with sharp denials.  The issue has demonstrated that European countries are quick to dismiss their own problems in favor of calling out their neighbors.


The VIX was up 3.75% on Friday and is up 13.56% year-to-date.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (22.37) and Sell Trade (28.94).


Regardless of how fast they are growing or innovating, Technology (XLK) was the second worst performing sector on Friday and year-to-date.  The semiconductor index is under considerable pressure declining 3.42% on Friday.  Year-to-date the SOX is down 12.18%.  Friday’s standout to the downside was SNDK, declining 11.67%, on a decent quarter, but underwhelming guidance.  Mr. Softie (MSFT) also reported a good quarter but declined 3.36% on Friday.


On the back of the stronger confidence numbers, two of the three best performing sectors on Friday were consumer - XLY and XLP.  While the GDP number was strong, the personal consumption expenditures declined sequentially down to 2.0% annualized from 2.8% in 3Q09 and the personal savings rate increased slightly to 4.6% from 4.5%.


As we look at today’s set up the range for the S&P 500 is 32 points or 1.5% (1,056) downside and 2.3% (1,098) upside.  At the time of writing the major market futures are trading up on the day.  


In early trading today Copper is trading lower to an 11-weeks low; a stronger dollar and concern about China’s demand.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (3.03) and Sell Trade (3.12).


In early trading today Gold is little changes but could trade higher today on a weaker dollar.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,066) and Sell Trade (1,111).


Crude oil is little changed over concerns over the pace of demand growth.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (71.38) and Sell Trade (77.08).


Howard Penney

Managing Director


US STRATEGY – Objects are closer than they appear - sp1


US STRATEGY – Objects are closer than they appear - usd2


US STRATEGY – Objects are closer than they appear - vix3


US STRATEGY – Objects are closer than they appear - oil4


US STRATEGY – Objects are closer than they appear - gold5


US STRATEGY – Objects are closer than they appear - copper6


Sovereign CDS Download

Sovereign CDS Download - CDS21

The Week Ahead

The Economic Data calendar for the week of the 1st of February through the 5th 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 - wa1

The Week Ahead - wa2


Shorting Oil

Earlier this morning, Keith shorted the XLE in our virtual portfolio.  We’ve outlined the chart of this etf below, but suffice it to say oil, the commodity, and oil producers, as represented in the XLE, are broken.  The key drivers behind this breakdown are the inverse correlations with the U.S. dollar, an ongoing slowdown in China, and burgeoning inventories globally.


Two days ago we wrote a note titled, “Oil is Broken”, and we noted:


“As we discussed ad nausea last year, the direction of the price of the U.S. dollar is critical for determining the price of those commodities priced in dollars.  In the year to date, the U.S. Dollar Index is up ~0.74% and, not surprisingly, Oil is down ~-6.61%.  While last year the inverse correlation was more like 4.5:1, early on this year it seems like that factor is accelerating.  One driver of this is likely the slowdown occurring sequentially in China.”


As the Chinese proactively slow their economy in the first half of this year via lending restrictions and higher interest rates, it will continue to have a negative impact on the demand side of the equation for commodities and primarily oil and copper.  China is the world’s GDP market share taker and as its growth slows, even on the margin, it has an amplified impact on the demand for commodities, which is negative for price in the intermediate term.


On January 27th the DOE reported inventory numbers for oil and oil products.  While oil actually showed a draw of 3.9 million barrels, which is bullish on face value, this was quickly attributed to weather issues in the Gulf of Mexico.  Most disturbing for those bullish of oil were the build in inventories of both gasoline and distillates, which suggest a soft demand situation in the United States, the world’s largest user of petroleum.


The chart of the XLE and its key levels is outlined below.


Daryl G. Jones

Managing Director


Shorting Oil - xle29



Consumer confidence bottomed in early 2009.  In early 2010, divergences in consumer confidence among income groups will be worth watching for restaurant investors.


The chart below clearly shows a split in consumer confidence between those earning salaries of $35,000 and over and those earning $34,999 and below.  Since October 2009, the wealthier segment of the population has seen a significant boost in confidence, while lower income levels have seen stagnating, or even deteriorating, levels of consumer confidence.


CONSUMER CONFIDENCE & EATING OUT - consumer confidence


Looking at quarterly comparable-store sales metrics for restaurants by average check, it is clear that trends have been improving in restaurants with average check of $45+.  The third calendar quarter has seen a slight tick up in trends for the $5-10 average check group.  It is worth noting, however, that some of the 4Q comparable sales numbers that have been released by companies whose average checks fall within $5-10 have been negative.  Carl’s Jr. has released comparable-store sales for two of the three periods of the fourth calendar quarter.  Thus far for the quarter, comparable-store sales have been approximately -8%.  In addition, Sonic’s comparable-store sales for the quarter ended November 30th (not included in the chart below) declined -9.1%.  We anticipate declines in the trends for these companies going forward, assuming the divergence in consumer confidence between income levels remains.


Between restaurants with average check between $10-20 and $20-27.50, it seems that the $20-27.50 average check group saw more stability in the last quarter than those restaurants with average check between $10-20.   At this point, it is difficult to draw a firm conclusion from the data available, but we will be paying close attention to the consumer confidence trends, comparable-store sales at various average check levels, and the relationship between the two metrics.




Below is a table indicating the companies whose data was included in the chart above:



Sovereign CDS Download

Sovereign CDS Download - cds29

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.