prev

R3: Retail Earnings Call Outs; Part 1

R3: REQUIRED RETAIL READING

February 23, 2010

 

If there are any themes starting to take shape, they relate to capital allocation and changes in capex, working capital, and SG&A needed to fuel demand from here.

 

 

TODAY’S CALL OUT

 

JWN:  Missed by $0.02. Lots of moving parts, but the bulk seems to be in higher bad debt expense as they flush out the garbage heading into a new year. First positive in 9 quarters (already known) is nice, but the capital setup bugs me. Operating margins are close to historical lows, but FCF margins are at all time highs as the company has pulled back so far on capex and working capital. In fact, mgmt touted a 5.4x working inventory turn as its highest in history. JWN is at the point where it needs to grow, and will need capital – capex, working capital, and SG&A – in order to do it. Our question is simply “are people willing to pay for a department store growth story?”.

 

R3: Retail Earnings Call Outs; Part 1 - JWN SIGMA

 

SHLD: Kind of a boring quarter for SHLD – which is an outlier in itself. SIGMA position is nearly identical vs. 1 quarter ago, and it has another 1-2 quarters until it should start to feel pressure. The Craftsman deal to extend the brand outside Sears’ broken box is a positive, and opens the door for other Sears content to follow (ie Die-Hard and Kenmore). We don’t believe in the sustainability of this box, or its financials, by any stretch. But there’s a time for everything. We’re not there yet for SHLD.

 

R3: Retail Earnings Call Outs; Part 1 - SHLD SIGMA

 

HD: Smoked the quarter. $0.24 vs $0.16 consensus. This is right in line with our view. But as we noted in our 2/11 note (Keep a Trade a Trade), from this point in order to own HD you need to believe in a housing recovery. It did not matter in 4Q. Now it does.

 

R3: Retail Earnings Call Outs; Part 1 - HD SIGMA

 

HBI: In advance of its analyst meeting, HBI guided to 5-8% top line growth for the year. I don’t get it. This is an underwear company, folks. This range is 3x what it should be growing. Is there catch-up/restocking at retail? Maybe. Could growth in the dollar store channel (that should not be happening) be adding 1-2% to growth? Yes. Does the company have margin savings to use as an offensive weapon to gain share like Gildan did 5-years back in T-shirts and fleece? Yes.  Regardless, they put the goal out there, and near-term they will not miss it. The next 2 quarters appear to be a lock, and look solid. But then we need to bank on their expectations in 2H, at the same time the company is more exposed to cotton prices (which don’t want to go down). Then in 2011 they have to anniversary a big number. Duration matters a lot on this one. Near-term I like it. For those with a 6-9 month time horizon, I don’t.

 

R3: Retail Earnings Call Outs; Part 1 - HBI SIGMA

 

 

LEVINE’S LOW DOWN 

  • While we normally focus on the impact of Winter weather on sales of seasonal merchandise or potential business disruption, it is rare that we see it show up as a hit to corporate expenses. In the case of Lowe’s, management noted that with snow simultaneously on the ground in 48 states a few weeks ago, they have tempered both sales and expense forecasts. Interestingly, the shear amount of snowfall and the related removal costs are now expected to be a 15 bps negative impact to SG&A in the company’s first quarter. So far, other big box retailers including Wal-Mart have not mentioned snow removal as a headwind in 1Q. 
  • In a rare glimpse into the fashion business of Marc Jacobs, CEO Robert Duffy offered up an interview during Fashion Week to talk about Twitter. Yes, of all things he focused on Twitter and his fascination with the real-time communication tool. Interestingly, Duffy noted that he receives hundreds of Tweets from young people looking for business advice. He went on to note that Marc Jacobs has been in business for 26 years, but did not turn a profit until year 20. 
  • Nordstrom management noted that a positive mid single digit same store sales trend could produce historically high EBIT margins given the company’s currently lean cost structure. While sales per square foot trends are now back to 2004 levels, management was quick to highlight that SG&A per foot is now less than the levels exhibited in 2004. Any sustained pick up in topline should yield positive incremental profits… 

 

MORNING NEWS

 

Adidas and NBA Launch NBA Shop at Champs Sports - The National Basketball Association (NBA), adidas, and Champs Sport announced the launch of the Official NBA Shop at Champs Sports. The NBA Shop will debut in 69 Champs Sports stores this month and will be in the remaining 486 Champs Sports stores nationwide by the start of the 2010-11 NBA season. The NBA Shop at Champs Sports will be a dedicated retail space featuring a wide assortment of adidas NBA performance and lifestyle apparel, including on-court products, fashion collections, and exclusive adidas NBA apparel and accessories year round. adidas is the league's official uniform and apparel provider. The NBA Shop at Champs Sports will feature player imagery, a replica NBA backboard and a hardwood floor graphic to provide fans with the league's authentic look and feel. Each shop will have a dedicated selection of local team products and an assortment of products representing some of the NBA's most popular players. This assortment will include swingman jerseys, on-court shooting shirts, exclusive T-shirts, shorts, headwear, and track jackets. Each season, Champs Sports will bring in exclusive NBA fashion collections catering to fashion-forward NBA fans, beginning with the adidas White/White Collection this spring, which will include a white swingman jersey, track jacket, and T-shirt.  <sportsonesource.com>

 

J.Crew's Overseas Push: Retailer Going Global on Net-a-porter - J. Crew is going global with Net-a-porter.com. In its first major push overseas, the retailer’s products will be featured on Net-a-porter’s Web site starting in mid-May. Currently, J. Crew operates stores only in the U.S. and is available in North America and Japan through its catalogues and Web site. However, the brand’s recognition factor and distribution could grow considerably since Net-a-porter ships to over 170 countries. J. Crew’s growth via Net-a-porter will also depend on the degree the Web site plays up the brand’s merchandise. “When we go live in May, this will be announced to our millions of subscribers, celebrated with a cover and a story in our weekly magazine. It is going to be a big deal for us,” said Natalie Massenet, the founder and chairman of Net-a-porter.com. Net-a-porter, which is strictly women’s and offers over 300 designer and contemporary labels, will carry an edited selection of J. Crew’s women’s apparel, shoes and accessories. In addition, J. Crew will provide some exclusive styles and colors to the London-based site. <wwd.com>

 

Sears Plans to Close 21 Underperforming Stores in April and May - Sears Holdings Corp., the largest U.S. department-store chain, said it will close 21 underperforming stores in April and May. Sears, based in Hoffman Estates, Illinois, will shut 13 Kmarts, 4 full-line Sears stores and 4 Sears Essentials, which sell groceries, Kimberly Freely, a company spokeswoman, said today by telephone. The closings will affect about 1,000 full-time and part- time workers, she said. <bloomberg.com>

 

DKNY Jeans Taps President - Debbie Elmore has been named president of Liz Claiborne Inc.’s DKNY Jeans and DKNY Men division. Elmore replaces Kevin Monogue, who has left the company to pursue other opportunities, according to Claiborne. Monogue had served as president since June 2007. Elmore is a 30-year industry veteran who spent more than half of her career with Macy’s. She was most recently president of sales and design for the Ecko Red label at Paul Davril. She’ll take over a brand that has been a strong performer for Claiborne and one that has joined in the celebrity cross-promotion frenzy of recent years. DKNY Jeans has partnered with Fall Out Boy Pete Wentz and actress Rachel Bilson to create lines over the last several years. Last fall saw the introduction of Femme for DKNY Jeans, a collaboration with singer and actress Hilary Duff. <wwd.com>


American Apparel, Dov Charney Still Betting On Soft-Core Porn Ads - Dov Charney, sleazeball CEO behind hipster clothing emporium American Apparel, is known for lecherous behavior, especially when it comes to the young girls he photographs/films for his company’s ontroversial ad campaigns. The latest example can be seen in the company’s Panytime! videos (click here), part of an annual February sales promotion. <trueslant.com>

 

Zumiez Relocating Washington Distribution Center to California - Zumiez Inc. will be closing its Everett Distribution Center and relocating this portion of its business to Corona, CA. The company's headquarters, corporate offices and e-commerce division will remain in Everett, WA. About 170 jobs will be eliminated. As a result of this process, Zumiez will vacate Building C on Merrill Creek Parkway, the smaller of the two buildings it leases, in Everett, Washington and will be purchasing a new 168,450 square feet Silver Certified Leadership in Energy and Environmental Design building in Corona, California. The company anticipates hiring 180-200 people in California. <sportsonesource.com>

 

Pacific Sunwear spotlights a new senior vice president of marketing - Apparel and accessories retailer Pacific Sunwear of California Inc. has named Robert Cameron senior vice president of marketing. Cameron will be responsible for ensuring the consistency between the customer experience at PacSun.com and the company’s retail stores, the retailer says. Cameron most recently served as vice president of Levi’s brand marketing, where he was charged with modernizing the company’s brand strategy and implementing new media strategies. Prior to Levi’s, he was a founding partner and chief creative officer at strategic branding agency Fantascope Inc. <internetretailer.com>

 

Michael Kors Taps Marketing Execs - Michael Kors has named Anne Waterman senior vice president of global image and Jill Fishman senior vice president of global marketing and licensing, reflecting the company’s increased focus on global expansion and online presence. Since joining the company 14 years ago, Waterman has occupied various roles, most recently senior vice president, fashion director. In her new post, she will continue to head creative service with the added responsibility of public relations and special events. Billy Daley, vice president of global communications, is leaving the company. “Anne has worked with me for almost 15 years and totally gets my point of view,” Kors said Monday. “It was a logical progression as we expand on a global scale.” Michael Kors Inc. is focused on increasing its international presence, specifically with press offices planned to open in Milan, Munich, London and Tokyo in the next 12 months. “As we expand globally, it makes sense that our communication with the public be housed under one division, one person,” said John Idol, chief executive officer of Michael Kors. “Whether it’s a feature story, ad campaign or event, the seamless progression from one to the next is essential in the fast-paced environment we live in today.”  <wwd.com>

 

Retailers Criticize Obama's New Health Care Plan - President Obama outlined a health care reform compromise on Monday that would increase government fees on employers that don’t offer full-time health insurance to subsidize eligible workers applying for aid in an insurance exchange. Retail groups criticized Obama’s proposed compromise — an effort to resuscitate his signature domestic issue — over employer health insurance coverage requirements, saying they would impose undue cost burdens on companies. The White House estimated the package would cost $950 billion over 10 years, but would be paid for by new taxes and fees on business. “From an employer’s perspective, if you make a good-faith effort to offer health care coverage and have employees go to an exchange [for coverage], why should you as an employer be penalized?” asked John Emling, senior vice president for government affairs at the Retail Industry Leaders Association. “We need more details about the President’s proposal, but if it is consistent with the Senate bill, it is still problematic for us.” Under Obama’s proposal, firms with more than 50 workers and not offering coverage would be required to pay a $2,000 fine for every employee if just one received a subsidy. By contrast, the Senate bill that never came up for a full vote in the chamber requires employers that do not offer coverage to pay a $750 fee for every full-time worker receiving subsidies. <wwd.com>

 

Research and Markets: An Essential Report on The Future of Retailing in Japan -

Key Market Trends

  • Japan - the second largest retail market: Japan continues to be the second biggest retail market in the world with 127 million sophisticated consumers in spite of the global economic downturn. In terms of retail market size, Japan still accounts for more than 55% of the entire Asian market. Though the retail market has been adversely affected due to the recession in 2008, the market is expected to witness growth in 2009 with retailers adopting various strategies such as mergers and acquisitions to increase the revenue.
  • Decline in Household Expenditures: The Japanese household expenditures fell by 70,000 on average in 2008. The category taking the biggest hit due to the decline in expenditure was food, which decreased by 17,000. The consumers have become more practical and selective by opting to purchase necessary products that have value. This has resulted in higher demand for private label products. In Japan, the number of consumers purchasing cheaper private-brand items has increased by 44% over last year.

Key Channel Trends

  • Continuous decline in department store sales: The department store channel revenues in Japan continued to decline consecutively for the tenth year in 2008. In the past decade, 1.5 trillion ($15.2 billion) in sales, which is almost equal to the entire annual sales of Japan's largest chain, has been wiped out. The department stores are also facing stiff competition from drugstores and suburban shopping malls that are encroaching on their turf. Hence, to increase their efficiency to face the competition and economic slowdown, department stores have been joining hands.
  • Non-Store Retailing to Drive Growth: The growth in the retail market in Japan over the forecasted period is expected to be marginal. With the growing popularity of online retailing and home shopping, non-store based retailing is expected to drive the growth. Store-based retailing is expected to continue to decline, with department stores and supermarkets witnessing further drop in sales. Online retailing is expected to offer good opportunities for retailers to expand their sales and customer base.

Key Category Trends

  • Dominance of food & groceries: Food & drinks dominate retail sales in all countries, due to their vital importance in everyday life. In Japan, the food and groceries category accounted for around 52.5% of the total retail market in the year 2008. Packaged food had the largest contribution to the category sales with a value of 31,961.8 billion (US$310.0 billion), registering a CAGR of 2.5% over the period 2004-08.
  • Recession effect on Luxury goods: Japan, one of the world's top markets for luxury goods, consumes nearly 40% of all the luxury goods worldwide sold every year. However, with recession setting in Japan, the consumers have decreased their spending on luxury goods.

<businesswire.com


Sovereign Debt For Dummies

“Who can be wise, amazed, temperate and furious, loyal and neutral, in a moment? – No man.”

-William Shakespeare

 

On US stock market weakness yesterday, I moved from bearish on US Equities to neutral. On the margin, that’s a bullish shift. Everything that really matters in our macro risk management process happens on the margin.

 

Can you be loyal and neutral at the same time? Can you be temperate and furious in the same moment? Who can be wise about economic history’s lessons and, at the same time, manage risk daily, unemotionally attached?

 

In risk management, neutral is as neutral does. Going into yesterday’s macro morning I had more shorts in the Virtual Portfolio than I had longs, I was short the SP500 via the SPY, and I was carrying a cash position of 67% in the our Asset Allocation Model.

 

This  morning I have 12 longs and 12 shorts in the Virtual Portfolio. I am no longer short the SP500 (SPY), and I have doubled our asset allocation to US Equities from 3% to 6%. I made these moves on a market down day. Yesterday was the first down day for the SP500 in the last five. Can I be bullish on the Dollar, bearish on Treasuries, bearish on China, and move to neutral on US Equities? Apparently yes.

 

This morning is like every morning. This morning it’s time to play the game that’s in front of me. Yesterday is for the revisionist historians to figure out. They are very good at that – let’s not interrupt them.

 

From my trusty daily market diary, there are 3 immediate term macro factors staring me in the face this morning:

 

1.       Chinese Ox In a Box (Chinese stocks were down another -0.69% last night, taking YTD performance for the Shanghai Composite to -9%)

2.       Buck Breakout and Rate Run-up (both the US Dollar and 10-year yields continue to make higher-lows after brief selloffs)

3.       Sovereign Debt For Dummies

 

Before I focus on that last point about sovereign debt (yes, it sounds like a Hedgeye Macro Theme brewing here in New Haven for Q2), let me say this: managing global macro risk doesn’t occur in the vacuum that the manic media sucks you into. It’s multi-factor; it can be furious; and it can be temperate. The art in managing around all of these global risk factors can be found in orchestrating at the extremes of consensus.

 

Sovereign Debt For Dummies is a book we might collaborate on with some folks on Yale’s campus. With both Spain and Greece trading down -0.82% and -1.2%, respectively this morning, there is plenty a CNBC pundit with Perceived Wisdom who is racing to call these out as negatives embedded in weak pre-market open US futures trading.

 

On an absolute basis, the risk management point associated with what we call a negative divergence (for example a country index like the United Arab Emirates trading down -2.2% this morning is a negative divergence versus the DAX in Germany which is flat on the day so far) is crystal clear. Spain and Greece are negatives today, but what are they telling us about what might happen tomorrow? Will the sovereign debt bears be loyal to their short positions, or will they be forced to move to neutral?

 

Context, of course, is one of the most critical factors you’ll need to answer that question. Historical price momentum, volatility, and volume studies will help you too. These should all be in the index for Sovereign Debt For Dummies. So we’ll work on that…  

 

When it comes to analyzing sovereign debt, Ken Rogoff at Harvard is no one’s dummy. He was very early in quantifying and cataloging history’s lessons on piling debt, upon debt, upon debt. We were at least earlier than the dummies in calling out what Rogoff was calling out. For accountability purposes, here’s what I wrote in my Early Look from 12/23/09, titled “Standing Still”:

 

One of the most misunderstood global macro risks in the market today is that of sovereign debt defaults. Many market pundits are brushing off what is happening in Middle Eastern debt, Eastern European banks, and Chinese property stocks as isolated events. Standing still into year-end with that opinion is very risky.
 
Sovereign defaults, as a percentage of total global defaults, remains at a generationally low level. That can change. Carmen Reinhart (University of Maryland) and Ken Rogoff (Harvard) wrote a great book in the last year titled, “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises”, that provides the best historical context of this critical risk management point. So rather than rehash their work, I will refer you to the Amazon.
 
The simpleton question that every global risk manager should be asking themselves is this: if sovereign defaults are near all-time lows, and sovereign bailout debt issuance continues to hit all-time highs, how do you think this is going to all end? Until we know, I can assure you of this – we don’t know. That’s what I call risk.

 

No, this isn’t me saying I am smarter than you. This is just a friendly reminder that managing risk doesn’t happen in a vacuum. There are proactive risk managers you can follow in the marketplace like Reinhart & Roggoff, and then there are reactive dummies who are trying to short the SP500 this morning because Spain and Greece are trading down (note Spain, Greece, and the United Arab Emirates are all down -12% for 2010 to-date already – this isn’t new).

 

Not unlike Niall Ferguson at Harvard being the most cited US Dollar bear back in November (at the bottom for the Bombed Out Buck), or Nouriel Roubini being the most sought after speaker on the Wall Street Group-thinking Conference Circuit of early 2009 (at the US stock market bottom), sometimes academics find a way of making big long term bearish calls, but also marking the intermediate term peaks in consensus fear associated with those calls.

 

Ironically enough, this is the #3 most read story on Bloomberg this morning: “Harvard’s Rogoff Sees Bunch of Sovereign Defaults.” Nope, I couldn’t make that up if I tried. It’s not like this guy just published his book last night folks. So realize this, Sovereign Debt For Dummies is now the most consensus macro fear we have seen since the Burning Buck was in 2009. And every fear and fury has a funny way of being neutralized, in the immediate term, at a price.

 

My immediate term support and resistance lines for the SP500 are now 1099 and 1122, respectively.

 

Best of luck out there today,

KM

 

LONG ETFS

 

XLK – SPDR Technology — Technology is underperforming the SP500 YTD; a down day on 2/22/10 prompted us to buy more. We expect to see some positive mean reversion for Technology as M&A picks up.

 

UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

CYB - WisdomTree Dreyfus Chinese Yuan — The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP - iShares TIPS — The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.
 

SHORT ETFS

 

EWU – iShares United KingdomThe TREND of higher y/y inflation and stagnant growth = stagflation. For a country with the UK's balance sheet and leadership problems, that’s not good.

 

GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.

 

RSX – Market Vectors RussiaWe shorted Russia on 2/9/10 and maintain our intermediate term TREND bearish view on the price of oil.

 

XLP – SPDR Consumer StaplesGiven how many investors own Consumer Staples stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.

   

IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.


US STRATEGY – Financials' Mo, continues…

The S&P 500 finished modestly lower (-0.1%) yesterday on extremely light volume and slightly negative breadth.  The lack of volume is likely a result of the lack of earnings, economic, and political news.  On the global MACRO front, the lack of data suggests that that the MACRO remains a slight headwind, although the RISK AVERSION trade continues its current momentum.

 

Overall the markets continue to shrug off the potential negative impact of the recent discount rate hike on the favorable liquidity backdrop.  Yesterday, from a sector performances standpoint, most sectors with outsized exposure to the risk/recovery trade put in mixed performances.

 

Confirming the risk aversion trade the Russell 2000 finished higher for a ninth straight day and the VIX is broken on all three durations - TRADE, TREND and TAIL.  Now having 6 of 9 sectors positive on TRADE, a bearish VIX really does make sense from a contrarian perspective.  With bearish sentiment mounting and the S&P500 still down YTD (plus our bearish calls on China and US Treasury bonds freaking people out alongside the sovereign debt worries), the VIX looks like it wants to suck back down to the mid-teens. The VIX remains positive on TREND at 22.43.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (18.32) and Sell Trade (22.40). 

 

The best performing sector yesterday was the Financials (XLF), with upside largely a function of the continued strength in the banking group, with the BKX +1.9%, and up for a third straight session.  There did not seem to be anything specific behind the outperformance, other than some sell-side upgrades in the larger-cap regional space.  The sector also benefited from the high-profile hedge fund buying note in Barron’s over the weekend. 

 

Heading into the retail earnings season, the Consumer Discretionary also outperformed yesterday.  Overall, retail held up a bit better than the broader market with the S&P Retail Index unchanged, after finishing higher over the past six days. 

 

As I mentioned above the RECOVERY trade took it on the chin as Energy (XLE) and Materials (XLB) were 2 of the three worst performing sectors yesterday.  Within Energy, E&P stocks were among the worst performing sub-indices.  The oil services group also finished lower on the day, but M&A was in a highlight after SII agreed to be acquired by SLB. 

 

Equity futures are trading above fair value following yesterday's slow day, as the market awaits further news on Greece's forthcoming bond issue and tomorrow's testimony to Congress by Fed Chairman Bernanke.   This has the Dollar index up by nearly 0.3% in early trading.  The Hedgeye Risk Management models have levels for DXY at – buy Trade (79.60) and sell Trade (80.85). 

 

As we look at today’s set up the range for the S&P 500 is 23 points or 0.9% (1,099) downside and 1.2% (1,122) upside. 

 

In early trading, copper is higher in London on a positive demand outlook.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.17) and Sell Trade (3.46).

 

In early trading gold fell in London on a stronger dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,101) and Sell Trade (1,133).

 

Oil is trading down for the first time is six days on increased supply.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (77.08) and Sell Trade (81.83).

 

Howard Penney

Managing Director

 

US STRATEGY – Financials' Mo, continues… - sp1

 

US STRATEGY – Financials' Mo, continues… - usd2

 

US STRATEGY – Financials' Mo, continues… - vix3

 

US STRATEGY – Financials' Mo, continues… - oil4

 

US STRATEGY – Financials' Mo, continues… - gold5

 

US STRATEGY – Financials' Mo, continues… - copper6

 


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.


Risk Management Time: SP500 Levels, Refreshed...

I am getting a lot of questions on the subtle shift I made this morning in my US stock market view. Subtle is as subtle does but, on the margin, it matters…

 

On this morning’s market weakness I made the following moves in US Equities:

 

1.       Covered my short position in the SP500 (SPY)

2.       Covered my short position in US Energy (XLE)

3.       Bought a long position in US Technology (XLK)

 

This doesn’t make me the bull, but it definitely signals my moving from bearish on the SP500 to neutral. On the margin, that’s a bullish shift.

 

I can make this move without changing my view on our Top 3 Macro Themes in Global Macro:

 

1.       Buck Breakout (bullish on the US Dollar)

2.       Rate Run-up (bearish on US Treasuries)

3.       Chinese Ox in a Box (bearish on China)

 

I have been managing risk around my US Equity long and short positions throughout Q1 as my conviction bobs and weaves in and around the SP500’s intermediate term TREND line (in the chart below at 1099). While price momentum is only one factor in my multi-factor risk management model, it is weighted heavily alongside volume and volatility factors.

 

As the VIX breaks down further today (no support to $18.11), the probability heightens that we’ll see a near term upside test of the dotted red line in the chart below (1122). I have added 3% to the US Equity side of our Asset Allocation Model so that I can capitalize on some of this potential upside. Remember, risk management works both ways. Markets can work higher when consensus is leaning too bearish.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Risk Management Time: SP500 Levels, Refreshed...  - was

 


Play It As It Lies: SP500 Price Momentum Shifting

For now, price momentum has trumped interest rate fear (see the table below for TRADE and TREND updates, by sector study).

 

The SP500 finished the week up 3.2%.  As we respect price first and foremost, we have taken a small loss in our Short SPY position (-1.23%).  The interest rate hike (Rate Run-up) and dollar up move (Buck Breakout) of last week were good for stocks; markets’ closing prices did not reflect a fear of higher rates. 

 

For the SP500, 1099 was resistance but now it is support; 1119 is now the new resistance line and we are seeing posistive price momentum building in the market across all durations.  We now have 7 out of 9 sectors in positive TRADE zone and intend to manage risk around the data. 

 

The lower volume in the market moves at the end of last week, and the lower-highs being reached (relative to the prior closing highs of 1/19/10), makes for a mixed outlook and one that we will be monitoring closely as the week plays out. 

 

In particular, we will be observing whether or not new TREND lines of support manage to hold.  As of this morning, the US Dollar Index was trading at 80.56 and the trendline support line lies at 79.57.  Volatility is now indicating bullish for stocks and has broken its TREND line at 22.43, which is now resistance.  Gold and Oil are also testing their TREND lines to the upside, which are now support at 1,122 and $77.09, respectively.  We will look for these levels of support to be confirmed over the next 3 days.

 

In the immediate term, we have covered our short SPY position and bought XLK (Technology Sector ETF).  On Friday, we bought some small cap and mid cap exposure via Penn Gaming (PENN) and Glacier Bancorp (GBCI).

 

Howard Penney

Managing Director

US Strategy

 

Play It As It Lies: SP500 Price Momentum Shifting  - HPT

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.32%
  • SHORT SIGNALS 78.48%
next