US STRATEGY – Fears Persist

On Friday, the S&P 500 US equities finished slightly higher, capping off a down week for the Dow -0.7%, S&P -0.4%, NASDAQ -0.23% and Russell -0.5%.  From a MACRO perspective, issues surrounding the momentum behind the global RECOVERY trade remain in place, with a continued focus on weaker-than-expected economic data out of both the US and the Eurozone.  Despite this, the dollar index was slightly lower last week declining 0.35%.  Today’s set up based on Hedgeye Risk Management models have levels for the Dollar Index (DXY):  buy Trade (79.69) and sell Trade (81.20).


The RISK trade unwound last week with the VIX declining 2.6% and declined 20.8% for the month of February.  Today’s setup for the volatility Index (VIX) is buy Trade (18.89) and sell Trade (22.50).  As we posted on Friday, on March 9th, Greece’s Prime Minister will be visiting the USA.  In addition to meeting with Merkel in Germany on March 5th this, on the margin, is another bullish catalyst for Greek stocks (bearish for Greek CDS and bond yields) which look poised to make a series of higher-lows in the coming weeks.  “Fashionable Fears” are now locked in with Friday’s fears associated with a Moody’s downgrade (see our Early Look note from 2/26/10 for a more detailed analysis of the same).


As we wrote about last week there are some MACRO headwinds that can’t be ignored; a pickup in bank failures, continued excess inventories in the semi-conductor space, jobs, state budget pressures and reports of additional efforts to curb lending growth in China.  The mitigating factors are the free money Fed policy, a continued pickup in M&A, well-received Q4 earnings, and 2010 guidance out of the retail space. 


Last week, Europe dominated the MACRO headlines.  The global recovery theme was called into question after Germany's Ifo business climate index unexpectedly fell in February for the first time in 11 months.  In addition, Greek downgrade warnings from both S&P and Moody's made lots of headlines, but is a lagging indicator. 


In the US, news on the consumer and housing were an addition headwind for the market.  Our bearish stance on housing is expressed through our short in TOL which declined 1.72% last week and 5.2% over the past two weeks.  Other builders such as LEN (5.2%), PHM (5.3%), RYL (4.7%) and DHI (4.6%) were also very weak.  New home sales plunged 11.2% month-to-month in January to a record low 309,000 unit annualized pace, while existing home sales fell 7.2% last month following a 16.2% decline in December.  It also should be noted that, mortgage applications fell 8.9% for the week ended February 19th, the third straight decline.  Purchase applications fell 7.3% following declines of 7% and 4% in the prior two weeks, pushing the purchase applications index down to levels not seen since 1997.


Last week there were only two sectors with positive performance, Consumer Discretionary (XLY) and Financials (XLF).  The XLY benefitted as Retail had a very strong relative outperformed last week, with the S&P Retail Index +1.9%.  Better-than-expected Q4 earnings and increasingly upbeat outlook for 2010 helped to underpin the group last week.   This outperformance came despite some continued headwinds facing the US consumer, as February consumer confidence plunged 10.5 points to 46, the lowest level since April. Expectations fell to a seven-month low, while the current conditions index hit its lowest level since early 1983.


As we wake up today, Asian and European markets rose this morning as worries about Greece subsided. Resources stocks went up as copper prices surged after the earthquake in Chile.  Chile is the world’s largest country producing copper.   US Equity futures are trading above fair value but well below the highs as European markets pare earlier gains.


On the MACRO calendar today we will see January personal Income/Spending, PCE Deflator, February ISM and January Construction Spending.  As we look at today’s set up the range for the S&P 500 is 21 points or 1% (1,092) downside and 0.8% (1,113) upside. 


Copper jumped to the highest price in five weeks in London after a magnitude-8.8 earthquake disrupted supplies from Chile, the world’s largest producer.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.18) and Sell Trade (3.38).


Gold declined in London as the dollar extended gains against the euro.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,097) and Sell Trade (1,124).


Crude oil rose for a second day on expectations that economic growth in the U.S. will boost fuel demand.   The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (77.10) and Sell Trade (81.09).


Howard Penney

Managing Director


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The Joy of Winning

“I'm trying to learn as much as I can out there, but I'm confident in what I can do.”

-Sidney Crosby


Sidney Crosby is a 22 year-old from Cole Harbour, Nova Scotia. Sometimes it’s hard to contextualize how young some of these national leaders are, but youth is ambition’s ladder and it’s important to take the time to embrace.


The Vancouver Olympics inspired us to live with passion and pride. Between Americans and Canadians, new Olympic records for total medals (USA’s 37) and gold medals (Canada’s 14) were set, and the leadership infused into all of our living rooms for the past few weeks goes well beyond one man’s goal.


Immediately after the hockey game, Sidney Crosby said “there's nothing really that goes through your mind besides the joy of winning and to be able to share that with the guys and all of Canada.” I’ll take that one step further Sidney – I think all of Olympic sport shared it with all of the world. We needed that. To all of the champions of Vancouver 2010, from all of us, thank you.


“The Joy of Winning” is something we can all can sign up for. Enough of the fear-mongering and threats of the “alternative” that this world’s politicians use as a backboard for their losing strategies. Enough of Selling Fear to our marketplace. Enough is enough. Winners don’t whine. Winners win.


Stock markets across the world opened strong this morning, and I have to believe there is a much greater power in all of this than what the Prime Minister of Greece had to say. His conflicted and compromised stock market has lost 1/3 of its value already. He is yesterday’s losing news.


From China to India, whose stock markets were up +1.2% and +1.1%, respectively, to the rally we are seeing from Turkey (+2.2%) to Germany (1.6%) this morning, is there time for us to celebrate that we don’t have to live in the fear that our politicians create?


China’s February PMI (Producer Manufacturing Index) hit a one-year low last night, coming in at 52 versus 55.8 reported in January. This was proactively predictable (we predicted it on slide 1 of our Chinese Ox in a Box presentation 2 months ago), and the Chinese stock market has obviously been discounting this slowdown for the better part of 2010. Thankfully, markets look forward, like winners do.


Are the lows for the Chinese, Spanish, and Greek stock markets for 2010 locked into the rear-view mirror? For the immediate to intermediate term, the answer to that question seems to be very likely.


Here’s what history tells us about recent stock market bottoms and how people Selling Fear see them after the fact:

  1. China’s Shanghai Composite saw its YTD low established on February 2nd at 2934 (-5.2% lower)
  2. Spain’s IBEX 35 Index saw its YTD low established on February 5th at 10,103 (-3.2% lower)
  3. Greece’s ATHEX Index saw its YTD low established on February 8th at 1806 (-8.0% lower)

Today is March the 1st, and those who sold the aforementioned fear-mongered lows may very well be feeling shame, as they should. Forward me another You Tube video of an empty Chinese city. I doubt I’ll be shorting Chinese stocks on that tomorrow. Consensus is what consensus does. It’s often a loser’s game.


Managing risk doesn’t happen in the vacuum that the manic media creates. Managing risk doesn’t happen when living in fear. Managing risk doesn’t only happen on the way down.


Managing risk happens when the proactively prepared have the “confidence in what they can do”, but at the same time maintain an attitude to “try and learn as much as they can out there.” Thank you again and again, Mr. Crosby, for teaching us all that.


My immediate term risk/reward levels of support and resistance for the SP500 are now 1092 and 1113, respectively.


Best of luck out there today,





FXC – CurrencyShares Canadian Dollar — Canada's currency was on sale on 2/25/10 and we are bullish on the Loonie's long term TAIL, at a price. Look for rate hikes in Canada in the coming 6-9 months.


TUR – iShares Turkey — Turkey has been pounded in the last week and fears were delivered upon with the inside information of 40 retired military officers arrested on 2/24/10. We'll buy the fear for a trade. The long term TAIL for Turkey is bullish, from a price.


XLF – SPDR Financials — With sentiment negative and a Piggy Banker Spread hitting a record wide spread on 2/23/10, we bought red.


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.



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.


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.

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The Week Ahead

The Economic Data calendar for the week of the 1st of March 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.


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Greece: March 9th Global Macro event

On March 9th, Greece’s Prime Minister will be visiting the USA. In addition to meeting with Merkel in Germany on March 5th this, on the margin, is another bullish catalyst for Greek stocks (bearish for Greek CDS and bond yields) which look poised to make a series of higher-lows in the coming weeks.


Fashionable Fears are now locked in with yesterday’s fears associated with a Moody’s downgrade (see our Early Look note from this morning for a more detailed analysis of the same).


Everything that matters to our macro risk management process happens on the margin.



Keith R. McCullough
Chief Executive Officer


Greece: March 9th Global Macro event - gh


We are cautious on the consumer and SHORT housing.


Over the last two weeks the incremental data points on jobs, housing and consumer sentiment have all been incrementally more negative.  Ironically, the government reported the U.S. economy expanded at a 5.9% annual rate in 4Q09, more than what was reported last month.  The improvement in the GDP number is reflecting stronger business investment and a greater contribution from inventories and not an improvement in consumer spending.


The University of Michigan final index of consumer sentiment for February fell to 73.6 from 74.4 in January.  Breaking down the index, the measure of current conditions, which reflects Americans’ perceptions of their own finances, rose to 81.8 this month from 81.1 in January.  The index of expectations six months from now, which projects the direction of consumer spending, dropped to 68.4 from 70.1 in January. The preliminary February reading was 66.9.


Putting in context the decline in the expectations component it’s not surprising that the last two data points on housing have been to the down side. 


Earlier this week sales of new homes fell in January to the lowest level on record.  New home purchases declined 11% to an annual pace of 309,000, as the median sales price dropped 2.4% from January 2009.  The supply of unsold homes increased to 9.1 month’s worth, the highest since May 2009. 


In isolation, the decline in new home sales can be explained away by the supply and favorable prices on “nearly new” homes that are being sold on foreclosure.  The manufacturers of new homes can’t compete with a bank that does not want an ever growing supply of foreclosed homes on its balance sheet.


 Unfortunately the news on resales is not looking much better.  Today the NAR reported that resale of U.S. homes fell 7.2% in January to a seasonally adjusted annual rate of 5.05 million; the lowest in seven months.  The sales of existing homes have now fallen for two consecutive months.  


Seasonality issues are currently playing into the depressed numbers, and the spring selling season should add some lift to the current trends, but that will be the gasp of air.  



Howard Penney
Managing Director








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