Seldom Do We See

“Seldom, very seldom, does complete truth belong to any human disclosure; seldom can it happen that something is not a little disguised, or a little mistaken.”

-Jane Austen


It's the end of the first quarter, and what a quarter it’s been!  The S&P 500 is up 5.2%, led by the Industrials (XLI +13.1%), Consumer Discretionary (XLY +11.1%) and Financials (XLF +10.6%).


It’s the beginning of spring and spirits have been lifted with a strong first quarter; but that doesn’t mean “something is not a little disguised, or a little mistaken.”  It’s hard to see how improving sentiment can override leveraged US balance sheets, anemic demand, high unemployment, and unruly state and household budgets.


As Keith posted yesterday, “We could easily see an early month correction in April like we did in February. The intermediate term TREND line of support for the SP500 is at 1118.  From today’s price, that would be a -5% correction that my models wouldn’t consider anything but proactively predictable.”


While we did not short the S&P 500 yesterday, we did buy the VXX, as the S&P 500 tries to confirm higher-highs into quarter-end.  In early trading today, the overseas markets are reluctant to push higher ahead of quarter end, the shortened holiday week and Friday's US jobs data.  That being said, there is an outside chance we see the S&P 500 trade in the 1175-1178 range; a level we would consider managing risk around.


Some things to consider as we head into the second quarter:


(1)          While the bond market isn’t blowing up, it is sending a clear message that interest rates will be headed higher sooner than expected.

(2)          The squeeze in the “pain” trade is nearly over.

(3)          A +11.2% melt-up in the S&P 500 over a 7-week timeline is not normal.

(4)          Can the 1Q earnings season exceed expectations and deliver continued upward guidance?

(5)          Global sovereign debt issues will act as a governor on any significant upside potential.


On the sovereign debt front (and as ridiculous as ratings agencies may be), Moody’s said that Aaa-rated sovereigns with financing costs at 10% or more of revenue exceeds the limits of “debt affordability.”  This increases the number of countries that could potentially see rating “downgrades.” 


China’s stocks fell for the first time in four days last night, declining 0.6%.  For 1Q10, this puts the Chinese market down 5.1%, the worst quarterly drop since August last year.  While we have not yet officially introduced our 2Q10 themes yet, continued property-related policy risks surrounding China is still a slight MACRO headwind.


Nothing is really ever what is seems on the surface.  Just ask the venerable European institution Gartmore, which plunged 31% following the announcement of potential “breaches of internal procedures regarding directing trades.”


Function in disaster; finish in style.


Howard Penney 

Managing Director


Seldom Do We See - sp1


Keith McCullough Sees Ratings `Incompetence' on CDOs

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Grant Says US Treasury Yields `Likely' to Rise


It was reported today that the January Case-Shiller home price index rose +0.3% month-to-month (8th consecutive month of improvement), and declined only -0.7% year-over-year from -3.1% last month; this is the slowest rate of decline in 36 months.


January saw month-to-month price declines in the following cities: Miami (-0.1%), Atlanta (-0.5%), Chicago (-0.8%), Charlotte (-0.1%), New York (-0.3%), Portland (-0.5%), Dallas (-0.3%) and Seattle (-0.6%).   In contrast prices improved in Los Angeles (+1.8%), San Diego (+0.9%), San Francisco (+0.6%), and Phoenix (+0.8%).


We do not expect this trend to continue as we head into 2H10.  Despite continued efforts on the part of the Obama administration to provide relief to the housing sector, there are several reasons for a more cautious stance.  (1) Interest rates (especially mortgage rates) are headed higher, (2) housing starts and existing home sales continue to be at extremely low levels, (3) there is a recent uptick in the percentage of existing home sales sold in foreclosure and (4) home prices will remain depressed as the rate of foreclosed homes increases (adding to inventory of unsold homes).


As a point of reference, the S&P 500 Homebuilding index is up 24% in the past three months and 4.5% over the past week.  Over the same time period, the S&P 500 is up 4.2% and 0.6%, respectively.   


In the short run, home builders can protect their earnings stream against a stagnating housing market by (1) focusing on selling homes where there are less distressed properties, (2) cutting administrative costs and (3) reducing incentives to buyers.  The disconnect between the housing market and homebuilding stocks is what we call a duration mismatch.


Howard Penney

Managing Director




SP500 Levels Update: "The World Is Awash With Liqudity"

In the last 2 weeks, I have largely missed these short squeeze rallies to higher-highs in the SP500. I missed making money on them in last part of 2007 too. This time, the volume is a lot lower (both actual market volume and the daily yip-yap of who is going to be LBO’d next), but things I am seeing and hearing out there are starting to rhyme.


I won’t remind you who those were that used to parrot that “the world is awash with liquidity” in 2007, but I will show you a chart that A) isn’t new and B) gets emailed to me at this point every other day. This is one way the perpetual bulls are trying to justify chasing this rally up here  - the “cash on the sidelines.” Yes, there is a lot of it. But there was with the SP500 -74% lower too.


The second chart shows you the Pain Trade since the February 8th lows. By any historical analysis of SP500 price performance, a +11.2% melt-up in over a 7-week timeline is not normal. Some people are calling this a complacency rally. I disagree  - I think it’s a Fear Rally at this point. There is outright fear of either being short squeezed or redeemed for missing another massive move higher. This fear factor is usually most prominent at month and quarter ends (Wednesday).


Anything north of the 1175-1178 range in the SP500 would be a 2.5 standard deviation move in my model. These don’t happen very often on the duration I am using (immediate term TRADE). We could easily see an early month correction in April like we did in February. The intermediate term TREND line of support for the SP500 is at 1118. From today’s price, that would be a -5% correction that my models wouldn’t consider anything but proactively predictable.


I’m not calling for a 2008 style crash, yet. But I am calling for another correction.



Keith R. McCullough
Chief Executive Officer


SP500 Levels Update: "The World Is Awash With Liqudity" - S P Cash Index


SP500 Levels Update: "The World Is Awash With Liqudity" - S P

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 80.43%
  • SHORT SIGNALS 78.37%