Yesterday, the S&P 500 finished flat in quiet trading.  The restrained performance was not particularly surprising given the holiday-shortened week and the looming release on Friday of the March nonfarm payrolls.  For the second day in a row, the Utilities (XLU) stands alone - broken on TREND. 


On the MACRO front, a slight improvement in March consumer confidence was a peace offering to the Consumer Discretionary (XLY) which has had an amazing run in 1Q10.  Consumer confidence rose to 52.5 in March from 46.4 in February, slightly ahead of the 51 consensus. The current situation component rose to 26 from 21.7 - the highest level since January - while the expectations component improved to 70.2 from 62.9 last month.  Despite a sequential improvement from February, the confidence numbers are not anything to get overly excited about. 


The S&P/Case-Shiller home-price index rose 0.3% month-to-month - the eighth straight monthly increase (a Bloomberg survey had a decline 0.3% in January).  In response to the data, the S&P 500 Homebuilder index gave back some of its outperformance, declining 1.5% on the day.  


The Dollar index recovered slightly yesterday up 0.14%.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (81.21) and sell TRADE (82.40). 


The VIX declined 2.6% yesterday and remains broken on all three durations - TRADE, TREND and TAIL. The Hedgeye Risk Management models have the following levels for the Volatility Index (VIX) – Buy TRADE (16.01) and Sell TRADE (18.23).


Yesterday the laggards in 1Q10 (Technology - XLK) outperformed, while the 1Q10 sector leaders (Financials - XLF and Consumer Discretionary - XLY) underperformed.   The hype over AAPL and the Smartphone generated a significant amount of excitement in the technology space. 


In early trading, crude oil is trading above $83 a barrel in New York for the first time in two weeks on signs that improving demand is eroding excess supplies.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (80.95) and Sell TRADE (83.13). 


In early trading in London, gold is trading higher and heading for a sixth quarterly increase.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,082) and Sell TRADE (1,114).


In 1Q10, Copper is up 6.4% and yesterday it reached the highest level since August 2008 as demand looks strong and inventories are declining.  The Hedgeye Risk Management models have the following levels for COPPER – Buy TRADE (3.41) and Sell TRADE (3.56).


In early trading, equity futures are trading modestly below fair value after markets drifted off highs on a stronger dollar.  As we look at today’s set up the range for the S&P 500 is 18 points or 1.2% (1,159) downside and 0.3% (1,177) upside. 


Today's MACRO highlights are:

  • MBA Mortgage Apps  - +1.3%
  • March ADP Employment -23 vs. 40K consensus
  • March Chicago PMI
  • March NAPM Milwaukee,
  • February Factory Orders
  • DOE Crude Oil Inventories 

Howard Penney

Managing Director













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


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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




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