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The pattern of consolidation continues.  Down in the morning and up in the afternoon has been the pattern and it’s been most constructive with the Russell 2000 hitting a new high yesterday.  European sovereign concerns, some high-profile earnings disappointments in Technology (XLK) and Healthcare (XLV), along with lingering uncertainty surrounding a looming financial regulatory overhaul were the major headwinds. 

On the MACRO front, Greek funding concerns seemed to offer a more meaningful headwind for the risk trade early on.  Now Greece has formally called for the activation of a financial lifeline of as much as $60 billion in an unprecedented test of the euro’s stability and European political will.  Yesterday, an EU report showed that Greece's 2009 public deficit widened to 13.6% from the previous estimate of 12.7%, and could be revised even higher. In addition, Moody's downgraded Greece's sovereign debt to A3, and put it on review for a further possible downgrade.

Also on the MACRO front, housing-leveraged names outperformed again with the XHB up 3.8% yesterday and 7.9% over the past four days.  The economic calendar was the big driver of the move as existing home sales rose 6.8% month-over-month in March to a 5.35M annualized rate. The improvement in March helped reverse the declines seen in the prior two months. While the inventory of homes for sale rose 1.5% to 3.58M, supply still fell to 8 months from 8.5 months in February.

Lastly on the MACRO front, jobless claims for the most recent week, released yesterday, dropped 24,000 to 456,000 from 480.000 (revised down 4,000) in the prior week. This caused the rolling 4-week average to actually increase by 3k to 459.5k from 456.8k.

As our Financials analyst, Josh Steiner, commented yesterday “We hate to be the ones to take away the punchbowl, but consider this. As the charts below show, at 456,000, claims are at the same level they were at on 11/28/09 (457,000). In other words, claims have gone nowhere in almost five months. Compare this with the colossal improvement in claims from April 2009 through November 2009. In stark contrast to recent claims trends, the XLF has barreled higher some 17% over the last 4.5 months, with high-beta Financials rising by multiples of this.”

The broadest measure of support for the RESILIENCE trade can be seen in the consumer related sectors.  Yesterday the Consumer Discretionary (XLY) was the best performing sector closing up 1.8% on the day.  Over the past month, the XLY is also the best performing sector - up 8.9% versus the S&P 500 up 3.7%.   Some of the more upbeat results recently came out of the consumer discretionary space (NFLX +15.3%, CMG +14.2%, SBUX +7.3%, MAR +6.2%), while housing-leveraged names extended their rally on the back of a rebound in March existing home sales.  We took advantage of the consumer melt up and made a few sales.

 

SHORTING CMG - Now this is a world class short squeeze! Howard Penney thinks that headwinds start to develop in the quarterly earnings in the next 3-6 months. We'll short it for the immediate term TRADE up here. KM

 

SHORTING XLY - Today is another capitulation day for the short the consumer crowd. We are long names like SBUX, NKE, and FL, so we understand the pain some of the shorts are feeling. We'll hedge their fears up here, for a TRADE. KM

 

BUYING CIT - Josh Steiner and I have been waiting for the stock to correct and now it has. Josh has come full circle on this name as any analyst with an objective process should. KM

 

SELLING PSS - While McGough still likes the long term TAIL for PSS, it’s simply overbought here. We'll sell high and look to buy it back on a down day. KM

 

SELLING WFMI - We'd like to thank JPM for making a call on this the day after we got long. Levine likes their call, and I'll sell into it here. KM

The Financials (XLF) outperformed yesterday, with credit takeaways from the regional banks helping to underpin a positive sentiment.  In addition, overall takeaways from 1Q earnings seemed fairly consistent with the trends seen thus far during earnings season, including declining provisions and NCOs, slowing NPA formation and more upbeat management commentary.

The Chinese market continues to weaken of late, down 0.53% last night, and is now down 8.96% year-to-date.  The weakness in China and a stronger dollar has slowed the REFLATION trade.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.96) and sell Trade (81.70).  We have no position in the VIX currently and it remains broken on all three Hedgeye durations.  The Hedgeye Risk Management models have levels for the VIX is: buy Trade (14.65) and sell Trade (16.85). 

Yesterday, Healthcare (XLV) was the worst performing sector for a second day in a row.  The sector has been dragged down over the last two days on concerns that the impact of healthcare reform has been bigger than expected for the companies that have reported thus far. Yesterday, BAX declined 13.3% as it became the latest company to lower guidance on healthcare reform, though the company also cited continued plasma market pressures.

Oil is trading above $84 after reports that Greece will request financial aid.  The Hedgeye Risk Management models have levels for the OIL is: buy Trade (83.74) and sell Trade (87.14). 

In early trading Gold may extend losses tracking a firm dollar overseas?  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,130) and Sell Trade (1,163).

In early trading, copper is trading slightly higher on the bullish news from Germany.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.51) and Sell Trade (3.63).

In early trading, equity futures are trading mixed to fair value having pared earlier losses as Greece formally asks for financial help from the EU as it tries to solve its acute funding needs.  As we look at today’s set up, the range for the S&P 500 is 37 points or 0.4% (1,203) downside and 0.5% (1,214) upside. 

Today’s MACRO calendar:

  • Mar Durable Goods
  • Mar New Home Sales
  • G20 meets in Washington to discuss global economy

Howard Penney

Managing Director

US STRATEGY – SELLING THE MELT UP - sp1

US STRATEGY – SELLING THE MELT UP - usd2

US STRATEGY – SELLING THE MELT UP - vix3

US STRATEGY – SELLING THE MELT UP - oil4

US STRATEGY – SELLING THE MELT UP - gold5

US STRATEGY – SELLING THE MELT UP - copper6