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Faith is taking the first step even when you don't see the whole staircase.

- Martin Luther King, Jr.

In general terms, faith is the persuasion of the mind that certain statements are true, belief in and assent to the truth of what is declared by another, based on his or her supposed authority and truthfulness. Faith in politicians around the world is certainly waning. Europeans, Americans, and Asians can’t see the whole staircase, but they don’t believe their representatives can either.

Yesterday the S&P 500 finished lower by 0.5%, with the financials as the only sector positive on the day. The Financials (XLF) sector was somewhat of a surprise outperformer despite headlines out of Washington that continued to feed into worries surrounding the bottom-line impact of financial reform. Specifically, yesterday the Senate failed to cut off debate on the financial regulatory bill as two key Democrats said it still did not sufficiently tighten rules.

The market was also unable to take advantage of a short-covering bounce in the euro. The euro has gone straight up from our oversold line of 1.21 and is currently trading at 1.23. The Hedgeye Risk Management models have the following levels for the euro – Buy Trade (1.21) and Sell Trade (1.25). Despite a brief reprieve for euro, the issues in Europe continued to be a drag on sentiment.

On the MACRO front, the Mortgage Bankers Association data showed that the mortgage delinquency rate rose in the first quarter to 9.38% of all loans outstanding, from 8.22% last year. Yesterday the Dollar Index gave back some of it recent gains, declining 0.88% on the day. The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.48) and Sell Trade (86.97).

Currently, equity futures are trading below fair value as markets attempt to reconcile yesterday's decline and the more bullish FOMC minutes. The news in Europe is mixed and there is clear lack of direction coming out of Europe regarding the appropriate strategy for dealing with its debt crisis. As we look at today’s set up the range for the S&P 500 is 41 points or 1.4% (1,099) downside and 2.2% (1,140) upside.

The Hedgeye Risk management models have moved to 0/9 sectors on TRADE and 2/9 sectors positive on TREND - Industrials (XLI) and Consumer Discretionary (XLY).

Yesterday, the Industrials (XLI) was the worst performing sector, declining 1.3%. Year-to-date, the XLI has been the biggest beneficiary of the MACRO headlines that have been driving the bulk of the direction for global equities. In addition, although the sector has been a big beneficiary of a rebound in the manufacturing sector, May represents that first data point that was a disappointment as the Empire Manufacturing Index fell to 19.1 from 31.9 in April.

Consumer Discretionary (XLY) underperformed as stocks leveraged to the housing sector were mostly weaker today with the XHB down 1.5%. The building products names remained under pressure with USG (4.5%), AWI (3.7%) and OC (2.8%) all finishing down for a fifth straight session. The home builders were mixed on the day. As expected, the recent housing data points have come in ahead of expectations, doused by the reality that the stimulus measures have pulled demand forward. Today's MBA release offers some support for that thesis, as the purchase index fell 27.1% week-over-week.

Oil halted a six-day losing streak yesterday after stockpiles in the U.S., increased less than analysts forecast last week and supplies of distillate fuel unexpectedly declined. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (69.99) and Sell Trade (74.63).

Gold declined 1.9% yesterday as did many other commodities on speculation that the recent rally is ahead of itself. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,180) and Sell Trade (1,251).

Copper rose as declining stockpiles in warehouses monitored by the London Metal Exchange boosted speculation that demand for the metal may be increasing. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.90) and Sell Trade (3.11).

Three month LIBOR ticked up to 0.48 from 0.46 yesterday. The TED Spread widened to 0.32, indicating that risk perception is heightening. Europe remains a factor for investors gauging global risk; the inverse correlation between the TED Spread and the euro is now -0.95.

On the MACRO calendar we have: 

  • Initial Jobless Claims
  • May Philadelphia Fed
  • April Leading Indicators
  • Fed Governor Tarullo testifies at a House Financial Services joint subcommittee hearing on The Role of the IMF and Federal Reserve in Stabilizing Europe 

Howard Penney

Managing Director