US STRATEGY – FOLLOWING THROUGH

“The U.S. remains the proverbial elephant in the bathtub”

-John Williams

 

With S&P now down 11.9% from the peak on April 23rd on the fears of European financial instability, we are shifting our focus to when will the market shift and begin discount the fears of U.S. financial instability. The United States is not immune or separated from the current global crisis; Timmy Geither would be better served focusing on his own job rather than cheering Europe’s “capacity to manage through this”. Geithner said, “we just want to see them follow through”. In the interwoven web of global debt, there are many creditors hoping that their debtors follow through. China is indeed watching.

 

Yesterday, the S&P 500 index closed right around its worst levels for the day and postedthe biggest one-day decline for 2010. Once again, our “Sovereign Debt Dichotomy” theme is having a growing impact on the trajectory of the global economic recovery. On top of that, the issue is being exasperated by Germany's recent unilateral move to ban naked shorts on certain German banks, Eurozone government bonds and related CDS. Policy-related issues in China and the riots in Thailand also continued to weigh on sentiment.

 

At home, the economic calendar was a net negative, especially for consumer related names. Our Financials team has been harping on claims for a while now, pointing to the fact that they have been essentially flat for the last five months. Yesterday, they were actually up quite a bit. Initial claims unexpectedly rose 25,000 to 471,000 last week, the highest level in a month. The four-week moving average increased to 454,000 from 451,000. The reality is that without significant improvement in claims, a leading indicator, there will be little improvement in unemployment.

 

Leading indicators also disappointed, falling 0.1% month-to-month in April with negative contributions from six out of the ten components. The decline marked the end of a 12-month winning streak for leading indicators. The Philadelphia Fed Index rose for a fourth straight month in May, though the headline reading was only slightly better than consensus.

 

In early trading, the euro bounced big time from our intermediate term line of support of $1.21 and has now moved right to our target of $1.25. The euro is trading up versus all major currencies with the exception of the Swiss Franc. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.25). Despite this brief reprieve for the euro, the issues in Europe continued to be a drag on sentiment.

 

Over the short-term, elements of "flight to safety" in the U.S. dollar will help to contain short-term U.S. inflation.  We do, however, suspect that the U.S.'s day of reckoning is coming. The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.62) and Sell Trade (89.97).

 

Currently, equity futures are trading below fair value as markets can’t escape the “Sovereign Debt Dichotomy”. As we look at today’s set up the range for the S&P 500, is 34 points or 0.1% (1,070) downside and 6.0% (1,136) upside. For the first time since early 2009, the Hedgeye Risk management models have moved to 0/9 sectors on TRADE and 0/9 sectors positive on TREND.

 

Commodities fell to an eight-month low. The CRB Index dropped 1% to 250.07. Intraday, the index was at 247.49, the lowest level since Sept. 8. Energy and precious metals led the decline. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,182) and Sell Trade (1,255).

 

Crude oil was poised for a third weekly decline as European leaders struggled to contain the region’s debt crisis and reports cast doubts on the strength of the economic recovery in the U.S. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (69.01) and Sell Trade (74.16).

 

Copper is headed for a sixth consecutive weekly loss as investors remains concerned that Europe’s debt crisis will spread and hurt a global economic recovery. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.85) and Sell Trade (3.09).

 

In credit markets, the TED spread has widened further to 0.37 and LIBOR has ticked up to 0.49 from 0.48 yesterday. The inverse correlation between the TED spread and the euro tightened further to -0.96.

 

Howard Penney

Managing Director

 

US STRATEGY – FOLLOWING THROUGH  - S P

 

US STRATEGY – FOLLOWING THROUGH  - DOLLAR

 

US STRATEGY – FOLLOWING THROUGH  - VIX

 

US STRATEGY – FOLLOWING THROUGH  - OIL

 

US STRATEGY – FOLLOWING THROUGH  - GOLD

 

US STRATEGY – FOLLOWING THROUGH  - COPPER


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more