US STRATEGY – CHINA SPEAK

It takes two to speak the truth. One to speak and another to listen.
    --Henry David Thoreau

 

Yesterday, the S&P 500 fell amid rumors that China may consider reducing its investment in European government bonds, creating a very bearish close for the S&P 500; lower-highs on the open; lower-YTD-closing-lows on the close.  We are waking up to a big rally in Europe and Asia, as China said it remains a long-term investor in Europe.   Commodities are rallying across the board with the exception of gold.  One of our favorite sayings last year was that President Obama needs to “shake hands with the client.”   The power of the Chinese continues to grow.  I hope we, as a nation, are listening.

 

Consistent with our 1Q10 theme “Chinese Ox in a Box,” the Chinese market rolled over in Q1, taking down the US market in 2Q10 - “April Flowers, May Showers.”  Concern of an overheating Chinese economy has had broad implications for commodities and the REFLATION trade.  The Chinese market officially “crashed” in early May, putting copper and crude in a bearish formation, which both have a very high correlation to Energy (XLE) and Materials (XLB).   

 

With the Chinese market up in four of the last five days, commodities prices are starting to rally (China was up 1.1% last night.)  Yesterday, the CRB closed at 253, up 1.4%.  Crude closed at 71.55, up 4% and is trading higher again today.   The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (68.51) and Sell Trade (73.78).

 

Yesterday, Treasuries were weaker despite the pullback in stocks.  The Dollar index was up 0.39% to $87.12.  The DXY is looking slightly lower today.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.08) and Sell Trade (87.18).  We are short the Dollar. 

 

Another sharp downturn in the EURO may have also weighed on sentiment yesterday, but the EURO held our level of $1.21 and is trading higher today.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.24).

 

The notable stand out in yesterday’s weakness was Technology (XLK).  The downward pressure was attributed to comments from MSFT (down 4.1% yesterday) CEO Steve Ballmer, who reportedly said that the fallout from the fiscal crisis will not be limited to Europe and the company may have to shift its focus elsewhere in Asia given the impact of China's enforcement laws.   There have also been a number of articles recently criticizing the CEO’s performance and suggesting he should maybe step down.  The S&P Software index fell 2.6% yesterday.   

 

On the MACRO front in the US, April housing data continued to come in ahead of expectations as new home sales surged 15% following an upwardly revised 30% gain in March.  Not surprisingly, housing-leveraged stocks were among the best performers yesterday; HOV +1.5%, SPF +0.9% and LEN +0.5% were among the big gainers.  TOL was up 0.8% despite a somewhat disappointing April quarter, but all is forgiven with outsized order volume growth.

 

The VIX remains in a bullish formation and was up 1.1% yesterday.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (27.23) and Sell Trade (44.95).

 

As the demand outlook improves, so goes copper.  China up, copper up!  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.01) and Sell Trade (3.18).    

 

For the time being, gold may have seen its day in the sun.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,204) and Sell Trade (1,240).

 

As we look at today’s set up for the S&P 500, the range is 55 points or 2.3% (1,043) downside and 2.8% (1,098) upside. Equity futures are trading above fair value following Wednesday's late day sell-off, which saw gains reversed with Technology stocks leading the decline.

 

On the economic front, to be reported today are:

  • Q1 GDP (2nd read)
  • Personal Consumption
  • Core PCE
  • Initial Jobless Claims
  • Natural Gas Inventories
  • Treasury Secretary Geithner and German Finance Minister Wolfgang Schaeuble hold press conf 

Howard Penney

 

US STRATEGY – CHINA SPEAK - S P

 

US STRATEGY – CHINA SPEAK - DOLLAR

 

US STRATEGY – CHINA SPEAK - VIX

 

US STRATEGY – CHINA SPEAK - OIL

 

US STRATEGY – CHINA SPEAK - GOLD

 

US STRATEGY – CHINA SPEAK - COPPER


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