US STRATEGY – DELEVERAGING

The S&P 500 finished lower on Monday after a late afternoon collapse, which coincided with the release of the consumer credit data.  After showing a glimmer of hope last month, the most recent data continued to show a sharp contraction in credit.   Revolving consumer credit (card debt) declined in April at a rate consistent with the fastest rates we've seen since the start of the crisis. On balance, this is a negative for the Financials (XLF), though a net positive for the balance sheet of the American consumer.  The flight to safety continues as the only sector that ended the in positive territory was the Utilities (XLU - up 0.6%).  

 

There was more evidence of the safety trade with Treasuries stronger yesterday and the Dollar Index closed up 0.19%.   The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (87.14) and Sell Trade (88.51).  The VIX rose another 3% yesterday on back of a 20% up move last Friday.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (33.18) and Sell Trade (38.52).

 

The EURO has now declined for the past six days, trading down 0.12% yesterday.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.19) and Sell Trade (1.22).  The European MACRO data points focused on the Hungarian government, as it tried to play down previous comparisons to Greece and committing to meeting deficit targets.  The most recent comments were more about politics than a different assessment of the countries financials.  Hungarian CDS have come off recent highs, but remain elevated. 

 

There was some positive news out of Europe as a better than expected April Factory Orders was reported in Germany up 2.8% month-to-month vs. consensus (0.4%).  Greece continues to struggle as the market declined 5.45% to a 12-yr low (in early trading today the market is up 1%).  The UK market is currently trading down 1.2% as Fitch Ratings said that “the scale of the U.K.'s fiscal challenge is formidable and warrants a strong medium term consolidation strategy.”

 

The second best performing sector yesterday was Healthcare (XLV).   Bristol-Myers Squibb (BMY) rose 6.3% (the most of any company in the S&P 500 yesterday) after positive drug data showed two of its cancer drugs (ipilimumab and sprycell) could change the standard of care for patients with deadly skin and blood malignancies. 

 

The Industrials (XLI) has now been the worst performing sector for the past two days.  Yesterday, machinery names were weaker – DE down 3.7%, CAT down 3.3% and CNH down 4.2%.  Airlines, rails and shipping were also weaker - FDX and UPS declined 3.6% and 3.5%, respectively. 

 

Rounding out the bottom three performing sectors were Financials (XLF) and Consumer Discretionary (XLY) - the XLY is now the only sector positive for the year-to-date.  Both groups were negatively impacted by the continued decline in consumer credit trends.  Homebuilders and related equities were under considerable pressure, down 4.3% and 13.6% over the past week.  The much anticipated introduction of the new iPhone was not enough to lift AAPL and GOOG is facing an investigation by CT AG Blumenthal regarding data collection and privacy concerns.

 

In early trading, crude reversed a gain of as much as 1% as European stock markets are declining.  According to a Bloomberg, U.S. oil supplies probably dropped by 1 million barrels last week.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (69.03) and Sell Trade (75.31).

 

In early trading, copper is trading down for the seventh day in a row.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.75) and Sell Trade (3.03). 

 

The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,217) and Sell Trade (1,248).   

 

As we look at today’s set up for the S&P 500, the range is 36 points or 0.6% (1,044) downside and 2.8% (1,080) upside.  Equity futures are trading mixed to fair value in the wake of yesterdays late day slide.  The MACO calendar is light again today.    

 

Howard Penney

 

US STRATEGY – DELEVERAGING - S P

 

US STRATEGY – DELEVERAGING - DOLLAR

 

US STRATEGY – DELEVERAGING - VIX

 

US STRATEGY – DELEVERAGING - OIL

 

US STRATEGY – DELEVERAGING - GOLD

 

US STRATEGY – DELEVERAGING - COPPER


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