US STRATEGY – RUNNING OUT OF ENERGY

Despite the fairly dovish comments from Fed Chairman Bernanke during his testimony in Washington yesterday, the S&P ended the day down 0.6%.  The weakness was concentrated in two sectors: Energy (XLE) and Financials (XLF).

 

The move in XLE was not that surprising given the weakness in the Energy (XLE), with a sharp selloff in BP down 15.8%.  Pressure from the Obama administration on BP to suspend its dividend was one major factor in the steep decline.  Other names leveraged to the Gulf of Mexico disaster such as APC (down 18.6%) and RIG down (8.1%) came under meaningful pressure as the market focuses on the potential for bankruptcy. 

 

The Financials were actually the worst performing sector on worries that Senator Lincoln's derivatives legislation will remain part of the financial regulatory overhaul; this put pressure on the money-center and investment banks.  In addition, the fundamentals surrounding the housing market continue to erode.  As our financials analyst Josh Steiner wrote yesterday “mortgage applications have done a base jump off their April levels and haven't hit bottom yet in the wake of the April tax credit expiration pull-forward. “  The MBA Mortgage Purchase Application Index, a leading indicator for home sales activity, declined 5.7% from last week bringing the decline since April to 32.8%. The month of May was down 18% vs. the month of April.

 

There is some level of uncertainty surrounding today’s ECB meeting, but the Euro has rallied for three days and is currently trading just above $1.20 versus the U.S. dollar.  We will see if it can close higher today.   The consensus is that Jean Claude Trichet will leave the benchmark rate at a record low of 1%.  The Bank of England, also meeting today, will likely keep its emergency stimulus in place and maintain the benchmark interest rate at a record low of 0.5%.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.18) and Sell Trade (1.21).  A higher Euro will help to put a bid under the RISK trade. 

 

Treasuries finished well off their worst levels on the day with the pickup in the risk aversion trade.  The dollar index was down 0.56%.  The positive correlation between the USDEUR and the TED spread (on a trailing three month basis) tightened yesterday to 0.98.  The inverse correlation with the EURUSD and the TED spread tightened to -0.97.  The Risk Management models have the following levels for the USD – Buy Trade (87.40) and Sell Trade (88.21).  The VIX was flat on the day, closing at $33.73.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (32.34) and Sell Trade (38.04).

 

Materials (XLB) and Consumer discretionary (XLY) were the two best performers yesterday with retail and media as the bright spots in the sector.  The S&P 500 Restaurant Index climbed 1.2% on the day. 

 

Technology (XLK) was unable to sustain its early outperformance that came on the back of upwardly revised guidance out of TXN.  The S&P Software index closed down 0.8% on the day. 

 

The voices of corporate stability are helping to provide some support for the market:

 

(1)    VIA.B rallied after announcing the resumption of its share buyback program; the company increased the funds available to repurchase shares to $4B.

(2)    BF.B said that it would buy back up to $250M worth of shares.

(3)    CAT +0.4% raised its quarterly dividend by 5%.

(4)    KBR up 10.1% after the company announced plans to repurchase up to 10M of its shares.

(5)    Monsanto announced a three-year, $1B share repurchase program. 

 

The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.66) and Sell Trade (2.94). 

 

Oil is moving higher for a third day on expectations of stronger demand after China’s crude imports increased and a weaker dollar.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.01) and Sell Trade (74.68).

 

Gold is indicating lower for a third day as a stronger Euro and better-than-expected economic data in China is mitigating some of gold’s safe haven status.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,202) and Sell Trade (1,246).   

 

As we look at today’s set up for the S&P 500, the range is 40 points or 1.8% (1,037) downside and 2% (1,077) upside. 

 

Howard Penney

 

US STRATEGY – RUNNING OUT OF ENERGY - S P

 

US STRATEGY – RUNNING OUT OF ENERGY - DOLLAR

 

US STRATEGY – RUNNING OUT OF ENERGY - VIX

 

US STRATEGY – RUNNING OUT OF ENERGY - OIL

 

US STRATEGY – RUNNING OUT OF ENERGY - GOLD

 

US STRATEGY – RUNNING OUT OF ENERGY - COPPER


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