U.S. stocks fell, sending the S&P 500 to its longest losing streak in seven weeks, as the REFLATION trade burst.  Earlier in the week that news that China would pursue a more flexible exchange rate policy boosted the REFLATION trade, but the reality appears to be that that Beijing was more interested in deflecting criticism ahead of the G-20 meeting this weekend.  Europe was one of the more influential drivers of incremental concerns with much focus on the recent widening in CDS and bond spreads.  In addition, the Consumer Discretionary (XLY -2.4%) underperformed as spending trends continued to deteriorate in retail and the Restaurant sectors.


The S&P Retail Index declined 2.7% with the focus on BBBY and guidance that suggested that trends will slow over the next few quarters.  Darden (DRI) guidance for improving trends did not get much support.  Darden guided to 2% to 3% blended same-store growth in FY11. Seeing that the company’s two-year average same-store sales growth already slowed during the fiscal fourth quarter with trends, for the most part, decelerating more in May, this full-year guidance seems aggressive.  Housing and housing derivative names were under pressure again yesterday as LOW and HD declined 2.8% and 2.7%, respectively. 


The Financials (XLF) also underperformed; as the BKX declined -2.2% on financial regulation concerns and after the cost to protect from a Greek default surged to a record level (BOA and JPM dropped 2.7% and 2.2%, respectively).  Washington reached a compromise that will force banks to move their swaps-trading desks to subsidiaries, clearing the way for a final agreement on the biggest overhaul of financial regulation since the 1930’s.


Initial claims fell week-over-week by 19,000 after upwardly revising the prior week by 4,000, suggesting the actual improvement was 15,000.  As our Financials analyst Josh Steiner noted, “More important to us is that the level of jobless claims - 457k - remains right in line with its trend year-to-date in the 450k-460k range.  As a reminder, this level is too high for unemployment to materially improve. The level would need to be in the 375k-400k range by our estimates for unemployment to make real headway in the right direction. On a rolling basis, claims fell by 1.5k to 463k from 464.5k last week. On the margin, this morning's data is slightly positive, but it's only a small step in the right direction so we'll reserve our enthusiasm for the time being.”


Treasuries put in a mixed performance yesterday, despite the pickup in RISK aversion. The dollar index traded flat on the day and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.35) and Sell Trade (86.66).  The VIX surged 10.5% yesterday and is now up 18% over the last five trading days.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (26.44) and Sell Trade (31.72).


The Euro moved higher by 0.82%, despite increased concerns of Greek bond default.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.25).


The Materials (XLB) and Energy (XLE) sectors were two of the three worst performing sectors yesterday.  The REFLATION trade, as I noted earlier, was boosted by the news of China’s announcement that they would pursue a more flexible exchange rate policy.  In the energy sector, both the oil services and E&P groups fell for a fourth straight session, with the OSX and the EPX down 2.5% and 2.4%, respectively.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (75.59) and Sell Trade (79.12).  


Yesterday, Copper rallied 2.3% to close above 3.00. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.97) and Sell Trade (3.06).


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,237) and Sell Trade (1,256).  


As we look at today’s set up for the S&P 500, the range is 18 points or 03% (1,071) downside and 1.4% (1,089) upside.   Equity futures are trading below fair value before a busy MACRO calendar today:

  • US GDP (Q1 Final) - consensus 3.00%
  • US Core PCE (Q1 Final) - consensus 0.6%
  • US GDP Price Index (Q1 Final) - consensus 1.17%
  • US GDP deflator (Q1 Final) - consensus 1.05%
  • U. of Michigan Confidence (June Final) -  consensus 75.4

Howard Penney













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