US Growth Continues To Slow...

Conclusion: the June ISM Non-Manufacturing report supports Hedgeye’s Bear Market Macro theme for Q3.


This morning ISM released its Non-Manufacturing report for June. Relative to May’s reading of 55.4, this morning’s 53.8 should be seen for what it is – a sequential slowdown in growth on a month-over-month basis.


We like to think our risk management process is duration agnostic. That is, we consume immediate term data within the framework of a multi-duration model (TRADE, TREND, and TAIL). From an immediate term (TRADE) and intermediate term (TREND) perspective, what’s clear in the chart below is that the slope of the line has turned negative. What was probably less obvious to the bulls is how this morning’s ISM Non-Manufacturing report fits within the context of the longer term picture.


We have circled 2 monthly reports with red circles – June of 2007 and 2010. What’s most interesting to us now is considering not only how elevated a reading of 53.8 is relative to where the US Consumer can take this chart (lower), but that there is a big seasonal factor to how this country thinks about the future. This is probably why bear markets tend to growl in the summer time and capitulate in the fall. The bulls are hungry for a bid that’s based on a forward growth outlook that just isn’t coming.


We’re not calling for a crash yet, but with every fleeting rally the SP500 has to a lower-high, we are asking ourselves why we aren’t. From ISM and housing reports to weekly jobless claims, the most recent data pertaining to US economic growth is bearish. To change the course of this chart’s path to the upside in the coming months would require a hope that we aren’t brave enough to sign off on as a probable outcome.


Our refreshed (as of 1PM EST) immediate term support and resistance levels for the SP500 are now 1001 and 1052, respectively.


Keith R. McCullough
Chief Executive Officer


US Growth Continues To Slow...  - ISM Non Manufacturing

Lower Lows in Oil

Conclusion: Lower lows in the price of oil, leading economic indicators in free fall, and a disconnect in the correlation of U.S. dollar down and oil up make us bearish of oil.


As a preamble to this note, and just to clarify the title, we are not technicians.  We use closing prices as a leading indicator for future prices and fundamentals.  When there is consistently declining closing prices, or for that matter consistently increasing prices, it gives us a clue to add to a myriad of other clues, which may or may not lead to an investment action or decision.


As it relates to oil, it is has been recently causing indigestion for more than just the Obama Administration and those trying to plug the BP well in the Gulf of Mexico.  The lower lows we are seeing in the price of oil are also indicative of indigestion for those bullish of oil.


If Dr. Copper has a PH.D in economics (which after reading Paul Krugman lately, we admit a PH.D in economics doesn’t mean much), than oil certainly has an advanced degree in economics as well.  Oil, at times, tends to have a lower predictive ability of future economic growth than copper simply because there are a number of other factors, outside of pure economic growth, that tend to drive the price of oil. Most notably are geo-politics and the fact that a vast amount of oil is held by nations less than friendly to the United States -- the nation that is the largest consumer of oil.


From a pure fundamental perspective, one of the best measures of supply and demand balances for oil is the weekly inventory report from the Department of Energy.  Since a recent trough of 18.7 days of supply on the first week of January 2008, days supply of oil in the United States has been on a steady upwards climb and is currently at 24.0 days of supply.   As the chart below outlines, supply in the U.S. is on the march upwards and to the right.  Growing supply is negative for price.


Lower Lows in Oil - 1


An important consideration when contemplating the future price of oil is the direction of the price of the U.S. dollar.  In 2009, the key factor driving the meteoric increase in the price of oil was the weakness of the U.S. dollar.  As the dollar weakened, the commodities priced in U.S. dollars increased in price.  In conjunction with this, we also saw a marginal increase in global demand due to massive amounts of stimulus being implemented globally.


While we have an expectation that the U.S. dollar will weaken in the intermediate term due to burgeoning domestic debt issues, it is not clear what impact this will have on commodities such as oil.  Over the last few weeks, and as outlined in the chart below, we have actually seen a strong correlation between oil down and U.S. dollar down (as measured by the U.S. dollar index).


Lower Lows in Oil - Oil v DXY


Currently, the U.S. dollar is being trumped as the dominant factor determining the price of oil.   From our perspective, while more difficult to measure, global demand and expectation of slowing growth has become the dominant factor driving oil price.  To highlight global economic activity, we’ve also posted below a chart of the Baltic Dry Index, which has been falling like a proverbial knife for the last few months and is now at year-to-date lows.


Lower Lows in Oil - Baltic Dry Index


As a reminder, the Baltic Dry Index is a daily index posted in London that measures the supply and demand, and thus price, for dry bulked containers globally.  As such, the demand for containers to transport dried goods globally should ebb and flow with global economic activity.   As economic activity declines, or is expected to decline, the demand for containers also declines.


Collectively, lower lows in price, leading economic indicators in free fall, and a disconnect in the correlation of U.S. dollar down and oil up make us bearish of oil.


Daryl G. Jones

Managing Director


Last week, 6 of the 8 risk measures registered negative readings on a week-over-week basis, while one was neutral and one was positive


Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. Journal of Commerce Commodity Price Index

6. Greek Bond Spreads

7. Markit Subprime Spreads

8. AAII Bulls/Bears Sentiment Survey


1. Financials CDS Monitor – Moves in swaps were more modest last week than typical over the last few months, but nevertheless worsened week-over-week.  Spanish banks saw the greatest improvement.  On the domestic side, only MMC came in (by a single basis point) while all other companies increased.  Conclusion: Negative.

Contracted the most vs last week: SAN-ES, BBVA-ES, SAB-ES, POP-ES

Widened the most vs last week: CB, TRV, AIG, SLM

Contracted the most vs last month: AXP, COF, ALL, SAN-ES

Widened the most vs last month: MS, LNC, ACE, AGO




2. High Yield (YTM) Monitor – After improving significantly earlier in the month, High Yield rates rose 17 bps last week. Rates closed the week at 9.06% up from 8.89% the week prior. Conclusion: Negative.




3. Leveraged Loan Index Monitor - Leveraged loans fell by 10 bp last week, closing at 1454 versus 1464 the week prior. Conclusion: Negative.




4. TED Spread Monitor - The TED Spread is a great canary. Last week, it diverged from the rest of the risk monitor, making it the only positive reading of our eight indicators.   The TED spread fell, closing at 37 bps, down from 41 bps in the week prior. Conclusion: Positive.




5. Journal of Commerce Commodity Price Index – The  JOC smoothed commodity price index is a useful leading indicator.  A sharp sell-off in this index starting in July ’08 heralded further declines in the stock market.  This week, the index fell from 15.21 the prior week to 9.84 on last Friday. Conclusion: Negative. 




6. Greek Bond Yields Monitor – Greek bonds yields and CDS continue to show turmoil in the Aegean.  Last week yields fell modestly, ending the week at 1021 bps versus 1042 bps the prior week. Conclusion: Neutral.




7. Markit ABX Index Monitor - We use the 2006-2 series and look at the AAA, AA, A and BBB- series. We include this measure as a reflection of what is going on in deep subprime distressed paper. The AAA fell sharply versus last week, while the other tranches were flat/slightly up. Conclusion: Negative.




8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more bearish on the margin vs last week. Bulls decreased by 9.8% to 24.7% while Bears rose 9.6% to 42%, pushing the spread to 17% bearish, versus 2% bullish the prior week.  Conclusion: Negative.


One caveat is that our interpretation of the AAII Bulls/Bears survey is that a more bearish reading is bearish. Most market observers would use this survey as a contrarian indicator, which we wouldn't disagree with from a practitioner standpoint. However, for the purposes of this risk monitor, we treat an increase in bearish sentiment as a negative.




Joshua Steiner, CFA


Allison Kaptur

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


The S&P 500 closed down 0.5% on Friday, finishing a week of daily declines and 9 down days out of the last 10 trading days.  As expected the nonfarm payrolls data was the highlight of the day, as the data declined for the first time this year as 225K temporary census workers were let go.  The unemployment rate fell to 9.5% from 9.7%, consensus 9.8%, as discouraged jobseekers (650K) left the labor pool.  The private payroll data was the biggest disappointment out of the jobs data on Friday.


Last week’s MACRO news flow is now overwhelmingly pointing towards a stalling domestic recovery story.  In summary, the Chicago PMI, May housing and the domestic ISM all pointed to a slowing growth.  China PMI and Global ISM data suggest the slowing growth story is not isolated to the USA.    


The slowing global growth story is not yet showing up in the preannouncement earnings season.  According to Street account, 13 companies provided earnings updates last week, 7 of which represented an increase from prior guidance or were above consensus compared to 3 declines; this is the first week in which positive announcements outnumbered negative ones since the week ended June 11th.  More important will be the commentary about trends for 2H10.  According to S&P, the estimate for Q2 operating EPS growth from S&P 500 companies is 42%; the calendar 2010 earnings estimate stands at $82.


Treasuries were mostly weaker last Friday.  The dollar index was down and the 10-year traded below 2.90%, before rising again to 2.94% at the end of the day.  The dollar index closed slightly higher on Friday, closing at $84.60, up 0.21%.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.31) and Sell Trade (85.37).  The VIX moved lower by 8.3% on Friday, but closed up by 5.5% for the week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (24.76) and Sell Trade (35.75). 


The EURO was down slightly on Friday but closed up 1.6% on the week.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.22) and Sell Trade (1.26); the range for the EURO improved by $0.01 to the upside from Friday. 


Only two sectors were in the green on Friday - Healthcare (XLV) and Utilities (XLU).  The relative strength in the XLV was in Pharma (IHE up 0.5%) and Biotech (BTK up 0.6%), on increasing M&A speculation in the sector. 


The three worst performing sectors were Industrials (XLI down 1.2%), Financials (XLF down 1.2%) and Consumer Discretionary (XLY down 1.1%).  The XLI was lead lower the Transports (Air/Rails) and the Machinery names.  The S&P 500 machinery index was down 1.1%. 


Last week copper traded down 6.2% in support of the slowing global growth story.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.83) and Sell Trade (2.96).


Last week gold saw its biggest decline since the week of April 16th.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,201) and Sell Trade (1,229). 


Oil declined 8.5% last week.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.82) and Sell Trade (75.27).  


As we look at today’s set up for the S&P 500, the range is 54 points or 1.7% (1,005) downside and 3.6% (1,059) upside.  Equity futures are trading higher ahead of the ISM non manufacturing data. 


Howard Penney














The Macau Metro Monitor, July 6th, 2010



According to Xinhua News Agency, Minister of Land and Resources Xu Shaoshi said, "Home transaction volumes have declined and prices have stagnated.  In about a quarter's time, the property market will probably reach a full correction and prices will fall, but it's hard to predict the extent of the price falls."  The June property price data is released next week.


ELECTRIC DREAMS Inside Asian Gaming

Despite the public's aversion to electronic table games in Macau, Aruze's Lucky Sic Bo has been quite popular on the mass floors.  In Singapore, electronic table games seem to have more success as suppliers such as TCS JOHNHUXLEY and Spielo reported close to 100% occupancy at its roulette terminals.  According to IAG, the suppliers also noted that the Singaporean casino operators have replaced some baccarat tables with either blackjack tables, slots, or electronic gaming terminals, particularly roulette.


GAME CHANGER Inside Asian Gaming

There have been reports that suggest RWS continues to attract more VIP players than MBS.  Whether this stems from loyal relationships from Genting's Malaysian property or better incentives, it remains to be seen.


TOUGH LOVE Inside Asian Gaming

According to a Macau junket source, the high GGR growth in May may be attributed to a small group of established VIP customers rolling greater amounts on the strength of a strong economy rather than new VIP customers.  The source also said that junkets are very careful about which customers get credit and lending only a fraction (e.g. 25%) of what the player wants.  The source said, in contrast to past times, a customer who is denied credit at one property would not be allowed credit at another property, as junkets would share information through a "Rumor Control". 



Macao Dragon will launch two ferry boats this weekend--servicing between Hong Kong Macau Ferry Terminal and Taipa Temporary Ferry Terminal.  IM believes the new ferries' competitive prices for tour groups would allow Venetian to be more flexible in subsidizing its CotaiJet ferries. IM said CoD would also benefit from these new boats.

Americans Get It

“It is hard enough luck being a monarch, without being a target also.”

-Mark Twain


The monarchy of Keynesian Spending has finally fallen from its saddle – and the citizenry is hungry. Welcome back from your long weekend.


Away from Harvard historian Niall Ferguson pitching a version of our American Austerity theme in Aspen at the “Ideas Conference” yesterday, the most important consensus builder coming out of this long weekend came from a WSJ/NBC Poll that asked Americans what the President should worry about:

  1. Keeping the US Deficit down = 63%
  2. Boosting the US Economy = 34%

Once again, whether they are getting the message from Canadian or Scottish strategists makes no difference – Americans get it. “Boosting the economy” with government spending dollars that have no multiplier effect isn’t working. It’s time to save America’s balance sheet and get austere.


The current leadership on the economic side of the US Administration doesn’t get this yet. That’s marked-to-market by a simple 3 factor model every day:

  1. Currency Market: US Dollar was down for the 4th consecutive week last week, trading down another -1% to $84.61 (we are short the UUP).
  2. Stock Market: SP500 was down -5% last week and has closed in the red in 9 out of the last 10 trading days, making lower-YTD-lows.
  3. Jobs Market: US unemployment remains nauseatingly high and jobless claims jumped higher again last week to 472,000 (+13,000 wk/wk).

If this reality check doesn’t make you feel all red, white, and blue after some of the best weather Americans have had in decades, maybe it’s best to close your eyes, buy, and hope.


Maybe not.


Hope is not an investment process…


The good news here is that reality is starting to get priced into the market. As we like to say at Hedgeye, everything has a time and price. Now that we have had a -16% correction in the SP500 since April 23rd and China finally stopped making lower-lows for the YTD overnight, the US stock market should bounce.


Before I get you all bulled up and carried away here, let’s remind ourselves that bouncing to lower-highs before we make lower-lows isn’t cool – Americans get that too. We call this a bear market, and the bulls are finally starting to agree:


“I’m worried that we could have not just a soft patch but a double dip which lasts two or three quarters and where nominal GDP is only up 2 or 3 percent and that’ll have a big effect on profits… It’ll scare everybody and I’m afraid the market goes down another 10 or 15 percent if that happens.” (Barton Biggs July 2, 2010)


But don’t be scared – this was, after all, proactively predictable. As American investors, we are starting to get this too. Using the institutional leanings of perma- bulls and perma-bears always provides us a backboard of consensus to play against. The only “perma” we want to be is permanently managing risk.


Taking a step back before we have the conviction to make another market call is always critical. The institutionalization of asset management in America is something that everyone in this country needs to get.


Per the Federal Reserve’s flow of funds data, in the early 1990’s less than 40% of the US stock market was controlled by institutions and the “cash levels” of US Equity mutual funds were north of 12%. Today, over 60% of the market is controlled by institutions and cash levels of US Equity mutual funds is below 4%. That’s going to change.


If you get that the Perceived Wisdoms of the Buy-And-Hope institutional investor community is going by the way of the horse and buggy whip, you are definitely putting yourself in a position to get it right here in 2010 and beyond. The US government doesn’t “have to spend” to make this economy right and the institutional investor class doesn’t “have to be fully invested” to save their clients from losing their hard earned capital.


In the face of finding lower prices, the Hedgeye Asset Allocation Model has dropped its “cash” position from a YTD high of 79% to 58%. We aren’t asset managers, so we aren’t going to proclaim that maintaining a high and dynamically managed allocation to cash in a bear market is working for our fund – by design, we don’t have one. That said, our clients do  - and its working for them.


As a practical rather than theoretical matter, we go through the positioning of our asset allocation every morning at 830AM EST on the Hedgeye Morning Call (if you’d like to trial the call please email ). Our goal is to continue to move away from the lip service Washington and Wall Street give to “transparency and accountability” and give our clients a measurable tool that they can use to augment their respective investment processes every day.


We confidently submit that if you provide investors with the right risk management “call” on markets every day, they’ll get that too.


My immediate term support and resistance levels for the SP500 are now 1005 and 1059, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Americans Get It - cash

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