Bear Market Macro: SP500 Levels, Refreshed...

Today has been another low-volume price rally that has not overcome any lines that matter in our macro model. Interestingly, the SP500 has been flat or down in 11 of the last 15 days, and we’ve seen this movie of a one-off price UP, volume DOWN day before.


On August 2nd, the SP500 gapped up like this and closed up +2.2% on the day on a very bearish volume study (volume didn’t confirm price). After that, the SP500 toyed with my short selling fears, but ultimately dropped 54 points (-5.2%) from that uninspiring early August Monday to its Friday the 13th of August closing low.


This is a market that pays players who take a macro view and stick with it in order to productively trade either their gross or net exposure. For me, that view remains decidedly bearish. I shorted the SPY at my immediate term TRADE line of resistance this afternoon (1099) as I see no immediate term downside support to 1063 (see chart).


If you are legitimately bearish here, you have to be able to short them when they are green.



Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed...  - 1

EARLY LOOK: Exorbitant Privilege

This note was originally published at 8am this morning. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK in real-time, published by 8am every trading day.




“The US is not a superpower. The US is a financially dependent country that foreign lenders can close down at will. Washington still hasn’t learned this. American hubris can lead the administration and Congress into a bailout solution that the rest of the world, which has to finance it, might not accept.”

-Paul Craig Roberts



I read this quote just a few minutes ago from a respected American who has served his country well.  As an American, it’s painful and embarrassing at the same time to get up each morning and read sentiments like this.  It makes me want to move to Canada (kidding).
Valéry Giscard d’Estaing, a French Minister of Finance in the 1960’s referred to the benefits the United States had in the US Dollar being the international reserve currency as an “exorbitant privilege”.
Yesterday the S&P 500 closed flat on the day on anemic volume; it feels like everyone is on summer vacation.  We learned yesterday that the Chinese are selling their holding of US Treasuries in favor of Europe and Japan.  We are financially dependent on foreign lenders and our biggest creditor is saying “no mas” - on this news the S&P 500 traded flat on the day.   
The dollar sent the right message yesterday, declining 0.50% and it is headed lower.   The actions of the Chinese are telling the rest of the world to flee dollar-denominated paper assets.  This is a problem for the dollar as the Federal Reserve appears to be a lender of last resort for the U.S. Treasury.  While the selling of foreign-held dollar-denominated debt has been orderly so far, the inflow of foreign-held dollars into the U.S. will debase the dollar and lead to higher inflation.  Despite what the FED sees (it’s focused on the “core” figure), the signs of inflation abound in the economy.
(1)    Gold traded higher yesterday (looking to gain for a fourth day in a row) and has rallied 3.1% in the past month.
(2)    Copper traded up 0.8% yesterday and is up 13.3% over the past month.
(3)    Last Friday, the US CPI number crept higher and will again in August.
(4)    Today’s UK inflation reading is above the BOE target rate
(5)    The US PPI number will also post an upside surprise
Since the US does not have the balance sheet to execute on any creditable plan and the world has little faith in our political leaders, it’s hard to see a way out.  The “Fiat Fools” in Washington have already done everything in their power to spend or to create whatever money was needed to prevent systemic collapse in 2008.
Yet, today we seem to find ourselves in a precarious position.  While the situation is not overly similar to 2008 (yet); Lehman Brothers’ collapse is one important difference that shocked markets. Many facets of the economy are on a knife edge: housing is once more coming to the center of people’s attention as a concern and unemployment remains at elevated levels.
Should inflation meaningfully take hold, it would be a death knell for the margin story embedded in the current estimates for the S&P 500.  The only action that will expeditiously calm the markets is more spending or creating of U.S. cash (which creates inflation).  Daryl Jones has written extensively on this; our economy is addicted to foreign financing just as acutely as it is addicted to foreign oil.
The futures are rallying today on the back of China rising for the third day (up 0.4%) on signs that the Chinese economy is maintaining some momentum in June.  But this is not the case in the US.  The surging trade deficit and anemic retail sales (plus the Fed’s own admission) suggest that 2Q GDP will be revised downward and that 2H10 GDP will be even slower.
With consumer credit continuing to contract and confidence readings trending downward, downward sequential movement in GDP growth rhymes with what the data is indicating.  We estimate that personal consumption growth will slow to less than 1% in 4Q10 and discretionary spending growth will slow to a rate close to what we experienced in 1Q09.
The unease with which Valéry Giscard d’Estaing viewed a US Dollar denominated world reserve currency is not a relic of the 1960’s.   In 2009, Luo Ping, director general at China’s Banking Regulatory Commission, said in New York, “Once you start issuing $1 trillion-$2 trillion…we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do”.  Yesterday, we saw this sentiment manifest itself in action.  Keith highlighted Ping’s comment in real-time back in early 2009, and the selling of U.S. Treasuries by the Chinese is indicating that the turn in 10 year US Treasury yields is coming.

EARLY LOOK: Exorbitant Privilege - chart1



Function in disaster; finish in style
Howard Penney

German ZEW Economic Sentiment Dips

Position: Bullish Bias on German Equities (EWG); Long British Pound (FXB)


It’s just one data point, but it is in line with our forecast for fundamental economic data in Europe to show a meaningful negative inflection in August and continue downward into the end of the year as austerity measures throughout the region set in and choke off growth. ZEW’s sentiment survey for Germany is but one survey we track, however its 6-month forward-looking gauge of economic sentiment fell off a cliff month-over-month, from 21.2 in July to 14 in August, with consensus expectations at 21 (see chart below).  Conversely, the current situation ramped up materially, from 14.6 to 44.3, however we’ve found the current situation to be a lagging market indicator and therefore put greater stock in marginal changes in the economic sentiment curve.


With the DAX just hovering above its TREND line of support at 6076, we’re waiting to see if it makes a confirming move before taking an investment position.


Should you need to get invested in Europe, we continue to like countries with lower deficit and debt levels, like Germany, Denmark, Sweden and the Netherlands.  Inflation in the UK, which was reported today at 3.1% in July Y/Y, and further deterioration in its housing market continue to be concerns. We’re long the British Pound in our virtual portfolio as a play versus the deterioration in the US Dollar. Our TRADE (3 weeks or less) range for the GBP-USD is $1.55-$1.61 with TREND line support (3 months or more) at $1.50; our TRADE range for the EUR-USD is $1.26-$1.29.


Matthew Hedrick



German ZEW Economic Sentiment Dips - g1


German ZEW Economic Sentiment Dips - g2

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In restaurants, as with the broader equity market, yesterday was a quiet day.  Besides the low volume and flat price action, there were a few interesting news items and divergences to note.


The most noteworthy category in my space yesterday was coffee.  A surge in coffee prices yesterday raised concerns that costs are going up for coffee shops such as Green Mountain, Caribou, Peet’s, and Starbucks.  The recent price movement in softs and foodstuffs (and commodities in general) suggests that these concerns are likely well-founded.  This negative was offset by news emerging that Italian coffee maker Luigi Lavazza SpA agreed to buy a stake in GMCR.  This news caused the small cap coffee names to outperform, perhaps on the suggestion that M&A activity may escalate in the category.  SBUX bifurcated to the downside from GMCR, CBOU, and PEET.  As side note, SBUX saw it necessary this morning to reaffirm guidance following the spike in coffee prices.   The company stated, “We remain confident in our ability to manage this dynamic effectively”. 


In other news, Zagat has released its 2010 Zagat Fast-Food Survey.  In terms of stocks, RRGB received the “Best Burger” award in Full Service.  PNRA and CAKE received the “Best Salad” award in Fast Food and Full Service, respectively.  SBUX and IHOP (DINE) received the “Best Coffee” award in Fast Food and Full Service, respectively.  In terms of value, MCD and Olive Garden (DRI) got the plaudits from the survey. 


Commodities should remain front and center in investors’ models going forward.  BHP’s bid for Potash, although it was turned down, supports my conviction that inflation is being factored into these price movements.  Attention is slowly shifting from being firmly focused solely on the top line towards a more equal weighting of sales and margin trends.


TALES OF THE TAPE - stocks817




Howard Penney

Managing Director






As we look at today’s set up for the S&P 500, the range is 34 points or 1.4% (1,064) downside and 1.7% (1,098) upside.

  • ADVANCE/DECLINE LINE: 790 (+1068) Breadth turned positive on a flat day for the S&P
  • VOLUME: NYSE - 788.90 (-9.49%) - 35% below the average for the last 12 months!
  • SECTOR PERFORMANCE: Two sectors positive - XLB and XLK
  • MARKET LEADING/LOOSING STOCKS: Apollo +5.2%, Cliffs natural +3.3% and Devry -8.7% and Washington Post -8.1%


  • VIX - 26.10 0.53% - The VIX remains elevated.
  • SPX PUT/CALL RATIO - 1.55 down from 1.83 (low on 07/15/10 of 0.87)


  • TED SPREAD - 20.21 -0.969 (-4.577%)
  •  3-MONTH T-BILL YIELD .16% up from .15% yesterday
  • YIELD CURVE - 2.0802 to 2.0981


  • CRB: 269.36 -0.47%
  • Oil: 75.96 +0.96%
  • COPPER: 334.80 +1.44%
  • GOLD: 1,225 +0.13%


  • EURO: 1.2886 +0.38%
  • DOLLAR: 82.257 -0.33%


  • ASIA - Markets closed mixed; China closed up and Japan closed down.
  • EUROPE - Major indices are trading close to session highs.
  •  EASTERN EUROPE - Trading higher - Slovakia, Hungary and Romania leading the way.
  • MIDDLE EAST/AFRICA - Trading higher - Egypt and Israel up over 1%.
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













COMPLIANCE: All That Glitters

Matt Taibbi’s latest anti-Goldman polemic was posted on line this last week (Rolling Stone, 11 August) under the poetic title “Goldman: New Reform Law Can Kiss Our Ass.”  In it Taibbi makes the point – long obvious to readers of this Screed – that Goldman executives “don’t expect the new financial regulations to cut into their profits in any meaningful way.”



COMPLIANCE: All That Glitters - chart1



As with so much current anti-Wall Street invective, Taibbi aims his gonzo prose at a paper tiger.  For if the Goldmans of the world have nothing to fear, it is thanks to those who make the laws.
Case in point: the tempest in the backroom beer keg over death benefits for survivors of military personnel who die in action.  This story was broken by Bloomberg (29 July, “Veterans Agency To Probe Insurers On Soldier Benefits”).  (Full disclosure: our CEO, Keith McCullough, is a Bloomberg TV Contributing Editor and regular guest and co-host.)  Suddenly, everyone from the New York State Insurance Department, to the Senate Veterans Affairs Committee, to the White House is calling for “the VA’s immediate investigation into these unacceptable insurance companies’ practices.”
The “unacceptable” practice is, life insurers retaining these death benefits in their own corporate accounts, rather than sending lump-sum checks to the beneficiaries.  The company keeps the interest earned on the balance, and until the balance has been withdrawn by the survivors, pays what the Bloomberg story calls an “uncompetitive interest rate,” pocketing the spread.  The beneficiaries receive a book of drafts which they can use to withdraw all, or any part of the death benefit at any time.  Complaints about this practice have already been thrown out of court (Wall Street Journal, 6 August, “Courts Often Back Insurers’ Death-Benefit Practices”).  Not only is the practice legal, it is embedded in current insurance industry regulations.
Let’s ask a different question.  “Unacceptable” to whom?   Prudential, the company in the Bloomberg story, is the second largest insurer.  You can bet that every state regulator knows about this practice.  As well as every Senator and Member of Congress who has any dealings with the insurance industry.  The task of protecting the public, you see, is tempered by the awareness of which side of the pork-roll is larded.
Now those who make the laws and regulations that have long encouraged this practice are attacking the companies that do it.  And by the way, if this practice looks Structured Notes, it is because the insurance company, rather than segregating the death benefit in a separate account in the name of the beneficiaries, makes an accounting entry, making the death benefit an IOU of the insurance company.  But unlike the “guaranteed” structured notes, the benefit is protected by state insurance authority guarantees.  In fact, states have paid out on such guarantees when the insurers could not come up with the funds.  Guess the regulators were aware of this “unacceptable” practice all along.
Prudential, whose stock trades on the NYSE, has a market cap of over $26 billion.  Its current dividend yield of 1.2% makes it a more attractive income instrument than many money market funds – including, apparently, the rate of interest it pays to survivors.  Let’s face it, insurance companies don’t make money by paying out claims.
According to the website, “in 2007 and 2008, the insurance industry contributed a record $46.7 million to federal parties and candidates…”  The industry spent $164.4 million on lobbying in 2009, and $85.9 million so far this year.  Prudential, the third-largest lobbying client, has spent almost $4.7 million year to date.
“Unacceptable”?  We think “ungrateful” is more like it.  Legislators and regulators have a fine line to tread in going after the insurers.  It is only a question of time before the industry will tire of feeding the hand that bites it.
Moshe Silver
Managing Director / Chief Compliance Officer

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