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TODAY’S S&P 500 SET-UP - September 7, 2010

As we look at today’s set up for the S&P 500, the range is 20 points or 1.59% (1,087) downside and 0.23% (1,107) upside.  Equity futures are trading lower tracking a mixed close in Asia and weak trade in Europe as concerns over the state of the European banking sector keeps investors cautious.

  • Air Products & Chemicals boosted hostile takeover bid for Airgas by 3% to $65.50 in cash and said it will walk away unless ARG shareholders support its proposals at meeting next week
  • Watch CLF, BTU, NEM, CDE after Australia’s Julia Gillard won support to form govt. (Rio Tinto, BHP Billiton both down at least 0.9% in London)


  • One day: Dow +1.24%, S&P +1.32%, Nasdaq +1.53%, Russell +1.76%
  • Month-to-date: Dow +4.33%, S&P +5.26%, Nasdaq +5.66%, Russell +6.86%
  • Quarter-to-date: Dow +6.89%, S&P +7.16%, Nasdaq +5.9%, Russell +5.56%
  • Year-to-date: Dow +0.19%, S&P (0.95%), Nasdaq (1.56%), Russell +2.87%


  • ADVANCE/DECLINE LINE: 1699 (+471)
  • VOLUME: NYSE - 946.541 (-1.51%) - volume drying up ahead of the long weekend
  • SECTOR PERFORMANCE: All sectors up last Friday
  • MARKET LEADING/LAGGING STOCKS LAST WEEK: Monster WW +7.03%, Janus +6.64% and Genworth Fin +5.99%/Campbell -2.97%, Family Dollar -2.98% and Newmont Mining -1.07%
  • VIX: 21.31 -8.11% - down 12.84% in past week YTD PERFORMANCE: (-1.71%)      
  • SPX PUT/CALL RATIO: 2.08 up from 1.31  


  • TED SPREAD: 16.74 trading flat on the day
  •  3-MONTH T-BILL YIELD: .14% trading flat
  • YIELD CURVE: 2.20 from 2.13


  • CRB: 272.77 +0.60%  Up 2% last week
  • Oil: 74.60 -0.56%
  • COPPER: 351.80 +0.51% - Dr. Copper ragging ahead again
  • GOLD: 1,249 flat


  • EURO: 1.2876 -0.16% - Trading down big this AM
  • DOLLAR: 82.042 +0.03%



  • Nikkei (0.81%); Hang Seng +0.22%; Shanghai Composite +0.08%
  • Asian markets ended mixed ahead of key August data from China expected later this week.
  • Bank of Japan keeps overnight call rate target unchanged at 0.1%
  • Australia leaves cash rate unchanged at 4.5%



  • FTSE 100: (0.70%); DAX (0.54%); CAC 40 (0.95%)
  • Major European indices are trading lower on concerns about the state of the region’s banks following a WSJ report that European stress tests understand holdings off risky government debt.
  • A report from the German banking association that the 10 biggest banks in the country may need €105B worth of additional capital.
  • Healthcare and Food & Beverage are the only two sectors higher. 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













Accept Uncertainty

“For my part I know nothing with any certainty, but the sight of the stars makes me dream.”

-Vincent van Gogh


Back to the grind this morning. I’ll try to kick things into gear by keeping this tight. I’ll start where I always do, utilizing real-time market prices and the governing principles of chaos theory in our macro models. Managing risk in this increasingly interconnected global marketplace always starts with accepting uncertainty.


Chief of the Reserve Bank of Australia, Glenn Stevens, had this to say overnight as he kept Aussi rates unchanged at 4.5%:


“With growth in the near term likely to be close to trend, inflation close to target and with the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate for the time being.”


Crisp, concise, and the to the point. To be sure, saying “somewhat uncertain” was pointed directly at Ben Bernanke who calls today’s global economy “unusually uncertain.” Altogether, global risk managers and central bankers alike should simply accept uncertainty in what it is that they do.


While I’m not certain about what it is exactly that Bernanke does in managing multi-factor and multi-duration global macro risk every day, I am certain about what it is that Congress does whenever they have an economic problem to solve for – spend.


Taking President Bush’s lead in increasing government spending, President Obama introduced another $50 BILLION in stimulus spending over the long weekend. This isn’t a political point – it’s a mathematical one. As you increase the numerator (spending) and the denominator continues to shrink (GDP), the ratio of US deficit/GDP goes up.


While there was some sort of sadistic fanfare associated with a 9.6% unemployment rate in this country being “better than expected” on Friday, we are going to look at the current intermediate term TRENDS in both US employment and consumption for what they are and we’re going to cut our US GDP growth estimate from 1.7% for Q3 to 1.3%.


What are the main macro signals in the US marketplace that continue to flash slowing growth? 

  • US Currency – the US Dollar was down last week for the 12th week of the last 14, losing another -1.1% of its uncertain value as the world’s reserve currency. Perhaps the President’s plans for additional stimulus leaked into week’s end. You tell me. 
  • US Bond Yields – after rising from its YTD lows last week, the interest rate on 10-year US Treasuries are falling again this morning back down to 2.65%. Notwithstanding that our intermediate term TREND line of resistance remains much higher (up at 3.01%), the reality here is that the bond market doesn’t lie about US GDP growth; politicians do. 
  • US Equities – after a big rally from oversold lows (we covered most of our short positions between August 24th and 25th walking through the math associated with the 1040 level being an important level to book gains on the short side), the SP500 remains bearish from an intermediate term TREND perspective. Our Bear Market Macro line in the sand remains 1144, and we have immediate term TRADE resistance at 1107. 

This isn’t to say that there aren’t other countries, currencies, and commodities in this world that won’t do well in this uncertain macro marketplace (after being bearish on them for the first half of 2010, we are long Chinese equities via the CAF). This is simply an opportunity to recognize that there is nothing “unusual” about how currency, bond, and equity markets in the US are correlating.


What could change our view that US GDP growth is slowing? 

  1. Weekly Jobless claims dropping, sustainably, below 390,000.
  2. Weekly MBA mortgage applications showing some semblance of a demand signal for US Housing (as opposed to the lowest levels of demand since 1997).
  3. Weekly price performance of US currency, US Treasury bonds, and US stocks changing their intermediate term TRENDS for at least 3 consecutive weeks. 

What could change our call for American Austerity (Q3 Hedgeye Macro Theme)? 

  1. Slowing US government spending
  2. Accelerating US GDP growth 

Unfortunately, despite the “sight of the stars” of the northern lights last week, I am certain that I see neither government spending nor growth in America changing their respective bearish paths this morning.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Accept Uncertainty - 1


 We’re only a week in but the numbers continue to look soft, at least relative to the recent scorchers. 



Our sources indicate that through the first five days of September, Macau table revenues were HK$2.27 billion.  Taking into account that the first 5 days include a full weekend, it projects out to around HK$14 billion including slots, or a little over 30% growth.


Of course, it really isn’t that useful to make projections after only 5 days but we did it anyways.  We do believe that September will be a slower grower.  The initial data seems to confirm this and our peeps on the ground are indicating that the gaming floors are noticeably less busy than they were in mid-August. 


The market shares are all over the place as can be seen in the following table.  Wynn is holding near its reduced August level of 14%.  LVS must’ve gotten nailed on the VIP tables as its share fell all the way to 13%.  Most interesting is MPEL, up over 20%.  Still way too early, but if MPEL can generate a third straight month of market share gains, we doubt the stock would retain a four handle for very long.  Poor MGM.  Not much else to say there.



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The Week Ahead

The Economic Data calendar for the week of the 6th of September through the 10th of September is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - c1

The Week Ahead - c2

Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts

Conclusion: The combination of today’s employment report and the ISM Non-Manufacturing Index spell incremental trouble for the U.S. economy. We have conviction that growth will continue to slow based largely on a jobless and deleveraging consumer, downward pressure on housing prices, and a burgeoning federal debt burden.


Position: Short the S&P 500 (SPY).


This morning’s employment report was well received by the market (up around 1% today). This is largely due to the fact that private payrolls “beat” consensus estimates, climbing 67k vs. 40k (Bloomberg Consensus).


Akin to a bad company beating low earnings expectations, this morning’s employment report does not pass the test of analytical rigor. Diving deeper into the “model” we see that private payrolls growth (while up 67k MoM) slowed sequentially. In MACRO, everything that matters happens on the margin, and, on the margin, this is sequential deterioration.


 Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts - 1


Analyzing the industry-specific reports, we see that employment at service providers fell 54k MoM. While a sequential improvement, it is important to note that today’s ISM Non-Manufacturing Employment Index came in at 48.2 for the month of August, offering no near-term signs of reprieve in this sector. Employment in the retail industry fell by 4,900 bodies and employment in the construction sector grew 19k MoM. We hope (understanding full well that hope isn’t and investment process) that this addition of labor isn’t busy adding more supply to a housing market that is very much in disequilibrium from a supply/demand standpoint. Research from Josh Steiner, our Managing Director of Financials, suggests we are due for a ~20% correction in housing prices over the next 12 months based on current inventory levels – absent major government intervention.


 Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts - 2


The deltas in federal government employment continue to be distorted by the unwinding of Census hiring, so we’ll just leave the (-121k) MoM decline alone. We will, however, point out that State & local governments continue to shed jobs (down 10k MoM) and the austerity measures currently being undertaken across the country will weigh on GDP growth going forward. YTD, State & local governments have shed 135,000 jobs and without meaningful intervention by the federal government (or a pickup in tax revenues, which we feel is unlikely based on where we think GDP is headed), this trend will continue because of their budget balancing mandate.


 Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts - 3


Today’s unemployment report is similar to the trend we saw in the 2Q earnings season whereby companies beat on earnings but missing on the top line. The positive market reaction to the private payrolls “beat” is overshadowing the sequential uptick in the unemployment rate (9.6% vs. 9.5% in July), which is a miss in our eyes – regardless of consensus expectations. The end result is simply that less people that want jobs have them. Underemployment, which measures part-time workers who’d prefer full-time employment and people who want to work but have given up looking, also worsened sequentially (16.7% vs. 16.5% in July). Needless to say, the employment situation in America is not conducive for a pickup in growth, given that ~70% of our economy is consumer spending.


 Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts - 4


The last chart we want to highlight comes from another survey; the ISM Non-Manufacturing Index for August “missed” estimates, falling off the table sequentially (51.5 vs. 54.3 in July vs. consensus expectations of 53.2). The survey, which covers about 90% of the economy, is now 150bps away from signaling a contraction. The three components of the index we watch all declined sequentially: New Orders dropped to 52.4 from 56.7; Backlog of Orders dropped to 50.5 from 52; and Employment dropped into contraction at 48.2 vs. 50.9 in July.


 Not Looking Good: U.S. Unemployment & ISM Non-Manufacturing by the Charts - 5


All told, the combination of today’s employment report and the ISM Non-Manufacturing Index spell incremental trouble for the U.S. economy. We have conviction that growth will continue to slow based largely on a jobless and deleveraging consumer, downward pressure on housing prices, and a burgeoning federal debt burden. On July 1st as part of our American Austerity theme, we published our initial estimate for 3Q GDP, which was 1.7%. That will be revised lower in the coming weeks.


We remain short the S&P 500 via the etf SPY with an immediate term TRADE downside target of 1061.


Enjoy the long weekend with your family and friends.


Darius Dale


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