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THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 15, 2010

As we look at today’s set up for the S&P 500, the range is 21 points or -1.26% (1,107) downside and 0.62% (1,128) upside.  Equity futures are trading lower flat-to-fair value as recent momentum appears to have run out of steam.  Today's macro highlight includes NY Fed's Empire State Manufacturing Survey for September and August Industrial Production.  Production in the U.S. is estimated to have slowed in August, increasing 0.2% after a 1% in July as automakers scaled back following a surge in output last month.

  • Cohen (COHN) plans to acquire privately held investment firm JVB Financial Holdings LLC for $16.6m in cash and stock
  • Morgan Stanley (MS) was sued by China Development Industrial Bank for fraud to recover losses from an investment tied to residential mortgage-backed securities
  • Neurocrine Biosciences Inc. (NBIX) said a Phase 2 trial of a treatment for major depressive disorder showed no ease of symptoms in patients.
  • NextEra Energy (NEE) said it plans to sell $350m equity units at $50-each.
  • Sonic (SONC) said 4Q same-store system sales fell 6.4%
  • Steel Dynamics (STLD) forecast 3Q EPS 5c-10c vs est. 21c

PERFORMANCE

  • One day: Dow (0.17%), S&P (0.07%), Nasdaq +0.18%, Russell 2000 (0.47%)
  • Month-to-date: Dow +5.11%, S&P +6.84%, Nasdaq +8.31%, Russell +7.83%;
  • Quarter-to-date: Dow +7.70%, S&P +8.77%, Nasdaq +8.56%, Russell +6.52%
  • Year-to-date: Dow +0.94%, S&P +0.54%, Nasdaq +0.91%, Russell +7.44%

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -226 (-1812)
  • VOLUME: NYSE - 923.76 (-1.22%)  
  • SECTOR PERFORMANCE: Mixed performance - 4 sectors rose and 5 declined - the RECOVERY trade under-performed yesterday.
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: JC Penney +7.43%, Best Buy +6.00% and Corning +4.76%/Cliffs Natural -6.47%, SLM Corp -4.96% and EK -3.99%
  • VIX: 21.56 +1.65% - First up day in the last 4 - YTD PERFORMANCE: (-0.55%)         
  • SPX PUT/CALL RATIO: 1.58 from 0.92 +72%.26

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 15.31 -0.391 (-2.489%)
  •  3-MONTH T-BILL YIELD .15% unchanged
  • YIELD CURVE: 2.18 from 2.21

COMMODITY/GROWTH EXPECTATION:

  • CRB: 280.13 +0.93%
  • Oil: 76.80 -0.51% 
  • COPPER: 346.85 -0.30%
  • GOLD: 1,269 +1.83% - Will 2010 make it 10 years of annual gains?

CURRENCIES:

  • EURO: 1.3010 +1.16% - a two day 2.60% surge in the Euro
  • DOLLAR: 81.080 -1.02% - a two day 1.97% decline in the Buck

OVERSEAS MARKETS:

Europe

  • Markets: FTSE 100: -0.24%; DAX -0.36%; CAC 40 -0.45%
  • Markets are lower ahead of today's macro releases.
  • Strength in Auto, Retail and Insurance names offset by slight weakness across Oil & Gas, Travel and Technology sectors.
  • Astrazeneca fell after the FDA extended its review of the New Drug Application for its anti blood clotting drug ticagrelor
  • UK Jul ILO unemployment rate 7.8% vs cons 7.8%, Jobless claims +2.3K vs cons (3.0K)
  • Eurozone Aug CPI 1.6% y/y vs cons +1.6%

Asia

  • Markets: Nikkei +2.34%; Shanghai Composite (1.34%)
  • Most Asian markets ended mixed.
  • Japan reversed early losses when the Ministry of Finance confirmed that it intervened in the foreign exchange market after the dollar fell below ¥83.
  • China closed weaker following press reports suggesting that China may introduce new measures to cool the property market. Mining stocks across the region were boosted by a record gold price.
  • China's banking regulator may require the nation's "systemically important" banks to boost their capital adequacy ratios to as high as 15 percent by 2012.
Howard Penney
Managing Director

Intervention

“But their intervention makes our acts to serve ever less merely the immediate claims of our instincts.”

-Albert Einstein

 

I started intervening in the Hedgeye Portfolio yesterday, making my first sales (long or short) since September 3rd.

 

We’re still long Gold (GLD) and we didn’t sell any of that 6% position in the Hedgeye Asset Allocation Model as we saw yesterday’s melt-up in the World’s Replacement Currency a direct function of the fear trade – the fear of US Congress being back in session. We remain short the US Dollar (UUP).

 

Today’s market headlines are going to be dominated by the bad kind of intervention – government intervention. Particularly when it comes to the Fiat Republics of Japan and America, you have professional politicians who fundamentally believe that this is the only way out. It’s sad to watch losing teams repeat their mistakes.

 

Japan is intervening in its currency market this morning (bearish for the Yen - we are short FXY) and America is going to host another Groupthink Conference in Washington, DC where Timmy Geithner leads the unaware in pointing fingers at the Chinese for not intervening.

 

On Japan’s intervention, I found an interesting quote from Geithner who believes “deeply” in the Monetary and Fiscal Policy Manipulation model of the United States of America:

 

“They’re working through some difficult problems… My view is they should be focusing like we are on how to make sure they’re reinforcing recovery in Japan and doing things that are going to help.”

 

God help us all.

 

I’ve ended a few of my morning missives with this thought over the course of the last few days and it’s worth repeating in order to explain why I started making sales yesterday. The biggest risk to NOT selling US Equities here is US Congress and the “economists” that lead their decision making (Geithner says he’s “not an economist” by the way, so we’ll give him a hall pass as he’s only responsible for advising the President on economic matters).

 

Back to taking matters into my own hands via the Hedgeye intervention strategy…

 

Here are the moves we made intraday in the Hedgeye Portfolio yesterday. As opposed to Washington’s broken lip-service model, we are big believers in the modern day transparency/accountability model. We think the biggest opportunity in finance is showing the world what it is exactly you do when you make risk management decisions and why. Opacity is dying on the political vines of perceived wisdom.

 

1.  09/14/2010 10:22 AM

SHORTING FXY $119.08

We're looking forward to seeing what happens to the Yen when the Chinese start blowing out of their short term JGBs. Japanese Yen intervention imminent - thats what Fiat Republics like this do.

 

2.  09/14/2010 10:42 AM

SELLING CIT $38.74

I haven't made a sale (long or short) since September 3rd. It's time to book a gain and I'll let a Financial out the door first. Steiner remains bullish on CIT's intermediate term TREND.

 

3.  09/14/2010 12:49 PM

SHORTING ZMH $49.84

See Tom Tobin's bearish note on Zimmer today for details. The stock is up today but is broken from an intermediate term TREND perspective. Shorting green. KM

 

4.  09/14/2010 03:20 PM

SELLING NIB $38.79

Keeping a mean reversion TRADE a trade. We don't have to buy-and-hold cocoa. KM

 

These are just the headlines for research reports we put out on these positions. They are punchy because we like punching some of the hedgies out there whose business model is bullying the sell-side. Everyone knows the sell-side’s horse and buggy whip model is stale. This market needs new blood – and we’re happy to be hated by those we can beat.

 

On the same day that we bought Chinese equities (CAF) we also published a research note titled “Japan - The World's Easiest LayuP” that outlines why we were shorting the Japanese Yen as it approached 83 versus the US Dollar. Rather than listen to a revisionist sell-side bull tell you today is a “buying opportunity” in the Yen, please email  if you’d like the view of the interventionist firm that called this before the “risk on” day.

 

Our immediate term TRADE lines of support and resistance for the SP500 are now 1107 and 1128, respectively. That’s the first time I’ve issued a lower-high of immediate term TRADE resistance for the SP500 since September 3rd. That’s a marginally bearish signal and the SP500 not being able to eclipse 1144 on a closing basis to the upside is an explicitly bearish one.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Intervention - FXY


VIDEO: China's Re-accelerating Growth

6:14am ET, September 14,2010

 

Hedgeye CEO and Bloomberg Television contributing editor Keith McCullough discusses China's re-accelerating growth and his decision to go long Chinese equities after a bearish outlook in Q1.

 

 

http://www.youtube.com/watch?v=YOgJ3vQlph4

 

 

 

The chart below was extracted from a in-depth note dubbed "Chinese Growth: Sequential Slowdown Moderating?".  The note and additional charts in their entirety are available to Risk Manager subscribers in real-time.

 

 

VIDEO: China's Re-accelerating Growth - China New chart


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.

INSIDE THE HEDGEYE NOTEBOOK: Sept. 14, 2010

INSIDE THE HEDGEYE NOTEBOOK: Sept. 14, 2010 - Notebook Image Hedgeye

 

 

 

Feedback on the last grind was good. Here it is again – global macro/risk management PRICE and DATA points in my notebook from the last 48 hours:
 
Bullish:
1.      Chinese economic data for august = re-acceleration in growth (IP and Retail Sales) + expansion of money supply to +19.2% (AUG) vs +17.6% (JUL)

2.      Chinese equities have been up for 3 straight days, confirming bullish TRADE and TREND lines of support in the Shanghai Composite

3.      Indian Equities powered to higher-highs again last night = bullish TRADE and TREND confirming the same in Hong Kong, Indonesia and Singapore

4.      European equities continue to flash more bullish than US Equities as does the Euro vs the US Dollar

5.      Petrodollar stock markets (Russia, Norway, UAE, etc.) are now trading as bullish from a TREND perspective as the price of oil is

6.      Oil is holding its TREND line breakout from last week with TREND line support = $75.77/barrel

7.      Gold continues to flash higher-lows and higher highs; there isn’t a bullish line of price momentum that’s been challenged as suport

8.      US Budget Deficit spending line dropped 100bps sequentially (month over month) to +9.4% y/y growth (AUG) vs +10.4% in July.

9.      Brazil buying US Dollars to the tune of +$18.6B (net) YTD vs $7.3B in all of last year

10.  China introducing a CDS market by year end with allegedly tight control parameters

11.  Turkey’s PM Erdogan wins an important vote (58% to 42%) giving him increasing power over secular courts and army

12.  Basel3 timing pushes out the blowup case for banks out on the duration curve (9 years is to comply is a long time)

13.  Boehner falls in line with Obama’s middle class tax cut idea; give and takes = more, not less, tax cutting

14.  Frank Quattrone is back (selling Go-Daddy) and reminding us that bankers are back from holidays doing M&A

15.  SP500 continues to flash immediate term TRADE bullish (support = 1107) with upside to its intermediate term TREND range (1129-1144)

 


Bearish
1.      Chinese inflation (CPI) pushed higher sequentially (month over month) to +3.5% (AUG) vs +3.3% (JUL) and September looks higher to me too

2.      Japanese Equities (Nikkei225) continue to flash very negative divergences vs both rest of Asia and the Fiat Republic nations

3.      UK CPI (AUG) sticky at +3.1% y/y vs the same in July

4.      German ZEW (confidence) drops to a 19 month low (-4 vs +14 last month)

5.      Greek equities and bond yields continue to flash the nasty; a breakdown for the Athex Index below 1575 will be very bearish for worlds worst mkt YTD

6.      US Treasury yields are dancing on coals on the short end of the curve with immediate term TRADE line of support for 2s at 0.52%

7.      Back to a compression day today in Treasury Yield Spread (bearish leading indicator) with yield spread contracting 8bps day over day

8.      US Dollar continues to act like the dog of the Fiat Republic – down over 1% yesterday and down 13 of the last 16 weeks

 
In summary, this chaos theorist still sees more bullish than bearish PRICE and DATA in the immediate term. That’s why the Hedgeye has more longs than shorts (14 longs, 7 shorts) as of this morning’s open. That can, and will, change as PRICE and DATA does.
 
KM
 

Keith R. McCullough
Chief Executive Officer
HEDGEYE RISK MANAGEMENT


EARLY LOOK: Match Point

 

 

 

“I don’t have good luck in the match points.”
-Rafael Nadal

 

Shakespeare considered youth ambition’s ladder – I love that thought and I love watching winners play with confidence. If the younger players on my team don’t end up being better than me, it is I who has failed. Our congratulations to Spain’s Rafael Nadal for becoming the youngest player in the modern history of professional tennis to complete the Grand Slam.
 
The US stock market is all of a sudden starting to hit a few Grand Slams of its own. Yesterday the SP500 closed up for the 4th consecutive day and its 8th out of the last 9. At 1121, the SP500 has carried itself on the back of the Pain Trade (volume +25% day-over-day concentrated in 112 stocks) all the way back to the plus column for 2010 year-to-date.
 
To be clear, a YTD SP500 return of +0.5% isn’t even in the area code of challenging the 2010 global equity market leader-board (Sri Lanka leads with a +78% YTD gain, followed by Bangladesh and Latvia at +50% and +45% YTD, respectively), but it’s making the turn in the loser’s bracket that we call the Fiat Republic.

The structural impediment to long-term US economic growth isn’t very difficult to understand. It starts and ends with debt-financed-deficit spending that professional politicians call “stimulus.” We’ve beaten this Match Point into your inbox hard throughout the last few years. There is no such thing as luck when we unearth a Perceived Wisdom coming out of Washington, DC and take the other side. It’s called math.
 
The math in markets doesn’t lie; politicians do. As repetitive as that go-to baseline shot from the Hedgeye backhand is going to sound is as verbose as Paul Krugman is starting to sound trying to return it in bounds. There really is no refutation to the economic experience of the Fiat Republic of Japan – and the Big Government Spending fans of a former colony of “smart people” know it.
 
As a reminder, we have attached the most important global macro chart in Hedgeye’s current risk management slide deck this morning. This is the backhand that we want to see Krugman’s Kryptonite of piling-debt-upon-debt-upon-debt return. We call this chart “Crossing the Rubicon of Sovereign Debt” and overlay the growth of Japanese General Government Debt as a percentage of GDP with the Average Annual GDP growth of Japan by decade.
 
Here are the mathematical conclusions about growth in a losing country that saturates itself with debt:
 
1.      Japan Average y/y GDP growth: 1981-1989 = 4.6%

2.      Japan Average y/y GDP growth: 1990-1999 = 1.5%

3.      Japan Average y/y GDP growth: 2000-2009 = 0.8%

 
These last two decades have been pretty pathetic when you consider growth and innovation in this world like say, China and the Internet. In the moment however, how could Japanese bureaucrats being advised by Krugman in 1997 have known not to “PRINT LOTS OF MONEY”?
 
Our best answer to why is pretty straightforward – ambition’s ladder provided emerging global economies to take share from the world’s oldest and aging economy because it made itself most vulnerable to creative destruction. Capital chases yield – not zero growth, zero coupon, complacency.
 
Back to the Pain Trade that I mentioned earlier on but need to expand upon. When you read a missive like this, it’s pretty easy to get all beared up about America and its failed economic policy of printing moneys. That’s exactly the problem though. When something becomes this obvious, and it is, market participants tend to lean too far and too fast to the bearish side of the TRADE.
 
Since bear market bounces are usually more vicious than bull market ones, you need modern day risk management tools to defend against the machine like Nadals that are constantly going to grind you during every market minute of every market day. This isn’t to say managing money in modern days of an American Roman Republic that’s under siege is easy. This is just to say that this is the game that’s in front of you – so play it.
 
The Pain Trade is what’s carrying the US stock market higher, not some rah-rah speech from the Oracle of Government’s Got My Book. The America he built Berkshire out of didn’t have this debt. He has his own conflicts of interest. Don’t get upset about them – understand them, and take advantage of every market point you can get.
 
Understand the US stock market’s intermediate term bearish TREND has every opportunity to see smashing winners of bullish immediate term TRADEs. The TRADE (3 weeks or less) and the TREND (3 months or more) are two different Hedgeye durations and the real match points being made out there in the market every day have nothing to do with luck. They have everything to do with understanding Duration Mismatch.
 
Our intermediate term TREND line of resistance for the SP500 remains 1144, but a very convincing line of bullish immediate term TRADE support has asserted itself at 1085. Watch both of these lines very closely and play like a winner out there today.
 
KM
 
Keith R. McCullough
Chief Executive Officer
HEDGEYE RISK MANAGEMENT

 

 

 

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It was originally published at 8am this morning, September 14, 2010.  INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.


CBRL – FY10 WILL BE HARD TO MATCH

Fiscal 2010 was a really strong year for Cracker Barrel.  The company achieved positive restaurant same-store sales growth with two-year average trends improving each quarter.  Retail comparable sales improved to -0.5% from -5.9% in the prior year.  Operating margin grew about 80 bps YOY, helping to drive 25% EPS growth.  The year ended strongly with CBRL positing positive restaurant and retail comparable sales growth during the fourth quarter and a nearly 50 bp improvement in operating margin.  And, restaurant traffic turned positive during the fourth quarter for the first time since fiscal 1Q07.

 

To that end, Cracker Barrel started fiscal 2011 from a position of strength.  I think FY11 will be another good year, but it will not be a repeat of FY10.  Instead, I would expect the company’s rate of growth to slow in FY11, largely as a result of commodity costs, which are expected to work against the company during the year.  Management guided to a 1.5% to 2.5% increase in its FY11 commodity costs and currently has 61% of its costs locked for the year.  Commodity cost favorability should continue into the first quarter and then reverse during fiscal 2Q11 with management saying that the YOY commodity cost increase should peak during the second quarter and remain higher YOY for the balance of the year.  Specifically, the company highlighted its expectation for higher dairy and pork costs during the year.

 

Helping to offset these higher commodity costs are the expected lower labor costs through most of 1H11 until the company laps its lower healthcare benefit costs from a program it implemented in January 2010.  Management also expects to benefit from initiatives that should lead to improving productivity and labor competencies, lower incentive payments at both the store level and in the G&A line, improvements on the utilities expense line and from lapping some one-time expense items that hit the maintenance line in FY10 that are not expected to repeat in FY11.  Increased leverage from improving comparable sales should also benefit margins in FY11, but just how unfavorably commodity costs swing during the year is the biggest unknown for now.

 

Most of management’s fiscal 2011 guidance seems achievable; though the +2% to +4% retail comparable sales growth implies a sharp improvement in two-year average trends and could prove to be a stretch.  Outside of that, the company’s outlook appears within reach.  I would expect the company’s restaurant same-store sales momentum to continue.  I am currently modeling 10% EPS growth and a 30 bp improvement in FY11 operating margin, all within management’s guided ranges.  Again, this implies a slowdown from the 25% EPS growth and 80 bps of margin improvement in FY10.  Fiscal 1Q11 should continue to be strong as the company benefits from another quarter of favorable commodity costs, but operating margin should decline during the second quarter.

 

CBRL – FY10 WILL BE HARD TO MATCH - cbrl sigma png

 

Howard Penney

Managing Director


Early Look

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