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Bear/Bull Battle: SP500 Levels, Refreshed

In the last 6 trading days you could as readily have called the intermediate term TREND line of 1144 resistance as you could support – depends on what hour of the day that you need to call it names.

 

Government sponsored volatility like this is not going to end well, but that doesn’t mean the SP500 can’t continue to scale to lower-highs if 1144 holds. We have an immediate term TRADE line of resistance up at 1154 as of 3PM and we currently have no position in SPY.

 

The more I stare at this, the more I want to do nothing. I’m still waiting and watching as we approach month and quarter end.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear/Bull Battle: SP500 Levels, Refreshed - 1


Why We are Short Italy (EWI)

Hedgeye Virtual Portfolio: Short Italy (EWI); Long Germany (EWG)

 

Conclusion:  We are seeing continued negative fundamentals in Italy’s economy and political risk heightening under Berlusconi’s fractured leadership.  We shorted Italy via the etf EWI in the Hedgeye Virtual Portfolio on Sept. 24.

 

One of the first areas we focus on when sizing up an economy’s macroeconomic “health” is its debt and deficit levels (as a % of GDP).  Across our research (in particular on the U.S., Greece, and Japan) we’ve noted the seminal work of economists Reinhart and Rogoff who show historically (across 800+ years) that countries reach a crisis zone of fiscal imbalance when their debt ratio is north of 90% and deficit ratio is greater than 10%. 

 

With a debt ratio at 115.2% as of fiscal year 2009, Italy’s debt is of particular concern to us, while its deficit as a percentage of GDP is less worrisome at -5.3%, yet nevertheless above the -3% target rate set by the EU (see chart below).

 

Why We are Short Italy (EWI) - r1

 

This year we’ve been bullish from a top-down perspective on countries that issue austerity measures to clean up their fiscal houses. That said, fiscal trimming will not be a panacea across Europe to cure its ails. We see clear divergence among countries; we are bullish on Germany and continue to warn of further deterioration in the capital markets of countries like Portugal, Ireland, Italy, Greece, and Spain.

 

With regard to Italy we question the country’s ability to materially cut its bloated balance sheet on the backdrop of a much divided political landscape.  Remember that back in July PM Silvio Berlusconi expelled his speaker of the Parliament, Gianfranco Fini, and other dissents from his People of the Liberty party, which left his party with a majority coalition.  What lies now in the balance is the potential decision by Berlusconi to dissolve his government and set up a new administration or call for early elections next spring, three years ahead of schedule. In any case, we’d expect Berlusconi to choose the most politically expedient route for populous support going forward, which may not necessary equate to fiscal prudence.

 

Despite the issuance of €25 Billion in austerity earlier in the year, Berlusconi is up against a lofty €251 Billion of maturing debt next year (across all coupon types), according to Bloomberg data. As a point of reference, Germany, a country with an economy 1.6 times the size of Italy’s, has €210 due in 2011.

 

Already we’re seeing elevated signs of risk in Italian markets.  In the charts below we show that Italy’s CDS spread, while well short of Greece’s 820 bps spread, has blown out to 206 bps.  Also Italy’s 10YR spread over similarly maturing German bunds is kicking to the upside, as its equity market (Titan30) is broken across its TRADE (3 weeks or less) line of resistance and hovering near its TREND (3 months or more) resistance line—all bearish points.  [YTD the Titan30 is down -11%.]

 

Today and tomorrow the Italian government will attempt to sell €9.5 Billion ($12.8 Billion) of bonds. As we’ve affectionately said numerous times: countries cannot continue to kick the can of debt down the road in perpetuity. Italy should be no exception.

 

Matthew Hedrick

Analyst

 

Why We are Short Italy (EWI) - r2

 

Why We are Short Italy (EWI) - r3


WEN – INDUSTRY OUTLOOK CONFIRMS LACK OF CONFIDENCE

Lower consumer confidence numbers create more bad news for restaurant companies.

 

WEN’s CFO Steve Hare started his presentation at an investor conference earlier this afternoon by saying that in light of the disappointing consumer confidence numbers released this morning that today marked the 24th consecutive time he has started off a presentation with bad news.  He went on to say that the “best” thing he can about the restaurant industry today is that things seem fairly stable.  That being said, he is not pleased with the consumer confidence numbers, which he recognizes as one of the key statistics to measure restaurant trends going forward, “so that’s a step back.”

 

Today's headline Conference Board consumer confidence index number declined to 48.5 from 53.2 last month.  The median estimate from Bloomberg was for a decline to 52.1.  This now puts the confidence index down 14% year-to-date.  The real story lies in the present situations Index which is only up 14% from the low set back in December 2009.  Confidence is critical for the U.S. economy and it is clear that the government stimulus has been lackluster, at best, in boosting the outlook of consumers in America.

 

In fact, there is considerable evidence to suggest that the spending could be worsening people’s confidence.  A pool released by Public Notice today suggests that 71% of people say government spending is too high and, more importantly, 68% say government spending is a factor in their own financial situation.  Consumption accounts for roughly 70% of GDP; restoring some semblance of confidence will be necessary to encourage real economic growth.

 

Mr. Hare also outlined the continued elevated level of unemployment, particularly among its key 18-24 year old demographic, and the rising cost of some key commodities, specifically beef and bacon, as risks to both WEN’s and the QSR industry’s top and bottom lines.

 

WEN – INDUSTRY OUTLOOK CONFIRMS LACK OF CONFIDENCE - conference board present situations

 

Howard Penney

Managing Director

 


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Contemplating Turnout In The Midterms

We are on record already saying that we believe that Republicans will do much better than expected in the midterms.  The implication of much better than expected is that the Republicans could take the Senate back and will take the House by a much larger than expected margin.  In fact, we are more bullish on the chances for the Republicans than our friend and former White House Chief of Staff, Karl Rove.  Our bullishness isn’t partisan mind you, but merely based on the math.

 

As it stands today, our view is creeping more and more into consensus, and is certainly getting priced into the stock market.  The current Real Clear Politics poll averages for the Senate have the Democrats at 48 seats, the Republicans at 46 seats, and 6 seats currently “too close to call”.  In the House, the Republicans are currently at 208 seats, the Democrats are at 191 seats, and 37 seats are currently “too close to call”. 

 

If you didn’t know the Senate is in play, now you know. 

 

Currently, the “too close to call” races in the Senate are in CO, CT, IL, NV, WA, and WV.  Our view is that IL and WA will likely go Democratic, while NV, WV, and CO have a real shot at going Republican.  If this occurred, we would be at 50 – 49 for the Democrats, with CT to be decided.  Given the fact that Republican nominee Linda McMahon is willing to spend up to $50MM in advertising, this race is far from a foregone conclusion and in our estimation it is the key race to watch in the coming weeks to gauge whether the Republicans can really take the Senate.

 

The real wild card in the midterms will be voter turnout.  Our stance that Republicans could do much better than expected is based on the fact that the numbers are telling us that Republican turn out could be much, much higher than the Democrats. 

 

The supporting evidence is as follows: 

  • Reuters Ispos Poll – September 16th to 19th – 72% of Republicans said they are very likely to vote, 55% of Democrats said they are very likely to vote
  • Gallup Poll – September 20th to 26th – 48% of Republicans said they are very enthusiastic about voting, 28% of Democrats said they are very enthusiastic about voting
  • Fox News Poll – September 14th to 16th – 42% of Republicans said they are very interested in the elections, 22% of Democrats said they are very interested in the elections
  • McClatchy-Marist Poll – September 22nd – 46% of Republicans said they were very enthusiastic about voting, 30% of Democrats said they were very enthusiastic 

The differences in these numbers are outright staggering and suggest a Republican base that is ready and willing to vote, while a Democrat base that is more than likely to stay home. 

 

In midterm elections, voter turnout is typically less than 40%, so these voter enthusiasm numbers will have a significant impact.  Particularly given the context that the registered and likely voters is currently split in the country with 36.5% identifying as Democrats, 35.5% identifying as Republicans, and 24.8% indentifying as Independents (according to pollster.com), which we highlight below.  With the Republicans currently up +4% in the generic Congressional ballot, these turnout numbers may potentially add insult to injury for the Democrats.

 

Daryl G. Jones

Managing Director

 

Contemplating Turnout In The Midterms - 1


CONSUMER CONFIDENCE - WHERE IS THE PULSE OF THE CONSUMER AND THE ECONOMY?

Today's headline Conference Board consumer confidence index number declined to 48.5 from 53.2 last month.  The median estimate from Bloomberg was for a decline to 52.1.  This now puts the confidence index down 14% year-to-date.  The real story lies in the present situations Index which is only up 14% from the low set back in December 2009.  Confidence is critical for the U.S. economy and it is clear that the government stimulus has been lackluster, at best, in boosting the outlook of consumers in America.

 

In fact, there is considerable evidence to suggest that the spending could be worsening people’s confidence.  A pool released by Public Notice today suggests that 71% of people say government spending is too high and, more importantly, 68% say government spending is a factor in their own financial situation.  Consumption accounts for roughly 70% of GDP; restoring some semblance of confidence will be necessary to encourage real economic growth.

 

The Richmond Fed manufacturing survey fell to -2 from expectations of +5.  In total, 7 out of 8 Richmond Fed indicators declined, with just vendor lead-time remaining flat at 0.  The new orders index fell to 0 this month from 10 in September and shipments index fell to -4 from 11. The Richmond Fed’s district accounts for about 9.1% of the nation’s gross domestic product.

 

This morning, Hedgeye Financials sector head Josh Steiner’s read on the Case/Shiller numbers was not good.  His conclusion: “Home prices are just starting to roll, but downside will accelerate in coming months. We expect next month's number to be a wake-up call and the month after that to be a significant negative catalyst for the market generally and Financials specifically.”

 

In response to these data points, the VIX is up 1%, Gold is spiking up 8% and the dollar is down 0.4% (down 5% for the month).  The S&P is basically unchanged. 

 

The consumer is far from a picture of health, home prices are headed lower, the economy is decelerating and the S&P 500 is up 3.7% year-to-date.  The outlooks certainly seems decidedly bearish, but apparently two “big” boys think otherwise.

  • David Tepper said on CNBC yesterday that stocks are in a win-win situation.
  • From Zerohedge - “John Paulson Lecture: Bonds Are Wrong, Stocks Are Right"

The first day of the 4th quarter is setting up to be an ominous day, with the ISM manufacturing index to be reported.  The August reading of 56.3 posted a big upside surprise versus 52.8 expectations and setting off a 9% rally in the S&P 500.  Since then Factory orders, ISM non-manufacturing, Empire Manufacturing, Philadelphia Fed, Chicago Fed and the Dallas Fed have all reported disappointing numbers relative to expectations.  All of the regional FED readings, except the Empire State manufacturing reading, are showing numbers that imply economic contraction, not expansion.


A reading below 50 on the ISM is in play for the first day of October.

 

Howard Penney

Managing Director

 

CONSUMER CONFIDENCE - WHERE IS THE PULSE OF THE CONSUMER AND THE ECONOMY? - conference board present situations

 

CONSUMER CONFIDENCE - WHERE IS THE PULSE OF THE CONSUMER AND THE ECONOMY? - conference board confidence

 

CONSUMER CONFIDENCE - WHERE IS THE PULSE OF THE CONSUMER AND THE ECONOMY? - conference board expectations


THE GRIND: Sept 28, 2010

 

THE GRIND: Sept 28, 2010 - Notebook Image Hedgeye

 

Another day, another grind…


THE GRIND: Sept 28, 2010 - Notebook Bullish


1.      SP500 remains bullish from an immediate term TRADE perspective with an important line of support at 1135.

2.      The RANGE in my SP500 3-day probability model remains very tight and trade-able at 35pts

3.      Yesterday’s down day came on a weak volume study (as opposed to UP volume on DOWN days which is the TREND)

4.      All 9 sectors in our S&P Sector Risk Mgt model remain bullish from an immediate term TRADE perspective

5.      M&A continues to see more rumors than realities but Unilever for Alberto Culver yesterday was at least true

6.      China had 21 banks agree to sell loans on China’s interbank market = 1st time the govt allowed these transactions = liquidity

7.      Vietnam reported an accelerating sequential q/q GDP growth # for Q3 last night at +7.2% y/y vs. +6.4% in Q2

8.      German consumer confidence (OCT) improved to 4.9 in the GFK report vs. 4.3 last

9.      German (DAX) and UK (FTSE) stocks continue flash positive global divergences (bullish TRADE and TREND)

10.  Euro and British Pound continue to be bullish on both TRADE and TREND (we are long Pounds versus short USD)

11.  Commodities (CRB Index) continue higher in the face of a US Dollar debasement (inverse correlations on immediate term TRADE duration high)

12.  Gold is holding a very immediate term TRADE line of important price momentum of $1285

13.  Copper continues to trade in a Bullish Formation (bullish TRADE, TREND, and TAIL)

14.  Agricultural and soft commodities continue to make higher-highs and higher-lows (Bullish Formations)

15.  Israel joins an expanding list of countries who see global inflation re-accelerating for what it is and raises interest rates to 2% this morning

 


THE GRIND: Sept 28, 2010 - Notebook Bearish


1.      SP500 is broken again from an intermediate term TREND perspective (resistance = 1144)

2.      Volatility (VIX) continues to trade with an extremely high inverse correlation to the SP500 with TREND line support for the VIX at 20.96

3.      Inclusive of this morning’s weakness, the SP500 is actually down for 5 out of the last 6 trading days (market breadth deteriorating)

4.      Financials (XLF) remain the only sector in the SP500 (of the 9 we model top down daily) that’s bearish from a TREND perspective

5.      Yield Spread (10s to 2s) continues to compress this week versus last and remains a bearish headwind for US Financials earnings

6.      High Yield is trading within 7bps of its April 2010 highs at 8.25%; this is a contrarian indicator, big time

7.      Levered Loan Index at 15.13 is 5bps away from its late April early May highs; another contrarian (bearish) indicator for equities

8.      Case Shiller Prices (JUL) rollover again sequentially (month over month)

9.      US Consumer confidence comes in at a bomb 48.5 for SEP versus 53.2 AUG despite CNBC cheering the stock market higher

10.  “Republican House” finds its way onto the cover of Barron’s = consensus bullish catalyst now

11.  M&A rumors haven’t been this frothy since September of 2007 (we’ve counted 67 alleged “takeouts” that haven’t occurred)

12.  US Dollar Index continues to burn at the stake of QE hope; down now for the 15th of the last 18 weeks and Washington doesn’t care

13.  US Treasury Yields are in a Bearish Formation across the curve (2yr yield TRADE resist = 0.51%) = bearish signal for US economic growth

14.  Chinese stocks have closed down for 5 out of the last 7 days and the Shanghai Composite is now broken on immediate term TRADE duration

15.  Japanese stocks continue to be the armpit that is long term QE; Nikkei down 3 of last 4 days and down -10% for 2010 todate

16.  Japanese exports (AUG) hammered sequentially down to +15.3% y/y vs +23.5% y/y in JUL

17.  Japan’s Bureaucrats calling for another 4.6 TRILLION Yen in stimulus and proposing to pay for it by raising taxes this time?

18.  Spain’s IBEX is testing a TRADE line breakdown for the first time in months; support line could become resistance at 10,499

19.  Italy’s CDS continues to push higher at 205bps and remains the country with the most downside relative to consensus (we’re short EWI)

20.  European CDS continues to push wider on the heels of Greek Equities getting smoked (down -12% since 1st week of September with SPY +9%)

21.  Russian equities weakening in the face of Medvedev firing the longstanding (18 year) mayor of Moscow

22.  Romania’s Interior Minister resigns in the face of austerity implementation

23.  Sri Lanka is now issuing sovereign debt ($6B worth) and markets there are cheering it on?

24.  Dubai says “we are back”

 
Altogether the fundamental research DATA continues to tilt to the bearish side (as of the last 6 trading days) but PRICES are not entirely confirming how bad the DATA has become. I think a lot of this has to do with severe performance problems in the US hedge fund business into month and quarter end, so we may need to close an eye or two here for the next 72 hours before some of the smoke signals clear.
 
In the Hedgeye Portfolio we are still giving the benefit of the doubt to the bulls (LONGS = 12, SHORTS = 9), but I am increasingly concerned about October.
 
KM
 
Keith R. McCullough
Chief Executive Officer
HEDGEYE RISK MANAGEMENT

 

 

THE GRIND: Sept 28, 2010 - HE Durations


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
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