Wednesday, December 1, 2010

Morning Note...


Happy December 1st -- the Santa Claus Rally is upon us… The world is higher this morning (U.S. futures +1.4%) on the back of yesterday’s Obama commentary hinting at the extension of the Bush tax cuts for the middle class, today’s positive comments from ECB President Jean-Claude Trichet (to whit: the ECB stands ready to stave off any potential European sovereign contagion issues), better-than-expected economic data in China (November PMI 55.2 vs. 54.8 estimate and 54.7 prior), better-than-expected economic data in Europe (U.K. and French PMI beat estimates), and better-than-expected jobs data here in the U.S. (ADP November employment +93k jobs vs. the +70k expectation).  Also note that ISM data is due at 10am, and the Official Nonfarm Payrolls release will be Friday morning.  Asia was higher overnight, Europe is up 2.5% as of writing, the euro is up 110bps against the USD, and Oil is up nearly 2%. Note that the DEFICIT COMMISSION REPORT is due at 9:30am today and may generate some market response.

Amidst all the bullishness, here’s a contrarian view from Hedgeye:

GAME ON: It's DAY 1 of a new month and the perma-bulls are blasting out of the box, taking US futures up to another lower-long-term-high, repeating what they've said since the October 2007 peak - the world is "awash with liquidity" and "don't fight the Fed."

For us, it's always a game of US versus THEM. Yes, we have a culture of picking fights. But we pick the ones we expect to win. When we lose, we are prepared to abandon almost every theoretical and qualitative assumption in our macro model.

It's critical to keep them (Wall Street consensus) in the game. Without them, I don't know how we'd go about Surviving The Future.

For them, it's going to be very interesting to see who survives getting wiped out the 2nd time around. Sure, the world is "awash" with liquidity, but it's also laden with sovereign debt. Absolutely, "fighting the Fed" was painful in October of 2007 and 2010, but it's also been the fight worth fighting in both Novembers of those respective years. You have to know what you are fighting for. We are fighting the academic dogma of the Fiat Fools.

So let's throw down and get at it this morning...

The #1 Headline on Bloomberg (most read) is: "Contagion May Force EU to Expand Arsenal To Fight Debt Crisis"

TRANSLATION: Predictably, the Big Government Interventionists (them) are out in full force this morning trying to get investors to believe that the solution to this European Sovereign Debt disaster = QE/EU.

The quants @Hedgeye are already tweeting about this phenomena of buy-and-hope - they've interpreted this academic solution as:

QG = QE/EU = Inflation

I know. This is the kind of quant that we spend hours on, laboring throughout the night. It's amazing that we get any sleep over here at all. But it's always encouraging to wake-up to real-time market prices and global activity that supports or refutes our case.

Here's the real-time, globally interconnected, market response to QE/EU:

1.       Asian Equities UP
2.       European Equities UP
3.       US Futures UP

Oh wait, that's just the stock market response. Silly Mucker.

1.       Fiat Euro UP
2.       Commodities UP
3.       Bonds DOWN

Right, right...

So, after getting powdered for the last 3 weeks, stock markets around the world have a dead cat bounce to lower-highs (on low volume), global inflation reignites to the upside (Oil is bullish TRADE and TREND at $85.10, Gold is blasting higher to $1392, and Copper is up +2.4% in a straight line), and the real global contagion on risk managers minds remains a flashing red light in the bond market.

All the while, Chinese stocks (which are down more than -10% in the last month and down -13.8% for the YTD) closed up a whole 12 basis points after China reported its highest INPUT PRICE number (73.5) since June of 2008. Yes, like QG (Quantitative Guessing) = QE/EU, the Chinese see inflation.

Chinese interest rate swaps just had their biggest melt-up since April of 2007 (+58 basis points = biggest monthly move in 3 years). That's an explicit signal that China gave us then as it is now. It's also similar to the one they gave us on global inflation in June of 2008 when The Ber-nank said he saw no inflation with $150 oil. China is going to continue to raise interest rates to fight Fed and ECB stoked inflation.

During the recent -3.7% correction in US Equities (from their November 5th high of 1225 on the SP500 when we had 15 SHORTS), I've pared back our SHORTS in the Hedgeye Portfolio to 9 positions. I'll be looking to re-populate our short book on today's strength. My immediate-term support and resistance lines for the SP500 are now 1173 and 1189, respectively.

Best of luck out there today,
KM

DBAB ups LH.  FBRC ups SPW.  GSCO ups TSN.  Janney ups ESS.  JPHQ ups HAR.  BARD ups LSTR, OPTR.  UBSS ups KR.  WEFA ups SAPE.  AVON cuts BEZ.  CSFB cuts LPNT.  GSCO cuts SAFM.  Janney cuts CPT.  UBSS cuts X. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
Today’s Trivia:  What is the nearest planet to the Sun to be orbited by a moon?
                                                                                                                                                           
Yesterday’s Question: What types of ads were banned from television in 1971, costing networks roughly $200M in revenue at the time?

Yesterday's Answer: Cigarette ads were banned from TV in 1971. 

Best Quotes:  BofAMLCO trader note…

“So far a good start to December.   Jean-Claude Trichet signaled that leaders may step up their response to the debt crisis, he told folks that he didn’t believe that financial stability in the euro zone “could really be called into question.”   The speculation is that ECB will be buying Euro binds to the tune of 2 trillion.  China’s manufacturing expanded at the fastest pace in seven months in November.   That report has equities and commodity prices bid early this morning.   There is a ton of economic data today.  ISM, ADP Payroll, Construction spending, Fed’s Beige Book, Auto Sales to name a few.    Activity has been brutal the last two days, hopefully the new month brings a change.   1200 still key upside level.  1174 is the 50 day.”