Wednesday, December 29, 2010

Morning Note...

Futures are up ~20bps this morning as Asia recovers from recent weakness overnight and Europe trends slightly higher.  Asia was up ~1% on average and Europe is up 75bps on aggregate.  On this side of the pond, news and volumes remain light, which is as to be expected given the holidays.   For the moment, stocks continue their slow and steady “melt up” into year-end, probably for lack of bad news than anything else.   There is some small M&A chatter this morning, however, as BJ’s Wholesale Club (BJ; +5%) is rumored to be a takeout target for Leonard Green & Partners.  Oil -40bps.  Gold +5bps.  USD -20bps and EUR/USD 1.3133. 

No economic data on tap for today, but Initial Jobless Claims and Continuing Claims are due tomorrow at 8:30am, and Pending Home Sales are due at 10am tomorrow. 

Regarding recent stock action, here’s a pithy quote from

There have been 19 trading sessions in December.  The S&P 500 has logged a gain in all but three of the sessions; it has not had consecutive losing sessions; and its biggest loss has been a 0.5% decline on December 15.  Since gaining 1.3% on December 2, the S&P 500 has not gained more than 0.6% in a single session.

Any guesses as to how today's session might go?

The odds-on bet is that there will be more "drifting" in the major averages during the day before things finally settle with a small gain for the S&P 500.  That isn't a guarantee, but it certainly seems to have been the modus operandi for most of the month.

In other commentary, Knight also put out a cautious piece this morning that is worth a glance:

            Drifting Into Year-End

Bottom Line – Yesterday’s US stock market action did nothing to change our current outlook. While our view is that the intermediate-term outlook is still positive for US stocks there are signs of some technical deterioration in the short-term indicators we follow suggesting the risk of a pullback is high. But seasonal influences are powerful witness yesterday’s recovery from early weakness so any pullback may be postponed until January.

Yesterday’s US market showed a softer tone than Monday with breadth mildly negative  but volumes remained pre-holiday like and small-caps underperformed. Precious metal and energy related issues were aided by the recent strength in their underlying commodities.

Yesterday’s market action did nothing to change our view that the risks of a mild correction remain high. Upside participation has narrowed as has the new high list and volumes have been tepid as prices rise. Sentiment continues to be quite bullish.

The setup for a pullback would in our view be the following: SPX breaking 1251 sees 1233, DJIA breaking 11519 sees 11421, NASDAQ Composite breaking 2645 sees 2613, NDX breaking 2209 sees 2197 and Russell 2000 breaking 785 sees 768.

NBL announces new offshore discovery.  RBCM ups CRNT.  DARA announces $4M offering.  CNBC’s Fast Money positive on IM.  RNOW upgraded to OW at PIPR.

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
Best Quotes:  Hedgeye…


"This stubbornness in the face of clear data is right up there with the efficient market believers."
-Jeremy Grantham (Quarterly Letter, October 2010)

Quite often I get asked whose research thoughts I try to incorporate into my global macro risk management process. In terms of risk managers who are still alive, I have a relatively short list. Jeremy Grantham, Jim Grant, and John Hussman are at the top of it. All three of these gentleman write consistently, quantitatively, and accountably.

This isn't to say that there aren't plenty of thoughtful people out there who are worth reading. This is to say, however, that there are plenty more opinions in the market place than there is time. Taking the time to focus on doing your own work is critical.

I'm fairly maniacal about writing down my investment thoughts. I use the same amount of space, on the same number of pages, in the same notebooks, every day. When my own work isn't working, I shut down the noise, review my notes, and rethink my theses.  Then, if I have time, I re-read some of the more pertinent intermediate-term TREND thoughts of some of the aforementioned thinkers to keep myself in check.

Yesterday, I was re-reading Jeremy Grantham's Quarterly Letter for October titled "Night of the Living Fed" and that helped me re-think my global macro positioning heading into 2011.

Before you scroll down, don't worry - I'm not covering my short position in the SP500 (it's -2.81% against me). I currently hold 11 SHORT positions in the Hedgeye Portfolio (versus 10 LONGS) and my biggest loser on the short side is an unrealized loss of -4.8% in Hudson City Bancorp (HCBK). I've been bearish plenty enough times on US stocks in my career with performance that's worse than that.

Being bearish on US stocks here doesn't mean you have to be bearish on everything - that's a US-centric stock market investor's risk management problem, not yours. You can also be bearish on the Fed and make money being long the US Dollar (or short US Treasury bonds). Both are bets that Bernanke fails to debauch America's currency and hold rates of return on American savings accounts unsustainably low.

Grantham, Grant, and Hussman aren't fans of The Ber-nank either. So, while hope is not an investment process, I'm really hoping we can start a little Groupthink Club of our own ahead of Bernanke having to face both Ron Paul and more dissenting Fed Voting Members in 2011.

On the politicized US central bank, here are some valuable excerpts from Grantham in the "Night of the Living Fed":

1.       On Evolution: "... displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment."
2.       On Quantitative Guessing (QG): "Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy."
3.       On US Economic Growth: "... on the positive side, all it can do is move demand forward by a few weeks and then give it back later. This is the paper world. It is, in an important sense, not the real world."

The "real world" is, of course, real-time... and... as Ludwig von Mises said, "for many people, the "long run" quickly becomes the short run." There's no better evidence of that than daily, weekly, and monthly price, sentiment, and expectations data.

On the inflation side, with the 19 component CRB Commodities Index hitting another fresh YTD high yesterday up at 331, here's what the expectations of higher prices (inflation) have done:

1.       Week-to-date = +0.61%
2.       Month-to-date = +9.6%!
3.       Quarter-to-date = +16.1%

For a man who preaches "price stability", that's nice Heli-Ben... really nice. The 45 MILLION Americans on food stamps salute you.

On the sentiment side, not surprisingly now that holiday cheer is becoming a rear-view event, this morning's ABC Consumer Confidence reading dropped to minus -44 versus minus -41 last week. Jobless Stagflation in America perpetuated by a Fed policy to inflate isn't cool for the 90% of Americans who aren't levered-long the SPY.

Meanwhile, US-centric stock market bulls continue to be Stubborn Believers (like they were in late 07' and early 08') that stocks are "cheap" even though corporate earnings are being fueled by record low costs of capital (interest rates) and peak operating margins.

Managing risk using record low interest rates and peak margins as perpetual plugs in an earnings model is something that only a historian who has never run a business or a global macro P&L would do. Or should I say, dare you to do. Ben Bernanke, good luck with that in 2011.

My immediate term support and resistance levels for the SP500 are now 1250 and 1266, respectively.

Best of luck out there today,