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Hedgeye Editorial: "1995 Revisited"

Post Thanksgiving To Do: Show more client editorials from the Hedgeye Network

 

KM Reply:

 

On the timing of the debt/deficit commission - fair point - someone always knows something... but in this case, I think what you and I know is what any rational analyst is capable of concluding. This commission has been in motion for a while now and I think they are simply reflecting upon what we talk about every day - they know what we know.

 

Hedgeye Editorial

To: Keith R. McCullough

Subject: 1995 Revisited

 

Keith - I did not run a hedge fund in 1995 but I sat across the desk from someone who did. 

 

Upon reflection here are my thoughts on the asset allocation (sell bonds and move to stocks) question.  The answer to the question revolves around the composition of bond exposure and the collateral upon which it rests. 

 

As we now know, many strategies employ leverage and leverage requires collateral.  To the extent people have no leverage, own bonds outright and can re-allocate into stocks I see the "rotation" argument.  To the extent there is leveraged derivative composition (swaps etc) to create bond exposure and a leveraged equity portfolio is the collateral upon which the counterparty has access by virtue of the swaps - you have margin calls.  I suspect that reducing leverage impacts the prices of all underlying collateral - asset class not withstanding - (we have seen this movie before).

 

Second point - the timing of this Debt Commission "draft release" needs some scrutiny.  Why the rush?  Possible answers - Could they know how shaky the foundation of low interest rates is to the status quo?  Could they have insight about the need for other G-20 members to see a framework of a plan?  By virtue of intensely studying the issue, they know something and the timing is an expression of that knowledge...

 

-Anonymous Hedge Fund PM


WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 0 of 10 improved / 5 of 10 worsened / 5 of 10 unchanged
  • Intermediate-term (MoM): Positive / 1 of 10 improved / 7 of 10 worsened / 1 of 10 unchanged
  • Long-term (150 DMA): Negative / 0 of 10 improved / 6 of 10 worsened / 3 of 10 unchanged / 1 of 10 n/a

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - summary

 

1. US Financials CDS Monitor – Swaps increased across domestic financials last week.  Only PMI saw swaps come in; spreads increased for the other 28 reference entities.  

Tightened the most vs last week/widened the least: PMI, MTG, JPM

Widened the most vs last week: GS, COF, MBI

Tightened the most vs last month: SLM, MTG, RDN

Widened the most vs last month: CB, TRV, MBI

 

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - us cds

 

2. European Financials CDS Monitor – In Europe, banks swaps blew out ahead of the Irish bailout.  Swaps increased for all 39 reference entities.  

 

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - europe cds

 

3. Sovereign CDS – Sovereign CDS rose 47 bps on average last week.  Ireland and Portugal improved substantially, while Greece continued to worsen, pushing back above its August highs.   

 

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates rose last week, closing at 8.44 on Friday.  

 

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - high yield

 

5. Leveraged Loan Index Monitor – The leveraged loan index put in its third consecutive down week, falling 2 points versus the previous Friday.   

 

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - lev loan

 

6. TED Spread Monitor – Last week the TED spread fell slightly, closing at 14.2 bps.

 

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index fell 4.5 points, closing at 14.4 on Wednesday, the last day for which pricing was available.

 

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - joc

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields continued to rise, ending the week 21 bps above last week’s close.

 

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads closed the week at 181 bps.     

 

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - markit

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index rose slightly, closing at 217 versus 215 the prior week.  

 

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - Baltic dry

 

11. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: 1.9% upside to TRADE resistance, 0.7% downside to TRADE support. 

 

WEEKLY FINANCIALS RISK MONITOR: STILL NEGATIVE ACROSS ALL THREE DURATIONS - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: SLOTS; UNEMPLOYMENT UNCHANGED; TAIWAN IVS

The Macau Metro Monitor, November 29th, 2010

 

MORE GAMING REGULATIONS ON SLOT MACHINES Macau Daily News

Secretary Tam said drafts laws concerning plans to relocate slot machine parlors from residential areas and to raise the casino age limit to 21 have already entered the legislative process.  The slot machine relocation draft is currently being deliberated in the Executive Council.  In addition, lawmaker Melinda Chan Mei Yi suggested prohibiting casinos from sending promotional text messages to Macau residents and the operations of casino courtesy buses. 


EMPLOYMENT SURVEY FOR AUGUST-OCTOBER 2010 DSEC

The unemployment rate for August-October 2010 remains at 2.9% (9,400 people), unchanged from that of July-September 2010.  Total labour force was 330,000 and the labour force participation rate stood at 71.7%.


TAIWAN PROPOSES INDIVIDUAL TRAVEL FROM MAINLAND CHINA Xinhua News

Officials from Mainland China and Taiwan have discussed the feasibility of allowing individual tourists from the mainland to visit the island. Taiwan officials hope the new policy will first be applied to business travelers from Beijing and Shanghai, with maximum 300 individual tourists per day.  The Taiwan Affairs Office of the State Council forecasted Taiwan to receive some 1.2 million Mainland tourists by the end of 2010. Currently, Taiwan allows mainland tourists to visit the island on package tours for stays of up to 15 days.


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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - November 29, 2010

As we look at today’s set up for the S&P 500, the range is 24 points or -1.38% downside to 1173 and 0.64% upside to 1197.  Equity futures are trading above fair value as positive reaction to what was deemed to be a strong start to the pre-Christmas shopping season.  Retailers promote online sales as the U.S. heads back to work; overall, the average shopper spent 6.4% more during the Thanksgiving holiday weekend compared with last year, the National Retail Federation said, though it cautioned that this isn’t always indicative of the season.

  • Ameriprise Financial (AMP) may be poised to rise as it continues to move into money management from the insurance business, Barron’s reported.
  • Berkshire Hathaway (BRK/A) Vice Chairman Charles Munger disposed of $750m in company stock from trust.
  • Hewlett-Packard (HPQ) was sued by shareholders in Delaware Chancery Court seeking information about company’s ouster of former CEO Mark Hurd.
  • Lions Gate Entertainment (LGF)’s Icahn files proxy nominating 5 to Lions Gate Board: Jay Firestone, Michael Dornemann, Christopher J. McGurk, Daniel A. Ninivaggi, Harold T. Shapiro.
  • Siemens AG (SI): American depositary receipts may rise as high as $140-shr as company benefits from restructuring and global economic growth, Barron’s said.
  • Steinway Musical Instruments (LVB) may be overvalued even as U.S. demand for luxury items rebounds, Barron’s said.
  • Steven Madden Ltd. (SHOO) may rise as the company pares manufacturing costs as much as 15%, beats rivals to the market with new products, Barron’s said.

 PERFORMANCE

  • One day: Dow (0.85%), S&P (0.75%), Nasdaq (0.34%), Russell (0.52%)
  • Month-to-date: Dow (0.24%), S&P +0.52%, Nasdaq +1.08%, Russell +4.18%
  • Quarter-to-date: Dow +2.82%, S&P +4.22%, Nasdaq +7.01%, Russell +8.37%
  • Year-to-date: Dow +6.37%, S&P +6.66%, Nasdaq +11.7%, Russell +17.16%
  • Sector Performance: Telecom (0.35%), Tech (0.44%), Consumer Discretionary (0.46%), Utilities (0.56%), Consumer Staples (0.6%), Industrials (0.73%), Healthcare (0.77%), Financials (1.13%), Energy (1.15%), and Materials (1.23%)

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1079 (-3065)  
  • VOLUME: NYSE - 428.50 (-48.00%)
  • VIX: - 22.22 +13.60% - YTD PERFORMANCE - +2.49%)
  • SPX PUT/CALL RATIO: - 2.07 from 2.00 +3.66%  

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD - 14.18 -0.047 (-0.330%)
  • 3-MONTH T-BILL YIELD 0.16%  
  • YIELD CURVE - 2.36 from 2.40

COMMODITY/GROWTH EXPECTATION:

  • CRB: 301.13 -0.40% (up 0.75% last week)
  • Oil: 83.76 -0.12% - NEUTRAL (up 2.17% last week)
  • COPPER: 376.25 -0.11% - BEARISH (down 2.08% last week)
  • GOLD: 1,360.10 -1.08% - BEARISH (up 0.46% last week)

CURRENCIES:

  • EURO: 1.3242 -0.99% - NEUTRAL  (down 3.15% last week)
  • DOLLAR: 80.357 +0.79%  - BULLISH (up 2.36% last week)

OVERSEAS MARKETS:

 

EUROPEAN MARKETS:

  • FTSE 100: +0.26%; DAX: (0.22%); CAC 40: (0.06%)
    European markets initially found some stability after the EU/IMF concluded a bailout deal with Ireland over the weekend.
  • Additionally the Irish Central Bank set a new minimum capital requirement for Irish banks. After early modest moves higher, major indices turned mixed to negative on market talk of a disappointing Italian bond auction and Portugal's increasing likely need for an international bailout and the worst UK M4 y/y money supply growth since records began.
  • Advancing and declining sectors are even 9-9, with insurance, basic resources and food the leading gainers, auto's, travel & leisure and healthcare the leading decliners.
  • UK Oct mortgage approvals 47,185 vs consensus 47,000 and prior 47,369
  • European Commission's autumn forecast foresees a continuation of the economic recovery currently underway in the EU.
  • GDP is projected to grow by around +1.75% in 2010-11 and by around +2% in 2012. Says a softening global environment and the onset of fiscal consolidation, activity is expected to moderate towards the end of the year and in 2011, but to pick up again in 2012 on the back of strengthening private demand
  • Labor-market conditions are expected to slowly improve over the forecast horizon, with unemployment rate projected to fall to around 9% in 2012
  • Says around half of EU Member States are set to post a lower general government deficit in 2010 than in 2009 deficit is projected to fall in 24 Member States next year.  EU as a whole, a deficit of slightly above 5% of GDP is expected in 2011, with a further decline of about 1 percentage point in 2012 as the recovery gains ground.
  • Debt ratio is set to remain on an upward path over the forecast horizon 

ASIAN MARKTES:

  • Nikkei +0.9%; Hang Seng +1.3%; Shanghai Composite (0.2%)
  • Asian markets were mixed in light trading today. Miners fell on weaker commodity prices.
  • Hong Kong bounced higher in the afternoon, but turnover remained low on worries about pending moves to fight inflation in China. Li & Fung added 5% on US consumer spending over the weekend. But Chinese carmakers dropped 5-8% since their tax exemptions expire tomorrow.
  • Exporters lifted Japan slightly on a weaker yen; momentum was lost on caution regarding conflict between the Koreas and European debt.
  • Taiwan rose after local elections left the ruling party and its pro-China policies in power. Tourism and real-estate shares rose on hopes more Chinese tourists would visit the island.
  • Banks accounted for Australia’s gain, as miners fell.
  • China slipped as commodity stocks fell and profit-taking knocked carmakers down. Small-cap pharmaceuticals continued to rise on an assumption that government support was a reason to buy.
  • Japan October retail sales (0.2%) y/y vs survey +0.7%.

Howard Penney
Manging Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER



Strength At Home

“The strength of a nation derives from the integrity of the home.”

-Confucius

 

Slowly, but surely, the US Dollar is re-capturing some credibility. Yes, we get that credibility amongst the Fiat Fools is a relative measurement. But for now, with the Europeans doing their best to become Japanese, we’re long the US Dollar and we’ll take what we can get.

 

The strength of a nation is not derived from Piling Debt-Upon-Debt. The strength of a nation is not derived from professional politicians funding long term liabilities with short term fiat paper. The strength of a nation derives from the integrity of a country’s fiscal position.

 

I am well aware of the deficit and debt risks in America. I am certainly not saying they have gone away. That said, everything that matters in global macro happens A) on the margin and B) relative to everything else. What global currency prices are telling me now is that a strong currency at home could be more than just an immediate term TRADE.

 

Last week the US Dollar Index closed up +2.37% and +5.84% higher than its November 4th YTD low. That was the 4th consecutive week of gains and all of a sudden the Buck is Breaking Out above both its immediate and intermediate-term TRADE and TREND lines. Critically, what was resistance for US style fiscal conservatism is now support:

  1. TRADE support = $77.89
  2. TREND support = $79.71

As always, trending currency strength needs multiple factors of support - not the least of which are other foreign currencies weakening. When managing foreign currency risk, never underestimate the power of what’s going on in the rest of the currency basket.

 

In the last 3 weeks, the Euro has dominated headline news. This morning, “news” of an Irish bailout comes with the associated political nonsense. France’s central banking Fiat Chef went as far as to suggest that ze package “is very well tailored and will restore competitiveness in Ireland.” He’s got to be kidding me. Ask someone in Ireland how competitive they are feeling this morning.

 

Euros bulls are obviously having trouble swallowing that weekend old French toast. After losing -3.6% of its value last week, the Euro is trading down another -0.61% this morning at $1.32 versus the USD. It’s broken on both our TRADE and TREND durations:

  1. TRADE = $1.38
  2. TREND = $1.33

All the while, there is this large island of compromised Bureaucrats called Japan that is seeing its currency weaken as the #1 driver to economic-hope slows to a screeching halt. For the month of October, Japanese exports were effectively HALVED in term of their sequential (monthly) growth rate (+7.8% OCT versus +14.4% in SEP). As Asia slows, Japan slows… and these are the globally interconnected days of our lives.

 

Euro DOWN + Yen DOWN = US Dollar UP. Cool. Now Americans need to have the political backbone to maintain the integrity of the home currency. Can we do it? Yes, We Can.

 

I’ve got no problem cheering this Buck Breakout on. Yes, it will equate to immediate term US stock volatility, but I’m already proactively prepared for that. I cut my position in US Equities to The Ber-nank’s favorite exposure (ZERO percent) before the current 3% correction in US Equities started to take hold and this morning I have a 64% asset allocation to Cash waiting, as les bulls like to say, on ze sideline, eh.

 

The Volatility Index (VIX) was up a monster +23.2% last week to 22.22, so at least we’ve dropped some of the levered-long kids off at the pool. Volatility is a concurrent measurement of emotion and can quite often be a contrarian indicator of future performance. Naked swimmers may want to bear that in mind as the price momentum tide rolls out.

 

Strong Dollar nips The Ber-nank’s global inflation race in the bud. Strong Dollar also helps drive up short-term interest rates on my hard earned personal and corporate savings accounts. No, no, Mr. Hard Core Leverage Man, that doesn’t help you too. Strong Dollar helps men and women who are debt-free run strong like bull all over you when you are least expecting it. And this is where the true strength of this Nation lives.

 

My immediate term support and resistance levels for the SP500 are now 1173 and 1197, respectively. I remain short the SP500 (SPY) in the Hedgeye Portfolio.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Strength At Home - buck


A LOOK AT VEGAS AIR CAPACITY

Lower airline capacity and higher airfare could slow recovery 

 

 

As we mentioned in our note last week, “A SOLID OCTOBER ON THE STRIP,” McCarran visitation increased 2% YoY in October, the first increase since November 2009.  We wonder if this growth can be sustained, given what’s happening with air capacity and airfare.

 

The number of average daily seats at McCarran has fallen every month on a year-over-year comparison since Feb 2008.  Based on the released schedules, November is no exception, falling 4.5% YoY and 4.2% MoM, as Southwest Airlines, the busiest carrier at McCarran, had announced it was cutting 12 McCarran round-trip flights starting Nov 7.  This capacity shrinkage is not universal as North American air carriers, on a nationwide basis, increased capacity by 3% in November, according to aviation intelligence OAG.  Year-to-date, McCarran capacity is down 5.4%.  Furthermore, airlines are focusing more on business travel routes which yield higher than leisure markets such as Las Vegas.

 

A LOOK AT VEGAS AIR CAPACITY - mccarran1

 

What about for 2011?  Hard to say.  MGM’s CEO Jim Murren is confident McCarran capacity will be higher in 2011.  The Air Transport Association and Randall Walker, Director of Clark County Aviation Department, believe capacity will have a small gain next year but nowhere close to 2007 levels.  Some of the smaller international carriers are also predicting greater number of seats.  But the domestic carriers, which account for 95% of the capacity, are cautious.  Southwest will only add one Vegas daily round-trip flight a day when winter seasonal changes are completed in February 2011.  Jet Blue’s CEO, David Barger, said he is reluctant to add Vegas flights and Andrew Levy, president of Allegiant Travel Co., the parent of Allegiant Air, said he doesn’t see higher number of planes at McCarran because of the focus on profit margins.  In addition, US Airways is unlikely to return to McCarran after its massive withdrawal in late 2009 and the proposed Continental and United merger may further cut capacity.

 

Meanwhile, lower capacity is contributing to higher airfare.  The average lowest LV airfare has remained stubbornly higher in 2010, compared with a year ago - higher lows if you will, which could mean lower highs for Vegas stocks.  The Bureau of Transportation Statistics data show that, as of June 30, 2010, Las Vegas airfares had risen quicker than the national average.  Using Expedia’s TrendTracker and FareCompare’s Airfare Tracker, we believe higher Vegas airfares continued in Q3 and will continue into year-end. 

 

A LOOK AT VEGAS AIR CAPACITY - AIRFARE

 

Unless the airlines reverse their tactic of higher prices/lower capacity, Vegas could see limitied visitation growh and less discretionary spending - potential impediments to any Vegas recovery.


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