Another Day At The Carnival

“If I shoot at the sun, I may hit a star.”

-P.T. Barnum


Yesterday we held our quarterly company meeting in New Haven, Connecticut.  After Keith gave the opening remarks, we spent the next five hours having various leaders from within the firm talk about their business units.  This was an opportunity for us to reflect on what went right and wrong in 2010, what we need to do in 2011 to continue to take market share, and to share best practices amongst colleagues.  As I engaged with my teammates yesterday and watched their passion, one thought struck me repeatedly -- capitalism is alive and well in America.


Ironically, while going through the daily macro grind this morning, I happened upon a quote from another Connecticut capitalist, P.T. Barnum.   Now, admittedly, P.T. wasn’t in the securities or research business, he was in the carnival business.  Specifically, he started “P.T. Barnum’s Grand Travelling Museum, Menagerie, Caravan & Hippodrome”, which would eventually be coined as the “Greatest Show on Earth”.  Barnum’s circus eventually became so successful that he purchased his own train to transport it in the late 1880s.


While we don’t have any Tom Thumb like characters walking through our offices in New Haven (who Barnum billed as the smallest person to walk alone), we do enjoy moments of levity at work as we look out at the Global Macro Three-Ring Circus every morning. 


In the Geopolitical Ring this morning, we have Secretary of State Hilary Clinton.  Just when it seemed that the news flow could get no worse for the Obama administration following the mercy crushing of the Democrats in the midterms (losing 63 seats in the House), we have one of the leaders of global transparency, WikiLeaks founder Julian Assange, taking aim at the State Department. 


The most egregious foreign affairs circus act appears to have been spying at United Nations ordered by Secretary Clinton.  According to a news report:


“Secretary of State Hillary Rodham Clinton ordered State Department employees to gather private information from high-ranking officials, including the United Nations Secretary-General Ban Ki-Moon, Security Council members’ ambassadors (including our allies, France and Britain, as well as China and Russia), prominent African military and political leaders and top UN directors.”


Obviously, this is not exactly helpful as the United States tries to rally support to contain North Korea.


In the Inflation Ring this morning, we have China front and center again.  According to reports, China’s gold imports jumped almost 5x year-over-year in just the first 10 months of 2010.  Since the Chinese central bank has to approve all gold imports, this is a direct signal as to their thoughts on inflation and the direction of the U.S. dollar.  Like many commodities, even those with a less practical use like gold, China continues to be the key driver of incremental demand.  Chinese investment gold demand is expected to reach 150 tons this year, up from 105 last year and 3 to 4 tons 10 years ago. 


The fact that the Chinese are hoarding gold as a hedge against inflation should be no surprise given some recent inflationary data points out of China. The most noteworthy of which was October CPI, which was at a two year high of 4.4% year-over-year.  Inflation and subsequent tightening of monetary policy in China continue to be the key factors that drive our view that global growth will slow into the first half of 2011.


Finally, in the Sovereign Debt Ring, the PIIGS continue to be the main act in Europe.  This morning Spain auctioned 2.5 billion Euros in notes with an average yield of 3.7% and a bid to cover of 2.3x.  While the Spanish IBEX is up 2% on this news, the act of adding more debt to the Spanish balance sheet is far from a reason to celebrate.  In fact, as of November 30th the spread of Spain’s 10-year debt over comparable German bunds climbed to an all time high.


Most pertinent, of course, are the long term and structural unemployment issues in Spain.  Yesterday, our European Analyst Matt Hedrick wrote a note to our subscribers that highlighted Spain’s unemployment rate of 20.7%.  No, that was not a typo, a full fifth of Spain’s employable adults are out of work.  The second highest unemployment rate in the Eurozone is Ireland, which is currently at 13.5%.  While the equity markets are giving Spain a golf clap this morning, to think the structural economic issues in Spain have gone away are laughable at best.


While P.T. Barnum passed away well over a century ago, his famous quote, “there’s a sucker born every minute”, continues to have relevance today . . . especially for those folks who are buying Spanish government bonds today.


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


Another Day At The Carnival - 1spread


TODAY’S S&P 500 SET-UP - December 2, 2010

As we look at today’s set up for the S&P 500, the range is 13 points or -0.75% downside to 1197 and 0.33% upside to 1210.  Equity futures are trading back above fair value after the Dow on Wednesday posted its 6th largest points and percentage gain this year as strong data seen at home, China and in Europe encouraged increased risk.  Today's focus will center on the ECB meeting where there is growing expectations the ECB will unveil new or additional measures to prevent contagion within the eurozone sovereign debt markets.  Weekly jobless claims and Nov retail chain store sales are also scheduled for release.

  • Aeropostale (ARO) 3Q sales below est. 
  • Collective Brands (PSS) 3Q EPS, Rev beat est.
  • Finisar (FNSR) sees 3Q adj EPS above est.
  • Jo-Ann Stores (JAS) 4Q gross margin improvement less than 3Q, sees costs increasing
  • Krispy Kreme Doughnuts (KKD) boosted year adj. op. income forecast
  • Merck (MRK)’s Proscar for treatment of enlarged-prostate
  • failed to win the support of a U.S. advisory panel for use in
  • preventing prostate cancer
  • Regal Cinemas (RGC) boosted qtr div to 21c from 18c; declares $1.40 special div
  • Semtech (SMTC) Sees 4Q rev. below est.
  • Sequenom (SQNM) Plans secondary offering
  • Valeant Pharmaceuticals (VRX) receives CRL from FDA on NDA for ezoga


  • One day: Dow +2.27%, S&P +2.16%, Nasdaq +2.05%, Russell 2000 +2.22%
  • Month-to-date: Dow +2.27%, S&P +2.16%, Nasdaq +2.05%, Russell +2.22%;
  • Quarter-to-date: Dow +4.34%, S&P +5.68%, Nasdaq +7.63%, Russell +9.91%;
  • Year-to-date: Dow +7.94%, S&P +8.16%, Nasdaq +12.35%, Russell +18.83%
  • Sector Performance: Utilities +1.17%, Consumer Spls +1.62%, Healthcare +1.92%, Consumer Disc +2.13%, Financials +2.02%, Tech +2.13%, Industrials +2.58%, Materials +2.73%, Energy +2.97%


  • ADVANCE/DECLINE LINE: 1686 (+2650)  
  • VOLUME: NYSE - 1118.61 (-27.18%)
  • VIX: 21.36 -9.26% - YTD PERFORMANCE: -1.48%
  • SPX PUT/CALL RATIO: 1.67 from 2.12 -21.38%  


  • TED SPREAD: 14.62 -0.101 (-0.689%)
  • 3-MONTH T-BILL YIELD: 0.16% -0.01%  
  • YIELD CURVE: 2.44 from 2.36


  • CRB: 308.91 +2.49%
  • Oil: 86.75 +3.14% - NEUTRAL
  • COPPER: 394.75 +3.19% - BEARISH
  • GOLD: 1,390.83 +0.17% - BEARISH


  • EURO: 1.3129 +0.70% - NEUTRAL
  • DOLLAR: 80.713 -0.59%  - BULLISH




  • European markets opened higher and pared gains before advancing to currently trade at session highs.
  • Continuing expectation that the ECB will introduce more measures to mitigate concerns over the EuroZone's debt crisis buoyed sentiment.
  • The ECB benchmark interest rate decision is due at 7:45ET, with no change to the 1% rate expected. Spains relatively successful 3-yr bond auction, though the yield was much higher vs last auction, provided additional support.
  • 15 of 18 sectors trade higher led by banks, autos and insurers. The leading decliner is healthcare.
  • France Q3 ILO unemployment rate 9.7% vs prior 9.7%
  • UK Nov Construction PMI 51.8 vs con 51 and prior 51.6
  • EuroZone Q3 GDP and Oct PPI due at 5ET


  • Nikkei +1.8%; Hang Seng +0.9%; Shanghai Composite +0.7%
  • Asian markets followed Wall Street up to post decent rises today.
  • Miners lifted Australia on higher resource prices, though the market drifted off its highs when disappointing October retail sales data was released.
  • Japan rose on a weaker yen and Wall Street’s gain, with electricity & gas and air transport being the only sectors to decline.
  • Hong Kong rose on bargain hunting.
  • Large caps advanced modestly as China rose, though it lost some gains in the afternoon.
  • Japan Q3 corporate capex +5.0%. Q3 corporate sales +6.5% y/y. Q3 corporate pretax profits +54.1% y/y. November monetary base +7.6% y/y. Australia October seasonally adjusted retail sales (1.1%) vs survey +0.5%. October trade surplus A$2.63B vs survey A$2B.  

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














There may be little correlation with VIP, but Macau visitation drives Mass revenues and profits.



The common held view is that gross gaming receipts in Macau bear little statistical resemblance to visitation growth.  Since VIP revenues are about 3x Mass revenues, that shouldn’t be a surprise.  However, visitation is hugely statistically significant in explaining Mass gaming revenues - with a t-stat over 7 and an R Square of 0.73.


Mass gaming revenue generates over 50% of Macau EBITDA so it is critical to profitability.  Regressing Macau EBITDA to visitation yields an even stronger statistically significant relationship with an R Square of 0.85.


The strong relationship can be seen in the chart below that shows 3-month rolling Mass gaming revenue and visitation growth:




It’s clear from the chart that both visitation and spend per visitor have grown nicely.  Visitation is the more important metric, in our opinion, for long-term growth.  We’ve consistently maintained that there remains a significant amount of untapped demand from mainland China and as long as visitation is growing, that should remain the case.

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 80.43%
  • SHORT SIGNALS 78.35%

Surviving The Future

This note was originally published at 8am this morning, December 01, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"Every organization must be prepared to abandon everything it does to survive in the future."

~ Peter Drucker


After closing down for the 3rd consecutive day, the S&P500 ended up closing down -0.23% in November, doing less-bad than both the Nasdaq Composite and Dow Jones Industrial Indices which were down -0.37% and -1.01% for the month, respectively.


If you were long virtually anything other than the US Dollar (best major global asset class allocation for November of 2010, closing up +5.2%) in the last 3 weeks of November, you probably felt some pain. I did. The MSCI All World Index underperformed US Equities closing down -2.2% for the month and, depending on which Fixed Income strategies you had assets allocated to, November probably didn’t feel very good either.


So where do we go from here?


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,



Keith R. McCullough
Chief Executive Officer


Surviving The Future - div

Europe’s Dead-Cat Bounce in Context

Position: Long Germany (EWG)


Today, European equities rallied off oversold levels (gaining +1.75%-4% across the region), however we’re interpreting the move as just that, a dead-cat bounce.  The headline risk associated with Europe’s sovereign debt contagion that has markets punishing countries with over-extended public debts and deficits is severe and should weigh to the downside over the next 3-5 years.


As we’ve shown in our research, despite the bailout package for Greece (May 2010) and the assurance of one in Ireland (Nov. 2010) credit spreads continue to widen as investors demand further protection to own the debt of Europe’s periphery and sell out of their positions as the Crisis in Confidence persists (see chart below).


Europe’s Dead-Cat Bounce in Context - m1


We don't believe recent statements from Eurocrats that speak to the contrary:


(12/1) Portugal’s PM Jose Socrates: “I do not see any reason to change the position of the Portuguese government which is very clear: we do not need any help…”


(12/1) Deutsche Bank’s CEO Josef Ackermann: “Investors’ mistrust of Spain is unjustified and the problems in the banking industry are manageable.”


Also, a quick look at select equity markets of debt and deficit bloated countries shows just how severe the recent run (inclusive of today’s bounce) has been. Here is the performance since the weekend of November 20-21 when Ireland confirmed its “need” for a €85 Billion bailout from the EU/IMF:  Italy’s MIB FTSE -6.0%; Portugal’s PSI 20 -5%; Ireland’s ISEQ -4%; Spain’s IBEX -4.0%.


The Euro has also corrected severely against major currencies, including versus the USD, down -4% since 11/19.  Our immediate term TRADE range for the EUR-USD is $1.29-$1.33.


As the PIIGS remain mired in the muck, we continue to like Germany due to its fiscal conservatism and profitable industrial and exporting base.  As the chart below shows, its unemployment rate has steadily declined over the last year to 7.5%, far outpacing the Eurozone average that ticked up 10bps to 10.1% in the most recent month and the scary base levels of 20.7% in Spain or 13.5% in Ireland. Further, German companies continue to outpace their peers, finding strong demand at home and abroad (especially China).


Europe’s Dead-Cat Bounce in Context - m2


German Retail Sales reported today gained a healthy +2.3% in October month-over-month. 


Finally, Manufacturing PMI figures were released for 15 European countries today. As the chart below shows, 10 countries saw an improvement while 5 contracted month-over-month. The notable call-out here is Italy, which contracted to the downside and teeters above the 50 line that divides expansion (above 50) and contraction (below 50). For more on our bearish bias on Italy see our portal.


Europe’s Dead-Cat Bounce in Context - m3


We’ll be looking to tactically short European countries with sovereign debt risk in the Hedgeye Portfolio.  Stay tuned.


Matthew Hedrick



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