Printing Price Volatility

“If the government owns all of the printing presses, it will determine what is to be printed and what is not to be printed.”

-Ludwig von Mises


On a flight to Calgary, Alberta yesterday I was reviewing “Economic Policy – Thoughts For Today and Tomorrow” by Austrian economist, historian, and philosopher Ludwig von Mises. His book, published by The Liberty Fund, compiles the following 6 lectures that von Mises gave in Argentina in 1959:

  1. “Capitalism”
  2. “Socialism”
  3. “Interventionism”
  4. “Inflation” 
  5. “Foreign Investment”
  6. “Politics and Ideas”

This book is only 75 pages long and sits amongst the classics in my library. The deep simplicity that von Mises achieves in explaining complex macro-economic issues is unrivalled. I highly recommend it to anyone looking for the opposing argument to Big Government Intervention.


In the coming weeks I’ll refer to these lectures, quoting one of the founding fathers of libertarian free-market thinking whenever the opportunity presents itself. After watching a completely politicized head of the US Federal Reserve telling stories on 60 Minutes last night, one of those opportunities is now.


Post Ben Bernanke’s interview, the #1 headline on Bloomberg this morning should shock anyone considering this country’s constitutional underpinnings: “Bernanke Says Fed May Take More Action To Curb Joblessness”… One man, one ideology, one power to print money…


Before I get into what The Ber-nank’s professional politicking for additional Quantitative Guessing (otherwise known as printing moneys) entailed, let’s take a step back and re-read what the US Federal Reserve said most recently about its go forward QG2 strategy:


“The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."


In English, sans le Greenspan-esque obscurity, this means that the Bernanke Fed’s goals are:

  1. Fostering maximum employment
  2. Fostering price stability

Sounds nice, in theory…  but last week’s US Unemployment rate hitting a new high of 9.8% was an unmitigated train-wreck on point #1 and on point #2, never mind “price stability”… Ben Bernanke is fostering some of the highest levels of price volatility that modern markets have ever seen. How about fostering some accountability, dude.


Look at last week’s week-over-week percentage moves:

  1. SP500 = +2.9%
  2. CRB Commodities Index = +5.0%
  3. Oil = +6.5%
  4. Gold = +3.1%
  5. Copper = +6.1%
  6. VIX = -18.9%

Bernanke must be kidding himself, because he certainly isn’t kidding me. That VIX (Volatility) decline of -18.9% week-over-week came the week after the VIX rocketed +23.2% higher. At this point, he’s Printing Price Volatility in volatility itself!


Let’s go back to some of The Ber-nank’s key statements on 60 Minutes:

  1. On Growth – “we’re not very far from the level where the economy is not self sustaining…”
  2. On Employment – “it takes about 2.5% growth just to keep unemployment stable…”
  3. On Inflation – “fears of inflation are overstated…”

In response, I guess my first question is, according to who? The man’s macro-economic conclusions are littered with ideology and inaccuracy. Maybe it’s a blessing in disguise that Ben Bernanke speaks this academic dogma out loud to the world. After all, it’s better to remain a humble looking man who knows nothing about the interconnectedness of global macro markets and says nothing, than to open one’s mouth and remove all doubt.


Rather than take my word for it on this global Fiat Experiment gone bad, I can only hope at this point that the people of the world look at real-time market prices (price instability) and the outcomes of these Greenspan and Bernanke interventions on both the sustainability of growth and employment. The records speak for themselves.


As for a solution to this mess. I’ve said this before, but I’ll say it again – the first solution is to STOP – that’s it. Stop this man from doing what he is doing in perpetuating all-time highs in the price of the #1 food staple for 3 BILLION people (rice) and anything else for that matter that’s priced in the dollars that he is on a mission to debauch.


Finally, I’d like to submit a few passages from Ludwig von Mises 3rd lecture, called “Interventionism”:


“The idea of government interference as a “solution” to economic problems leads, in every country, to conditions which, at the least, are very unsatisfactory and often quite chaotic. If the government does not stop in time, it will bring on socialism.” (“Economic Policy”, page 38)


“Is there a remedy  against such happenings? I would say, yes, there is a remedy. And this remedy is the power of the citizens; they have to prevent the establishment of such an autocratic regime that arrogates to itself a higher wisdom than that of the average citizen. This is the fundamental difference between freedom and serfdom.” (“Economic Policy”, page 39)


Stop. Listen. Re-think.


My immediate term support and resistance levels for the SP500 are now 1199 and 1229, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Printing Price Volatility - Bernanke EL PNG

The Week Ahead

The Economic Data calendar for the week of the 6th of December through the 10th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

Less Is A Good Thing

This note was originally published at 8am this morning, December 03, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Less Is A Good Thing.”

-Jason Fried & Heinemeier Hansson


At our year-end Hedgeye meeting this week, this was the most valuable take-away from the aforementioned bestselling authors of “REWORK.”


My immediate term support and resistance levels for the SP500 are 1197 and 1223, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The loss of lots 7 & 8 should not have been a surprise. 



LVS's 'loss' of sites 7 & 8 shouldn't be a big surprise.  Aside from the recent Macau government news on reclamation of undeveloped land, the fact that LVS has not yet been granted a land concession for sites 7 & 8 is also explicit in all of LVS's filings.  We have also heard for a while now that the Macau government would like each of the concessionaires to have strip facing properties, with the exception of Galaxy due to their development off strip. 


While it's clear that Sands had hoped that given their $6BN of capitalized investments on Cotai, history would repeat itself and the government would grant them the land concession for sites 7 & 8, the Company was aware of a possible rejection of the concession.

"Based on historical experience with the Macau government with respect to our land concessions for the Sands Macao and parcels 1, 2, 3 and 5 and 6, management believes that the land concession for parcels 7 and 8 will be granted; however, if we do not obtain the land concession, we could forfeit all or a substantial portion of the $102.4 million in capitalized construction costs, as of September 30, 2010, related to our development on parcels 7 and 8."

- September 20, 2010 10Q, page 36


In fact, despite having a land concession for parcel 3, should development on that site not be completed by April 2013, Sands is also at risk of losing that site.  Luckily, they have only invested $35MM into that parcel. Our contacts on the ground believe that it would be in Sands's best interest not to appeal and to possibly leverage off any good faith they build from not appealing in negotiations for a Four Seasons apartment deal.


In terms of implications for Sands China, we don't believe that this is a big negative since anything built on sites 7 & 8 would take billions to finish and wouldn’t open until at least 2016.  In addition, any opening would likely cannibalize existing LVS properties the most.  By then, there may be other opportunities for LVS to deploy their billions, like Japan.


The decision to reject LVS's land concession for sites 7 & 8 opens up an opportunity for both Wynn and MGM to move their plans on to the strip, and with the situation surrounding the Macau Studio City site still in the air, it may also open up an opportunity for SJM.


In terms of negative implications to Wynn Cotai, we don't really think there are many.  Wynn is in the process of developing their site now and they only have 1 site in Cotai.  LVS had 8 parcels in Cotai – with no definitive timeline for the development of its 3 remaining sites.  We don’t think that this is a departure from what the government has been saying for some time – basically, use it or lose it.  Remember, a lot of controversy surrounds many of these land grants/ "handshakes" that were done under the previous administration, especially around the award process or lack thereof.  The result was hundreds of parcels which companies are sitting on for over 5 years that are not getting developed--which is not good for the people of Macau or the government.  So bottom line--easy come, easy go.


Appendix of recent government announcements on the potential reclamation of unused land:

  • 3/22/2010: CEO Chui mentioned undeveloped land on Cotai Strip as high priority
  • 5/10/2010: The chairwoman of the Legislative Assembly’s (AL) Provisional Committee for the Analysis of Land and Public Concessions, Kwan Tsui Hang, said that 30 operators who are yet to develop land granted to them by the Macau government will be asked to explain the reasons for their inaction in writing.  Kwan stressed that the 30 cases are not only related to gaming operators.
  • 8/19/2010: Jaime Carion, director of DSSOPT, said the government has no timetable on when it plans to take back idle land.  DSSOPT has received replies from 26 concessionaires explaining why they have left their land parcels undeveloped, which are being studied by the bureau’s legal department.
  • 9/7/2010: SJM interested in sites 7&8. Sands China acting CEO Mike Leven said Sands "certainly will defend (its) positions on sites 7&8" and that historically when the government has allowed operators to invest in land, they've eventually gotten the rights to it.  However, recently, the government warned that undeveloped land on Cotai may be taken back.

Europe Taking a Breather

Hedgeye Position: Long Germany (EWG); Short Euro (FXE), Short Italy (EWI)


Yesterday we shorted Italy and the EUR-USD off a two-day bounce in equities and declines in peripheral yields. We called out the move as a dead-cat bounce and continue to stress that despite immediate term market swings, over the intermediate to longer term we expect the risk premium across Europe to remain elevated as the risk associated with the sovereign debt contagion spreads to the likes of Portugal, Spain and Italy.


That said, we’re seeing another day-over-day decline in risk via 10yr bond yields from the PIGS (except Italy) that is worth a call-out (see chart below). Further the EUR-USD has gained ground, currently at $1.3365, which we shorted into.


Europe Taking a Breather - mhh1


This lift comes into and out of ECB President Jean-ClaudeTrichet’s announcement yesterday morning to hold the ECB’s benchmark lending rate steady at 1%, and no step-up to its €67 Billion bond purchasing program, which the market was largely speculating on given the Fed’s $600 Billion QE2 injection (Quantitative Guessing) and the Bank of England’s larger bond purchasing program of £200 Billion.


The ECB will keep offering banks unlimited loans through the first quarter over periods of seven days, one month, and three months. That marks a shift from last month, when Trichet said that the ECB could start limiting access to its funds, a position long voiced by Bundesbank President Axel Weber.


Positive Data, on the margin


-The Bundesbank revised upward its GDP forecast for Germany in its bi-annual economic outlook today:


3.6% in 2010 (vs June estimate of 1.9%)

2.0% in 2011 (vs 1.4%)

1.5% in 2012


-Final readings of November Manufacturing and Services PMIs, released on Wednesday and today, respectively, showed month-over-month gains for the majority of the reporting countries:


Positive Divergences: UK Manufacturing rose to 58.0 in November versus 55.4 in October and Germany Services jumped to 59.2 vs. 56.0.


Negative Divergence: Spain Services rose M/M to 48.4 but remain under the 50 line, denoting contraction. Italy Manufacturing fell to 52.0 vs 53.0.


Europe Taking a Breather - mhh2



Keep your risk management pants on and have a great weekend!


Matthew Hedrick


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