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Fashionable Consensus

“Nothing is more obstinate than a fashionable consensus.”

-Margaret Thatcher

 

You’d think that some of the sell side’s finest would have learned something from being unanimously bullish on the US stock market in December 2007. Think again. It’s December of 2010 and, after a few minor bailouts and major bonus seasons, the bulls are back.

 

Don’t wince. Without a Fashionable Consensus, how else would we generate long term absolute returns? This weekend’s edition of Barron’s “Outlook For 2011” may be one of the finest gifts of Groupthink that we’ve been offered in years.

 

As Barron’s themselves reminds risk managers (not in the cover story article), the SP500 has only seen double-digit gains for 3 consecutive years twice since World War II (1951 and 1994). Looking at the bullish 2011 predictions for US stocks that way, maybe consensus is contrarian!

 

Will 2011 mark a 3rd year in a row of double-digit gains?

 

Well, let’s go through that…

 

Let’s start with a level. My immediate term TRADE zone of resistance for the SP500 into year-end is 1. Giving year-end bonus and mark-up season the bullish benefit of the doubt, let’s use the top end of that range and round the number up to 1256.

 

Since a +10% or better gain in the SP500 for 2011 (versus 1256) = 1382, let’s take a gander at who is more bullish than that:

  1. Deutsche Bank = 1550
  2. Goldman Sachs = 1450
  3. JP Morgan (formerly known as partly Bear Stearns) = 1425
  4. Barclays (formerly known as Lehman) = 1420
  5. Bank of America (formerly known as partly Merrill) = 1400

Now, to be fair, we’ll need to provide some disclosures (it’s a sell side thing)

*the aforementioned 2011 targets are from last week’s Bloomberg survey and subject to revision

**some of these estimates are the mid-point of Big Broker’s internal range (that’s a CYA thing)

***some estimates are from economists and bond strategists (yes, on Wall Street, cops are sometimes firefighters for commission)

 

The only person we can find who is more bullish than Binky Chada at Deutsche Bank isn’t a sell-sider, but he was equally as Bullish As Binky back in 2008. Don Luskin called for a +30% move in US stocks when I debated him on Kudlow on Friday night. Luskin’s made for YouTubing estimate implies a +377 point move in the SP500 to all-time highs in 2011 to 1633.

 

Now let’s not get caught up in what’s going on in the rest of the world this morning (Global Growth Slowing, Inflation Accelerating, and Interconnected Risk Compounding). Chinese stocks closed down for the 4th straight session to -13% for 2010 YTD and the CRB Commodities Index level of 320 is +25.5% inflated since the beginning of July.

 

Per the US stock market centric bulls, these interconnected global economic realities don’t matter, until they do.

 

Let’s get back to the US stock market’s 2011 Fashionable Consensus and dig a little deeper into its tapestry.

  1. Everyone loves Tech
  2. Everyone (except Doug Cliggott at CS) hates Healthcare
  3. Everyone has no short ideas

Most risk managers realize that doing what everyone else is doing isn’t a great idea (especially if you want to charge your clients 2 and 20). That’s why I’m short Tech (XLK) and Industrials (XLI) going into year-end. Both are reaching extreme levels of being intermediate-term TREND overbought.

 

I’m bearish on US Equities (SPY) and US Bonds (SHY). I’m bullish on the US Dollar (UUP).  As a result, I’m bullish on building up a large cash position as we head into what I think is going to be at least a 7% correction in the next 3-6 months (SP500 downside target = 1168).

 

No, I’m not reckless enough to give you my “year-end target” for the SP500 (that’s what unaccountable Big Brokers do). But I will tell you what I think every day between now and then. I’ll tell you what my upside/downside probabilities are across my 3 investment durations (TRADE, TREND, and TAIL), and I’ll take a long or short position that I’m accountable to.

 

If I’m wrong on US Equities in the next 3-6 months, I think some combination of the scenario laid out by Jeff Knight at Putnam (buy side PM) and Doug Cliggott (ex buy-sider at Credit Suisse) has the highest probability. Upside in the SP500 to the 1 range with the two sectors that I think auger best to an environment of US style Jobless Stagflation (Energy and Healthcare) outperforming.

 

My immediate term TRADE lines of support and resistance lines for the SP500 are now 1236 and 1249, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fashionable Consensus - thatcher


MACAU SLOWS SLIGHTLY

With table revenues at HK$8.0 billion through the 15th we are now projecting HK$17.0-17.5 billion in total revs for the full month of December. 

 

 

Our new projection range represents YoY growth of 55-60% - still strong but a slight slowdown from the first 10 days of the month.  Our projection takes into account slot revenue and the number of weekend days and weekdays.  Market shares are shown in the table below.  We continue to highlight Wynn’s impressive bounce back in market share and MGM's elevated share.  We think both will continue.

 

MACAU SLOWS SLIGHTLY - macau34



investing ideas

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 Week Ahead

The Economic Data calendar for the week of the 20th of December through the 24th 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

 


The Golden Haze

This note was originally published at 8am on December 17, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A question that sometimes drives me hazy: am I or are the others crazy?”

-Albert Einstein

 

Per our friends at Wikipedia, “haze is traditionally an atmospheric phenomenon where dust, smoke, and other dry particles obscure the clarity of the sky.” That just about summarizes what I think about the US stock market right here and now.

 

When I say now, I mean yesterday’s closing price. The SP500 inched up another point above its YTD closing high, taking its YTD gain to +11.4%. If you’re looking at this market price through The Golden Haze of ‘everything is going to be ok’ from here, you must be saying that higher-highs in a market price are bullish. They are, until they aren’t.

 

Up until 2 weeks ago, The Golden Haze was quite tranquilizing in another asset class market price – Gold. Then the music of bullish price momentum started to fade away. It didn’t stop suddenly. It didn’t stop hastily. It just started to stop…

 

The price of gold is now hitting a 2-week low this morning and is officially broken on my immediate-term TRADE duration. What were bullish higher-highs before December the 6th can now be considered bearish lower-highs. Again, until they aren’t.

 

Since I sold our entire gold position on December 6th  (+3.4% higher at $138.55 GLD), I suppose I have some credibility in attempting to make another “call” on gold from here. So let’s take a shot at this and consider the why and where from here:

 

Why is Gold down?

  1. CORRELATION RISK: Over the long term, Gold tends to underperform when real interest rates are positive.
  2. RELATIVE STRENGTH: Real-interest rates (domestic and global bond yields) have been blasting to the upside since November.
  3. CURRENCY COMPETITION: Don’t look now, but the US Dollar is up in 6 of the last 7 weeks as Fed Fighting becomes fashionable.

Where does Gold go from here?

  1. Immediate term TRADE: as of this morning my immediate term TRADE lines of support and resistance are $1362 and $1391, respectively. Trade the range.
  2. Intermediate term TREND: I introduced this line to investors in Calgary and Vancouver in a slide presentation on December 5th and 6th and the TREND line hasn’t changed. There’s intermediate term mean-reversion risk in the price of gold down to $1313.
  3. Long-term TAIL: there is a world full of support down in the $1210-1230 range and I’d love to buy back my gold there.

Now anyone who knows me well knows that I probably won’t have the patience to wait for $1230 gold on my buyback program. Heck, I may not have the patience to wait for $1313 either. But, provided that I remain bullish on the US Dollar (long UUP) and US Treasury Yields (short SHY), I’ll have a very hard time explaining why I’d buy back gold anytime soon. Being short gold on the next rally to lower-highs may be the better bet. We’ll see.

 

Back to The Golden Haze that is being long US Equities here… I think it’s instructive to think through the same CORRELATION RISK, RELATIVE STRENGTH, and CURRENCY COMPETITION scenario analysis that I went through for gold.

  1. CORRELATION RISK: using an intermediate-term TREND duration (6 months), the SP500 has an inverse correlation to the US Dollar Index of -0.77 and an r-square of 0.60. In other words, sustained USD strength should be bearish for US equities.
  2. RELATIVE STRENGTH: since March of 2009, the SP500 has outperformed gold by a lot (SP500 is +83.7% from its March lows, whereas gold is up 53%). So if Gold can go down in the face of Fed Fighting (competing with higher real interest rates), US stocks can.
  3. CURRENCY COMPETITION:  seasonal spikes in the US Dollar Index have happened in both of the last 2 years (2009 and 2010). It wasn’t cool to be levered-long US Equities in either of those January-February periods.

Never mind the obscurity of making the “valuation” case for stocks here; valuation isn’t a catalyst. Never mind the atmospheric phenomenon of short-term politicking and its effect on stoking “growth” hopes in the US economy either. That’s now consensus.

 

Take the “call” to sell US stocks here from a man who is already -3.37% too early in his short position (that would be me), as every Big Broker’s “strategist” is now officially calling for the US stock market to be up next year.

 

My immediate term support and resistance levels for the SP500 are now 1234 and 1248, respectively. If the SP500 makes another higher-high in the coming weeks, look for me to short it again. Yesterday I moved to a 70% position in Cash in the Hedgeye Asset Allocation Model.

 

Enjoy your weekend and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Golden Haze - 1


Corn Cobbed

Position: Long corn in our portfolio via the ETF CORN


Conclusion: The global corn supply and demand imbalance looks to persist into 2011 as we are seeing limited demand degradation due to increasing prices.


This has been a tough year for those short of corn.  In 2010, world corn production is only up ~2%, while world stocks are down ~2% after declining almost 6% last year.  More noteworthy, is that this has been the third year in a row in which consumption has outpaced supply.   This shortage has been reflected in the rapid price move in last six months and in the year-to-date on a $ per bushel basis.

 

Corn Cobbed - corn table


In fact, as outlined in the table above, corn has had the most rapid price movement of any of the major grains in 2010.  The primary reason for this relates to two factors: weak crop yields in the United States and an inflection point in demand out of China.

 

Before moving specifically into these factors, in the chart below we wanted to highlight the history of corn imbalance for the past decade.  As the chart shows – while the consumption of corn globally has been growing driven by demographic growth, increased consumption, and the use of corn as an alternative fuel – production shows a slightly different story.  In fact, in the last decade we’ve had three shortages of corn, which are driven by the inability of production to keep up with consumption.

 

Corn Cobbed - corn2

 

In terms of world production share, the United States currently leads the pack.  In fiscal 2009, the U.S. grew almost 40% of the world’s corn, and was by far the largest grower, at over 300 metric tonnes.  In terms of exporters of corn, the U.S. exports the most corn, with just over 50% of the export market;  Argentina is the second largest exporter at about 14% of the export market.

 

Collectively, the United States and Argentina dominate corn exports.  The recent growing seasons in these regions has been weak, which is the critical factor as it relates to global supply and demand, and therefore price.  Specifically, Argentina is experiencing very dry weather, which will likely hurt yields for Argentine corn crops as December and January are the key pollination periods.   A similar weak growing season in the United States has led to the projection that U.S. corn stocks could drop to the 832 million bushel levels.

 

Corn Cobbed - corn3

 

As it related to demand from China, the Shanghai JC Intelligence recently increased its estimates for Chinese corn imports to 7.5MM metric tonnes, which was an increase of 22.7% from the groups’ last estimate.  This is an important inflection point, since up until last year China was a net exporter of corn and is now potentially poised to become one of the largest importers of the commodity.   Chinese corn demand will likely continue to increase despite the threat of monetary tightening, as the government is focused on curbing food inflation domestically and needs to import food stuffs to do this.

 

Speaking toward global grain demand, the Canadian Wheat Board recently announced that, “domestic demand remains solid, and it remains to be seen how much the price has rationed offshore demand.”  This was also verified by the USDA who articulated in their December 10th report that global demand remains strong despite accelerating prices. 

 

Collectively, the combination of resilient grain demand (irrespective of rising prices), difficult growing environments in Argentina and the U.S., and low stock levels in the United States appear poised to continue to drive corn prices higher.  In fact, corn stocks have not been this tight since 1, when the current stocks-to-use ratio was also in the 6% range.  Put more bluntly, absent demand destruction, we could run out of corn!

 

It seems the corn bears might be setting themselves up to be corn cobbed…

 

Daryl Jones

Managing Director


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