“Forget about style; worry about results.”
Last night, after the Boston Bruins scored 2 goals in the 1st minute of the 1st period against the Philadelphia Flyers in the Stanley Cup Playoffs, I found myself high fiving friends in the Boston Garden amongst 18,000 of the most Ragingly Bullish Bears I have seen in my life.
Bears wearing black and gold jerseys have been pounding Boston’s pavement since the Bruins were born in 1924. While I’m not a long-time Bruins fan, I can assure you that the best risk managed position I could assume last night was to be one for the night.
Bears, Bud Lights, and belting heavy metal music with the Bruins about to go up 3-0 in a playoff series in May is as bullish a 3-factor model as a hockey fan can recognize. It’s been a long time. They haven’t won The Cup since Bobby Orr (1972). These bears are hungry.
How Ragingly Bullish are you?
While sentiment is one of the more difficult risk management factors to quantify, we do have some qualitative data that we overlay with our models. In mid-February, one of the key sentiment signals we called out in calling for a US stock market correction was the Institutional Investor (II) Bullish-to-Bearish survey.
Like most surveys, this one is far from perfect – but if measured relative to itself, you can at least consider little mathematical critters that matter like mean reversion and spread risk.
So let’s forget about the style of this survey for a second and consider the results:
- Bulls up 100 basis points week-over-week to 55%
- Bears down 200 basis week-over-week to 16.5%
- The Spread (Bulls minus Bears) widened by 150 basis points week-over-week to +38.2% for the Bulls
Again, relative to itself, there are a few critical risk management callouts in this long-dated survey to consider:
- Bulls are not ragingly bullish
- Bears are not allowed to be bearish
- The Spread between Bulls and Bears is only 200-300 basis points from its all-time wides (all-time is a long time)
All-time “wides” is risk management locker-room speak at Hedgeye for something you don’t want to mess with – kind of like being a man dressed in orange last night drinking a smoothie with your i-pod on in the bowl of the Boston Garden – it’s just a bad position to be long of.
Of course, with Correlation Risk to the US Currency Crashing running at all-time highs (see yesterday’s EL note to see how we quantify that), that definitely doesn’t mean you couldn’t try riding that Silver bull to the bitter end. But remember, the last 8-seconds of that ride is where all your risk really lives.
Interestingly, but not surprisingly, all it took to rock the raging inflation bulls’ world for a few days was some deflation.
How do you Deflate The Inflation (one of our Q2 Global Macro Themes)?
You stop the Currency Crash in the US Dollar.
For the week-to-date, after closing down for 14 of the prior 18 weeks, all it took to Deflate The Inflation was an arrest of the US Dollar’s decline. For the week, with the US Dollar Index trading flat, pull up a some of the following charts and you tell me how Ragingly Bullish you are on being long The Correlation Risk:
- Energy stocks
I can tell you that I for one am not enthused about being long Gold and Oil this week. When this gargantuan global carry trade of Gaming Policy unwinds, we can all forget about debating risk management styles and see who is left standing. Mr. Market owes the fans nothing.
My immediate-term support and resistance lines for Gold are now 1488 and 1526, respectively. Immediate-term support and resistance lines for oil are now $107.11 and $109.54 and my immediate-term lines of support and resistance for the SP500 are now 1332 and 1371, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on May 02, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“A little knowledge is dangerous. So is a lot.”
I have a tremendous amount of respect for what Einstein’s independent thinking did for this world, and I love that risk management quote. No matter what you do or do not know this morning, there’s this interconnected Global Macro market’s last price.
US Dollar driven correlation-risk to currency, commodity, and stocks market prices is running at its highest level since Q2 of 2008. While it’s Dangerous Knowledge to have marked-to-market models on your desktop to help you price this real-time risk, it’s doubly dangerous to summarize the uncertainty associated with this risk with partisan politics.
Since neither the Manic Media nor 90% of Washington/Wall Street got what a Crashing Currency meant in Q2 of 2008, we don’t expect consensus to provide any proactive thought leadership on the risk management topic this time. Whether it’s the US Dollar Index’s relationship to the price of Oil, Gold, or even Volatility, the similarities to the second quarter of 2008 are borderline glaring at this point.
The most market relevant mathematical learning since Einstein’s Relativity has been Chaos and Complexity Theory. It, unlike Efficient Market Theory, accepts uncertainty as a grounding principle. The Keynesian Kingdom’s top brass doesn’t do uncertainty. Allegedly, this time they know exactly what’s going on out there in this gargantuan ecosystem of colliding factors that we call the Global Economy.
What’s going on in Global Macro markets may very well be trivial. Market prices and the trailing correlations that impacted them are historical facts. What’s “not clear” (to quote The Bernank’s favorite career risk management qualifier from last week) is what can be quantified as causal over a long period of time. “Not clear” that is, to the professional politicians who are accountable to the US Dollar Debauchery math.
Here’s what the US Dollar did last week:
- Down another -1.4% week-over-week to a new YTD low
- Down -9.8% from its January, 2011 price and down for the 14th week out of the last 18
- Down -17.5% from June 2010
Wait. What does June 2010 have to do with anything other than making Groupthink Geithner’s record as a credible US Dollar stability guy anything short of a national embarrassment? June 2010 is when the US Dollar was high and prices at the US pumps were a lot lower.
38% lower, actually…
Looking ahead at our kids getting out of school and the summer driving season (hearing from my expert network that both still occurs this year), I think most Americans think a -17.5% meltdown in their Crashing Currency and a +38% tax at the gas pump is a bad trade – for them.
Have no fear however, the President is here in his weekly address (Saturday): “When oil companies are making huge profits and you’re struggling at the pump, and we’re scouring the federal budget for spending we can afford to do without, these tax giveaways aren’t right.”
Meanwhile, Brazil’s President had a different take than blaming Petrobras: “Guaranteeing purchasing power means playing tough on inflation. This is one of the fundamentals of our political economy, and one we’ll never let up on.”
At least there’s a healthy political bid/ask spread out there in terms of what left-leaning President knows the least about Complexity Theory. With American central planners leaning more left than even Europe and Brazil at this point – who would have thunk…
Back to the Global Scorecard – here were the big Global Macro currency and commodity moves associated with the US Currency Crashing week-over-week:
- The Euro = UP another +2.1% to $1.48
- The Chinese Yuan = UP another +0.3% to a new all-time high of $6.49
- CRB Commodities Index (19 commodities) = UP another +0.8% to a new 2-year weekly closing high of 370
- WTI Crude Oil = UP another +1.5% to a new 2-year weekly closing high of $113.93
- Gold = UP another +3.5% to a new all-time high of $1556 (all-time is a long time)
- Copper = DOWN -5.4% at $4.17/lb
Oops, one of these things is not like the other. That’s right, Dr. Copper is reminding those of us with some knowledge about real-time market signals that Global Growth Slows As Inflation Accelerates. Maybe that’s why Chinese and Brazilian stocks lost -3.3% and -1.4% last week, respectively. They no likey The Inflation from The Bernank.
US stocks had another great week, rallying like Japanese equities have for decades to lower-long-term-highs on decelerating volume and scary skew signals. But don’t worry – this Currency Crash thing is cool, like it was in Q2 of 2008, until it isn’t…
In the Hedgeye Asset Allocation Model I proved that I still know a little about learning from my many prior mistakes. I ended the week with my highest invested position of 2011, dropping my allocation to Cash to 34% (at the last immediate-term overbought peak in US Equities I had 62% in Cash, so at least this time is different in that I am riding out more of The Inflation trade’s gains).
The Hedgeye Asset Allocation Model’s week-end allocations are now as follows:
- Cash = 34% (down from 40% last week and 52% in the last week of March)
- International Currencies = 30% (Chinese Yuan, Canadian Dollar, British Pound - CYB, FCX, and FXB)
- Commodities = 12% (Gold, Oil, and Corn – GLD, OIL, and CORN)
- International Equities = 9% (China – CAF)
- Fixed Income = 9% (US Treasury Flattener – FLAT)
- US Equities = 6% (Technology – XLK)
A little knowledge of the Bin Laden takedown would have helped me be levered-long everything US Equities into this week’s start. Having Dangerous Knowledge like that though is a lot of knowledge I’ll pray to do without!
My immediate-term support and resistance lines for Gold are now $1515 and $1557, respectively. My immediate-term support and resistance lines for oil are now $111.47 and $115.61. And my immediate-term support and resistance lines for the SP500 are now 1338 and 1377, respectively.
I plan on taking down both my gross (Hedgeye Asset Allocation invested position) and net long positions (Hedgeye Portfolio: 17 LONGS, 11 SHORTS) into this morning’s newsy strength.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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Quarter was definitely better than expected even with the low hold. Sustainability is the question with convention business seasonally dissipating.
The Street clearly liked what they saw in MGM’s release this morning. If we take MGM’s word for it, and add back the $34MM low hold impact, then results would indeed have been 10% better than we estimated for their wholly owned properties. Without any adjustments, reported revenue of $1,505MM was 1% above our estimate, consolidated property level EBITDA was in line with our estimate and total EBITDA plus MGM’s pro-rata share of JV property level EBITDA was $3MM below our projection.
All in all, this was a good quarter for MGM. The real question is whether moderating Vegas trends will be enough to keep investors excited for the balance of the year.
Strip revenue was $3MM above our estimate while EBITDA was $11MM better. That’s before factoring MGM’s $40MM hold impact on revenues and $34MM EBITDA impact. It seems to us that management’s calculation of the flow through on the hold impact is a little high since there are usually a decent amount of rebates on gross gaming revenue – especially on table play.
- Comparable RevPAR growth of 11% was about 3% better than we estimated. As a reminder, some of MGM’s properties already introduced resort fees in 2010, like Bellagio, MGM Grand and Mandalay Bay. For most of the lower end properties resorts fees skewed the comparison – looking at MGM’s adjusted 2010 numbers though, it appears that the resort fee ranged between $6-9/night at these properties
- Casino revenues were lower than we expected. As a reminder, we indicated in our preview that while RevPAR would be strong, that strength would not be reflected in casino revenues. Therefore, we modeled low single digit casino revenue growth for most Strip properties. With low hold, the results were clearly worse.
- On the bright side, cost controls were a lot tighter than we projected, attributing to the better EBITDA performance
- While many properties had great results, double digit RevPAR didn’t always translate into improved results:
- Bellagio – RevPAR was up 13% but net revenue was flat; EBITDA was down 13%
- MGM Grand – RevPAR was up 14% but net revenue was only up 1%; EBITDA was down 4%
- Excalibur – RevPAR was up 15.5% but net revenue was only up 3%; EBITDA was only up 3%
- Some properties also had very easy comps which get much harder for the balance of the year:
- Circus Circus – EBITDA grew 170% YoY, off of $1.7MM of EBITDA. EBITDA for the next 2 quarters in 2010 was $5.5 and $6.1MM, respectively. Therefore, growth going forward should be much more moderate
- Monte Carlo EBITDA increased 113% YoY off of $6.4MM of EBITDA but produced EBITDA of $27MM for the last 9 months of 2010.
- Luxor EBITDA increased 58% YoY, off of $13MM in 1Q2010. In the balance of 2010, Luxor produced EBITDA of $48MM.
- Mandalay Bay posted a 44% EBITDA increase, off of the $25MM 1Q2010 EBITDA, which was down 40% YoY. The balance of 2010 showed average EBITDA declines of 15%.
- MGM Detroit results were a little better than we projected due to lower promotional expenditures.
- The 2H2011 faces a difficult comp here as EBITDA in 2H2010 increased 24% YoY
- The Mississippi properties were a little weaker than we projected due to lower revenues at Beau Rivage
- City Center EBITDA was $18MM above our estimate, largely due to high hold at Aria
- Factoring out high hold, Aria’s EBITDA would have been $6MM better than our estimate due to lower operating expenses. Operating expenses benefited by $6MM of a tax refund.
- MGM Macau EBITDA beat our estimate by $10MM, despite being materially above the Street to begin with.
- It looks like we overestimated direct play volumes, and therefore hold was better than we expected. Fixed expenses were also a little lower than we projected.
History may not exactly repeat itself, but it certainly does rhyme. We continue to notice strong similarities between 2008 and the present.
Today the ISM non-manufacturing index posted a larger than expected fall in April to 52.8; the weakest reading for this index since August and most of the Index’s components were feeling the same pressure. That magnitude of the drop shown in today’s April number is unnerving with the 4.5 point month-to-month decline the largest in more than two years.
Most of the survey’s components weakened in April, including the forward-looking new orders index, which plunged 11.4 points to 52.7 and the business activity index, which fell 6 points to 53.7. Showing smaller declines were the employment index, which fell 1.8 to 51.9 and backlogs, which fell 0.5 to 55.5. Supplier deliveries gained 1.5 to 53.
In addition to the ISM Non-Manufacturing Index slowing, the ADP number for April was equally disappointing; the ADP figure of 179,000 was below consensus of 198,000 and last month’s revised 207,000. The combination of the ADP number and a weak ISM Non-Manufacturing survey increases the chance that the Friday jobs picture will also miss expectations. That ISM survey’s employment index has hit its lowest level since September 2010, a month when private net job creation was closer to 100,000.
What is the ISM telling us about the potential for GDP growth going forward? For the first three months of 1Q11, the ISM nonmanufacturing index averaged 58.8, which coincided with 1.8% GDP growth. With the index at 52.8 in April and the manufacturing side of the economy slowing, it’s quite a stretch to arrive at the consensus GDP growth number for 2Q11 of +3.2%.
Conclusion: We continue to receive official confirmation of our longstanding call that inflation will surprise to the upside in Brazil, leaving a path of slower growth and higher interest rates in its wake. Further, we’re flagging the potential for structural inflation to take hold in Brazil – an outcome that would have negative consequences for the region at large.
Conclusion: Bearish on Brazilian Equities and real-denominated debt for the intermediate-term TREND. Bullish on Brazil’s inflation-linked bonds for the intermediate-term TREND.
This morning, we got a plethora of very sobering news regarding the slope and trajectory of inflation within Brazil (higher, in both cases). Both are going in the wrong direction for holders of Brazilian equities or real-denominated fixed income assets. Holders of Brazil’s inflation-linked bonds should continue to cheer on these developments, however.
As Dilma Rousseff (Brazil’s Obama), Alexandre Tombini (Brazil’s Bernanke), and Guido Mantega (Brazil’s Geithner) talk down, up, and around inflation, respectively, we continue to receive confirmation of our call that inflation is a growing problem in Brazil – one that will surprise consensus expectations to the upside over the intermediate-term TREND. Consider the following takeaways from an Alexandre Tombini interview with famed Brazilian economic columnist, Miriam Leitao provided by our Portuguese-speaking Managing Director Moshe Silver:
- A major take-away was his statement that inflation over the coming 12 months may well exceed the current upper limit of the bank’s target range (+4.5% +/- 200bps);
- Tombini said the uncontrolled influx of foreign capital – US$35 billion in the last three months alone – is undoing the central bank’s work to restrict credit; and
- Tombini affirmed that there is no political interference with the bank’s programs, and reaffirmed that inflation would be returned to current target by the end of 2012.
By the end of 2012??
As we pointed out in prior reports, Brazil’s political elite has become increasingly comfortable with higher rates of inflation over the near-to-intermediate term, opting instead to slow the pace and magnitude of rate increases in what we feel is a misguided attempt to preserve near-term economic growth.
As a point of reference, consensus for Brazil’s 2011 CPI YoY growth rate have been ripping to the upside as of late (lagging our early November call and alongside a subsequent (-12.7%) decline in the Bovespa Index). The latest 2011 Brazilian CPI forecasts are as follows:
- Bloomberg Consensus: +5.5%
- Brazil Central Bank Economist Survey: 6.37%
By comparison, our proprietary models peg Brazilian CPI to average in a range of +6.42% YoY to +6.67% YoY throughout 2011 – with the balance of risks skewed to the upside, given that Rousseff and Mantega appear to have successfully halted real appreciation for the time being through a series of newly implemented foreign capital controls and levies dating back to October.
The real is down (-2.6%) in a straight line vs. the US Dollar since it peaked on April 26 – the largest decline of any currency internationally vs. the USD over that duration. As we outlined in a couple of reports back in March, we expect Brazilian CPI to continue making higher-highs on top of our own street-high current estimates. Make no mistake, the confluence of recent policies designed to curb real appreciation may eventually become the final nail in the coffin with regard to Brazil’s current bout with The Stagflation.
“We’ve Got It Under Control,” Says Mantega
As central bank chief Tombini talks up Brazilian inflation towards Hedgeye estimates, Finance Minister Guido Mantega – Brazil’s equivalent of Tim Geithner – basically affirmed that neither he, nor the central government of Brazil have any idea what they’re doing to address it. His quotes are “Youtube-able”, and rather than attempt to paraphrase them, we’ll just paste Moshe’s translated notes below. We’re certain you’ll arrive at a similar conclusion as our own:
- In public testimony before the senate economic affairs committee, Mantega said Brazil is experiencing a new form of inflation that has never been studied in economic literature: “high and controlled.” He said the consumer price index could rise to 6% this year, but that would not be out of control. Rather than try to guide inflation back to the 4.5% midpoint – the original “inflation targeting” policy that Tombini executed for many years as a senior official at the central bank – Mantega says the objective now is for inflation to not exceed the 6.5% ceiling of the target range.
- Mantega, speaking before the Senate, said he is comfortable with 6% inflation for 2011. Mantega articulated a significant shift in the government’s approach, saying he is comfortable with inflation at the upper end of the central bank’s target range (6%-6.5% ceiling) rather than trying to hold inflation to the midpoint of the range (4.5%), which has always been the “inflation targeting” policy.
- Mantega blames current inflation on an “outbreak of inflation in developing nations,” saying producers fell asleep at the switch and “didn’t realize that there were countries where people were eating more, causing an increase in food consumption.” Mantega also blamed meteorological conditions and financial speculators as causes for the rise in inflation.
- Mantega says things aren’t so bad – after all, Brazil’s inflation is still below Russia’s (9.4%) and India’s (8.8%). But Brazil has other issues, including that many contracts are inflation indexed, meaning the cost of certain goods and services will automatically rise based on increases in reported CPI, creating a vicious cycle.
- One Senator angrily told Mantega that inflation is a major concern for all Brazilians, especially now that the central banker has thrown in the towel and said it is no longer possible to control inflation for the rest of this year. The senator said Mantega was being Pollyannaish and refusing to confront reality. Mantega reportedly did not have any new ideas about reducing prices.
The most important takeaways from his testimony are threefold:
- Brazil will experience a period of higher inflation, likely at or near the upper end of the central bank’s target range;
- The Brazilian government will be relatively comfortable with this higher rate(s) of inflation and will likely have a muted policy response as a result of it being “controlled”; and
- Brazilian officials, much like The Bernank and his Fed cronies, blame current higher rates of inflation on emerging market demand, the weather, and speculators in commodity markets.
Apparently, it seems the entire developing world took a cue from Jackson Hole to eat more, drive more, work more, shop more, etc… We obviously disagree with that conclusion and reject it as another fallacy of the Keynesian Kingdom. The great 20th century economist Ludwig von Mises has our back on this one:
"The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy."
The net result of this marginally dovish stance out of the central bank and central government is that inflation has the potential to become a structural issue in Brazil as it once was many moons ago. Two factors that support this budding thesis is the fact that Brazil is highly susceptible to a price-wage spiral, given the left-leaning tendencies of the central government and its massive influence on big business in Brazil (see: Vale, Petrobras, BNDES loans to private firms). We anticipate that Rousseff will be quick to give in to worker demands for higher wages should inflation continue to do what we expect it will do. Additionally, financing needs for the 2014 World Cup, the 2016 Olympics, and a bevy of infrastructure and energy investments will require a combination of public spending, BNDES loans, and foreign capital to the tune of roughly R$3.3 trillion (US $2.1T) over the next 3-5 years. Putting that in context, Brazil’s Gross Domestic Product is only US $2.02T (2010).
A shift on the margin towards incremental hawkishness and fiscal conservatism SOONER, rather than later, would be a very, very good thing for Brazil’s long-term economic prosperity. We’ll leave you and whomever from the Brazilian bureaucracy that is reading this note with the following quote from Milton Friedman:
"Inflation is a disease, a dangerous and sometimes fatal disease, a disease that if not checked in time can destroy a society."
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