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Ragingly Bullish Bears

This note was originally published at 8am on May 05, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Forget about style; worry about results.”

-Bobby Orr

 

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:

  1. Bulls up 100 basis points week-over-week to 55%
  2. Bears down 200 basis week-over-week to 16.5%
  3. 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:

  1. Bulls are not ragingly bullish
  2. Bears are not allowed to be bearish
  3. 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:

  1. Gold
  2. Silver
  3. Oil
  4. Cotton
  5. Copper
  6. 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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Ragingly Bullish Bears - Chart of the Day

 

Ragingly Bullish Bears - Virtual Portfolio



Who Plans Whom?

“Who plans whom, who directs and dominates whom…?”

-F.A. Hayek

 

As long as our central planning overlords keep coming up with new plans for our said “free markets” (regulating oil margin requirements, compromising a Constitutional debt-ceiling debate for political favors, etc.), I guess I’ll just keep rolling through a full frontal review of their Keynesian dogma.

 

This isn’t to say that the Austrian and Chaos Theory schools of math & economics don’t have their faults. All schools do. It is simply a reminder that all independent research starts and ends with finding the right answers. Sometimes those answers are different, depending on who you are, and who dominates you…

 

Being directed and dominated by bureaucrats isn’t cool. That’s why hard core American patriots are so upset. If you live in a different country where socialist planning isn’t new, you’ve probably been bitter for a while now and this email is likely regulated away from your inbox too.

 

The aforementioned quote comes from a chapter Hayek wrote in 1944 titled “Who, Whom?” He borrowed this metaphor from Lenin in order to ask some very basic questions about individual freedoms and liberties: “Who, whom? - during the early years of Soviet rule the byword in which the people summed up the universal problem of a socialist society.” (“The Road To Serfdom”, page 139)

 

Something to think about while you watch The Price Volatility trade in your increasingly planned markets this morning…

 

Evidently, markets that are rigged, planned, or regulated inspire lower and lower trading volumes and/or higher and higher levels of volatility. If this is what the end-game for the Keynesian Kingdom is supposed to look like, no one should be surprised.

 

Whether or not I like it, I have to deal with managing risk around it this morning. I know it won’t end well, but that’s not what I’ll get paid for saying today.

 

Sadly, what we are all getting paid to do is chase short-term returns. The Bernank perpetuates this performance pressure by marking the short-term “risk free” rate to model (or the ZERO bound) and, as a result, this gargantuan experiment of starving savers of returns imputes 3D Risk (3 D’s) into markets:

  1. The Dare – zero % rates dare you to chase yield across asset classes where you can justify it
  2. The Delay – zero % short-term financing for banks delays the financial restructurings that free market prices would impose
  3. The Disguise – zero % expectations disguise the interconnected risks associated with carry trading, correlation risk, etc

Bloomberg data quantified The Dare and The Delay in their “Weekly Commitments of Traders Report” yesterday with the following data point on short-term US Treasury speculation:

 

“Non-commercial accounts purchased 48,460 con­tracts on two-year Treasury notes during the latest reporting period. The long position of 235,621 con­tracts is 3.4 standard deviations above its one-year average.”

 

In other words, never mind who is planning whom for a minute and realize that the entire Institutional Investor community is getting paid to beg The Bernank to keep the status quo on remaining what we’ve labeled as being “Indefinitely Dovish” (Q2 Macro Theme).

 

Again, I may not like it – but I do have to deal with it. So here’s the read-through so far this morning, alongside our positioning across asset classes (which you can see daily in the Hedgeye Portfolio at the bottom of the Early Look):

 

Currencies

  1. US Dollar = down for the 15th week out of the last 20 (we’re short)
  2. Euro = flat for the week, holding immediate-term TRADE line support of $1.43 (no position)
  3. Chinese Yuan = hitting new all-time highs this morning at $6.49 (we’re long)

Equities

  1. US Equities = up for the 2nd day out of the last 6 making lower-highs on almost record low volume (we’re short SPY)
  2. US Tech = up in the pre-market on the heels of big M&A (MSFT for Skype) – we’re long Tech (XLK)
  3. Chinese Equities = up for the 5th day in the last 7 after an outstanding trade balance report (we’re long)
  4. Indian Equities = down again overnight to -9.8% YTD as USD debauchery driven inflation is forcing rate hikes (we’re short)
  5. Germany Equities = up a full percent this morning to +8.3%, outperforming SP500 like they did last year (we’re long)
  6. Greek Equities = up a full 2 percent this morning after crashing in the last few weeks (down -19.7% since February 18th)

Commodities

  1. WTI Crude Oil = down small this morning on margin whispering, and up +4.1% for the week (we’re long)
  2. Gold = up again this morning, recovering from its -4.2% down week, up +1.8% week-to-date (we’re long)
  3. Copper = up over +2% for the week-to-date but still bearish/broken on both our TRADE and TREND durations (no position)

So what do I plan on doing with all of these moves and positions? Who is planning to plan moves on me next?

 

I really don’t know.

 

And I guess that’s probably a good thing to admit, given that US stock centric cheerleaders of “Dow 13,000” from early 2008 are still telling you with 100% conviction that they know exactly where this baby is going next.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1488-$1522, $98.63-$109.11, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Who Plans Whom? - Chart of the Day

 

Who Plans Whom? - Virtual Portfolio


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REGIONALS: APRIL OFF TO A HOT START

April more than just confirming the Feb/Mar acceleration. 

 


While it’s not quite Macau-esque numbers, regional gaming revenues for April are coming in strong.  Iowa, Indiana, and yes, even Illinois recorded impressive April results, despite the destructive flooding, tornadoes, and other forces Mother Nature threw at the states.  Throw in the stubbornly high unemployment across the country and this has been an uphill battle.

 

The charts below show sequential revenue for the 3 “I” riverboat markets in April compared to where revenue would’ve grown had sequential revenue levels ( for the prior 3 months adjusted for seasonality) continued.  April furthered the Feb/Mar acceleration and growth accelerated relative to Q1.  It’s particularly notable for Illinois which hasn’t seen YoY growth since April 2010.

 

REGIONALS: APRIL OFF TO A HOT START - regional1

 

REGIONALS: APRIL OFF TO A HOT START - regional2

 

REGIONALS: APRIL OFF TO A HOT START - regional3

 

As Q2 gets under way, we continue to like the regional operators, particularly ASCA, BYD and PNK.  As can be seen in the table below, in the states that have reported revenue, those companies’ properties performed much better in April than in Q1.  We think there is a high probability of Q2 earnings beats.

 

REGIONALS: APRIL OFF TO A HOT START - regional4


Acushnet Bids Due Today

 

Offers for Fortune Brand’s Acushnet golf business are due today. With Adidas still among the names mentioned on the list of final bidders we have a couple of things to consider to the extent it actually does emerge as the winner for Acushnet:

  1. First off, let’s look at the basic facts. Acuschnet owns some great assets. Titleist and FootJoy are two of the top brands in golf owning the #1 position in Balls and Footwear respectively. Market share numbers are dicey, but Acushnet has over 50%+ share of the golf ball market in the US.
  2. Nike dosen’t want this asset. Nike thinks it can beat Titleist and FootJoy organically in all categories. Whether you believe it or not is irrelevant. If Nike thinks it can, it won’t do the deal.
  3. That said, Nike will get involved in the bidding. They’d like nothing more than to drive the price higher to prevent Adidas from getting it on the cheap. Remember that one of the risks in this space had been that Adidas freed up close to $40mm per year with the NFL deal moving over to Nike in the 2012 season and could otherwise bid on athletes. If it wins Acuschnet, it’s going to be more focused on golf.
  4. What’s the one thing that will burn Nike up on this deal? This will be the one category where Adidas will arguably have a Footwear product that is more successful than Nike’s in FootJoy. (Adidas usually leads in apparel). The numbers speak for themselves. Even many Nike Golf die hards wear FootJoys.
  5. This is not a bank-breaker for Adidas. Regardless of the sale price – we could see anything between $800mm-$1.2Bn, its balance sheet can handle it without a hitch. Current net debt/total capital is 12%, and adding a billion in debt would get us to 25%.
  6. Not a good read-through for the toning market. When Hainer steps up acquisition activity, it usually means that a recent sales driver is waning. This was going to be the year of the International Toner.

Acushnet Bids Due Today - Acushnet Financials 5 11

 

Acushnet Bids Due Today - Adidas Acushnet ProForma 5 11

 

 


JNY: Winning Is Losing

JNY's chances for landing Jimmy Choo just went up. The market might like this, but we can't get the numbers to work. Leverage chasing growth is a bad idea.

 

 

The media continues to swarm around the Jimmy Choo sale. Investcorp has apparently pulled out of the bidding for Jimmy Choo ahead of the May 11 deadline for all bids. This would leave Jones duking it out with TPG for the ‘prize.’  But there’s a  big difference between these two – one can afford it, and the other cannot.

 

Numbers are spotty on Jimmy Choo. So let’s back into a value based on what current owner TowerBrook (and advisor HSBC) are suggesting. Specifically, on April 27th, in attempt to speed up the process, HSBC proposed an IPO at £650mm. Clearly, they’re going to throw out a lofty price to maximize valuation – so that’s probably well over what it will sell for. But let’s conservatively give it a 20%. Unfortunately, this is being priced in pounds. Kind of a tough time to buy an asset priced in pounds with a US $ right now. After netting out the haircut from the dollar translation, we’d still  be looking at a purchase price of just over $800mm in US$.

 

This would require JNY to borrow virtually all of the purchase price – which would take its net debt to total capital up over 50%. On that amount of leverage, we’ll assume a 7% borrowing cost.

 

If we assume a 12% operating margin on that business, it suggests that we’d need to have the brand come in at $500mm in sales in order to be net neutral to the P&L.  That sounds about fair.

 

But it’s the balance sheet component here that concerns us. We have yet to find a scenario for just about any company (or country, or individual) where levering up profitably solves a growth problem.

 

If JNY ends up ‘winning’ this deal without some kind of creative partnership to share in the financial burden but take away disproportionate economics, then we’ll be even more worried.

 

We remain very negative on this story. 


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