“I’ve worked with dogs before and they’ll sit and they’ll roll over. With kangaroos, you say sit and they start boxing with you, they’re nuts.”
Keith is out on some family business today, but I think he would, after the last 24+ hours of global market trading, agree with the titled of this note: Kangaroo Markets. As creative as I can be at times, I have to give credit for the origin of the title to its rightful owners, the Aussies.
In another capital markets sign of the topping of the global economic cycle, it seems Kangaroo Bond sales surged to a record A$37.3 billion last year and are on track to nearly match that total this year. As a prominent Australian fixed income manager recently said to the financial press, “I expect more financial kangaroo sales.” Indeed, and we expect more kangaroo markets, which is to say markets that are “nuts”. Now, of course, markets can’t really be nuts, but Centrally Planned Price Volatility can certainly make those of us who trade them nuts.
Yesterday’s market action likely didn’t reward many. The dollar index rallied hard, so commodities were taken out to the woodshed and U.S. equities were down -1% or so with the small cap Russell 2000 leading the way to the downside at -1.8%. The pundits are calling this the “risk off” trade. I’m not sure risk is really ever off, but it is a convenient way of explaining that many investors got caught leaning way too hard into consensus. Or, perhaps, all the Hedgies at the SALT conference just aren’t trading this week…
The other important event yesterday related to the investment management industry was that Raj Rajaratnam, head of Galleon Management, was found guilty on all 14 counts of fraud and conspiracy. Personally, I don’t have a lot of knowledge about the case, but I can tell you this, Raj’s lawyer certainly thought he was in a Kangaroo Court as he announced immediately after the verdict that they intended to appeal to the Second Circuit.
To the extent that this was actually a catalyst for the market yesterday, there is another catalyst in the pipeline on this front, which is the trial of Zvi Goffer, more commonly known in technology insider trading circles as Octopussy, who according to the accusations and this chart from the WSJ (http://online.wsj.com/article/SB10001424052748703386704576186592268116056.html) was purportedly in the middle of a web of inside information. Personally, I just think he had a terrible nickname.
The bigger question, of course, is what does this all mean for the investment management industry? Luckily, despite the headlines, most actors in the investment management industry are ethical and have legal processes, so the prevalence of cheating is likely much less than the headlines would currently suggest.
In an unusual move, before we even had paying clients at Hedgeye we brought on board our compliance officer, Rabbi Moshe Silver, a Wall Street veteran of over 25 years. Prior to joining Hedgeye, Moshe worked with Keith at the Carlyle-Blue Wave hedge fund, where he was director of compliance. When Moshe came on board he recommended we introduce ourselves and our unique business model to our regulators – another unusual move, but in this day and age of increased scrutiny, we thought it was appropriate.
Moshe’s contributions have expanded to sharing his unique – and occasionally hilarious – insights into the world of regulation, un-regulation, and the shadowy places where Wall Street and the Real World meet. His thoughts appear in a weekly column that is a must-read for many of our clients. Needless to say, Moshe hasn’t been effective at limiting our use of hockey references, but we’re glad he’s got our back as he oversees our research and communications to ensure that compliance always comes first.
If there is any potential market impact of more insider trading trials and investigations, it is perhaps to accelerate Centrally Planned Price Volatility. We've highlighted this last point in the chart below. Over the course of the past decade when interests rates have been taken to abnormally low levels, such as in the 2002 – 2003 period and in the 2008 – current period, price volatility increases, as emphasized by the VIX stepping up to a new level.
In theory, this makes sense. Aside from attempting to artificial co-opt the natural business cycle, the other impact of our Central Planners taking interest rates to abnormal levels for extended periods is to force investors to speculatively chase return. Practically, what does that mean? As an example, it means bidding oil up into the $100+ level when global growth is slowing and global oil inventory is building. This works, of course, until it doesn’t and then the trade gets unwound, as we are seeing again this morning with the commodity complex down across the board and silver leading the way, down a cool -8.5%. (But wait, silver’s an industrial metal! Or is it?)
Underscoring the heightened commodity and equity market volatility we are seeing is currency volatility. This is a function of both the Central Planners at the Federal Reserve, but also the Fiat Fools in Washington, who are currently playing politics with the fiscal future of the United States on the debt ceiling debate. For a comprehensive review of our thoughts on the debt ceiling debate, please see the note written by my colleague Darius Dale yesterday, titled “Fear Mongering Meets Brinksmanship: A Comprehensive Guide to Navigating the Debt Ceiling Debate.”
Be it the moniker Octupussy, or the Fiat Fools in Washington, some days all of this just seems a little childish, so with that we’ll end with a nursery rhyme:
“Jump, jump, jump goes the big Kangaroo,
I thought there was one, but I see there are two.”
Keep your head up and stick on the ice,
Daryl G. Jones
This note was originally published at 8am on May 09, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Man is free if he needs to obey no person but solely the laws.”
Kant was an 18th century German philosopher who over-weighted the value of real-life experience versus academic theory. Hayek used Kant’s aforementioned quote in “The Road To Serfdom” to support his point that unchecked government planning and the Rule of Law run counter to each other’s objectives.
“By giving the government unlimited powers, the most arbitrary rule can be made legal; and in this way a democracy may set up the most complete despotism imaginable.” (F.A. Hayek, “The Road To Serfdom”, 1944, page 119).
Since professional politicians gave Hank Paulson the TARP “bazooka” and started begging The Bernank for both “shock & awe” rate cuts to zero (2008), then The Quantitative Guessing (2009-2010), we’ve been waking up every morning trying to manage risk around Fiat Laws.
This morning’s speculation as to what the European Union is going to do with Greece’s $110,000,000,000 lifeline of bailout Euros is no different than the perpetual risk management exercise of Gaming Policy that we engage with here in the US. It’s a sad state of the “free” market union.
The good news is that we can measure the Global Macro risks embedded in the next Big Government Intervention mathematically. If the intermediate-term TREND of US Dollar Debauchery is going to change, the currency market is going to signal that to us in real-time.
Last week’s short squeeze in the US Dollar did exactly what we thought it would do if and when it stopped crashing – it started making everything else start to crash. The Bernank calls this “The Price Stability.”
With the US Dollar closing up +2.6% week-over-week (only it’s 5th up week in the last 19 weeks), here’s what The Correlation Risk looked like:
- Euro = DOWN -3.4%
- CRB Commodities Index = DOWN -8.9%
- WTI Crude Oil = DOWN -14.7%
- Gold = DOWN -4.2%
- Copper = DOWN -4.8%
- Volatility (VIX) = UP +24.7%
No, that’s not a typo on the marked-to-market pricing of The Price Volatility associated with The Bernank pandering to the political winds and keeping “hope” for a 3rd round of rule making (QE3) alive.
Now, for myself, The Price Volatility is cool because I’m trying to prove that Big Government Intervention in our markets does nothing but A) shorten economic cycles and B) amplify market volatility.
For our profession and the economy that we live in, it’s not so cool. Last week’s US jobless claims (474,000 – breaking out to the upside) reflect this. So does the weekly Bloomberg consumer confidence survey coming in at minus -46.1. Volatility crushes confidence.
While there is a lot of partisan fanfare about a “bull market in stocks”, I don’t think I have ever seen so much storytelling go alongside a +6.6% YTD return for the SP500 since I started in this business 13 years ago.
Globally, as of Friday’s closing prices, the big “bull market” in equities isn’t especially bullish looking either. Take a look at the Top 3 Global Equity market performers for 2011 YTD:
- Venezuela = +17.6%
- Hungary = +11.2%
- Romania = +10.0%
Go Chavez and the Keynesian Kingdom?
Notwithstanding The Price Volatility that it’s taken us to get to another lower-long-term high in US Equities (down -14.4% versus it’s October 2007 peak), isn’t it interesting that there are only 3 stock markets in the world with double digit returns for the YTD?
Markets aren’t “free” – at least not like they used to be. And being reminded of that last week is why I took up the Cash position in the Hedgeye Asset Allocation Model on the Bin Laden news. Here are my current asset allocations and positions:
- Cash = 43% (versus 34% last Monday)
- International Currencies = 24% (Chinese Yuan and British Pounds – CYB and FXB)
- Commodities = 12% (Gold and Oil – GLD and OIL)
- Fixed Income = 9% ( US Treasury Flattener – FLAT)
- International Equities = 6% (China – CAF)
- US Equities = 6% (Technology – XLK)
As a reminder, the way I think about asset allocation is the way I think about my own net worth. I’m not saying that’s a perfect methodology for everyone else – I’m just saying it’s the only one I can hold myself accountable to. So after a +98.2% two-year rally in US stocks (where we got bullish in 2009), it shouldn’t be a surprise to see me wait and watch for my spots to get invested again.
We made a call in April of 2010 called “May Showers” that saw The Price Volatility index (VIX) shoot up to 45 by June. Looking ahead at the US political calendar of deficit and debt ceiling debates this June, I’m not especially hurried to be levering myself up alongside my least favorite Fiat Fools either. I’d rather obey my own risk management laws.
My immediate-term support and resistance line for Gold are $1485 and $1521, respectively. Immediate-term support and resistance for oil are $98.63 and $109.11, and my immediate-term support and resistance lines for the SP500 are now 1333 and 1351, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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THE HEDGEYE DAILY OUTLOOK
TODAY’S S&P 500 SET-UP - May 12, 2011
In our Q2 Global Macro Theme slide deck, we call this stage of asset prices (relative to USD) “Deflating The Inflation” – send an email to if you need those slides and scenario analysis (we also have the conference call replay on the Hedgeye Portal).
Obviously with last week’s hyper correlation risk (USD +2.6% week = Oil down -14.7%, CRB -8.9% on the week, etc), yesterday’s unwind was proactively predictable. USD UP = CRB index down -2.9% on the day – and oil hammered (we made a call to sell Oil on Tuesday).
The Hedgeye models are registering immediate-term TRADE (3 weeks or less) downside in WTI Crude Oil this morning of $93.33/barrel. That’s eye opening – and the other side of the biggest net long position in hedge fund history should be. The only “commodity” we are long here is gold. The Immediate-term TRADE ranges to watch on the way up to USD immediate-term TRADE overbought line = 75.79:
The reason why the Hedgeye models have USD and Euro “neutral” in the immediate-term is that the big moves in both are now in the rear view mirror! USD is bullish TRADE, bearish TREND whereas Euro is bearish TRADE (resist = 1.44), bullish TREND (support = 1.40). As we look at today’s set up for the S&P 500, the range is 18 points or -0.83% downside to 1331 and 0.52% upside to 1349.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: -1431 (-3326)
- VOLUME: NYSE 975.04 (+16.76%)
- VIX: 16.95 +6.54% YTD PERFORMANCE: -4.51%
- SPX PUT/CALL RATIO: 2.20 from 1.54 (+43.06%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 24.70
- 3-MONTH T-BILL YIELD: 0.03%
- 10-Year: 3.19 from 3.23
- YIELD CURVE: 2.62 from 2.60
MACRO DATA POINTS:
- 8:30 a.m.: Fed’s Plosser speaks in Aventura, Florida
- 8:30 a.m.: Initial jobless claims, est. 430k, prior 474k
- 8:30 a.m.: Net export sales (commods)
- 8:30 a.m.: Producer price index, est 0.6% M/m, prior 0.7%
- 8:30 a.m.: Retail sales, est. 0.6%, prior 0.4%
- 9:30 a.m.: Senate Banking committee votes on Fed nominee Diamond; Fed Chairman Ben Bernanke then testifies in oversight hearing on Dodd-Frank law
- 9:45 a.m.: Bloomberg consumer comfort, est. (-45.9), prior (-46.2)
- 10 a.m.: Business inventories, est. 0.9%, prior 0.5%
- 10:30 a.m.: EIA natural gas storage, est. 71, prior 72
- 1 p.m.: U.S. to sell $16b 30-yr bonds
- 8 p.m.: Bernanke gives brief remarks at award ceremony in Wash.
WHAT TO WATCH:
- AT&T to cut lots of jobs if its purchase of T-Mobile USA is approved - NY Post
- China raises reserve requirement ratios for banks by 50 bp to 21%; The reserve requirement ratio increase is effective 18-May
- EPS season ending ugly with the CSCO quarter - Soon it will be MACRO time
- Reserve-rich Asian countries still see US Treasuries as the safest bet - Reuters
COMMODITY HEADLINES FROM BLOOMBERG:
- Commodities Drop for Second Day as Higher Rates May Curb Economic Growth
- Crude Oil Declines After IEA Cuts 2011 Global Demand Forecast on Prices
- Copper Slides to a Five-Month Low as Tightening Cuts Into Demand in China
- Gold, Silver Decline as Dollar Gain Reduces Alternative Investment Demand
- Cocoa Falls as Ivory Coast Exports Add to Supply; Arabica Coffee Declines
- Investors Shifting to Cash From Commodities as Outlook Dims in Global Poll
- China’s Sugar Imports May Be 28% More Than Forecast by U.S., Olam Says
- Corn, Wheat Extend Decline as Crude Oil Trims Gains, Dollar Strengthens
- West African Oil’s Two-Year High Threatens Growth in India: Energy Markets
- Shanghai Exchange May Widen Silver Trading Band Tomorrow After Price Drop
- Food Prices May Extend Advance, Adding to Inflationary Pressure, FAO Says
- Japan Orders Slaughter of All Cattle Around Fukushima Nuclear-Power Planth
- EuroZone Mar Industrial production +5.3% vs consensus +6.2% and prior revised +7.7% from +7.3%; EuroZone mar Industrial Production (0.2%) m/m vs consensus +0.3% and prior revised +0.6% from +0.4%
- UK March Manufacturing output +2.7% y/y vs consensus +2.8% and prior +4.9%; UK March Manufacturing output +0.2% m/m vs consensus +0.3% and prior +0.0%
- UK Mar Industrial output y/y +0.7% y/y vs consensus +1.1% and prior +2.4%; UK Mar Industrial output m/m +0.3% y/y vs consensus +0.8% and prior (1.2%)
- France Apr CPI +2.2% y/y vs consensus +2.2% and prior +2.2%; France Apr CPI +0.4% m/m vs consensus +0.4% and prior +0.9%
- Markets are weal across the board; Oil markets are leading the way down.
- Asian market were weak across the board
- Japan April M3 +2.1% y/y. March trade surplus (77.9%) y/y. March current account surplus (34.3%) y/y to ¥1.679T vs consensus ¥1.731T.
- Australia April employment (22,100) m/m vs consensus +17,000; April unemployment 4.9%, matching expectations..
Huge quarter but upside from consensus was all due to high hold.
"The first quarter 2011 revenue are good as a result of the execution of our overseas marketing plans. The enhanced product offerings and service excellence that our customers demand, will allow us to build significant brand equity over time as the foremost destination resort in Asia."
HIGHLIGHTS FROM THE RELEASE
- Genting Singapore IR 1Q11 detail (S$MM's):
- Casino revenue: 804.4MM
- Non-gaming non-gaming: 109.154MM
- Adjusted EBITDA: 537.9MM (59% EBITDA margin)
- Group revenue was S$922.6MM and Adjusted EBITDA was S$529.4MM
- "Singapore IR experienced good win percentage and gaming volume in the first quarter of 2011 with steady growth in Universal Studio Singapore (“USS”) and the hotels."
- USS daily average visitation: 7,400 and average daily spend per visitor was: S$88 per visitor
- Hotel occupancy: 79% and ADR: S$280
- D&A: S$76.6MM
- "Higher finance costs of S$39.7 million was mainly due to charges related to the refinanced syndicated loan facility"
- "Higher taxation of S$77.4 million in the first quarter of 2011 mainly from the higher deferred tax expenses due to temporary difference in property, plant & equipment."
- Capex in the period was S$0.46BN
- "Our Casino VIP rolling market segment continues to be a major contributor to the total gaming revenue with growth compared to the previous quarter at 19%. The Casino VIP rolling revenue is now 62% of the total gross gaming revenue."
- "We are delighted that we have been able to attract record volumes of overseas visitors to our resort, and Universal Studios Singapore continues to be a major draw for the young and not so young from around the region."
- "Hotel occupancy has been good and our bundled products have been extremely popular. Quarter 2 bookings continue to be encouraging and we look forward to a strong summer holiday season."
- "We are encountering some unforeseen difficulties which may delay the completion of the second phase. However, we are addressing this issue and have allocated resources to catch up with the schedule."
CONF CALL NOTES
- Next week, Journey from Madagascar will open and USS will celebrate its grand opening
- VIP net revenue market share has grown from 65% to 68%
- They believe that the Mass market has entered a steady state, and therefore will not show big growth with aggressive marketing and comps to the local population which they won't do
- 3.8% hold rate this quarter helped achieve their high margin this quarter
- Gaming revenue was 88% of total rev
- No update on junket approvals
- MICE team did over 670 events, making the IR one of the 3 most active MICE players.
- Maritime Museum is set to open in the quarter, which should be a big attraction
- Rolling was 60% of their revenue, non-rolling was 40% - so they still have the majority market share in both segments
- There will definitely be organic growth in Mass, but it has usually tracked GDP plus around the region
- Long term stabilized margin target is still between 45-50%
- Was there a sequential decline in the RC volumes?
- RC volume declined sequentially and they expected that given that when people lose faster they roll less
- Post Golden Week, they are still quite happy with business
- Delays on PH2?
- There are minimal capex implications
- The delay is a few months due to design enhancements
- The delay is specific to just a few components - but they wouldn't elaborate
- Any thoughts on a clamp down post election?
- They will not pursue any marketing campaigns targeted at the local market
- Level of write-offs?
- Ratio of the provision of bad debt vs. receivables has come down
- Still hard to say until another year or so
- Will be opening parts of the West zone in the 2H11 which will positively impact the visitation to the resort
- Taxes is their largest expense, followed by primarily fixed labor expenses (20% is variable / 80% fixed). They don't see any significant expense increase.
- ETG's increased by about 150 machines. They are getting a little better than organic growth on the ETG side. The max is 2,500 and they are at 2,000 ETGs
- The restriction on their gaming floor is the restriction on SQFT on the main gaming floor - they are always tweaking the mix to maximize revenues
- 589 tables at 3/31/2011 (30% are VIP); 1,437 slots, 363 ETGs
- Interest expense: The facility is already fully drawn down. Going forward the interest expense will be a little lower because this quarter includes a refinancing fee
- Market share for RC volume was 59% vs 4Q share was 67%
- How much of their gaming SQFT have they used so far?
- Still in the planning stage for the rest
- There was a reduction in construction payables this quarter
- What's the residual capex for the West Zone?
- 1Q capex wasn't for west zone - so there is still S$700-800MM to be spent of which S$100MM has been spent
- VIP net revenue was 50% of net total gaming revenue and 62% at the gross level of total gaming revenue
- The commission rate was slightly lower than last quarter - they are not buying the business or increasing commissions
- VIP demographics - the market segmentation is still similar and don't see material shifting
- Allocated minimal space to poker on their floor. They will continue to tweak their mix on on the floor to maximize win
- First quarter they have collected a lot more of their receivables than last Q - less than 40% of receivables are past 30 days due
- Mass market drop was pretty flat but they held pretty well
- Would EBITDA have been S$400-410MM for the Q if hold was 2.8%?
- No Comment
Notable news items and price action from the past twenty-fours along with our fundamental view on select names.
- In the QSR space the notable call-outs were WEN, TAST and SBUX all down more than 1% on accelerating volume
- In the FSR space the notable outperformers were RRGB, CPKI and TXRH; all up on accelerating volume
- Sonic plans to simplify its crowded food-and-drink lineup when it introduces new menu boards on May 26. But gaining breathing room comes at the cost of removing 18 slower-selling items. In the short run SSS will suffer.
- Chipotle Mexican Grill Inc's (CMG.N) legal costs are starting to rise as the result of a federal probe into its hiring practices - CFO
- MIDD, THI and COSI report EPS today
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