“The most effective way of making everybody serve the single system of ends toward which the social plan is directed is to make everyone believe in those ends.”
That’s the first sentence of Chapter 11 titled “The End Of Truth” in F.A. Hayek’s “The Road To Serfdom” (page 171). “And the most efficient technique to this end is to use old words but change their meaning.” (page 174)
As they did in using the old techniques of dollar devaluation and debt monetization in the 1970s, messiahs of the Keynesian Kingdom continue to shop us their central planning policies. But that doesn’t mean that the rest of us have to follow.
Whether it’s the center-right Popular Party crushing Zapatero’s Socialist party in Spain this weekend or watching America’s political class go after Paul Ryan for having a spine on debt/deficit reform – no matter where you go out there this morning, there they are – The People.
The People get the storytelling. The People know when someone is lying to them. The People will protect their capital against the bureaucrats.
In the last 4 weeks, I have protected my family’s hard earned capital by moving to a 61% position in Cash. Since we do in fact keep score at Hedgeye every day, you’ve seen me hold myself accountable to these asset allocation decisions in real-time. I moved to a ZERO percent allocation to US Equities last Thursday as people were bucking up to get Linked-In.
This is not to say that I haven’t made my fair share of mistakes in 2011. Neither is it to suggest that I won’t buy back some US Equity exposure if I see my intermediate-term TREND line of support hold (SP500 = 1321). This is simply a reminder that I have an outstanding research team here in New Haven, CT that’s had an outside of consensus view in 2011 – and we’re sticking to it:
- Q1 2011 – Growth Slowing As Inflation Accelerates
- Q2 2011 – Deflating The Inflation
These two research views did not support chasing Equity or Commodity prices into their respective 2-year highs in April. As Global Macro Risk Managers, we are tasked with getting the slope of A) Growth and B) Inflation right. If we can do that, we take out a lot of risk.
In terms of what that means in the Hedgeye Asset Allocation Model, here are the moves I made week-over-week:
- Cash = 61% (down from 52% last week and 34% at the end of April)
- International Currencies = 18% (Chinese Yuan – CYB)
- Fixed Income = 18% (Long-Term Treasuries and US Treasury Flattener – TLT and FLAT)
- International Equities = 3% (Germany - EWG)
- US Equities = 0%
- Commodities = 0%
Of course, anytime I move to a ZERO percent asset allocation to anything, I get a lot of questions. Most of the questions surround how much conviction we have that The Bernank isn’t going to stop gravity.
With gravity being Growth Slowing …
What’s most interesting (but least surprising) about recent week-over-week moves is that the US Dollar Index continues to drive The Correlation Risk in asset prices. Typically, DOWN DOLLAR would equate to big “REFLATION” trades in everything US Equities. Not so much last week. After “REFLATION” becomes The Inflation – don’t forget that Deflating The Inflation comes next!
My longest of long-term base cases about Fiat Fool policy is that:
A) It shortens economic cycles
B) It amplifies market volatility
Therefore, it stands to reason that once you have debased your currency (3 weeks ago, the US Dollar was down -17% since Obama/Geithner took over in 2009) the stock market pops turn into drops.
And from what I can tell, all this popping and dropping is making The People tired…
After a 2-week +3.8% pop, last week’s US Dollar Index move was only down -0.2% to $75.65. Here’s what everything else did:
- SP500 = DOWN -0.3%
- Russell 2000 = DOWN -0.7%
- Euro = FLAT at $1.41
- CRB Commodities Index = UP +0.9%
- WTI Crude Oil = UP +0.5%
- Gold = UP +1.0%
- Copper = UP +3.5%
- Volatility (VIX) = UP +2.1%
- 2-year UST Yield = DOWN -3.7%
- 30-year UST Yield = DOWN -0.2%
So what does our Chaos Theory model tell us about these moves? What’s the deep simplicity of Mr. Macro Market’s messaging?
- GROWTH - Growth Slowing (stocks and UST bond yields falling for 3 consecutive weeks in unison)
- INFLATION - Deflating The Inflation (commodities are bouncing to lower-highs on low conviction rallies)
How does this all end? Well, if it means that we’re going to sustain anything that remotely resembles The Stagflation of the 1970s, that’s really bad for the market multiple you’ll pay for peak-cycle earnings (in 1974 the SP500 traded to 7x). As to how the storytellers will be Serving The End, like Europe’s proverbial pigs, we’re not sure this decade’s version of the Keynesians will fly.
My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $95.58-$101.13, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
The Macau Metro Monitor, May 23, 2011
WYNN RESORTS MAY EXPAND INTO SINGAPORE OR S. KOREA CHOSUN SAYS Bloomberg
According to Chosun Ilbo, Steve Wynn said the company may consider expanding into Singapore or South Korea, if allowed. Wynn is ready to invest $2-3BN in South Korea if the government allows its citizens entry into casinos.
VISITOR ARRIVALS FOR APRIL 2011 DSEC
Total visitor arrivals increased by 10.7% YoY to 2,338,449 in April 2011. Mainland China visitors increased by 20.7% YoY to 1,270,753 (54.3% of total visitor arrivals), mostly coming from Guangdong Province (628,970), Fujian Province (76,145) and Zhejiang Province (47,188); those traveling to Macao under the Individual Visit Scheme totaled 495,424, up by 27.0% YoY. Visitors from Hong Kong (709,053) and the Republic of Korea (25,865) increased by 2.1% and 2.4% respectively, while those from Taiwan (110,410), Malaysia (27,122), and Thailand (24,468) decreased by 1.3%, 10.8% and 3.6% respectively.
WYNN RESORTS CEO DOUBLES DOWN ON CHINA CASINO BUSINESS WSJ
WSJ: Do you have anyone in mind to become the next CEO of Wynn?
Steve Wynn: ...there are a score of young people who are very smart and very healthy, in Nevada and Macau. Incidentally, Linda Chen [chief operating officer of Wynn Macau] is on the board of the parent company. So if you ask me who could do it? A Chinese woman.
WSJ: Why has it taken so long to get the go-ahead to build in Cotai?
Steve Wynn: This current government is very meticulous. We've noticed a very definite tightening of attention to detail. Things happened faster when they were starting up. Now [the government is] managing a rather big industry.
INFLATION RISES AT SLOWER PACE IN APRIL Channel News Asia
S'pore CPI rose 4.5% YoY, a little lower than the 5% increase seen in March. The core inflation measure rose 2.2% YoY and 0.6% MoM.
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THE HEDGEYE DAILY OUTLOOK
TODAY’S S&P 500 SET-UP - May 23, 2011
With the US Dollar Index holding the Hedgeye immediate-term TRADE line of 74.41, the question now isn’t will it hold support; how high will it go from here, and how low will everything that’s correlated to it fall? As we look at today’s set up for the S&P 500, the range is 19 points or -0.92% downside to 1321 and 0.50% upside to 1340.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: -951 (+1503)
- VOLUME: NYSE 992.37 (+13.78%)
- VIX: 17.43 +12.31% YTD PERFORMANCE: -1.80%
- SPX PUT/CALL RATIO: 2.08 from 1.80 (+15.24%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 21.69
- 3-MONTH T-BILL YIELD: 0.05%
- 10-Year: 3.15 from 3.17
- YIELD CURVE: 2.60 from 2.62
MACRO DATA POINTS:
- 8:30 a.m.: Chicago Fed National Activity Index, est. 0.20, prior 0.26
- 11 a.m.: Export inspections: corn, soybeans, wheat
- 11:30 a.m.: U.S. to sell $27b 3-mo., $24b 6-mo. bills
- 4 p.m.: Crop conditions
- 8:10 p.m.: Fed’s Bullard speaks on economy in Missouri
WHAT TO WATCH:
- U.S. gasoline fell 9.24c to $3.9074/gallon over past two weeks, Lundberg Survey said; another dime drop is possible
- A congressional agreement to increase the U.S. debt limit may take until August, Paul Ryan, the Republican chairman of the U.S. House Budget Committee, said yesterday
- Dell to introduce $999 laptop 24-May - WSJ
COMMODITY HEADLINES FROM BLOOMBERG:
- Oil Declines Amid Concerns Over U.S. Economic Growth, Greek Debt Default
- Speculators Cut Bets Food Prices Will Keep Rising as Supply Concern Eases
- Hedge Funds Cut Bullish Bets on Crude to Three-Month Low: Energy Markets
- Copper Slides Most in Two Weeks as Manufacturing Growth Weakens in China
- Rubber Futures in China May Extend Decline From Record: Technical Analysis
- Corn Climbs to Highest in a Month on Concern Rains to Delay U.S. Planting
- Cocoa Falls as Ivory Coast Inaugurates President Ouattara; Sugar Declines
- Gold May Advance for a Second Day on Increased Europe Debt-Crisis Concern
- Nickel Market to Return to Balance From Deficit, Norilsk’s Kuznetzov Says
- Coal Exports From U.S. Reach 20-Year High on Australia Floods, SSY Says
- Cocoa Is Poised for 13% Drop as Cargill Resumes Exports From Ivory Coast
- Mitsubishi Materials Cuts Copper Output 22% After Earthquake Halts Smelter
- Bonds Wrecked by Inflation Send Record Money Into Gold Funds: India Credit
- Bullish Wheat Bets by Hedge Funds Drop 54% as Concern About Supply Eases
- A nasty selloff today with everything from Petro$ (Russia) to Pigs (Italy -3%) getting blasted; we're long DAX which is holding TREND (barely).
- Eurozone May Preliminary Manufacturing PMI 54.8 vs consensus 57.4 and prior 58.0; Eurozone May Preliminary Services PMI 55.4 vs consensus 56.5 and prior 56.7
- Germany May preliminary Manufacturing PMI 58.2 vs consensus 61.0 and prior 62.0; Germany May preliminary Services PMI 54.9 vs consensus 57.0 and prior 56.8
- France May preliminary Manufacturing PMI 55.0 vs consensus 57.0 and prior 57.5; France May preliminary Services PMI 62.8 vs consensus 62.0 and prior 62.9
- Greek falls behind on payments to medical suppliers - FT
- A flat out ugly session with China down -2.9%, Indonesia -2.4% and India down another -1.8% to -12.3% YTD (we're short India and Thailand)
- Japan April supermarket sales (1.3%) y/y.
- China May HSBC preliminary PMI 51.1 vs April final 51.8
A Very Important Probe we completed suggests that Chinese Government tightening is a statistically significant, albeit lagging, driver of VIP volume.
Our sales force likes to make fun of me for promoting my “statistical background”. Just because they made fun of people like me in high school, doesn’t mean that there isn’t some real world applications for my passion. OK, passion may be a strong word but since the average sell side analyst thinks regression means to walk backward, I think we may have a “leg” up in this category. Man, that Michael Jackson was regressive! For the youngsters out there, that’s a moonwalk reference.
According to our regressions, VIP volume has an incredibly high correlation to the China Lending Rate and the China Reserve Requirement Ratio. The Rate and Ratio drives VIP volumes on a lag basis, peaking at 12 month and 9 month, respectively. The R Squares are a whopping 0.61 and 0.73, respectively, with T-Stats of -7.3 and -9.7. T-Stats above 2 or below -2 are generally considered statistically significant. Even though the statistical relationship between Rate and VIP Volume and Ratio and VIP Volume peak at lags of 12 and 9 months, respectively, they become significant at 6 and 3 months lag.
Theoretically, this makes a lot of sense. The junkets are fueled by liquidity and credit. A lower discount rate and lower reserve requirements drives higher liquidity and higher junket volumes, and vice versa. Many people thought that the Chinese tightening that began last fall would have had an impact on the VIP business, yet VIP kept on its explosive trajectory that it maintains today. The stocks have had great runs and not many people seem to be focused on a VIP slowdown. However, the statistical lag of up to 11 months could explain why we haven’t seen an impact from tighter money, yet.
If the historical relationship holds, we could see a slowdown this summer in VIP. If this happens, the Macau gaming stocks would be under significant pressure. We monitor Macau gaming activity on a weekly basis so hopefully we will be early on discerning a slowing trend. The companies most exposed to VIP are Wynn, MPEL, MGM Macau, Galaxy (post Galaxy Macau opening), SJM, and Sands China.
The charts below accurately depict the inverse relationship of both variables:
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