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Temporary Safety

This note was originally published at 8am on May 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.”

-Benjamin Franklin

 

In “The Road To Serfdom”, F.A. Hayek ends an excellent chapter titled “Security and Freedom” with that very American quote from Benjamin Franklin in 1755. Compare and contrast that thought with this quote from America’s central planning elite last night at the Harvard Club:

 

“Fiscal problems are so pressing that they threaten to undermine the foundations of our future economic strength… and the country’s ability to protect our national security interests.” –Tim Geithner

 

Notwithstanding that Geithner has been a Government Gopher since 1988 (when he joined the Treasury department), the man has since blossomed into a full-fledged storyteller of fear mongering.

 

Whether it’s been Geithner serving as:

  1. 1998-2002 - Squirrel hunter and yes-man in chief of the Robert Rubin/Larry Summers’ era of ‘we’re bigger than markets’
  2. 2003-2009 – President of the Big Broker Club at the Federal Reserve Bank of New York
  3. 2009-2011 – US Treasury Secretary who has overseen a US Dollar Index decline of -16% since he assumed office

It’s no secret that I disagree with Geithner on many scores, but I wholeheartedly agree with him on this - the political strategy of scaring the hell out of whoever he can. With his track record of contributing to this country’s fiscal problems, you should be afraid – very afraid.

 

How we got here and why it’s not going to change where we are going anytime soon has been compiled in my Early Looks since I decided to start writing about real-time risk management matters 3.5 years ago. Of all the fundamental conclusions I have had about Big Government Intervention, here are two that have achieved the deepest simplicity:

  1. It shortens economic cycles
  2. It amplifies market volatility

“It”, being Big Government Intervention… and the Government Gopher being the last man standing who is dumb enough to fundamentally believe that it’s the American public that’s too dumb to understand what’s going on here.

 

Now when you call someone “dumb”, the elitists who are concerned with titles and resumes dismiss you – but I care as much about their opinion as I do someone who says there should be no fighting in hockey.

 

Dumb is as dumb does – and if they want to suit someone up in a Ph.D. in Economics dress and send them on over to 111 Whitney Avenue in New Haven, CT to tell me that what Geithner has been doing since 1988 has been smart, I’ll be waiting for them.

 

“It” is the Big Government Intervention. “They” are the bureaucrats. We are The People.

 

Back to this Global Macro Grind

 

Stocks, Bonds, and Commodities all reminded us yesterday of one fundamental reality that virtually the entire sell-side has had wrong for the past 5 months – GROWTH IS SLOWING. So let’s go through that:

 

1.   Stocks – closing down for the 3rd consecutive day, the US stock market has been down for the last 3 weeks. The rest of the world’s stock markets, started going down a few weeks before that – immediately following The Bernank’s pandering to the central planning elite to remain what we have coined as being “Indefinitely Dovish” (Q2 Macro Theme).

 

2.   Bonds – US Treasury Bonds in particular have been ripping to the upside (see Chart of The Day) ever since The Bernank reminded the world that both his growth and inflation forecasts were wrong (again). Growth Slows As Inflation Accelerates. We remain long Long-term US Treasury bonds (TLT) as a way to play the “Indefinitely Dovish” Macro Theme. We’re also long a US Treasury Flattener (FLAT).

 

3.   Commodities – May has been a mess. And a mess is what you should expect the likes of the Gopher to do to The Correlation Risk that’s imputed in daily US Dollar moves. You cannot experiment with blasting your currency to all-time lows and not assume unintended consequences. Temporary Safety, Mr. Geithner, this is not.

 

The good news here is that The People get it. They get the principles of individual freedom and national security. They also get that this is the only time in this country’s 235 years of economic history that some central planner has been able to politic on the platform that the markets are “national security” issues.

 

Geithner has spent the last 23 years of his life working on this. He’s only 49 years old. Imagine spending 47% of your life contributing to the “foundations” of America’s fiscal problems. Trust him – he knows his stuff.

 

Institutional money managers don’t trust the US stock market rally as much as they did while the stock market was going up – shocker. This week’s Bull/Bear Sentiment reading (Institutional Intelligence survey) saw the spread between Bulls and Bears narrow – big time.

  1. Bulls dropped from 51% last week to 45.6% this week
  2. Bears inched up to +18.5% last week to 19.6% this week
  3. Spread (Bulls minus Bears) narrowed from 32.5 points last week to 26 points this week 

I certainly make my fair share of mistakes, but I generally don’t pose a “national security” issue to our country and I certainly don’t make a habit of chasing markets at YTD highs. That’s where we were 3 weeks ago when the Bull/Bear Spread was +38.5 points wide and I shorted US stocks.

 

Please don’t let America’s central planning storytellers promise you Temporary Safety in exchange for their long-term job security.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are $1472-1497, $94.91-99.67, and 1319-1336, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Temporary Safety - Chart of the Day

 

Temporary Safety - Virtual Portfolio



Serving The End

“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.”

-F.A. Hayek

 

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:

  1. Q1 2011 – Growth Slowing As Inflation Accelerates
  2. 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:

  1. Cash = 61% (down from 52% last week and 34% at the end of April)
  2. International Currencies = 18% (Chinese Yuan – CYB)
  3. Fixed Income = 18% (Long-Term Treasuries and US Treasury Flattener – TLT and FLAT)
  4. International Equities = 3% (Germany  - EWG)
  5. US Equities = 0%
  6. 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:

  1. SP500 = DOWN -0.3%
  2. Russell 2000 = DOWN -0.7%
  3. Euro = FLAT at $1.41
  4. CRB Commodities Index = UP +0.9%
  5. WTI Crude Oil = UP +0.5%
  6. Gold = UP +1.0%
  7. Copper = UP +3.5%
  8. Volatility (VIX) = UP +2.1%
  9. 2-year UST Yield = DOWN -3.7%
  10. 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?

  1. GROWTH - Growth Slowing (stocks and UST bond yields falling for 3 consecutive weeks in unison)
  2. 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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Serving The End - Chart of the Day

 

Serving The End - Virtual Portfolio


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THE M3: WYNN--SINGAPORE/SOUTH KOREA; APRIL VISITOR STATS; LINDA CHEN; S'PORE APRIL CPI

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.

 

THE M3:  WYNN--SINGAPORE/SOUTH KOREA; APRIL VISITOR STATS; LINDA CHEN; S'PORE APRIL CPI - macau

 

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.


THE HEDGEYE DAILY OUTLOOK

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

 

THE HEDGEYE DAILY OUTLOOK - levels

THE HEDGEYE DAILY OUTLOOK - bpgm1

THE HEDGEYE DAILY OUTLOOK - wpgm1

 

EQUITY SENTIMENT:

  • 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/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - dcommv

 

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

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - dcurrv

 

EUROPEAN MARKETS

  • 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

 

THE HEDGEYE DAILY OUTLOOK - bpem1

THE HEDGEYE DAILY OUTLOOK - wpem1

 

ASIAN MARKETS

  • 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 

 

THE HEDGEYE DAILY OUTLOOK - bpam1

THE HEDGEYE DAILY OUTLOOK - wpam1

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - me

 

Howard Penney

Managing Director


A VIP SLOWDOWN IN THE CARDS?

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:

 

A VIP SLOWDOWN IN THE CARDS? - vip 1

 

A VIP SLOWDOWN IN THE CARDS? - vip2


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