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Government Interference

“Is it just or reasonable, that most voices against the main end of government should enslave the less number that would be free?”

-John Milton


John Milton was an influential 17th century poet who “wrote at a time of religious flux and political upheaval in England” (Wikipedia). His most famous writing was “Paradise Lost.” His most enduring life lesson was to challenge the Perceived Wisdoms of the State.


F.A. Hayek cites Milton’s aforementioned quote in “The Road To Serfdom” (page 210) in order to introduce Chapter 14, “Material Conditions And Ideal Ends.” Hayek goes on to remind us that: “Though it is natural that, as the world around us becomes more complex, our resistance grows against the forces which, without our understanding them, constantly interfere with individual hopes and plans…” (page 211).


In the face of Global Macro Markets waking up to further Government Interference in the free-market pricing of Greek risks this morning, considering Milton and Hayek’s thoughts on the matter seems just and reasonable to me.


BREAKING (#1 Headline on Bloomberg this morning): ”Greek Aid Package To Be Decided By June”


Ok. So what does that mean? Does it mean that the first 110 BILLION Euros ($158B US Dollars) allocated to the Greeks was a success? Does it mean that socialist bailout policies have gone global? Why don’t they throw another 30-60 BILLION at this sick puppy and see?


Obviously, this gargantuan global experiment in Fiat Fool policy has crossed its proverbial Rubicon – or I wouldn’t be in a position to ask such ridiculous questions. I do not think doing more of what isn’t working is a good idea. I do not think Greece’s structural economic implosion will end by June either.


So don’t get upset about it – capitalize on it.


Here are the 3 things that matter most in digesting this morning’s Global Macro Grind:

  1.  Greece’s ATG Stock Market Index: up +3.8% on “news”, but is still DOWN -25% since FEB and broken on both TRADE and TREND durations
  2. Euro: making its last charge to overcome its newly minted TRADE line of resistance at $1.44 (versus USD)
  3. USD: throwing a little fear into the US Currency Crash scenario again, but should hold Hedgeye’s critical $74.41 line of TRADE support

In other words, while it’s nice and tidy to tell ourselves stories that our long positions are all off to the races again, we’ll stop, take a breath, and remind ourselves that all this Government Interference in Europe means is that we’re going to have heightened market volatility in June.


Market volatility? Big time. As a reminder, our base long-term TAIL case is that that’s what Big Government Intervention does:

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

In order to capitalize on that thought, all you really have to do (for now) is stay ahead of the next big moves in the US Dollar Index. This morning, with the Euro up at $1.44, the USD Index is down at $74.59, if this US Dollar Index level holds, I’ll make LONG US Dollar (UUP) at least a 9% position in the Hedgeye Asset Allocation Model.


As you know, being long the US Dollar isn’t exactly what my Canadian craw should be considering – given my “long-term” view. And that’s exactly why I think the position makes so much more sense from this price. If the Europeans are actually serious about “ruling out restructurings”, what is going to be bearish for Euros in the intermediate-term is going to be bullish for Dollars.


Taking a step back, looking at last week’s US Market Macro Moves, the US Dollar has already set itself up to recover:

  1. US Dollar Index = DOWN -1% last week to $74.89 (down for the 2nd consecutive week)
  2. US Equities (SP500) = DOWN -0.2% last week (down for the 4th consecutive week)
  3. US Treasury Yields (30-year) = DOWN -1.4% last week to 4.24% (testing fresh YTD lows)

The summary risk management point embedded in currency, equity, and bond markets here in the United States of America is that Growth Is Slowing. This isn’t a new Hedgeye view. But it is becoming a consensus one.


Lower prices in US Equities had me cover our short position in the SP500 last Monday (time stamped @Hedgeye at $131.95 SPY on 5/23/11) and take up my US Equity exposure from ZERO percent last Monday to 3% this morning (I know – call me a horned up bull!).


The complexion of the Hedgeye Asset Allocation Model to kick off this week is now:

  1. Cash = 49% (down from a 61% last week – my peak Cash position for Q2)
  2. International Currencies = 24% (Chinese Yuan and US Dollar – CYB and UUP)
  3. Fixed Income = 18% (Long-Term Treasuries and US Treasury Flattener – TLT and FLAT)
  4. International Equities = 3% (Germany – EWG)
  5. US Equities = 3% (US Healthcare - XLV)
  6. Commodities = 3% (Gold – GLD)

Is it “just or reasonable” to have not lost money in the month of May? Is Government Interference the best path to long-term economic prosperity? These are simple questions for a complex macro market – and it’s our job, as your Risk Manager, to answer them in real-time.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $99.65-101.89, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Government Interference - Chart of the Day


Government Interference - Virtual Portfolio


The Macau Metro Monitor, May 31, 2011



An institutional shareholder is selling 120MM shares in Sands China to raise HK$2.34bn (US$301m). The shares are being offered at a fixed price of HK$19.50, a 3.2% discount to last night's close. Credit Suisse is the sole bookrunner.


Because of the strong IPO response, the greenshoe may get exercised leading Pansy Ho to sell an additional 3% of her shares to investors, reducing her stake to 26% and raising nearly $1.8BN.


RWS FEELS THE HEAT AS AIR-CON FAILS Strait Times, AsiaOne News, Channel News Asia

Due to an central air-conditioner malfunction, RWS closed two shows and its casino, four hotels, and at least 10 restaurants were affected yesterday.  Universal Studios Singapore also had to close much earlier than its extended opening hours during the June holiday period.  Currently, portable AC units are being used.  However, a RWS spokesman said the impact on resort operations is minimal.  RWS said it expects its air conditioning system to be fully restored by Friday.



Singapore bank lending grew by 21.9% YoY to S$351BN in April. Housing loans continued its ascent, expanding 22.2% YoY in April (vs. 18.4% YoY growth in March).

Athletic Apparel Remains Strong – FW Choppy


Athletic apparel sales remain healthy posting a sequential acceleration in the athletic specialty channel while footwear slowed. Volatility remains high in footwear consistent with recent weeks. However, in taking a closer look at footwear ASPs it’s important to keep in mind just how disruptive toning has been and how significantly it can mask underlying core trends. Take a look at the first two charts below. The recent weakness in footwear ASPs is almost as noteworthy as the strength we’re seeing in apparel. Yet, when we strip out the dilutive impact of toning ASPs, core athletic footwear trends reflect not only solid low-to-mid single digit growth, but on a more consistent basis than apparel. Additionally, it’s worth highlighting that toning has represented a 4%-5% drag on core athletic footwear sales growth on average YTD. Back to callouts from the week:

  • In footwear, running continues to be a pocket of strength lead by Brooks up +37% followed by Adidas up +20% due to the new Climacool introduction and Reebok up +19% reflecting the introductions of Zig Pulse and RealFlex. Nike and Adi remain the top share gainers at the expense of Skechers, Puma, and New Balance. This is consistent with monthly trends that reflect running is not only the largest, but also fastest growing category within the athletic specialty channel for the fourth month in a row.
  • In apparel, VF (The North Face) (+30%) edged out Adidas (+28%) as the top performing brand last week reflecting an uncharacteristically strong week in outdoor outerwear perhaps due to more inclement weather. In addition, Under Armour (+20%) continues to post consistently solid sales driven by the success of its charged cotton program. Adidas and Under Armour remain top share gainers while Columbia was the only brand to lose share maintaining a streak of twenty consecutive weeks.
  • The broad-based strength across all channels is also worth noting with both unit volume and ASPs up and sequential sales improvement across the board.
  • Lastly, on a regional basis New England was the clear negative standout as the only region to report a sales decline for the second consecutive week with the Mid-Atlantic and South Central outperforming again up +23% and +28% respectively – not good for DKS (which we’re short in the Hedgeye Virtual Portfolio) and better on the margin for HIBB.

Casey Flavin



Athletic Apparel Remains Strong – FW Choppy - FW APP ASPs 5 11


Athletic Apparel Remains Strong – FW Choppy - FW ASPs ExT 5 27 11


Athletic Apparel Remains Strong – FW Choppy - FW App Agg Table 5 25 11


Athletic Apparel Remains Strong – FW Choppy - FW App FW Table 1 5 25 11


Athletic Apparel Remains Strong – FW Choppy - FW App App Table 1 5 25 11


Athletic Apparel Remains Strong – FW Choppy - FW App App 1Yr 5 25 11


Athletic Apparel Remains Strong – FW Choppy - FW App App 2Yr 5 25 11


Athletic Apparel Remains Strong – FW Choppy - FW App Reg 5 25 11


Athletic Apparel Remains Strong – FW Choppy - FW Mo AthSpec Sales 5 11


Athletic Apparel Remains Strong – FW Choppy - FW Mo Running 5 11



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It looks like Macau total gaming revenues will come in around HK$23 billion for May, up 39%. 



Through the 29th, table revenues were just under HK$21 billion.  Add in 2 more days of table revenues and slot revenues of HK$950 million to get to our full month projection.  Business definitely slowed over the past week, dropping to HK$544 million per day versus HK$775 million last week (the first week of Galaxy Macau).  Indeed, total gaming revenues will fall at the low end of our previous estimate of HK$23-24 billion.  We don’t know yet if hold played a part.


There were some surprising shifts in market share post the Galaxy Macau opening.  Not surprisingly, most Macau operators lost share – the exception being Galaxy and MGM.  MGM is off to a solid start in Q2 and should report a strong first Q out of the blocks of its IPO.  The biggest surprise to the Street may be that Wynn lost the most share.  Low hold probably played the biggest role but Wynn Macau/Encore has the highest VIP revenue per table, so theoretically the most to lose.  Galaxy is a pretty fierce VIP competitor and may be going after Wynn’s lucrative VIP business.  We’re pretty sure Galaxy Macau was very aggressive in providing junket liquidity/credit through the opening.


From what we can glean from the limited data, Galaxy Macau is off to a great start.  Even after normalizing the current pace somewhat and including cannibalization of Starworld, ROI appears to be trending well above the 20% bogey.  However, it is still very early.


Here is the latest data:



Distributing The Future

This note was originally published at 8am on May 25, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The future is here. It’s just not evenly distributed yet.”

-William Gibson


Speculative-fiction author Bill Gibson is my kind of guy – he’s an American-Canadian. He also likes to make up his own terms for things and put himself out there with contrarian predictions about the future.


I’m currently in the middle of reading “The World In 2050” by Laurence Smith (excellent research read on resource risk, demographic risk, etc). In the very first chapter of the book, Smith gets your attention with the aforementioned Gibson quote and another by Niels Bohr.


Making market “calls”, or proactively managing risk around the edges of this globally interconnected marketplace, isn’t as hard as people crack it up to be. Sure, the daily grind is hard - but the data is there.


The future of Global Macro Risk Management is here.


Getting what people in this business used to call “edge” doesn’t come without orange jump suit risk. Ask The Raj about that. In economic cycles that are being shortened by Fiat Fool policies, the future of Risk Management Edge is going to be grounded in getting TIME and PRICE right.


To do that, in today’s marketplace at least (and this will change), you really need to get The Correlation Risk right.


To get The Correlation Risk right, you need to get the US Dollar right. To get the US Dollar right, you need to get monetary policy right. To get monetary policy right, you have to grind (or buddy up with The Gopher).


If the future was evenly distributed, you wouldn’t be seeing these massive moves in asset classes from quarter-to-quarter. It was only 6 months ago that Hedgeye had a Global Macro Theme called “Trashing Treasuries” (as in short them). Today, one of my highest conviction positions is long the long-bond (TLT). And in 3-6 months, I am sure that will change too.


What if you don’t change? What if you haven’t evolved your risk management process since 2008?


Dagny Taggart probably has a few answers for us all to those questions. My simple one is this – if you don’t evolve the process, you’ll lose. And I don’t mean lose whatever moneys you’ve made. I mean you’ll lose your confidence in making emotionless decisions. You’ll lose the conviction that it takes to change your mind.


So what is my Global Macro Risk Management process flagging this morning?

  1. Vietnam is the first Asian Equity market to crash – down -4% last night and down -20.5% since May 4th
  2. Japan continues to resemble the Big Government Intervention train wreck that bailout beggars in America want our markets to be
  3. Chinese equities have once again broken their intermediate-term TREND line of support (2811 on the Shanghai Composite Index)
  4. Indian stocks were down another -0.7% overnight to -12.8% YTD and remain one of our best Macro short ideas in 2011
  5. South Korean and Australian Equities have moved to bearish TRADE and TREND in our model – nasty signals for Global Growth
  6. Pakistan was up overnight, hooray
  7. European Equities are starting to look as ugly as their socialist policy to keep Greek and Portuguese bond markets ticking
  8. Germany, which we like, doesn’t look good
  9. Sweden, which we like, doesn’t look good
  10. Spanish and Italian Equities have broken their TRADE and TREND lines (this is new – in Q1 they were bullish on both durations)
  11. Russian stocks have broken their intermediate-term TREND line on the RTSI of 1964 – bearish signal for The Petro Dollar markets
  12. The Euro is testing and intermediate-term TREND breakdown of $1.41 TREND line support
  13. The US Dollar has moved to bullish immediate-term TRADE – what was big resistance at $74.41 is now big support
  14. US stocks have been down for 3 consecutive days and 4 consecutive weeks
  15. TREND lines in the SP500 (1321), Nasdaq (2794), and Russell2000 (826) are all broken as of last price
  16. Only 3 Sectors in our S&P Sector Risk Management Model are bullish TRADE and TREND (Healthcare, Utilities, and Staples)
  17. Volatility (VIX) is bullish on 2 of our 3 core durations (TRADE and TAIL), with a big breakout line at 18.04 daring you to buy the dip
  18. US Treasury Bonds look awesome – as in awesome bullish

Awesome is as awesome does. That’s the future. It’s here. And it’s our job to manage risk around it.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1508-1527 (bullish), $96.98-100.93 (bearish), and 1311-1321 (bearish), respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Distributing The Future - Chart of the Day


Distributing The Future - Virtual Portfolio

DKS: Shorting (Again)


Keith added to our DKS short today on the day’s high. See updated levels below.


DKS: Shorting (Again) - DKS Levels 5 27 11



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