“A movement whose main promise is the relief from responsibility cannot but be antimoral.”
It was a long, hard, weekend for the central planners of wanna-be Keynesian Kingdoms. In the US, “blue chip economists” advising President Obama were busy obfuscating the simple fact that QG2 has equated to Jobless Stagflation. In Europe, the socialists were voted off another proverbial island of responsibility – Portugal.
Where do we go from here? What broken promises does Academic Dogma have in store for us next? Fortunately, plenty of these outcomes have been proactively predictable. And those of us responsible for being responsible are well on our way to seizing the opportunity of cleaning up another mess.
The aforementioned quote comes from Hayek’s chapter titled “Material Conditions And Ideal Ends” in The Road To Serfdom (page 217). And, while it’s always dicey to talk like a Coach would about virtue and morality on Wall Street, I think the way that Hayek thought about this in 1944 is no less relevant than it is this morning:
“It is true that the virtues which are less esteemed and practiced now – independence, self-reliance, and the willingness to bear risks, the readiness to back one’s own conviction against a majority, and the willingness to voluntary cooperation with one’s neighbors – are essentially those on which the working of an individualist rests. Collectivism has nothing to put in their place.”
-F.A. Hayek (The Road to Serfdom, page 217)
It’s time for leadership. It’s time for change.
Last week, I didn’t make many changes to the Hedgeye Asset Allocation Model (our proxy risk management product for gross invested exposure). After starting the week net-short in the Hedgeye Portfolio (our proxy for expressing net exposure), I didn’t change a whole heck of a lot either (I covered a few shorts to end the week with 11 LONGS and 11 SHORTS).
The Hedgeye Asset Allocation Model’s complexion at the close last week was:
- Cash = 49% (no change week-over-week)
- International Currencies = 24% (Chinese Yuan and US Dollar – CYB and UUP)
- Fixed Income = 15% (Long-term US Treasuries and US Treasury Flattener – TLT and FLAT)
- US Equities = 6% (US Healthcare – XLV)
- International Equities = 3% (Germany – EWG)
- Commodities = 3% (Gold – GLD)
With Growth Slowing, Long-term Treasury Bonds (TLT) are putting on an impressive move to the upside. Growth Slowing is also instigating compression in the yield curve (long-term minus short-term interest rates) and we’ve also expressed our conviction in Growth Slowing with long positions in a US Treasury Flattener (FLAT) and Gold (GLD).
Did I say Growth Slowing?
“The readiness to back one’s own conviction against a majority…”
The #1 headline on Bloomberg this morning reads: “SLOWING US GROWTH PROMPTS OPTIMISTS TO QUESTION DURABILITY OF RECOVERY”
You see, without explicitly seeking Relief From Responsibility, this is how Wall Street works – seeking relief in building a consensus. The best way to perpetuate mediocrity, is to socialize responsibility.
Or at least they’ll try. Because the true art of Old Wall Street Research compensation lies not in the risk management of being right or wrong – it lies in the storytelling of collectivism.
In the Hedgeye Asset Allocation Model, where was I wrong last week?
- Long US Dollar (UUP) = down -1.0% week-over-week
- Long US Healthcare (XLV) = down -1.4% week-over-week
It doesn’t particularly matter why I was wrong with these positions. The scoreboard doesn’t care. I was wrong – and there needs to be absolute responsibility in recommendation.
“Independence, self-reliance, and the willingness to bear risks…”
That’s what we need to champion in this business. Re-think, re-learn, and re-invent. With “the willingness to voluntary cooperation with one’s neighbors”, may the best teams who are collaborating best risk management practices win.
My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.32-102.34, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP - June 6, 2011
There isn’t a data point or market price across the Hedgeye Global Macro risk management model that suggests this correction is over, yet:
- Treasury Bonds – continuing higher this morning w/ 2-yr yields crashing to 0.42% (10s at 2.99%); yield curve compressing
- Asian/European Stocks – Japan + Spain (2 of our short positions) down -1.2% and -0.9% this morning (Keynesianism not working)
- US Stocks – down for 5 consecutive weeks, which isn’t exactly textbook bull market (down -4.6% since April 29th high)
As we look at today’s set up for the S&P 500, the range is 24 points or -0.32% downside to 1296 and 1.53% upside to 1320.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: -1315 (+1135)
- VOLUME: NYSE 971.40 (-3.66%)
- VIX: 17.95 -0.77% YTD PERFORMANCE: +1.93%
- SPX PUT/CALL RATIO: 1.61 from 1.19 (-26.59%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 22.15
- 3-MONTH T-BILL YIELD: 0.04%
- 10-Year: 2.99 from 3.04
- YIELD CURVE: 2.57 from 2.59
MACRO DATA POINTS:
- 11 a.m.: Export inspections: corn, soybeans, wheat
- 11:30 a.m.: U.S. to sell $27b 3-mo., $24b 6-mo. bills
- 1:15 p.m.: Treasury’s Geithner speaks to bankers in Atlanta
- 4 p.m.: Crop conditions: Corn, winter wheat, cotton, soybean
- 5:30 p.m.: Fed’s Fisher speaks in NY
WHAT TO WATCH:
- Philly Fed President Charles Plosser said plan to withdraw central bank’s record monetary stimulus, “normalize” interest-rate policy would help avert confusion in financial markets
- Death toll from Germany’s E. coli outbreak rose to 22, with officials saying sprouts grown near Uelzen a “significant source of the bacteria”
- German government spokesman says expects EU/ECB/IMF report on Greece by mid week -- Reuters
- Social Democrats win Portuguese parliamentary election, removing the Socialist Party from power -- Boston Globe
COMMODITY HEADLINES FROM BLOOMBERG:
- Wheat Fields Wilt in Drought as Parched Earth Spreads From China to Kansas
- Oil Falls for a Second Day on Signs Slowing U.S. Economy May Crimp Demand
- Copper Rises for Second Day as Strike at Codelco Mine Fuels Supply Concern
- Gold Advances for Second Day After U.S. Data Increases Recovery Concerns
- Wheat Climbs on Speculation USDA Is Set to Reduce Global Supply Estimate
- OPEC Overshadowed by Qaddafi in Most-Hostile Meeting Since 1990 Gulf War
- Russia’s Black Earth Grains Growing Area Faces ‘50-50’ Chance of Drought
- Rubber in Tokyo Advances for Second Day Amid Tight Supplies in Thailand
- Grain Stockpiles Worldwide May Drop, Soybeans May Increase, Survey Shows
- Commodity Bubbles Caused by Speculators Need Intervention, UN Agency Says
- Olam Said to Raise $600 Million in Share Sale to Help Fund Acquisitions
- Funds Boost Bullish Commodity Bets Amid Improving Global Growth Prospects
- E. Coli Outbreak Death Toll Rises to 22 as Blame Focuses on Bean Sprouts
- In Europe a wet Kleenex continues to hover over Europe Keynesian experiment; Spain down -0.8% after Portugal votes out the socialist party too
- UK new car registrations (1.7%) y/y in May - SMMT -- wires
- In Asia, China closed but rest of Asia continues lower; Japan down -1.2% to -8.3% YTD (we're short $EWJ); Thailand down -1.1%; Vietnam -2.2%
- Hong Kong, China, and Taiwan were closed for Tuen Ng/Dragon Boat Festival
- South Korea was closed for Hyun Choong Il.
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.46%
SHORT SIGNALS 78.35%
As always, much is happening in Macau. Here is some of the stuff we’ve been hearing lately:
- May was the first HK$ billion slot month
- Wynn, MGM, and SJM Cotai sites may get gazetted as soon as in the next 4-5 weeks
- Neptune will be opening a new VIP room at City of Dreams in July/August – Neptune is one of the largest junkets in Macau so this could be significant for MPEL
- City of Dreams may be looking into converting its Dragon Dome Theater into a giant VIP operation – may be talking to the Guandong VIP Group to run it. We think Guandong currently has operations at Wynn and Starworld.
- MPEL may get rid of its dual management structure and leave Ted Chan fully in charge
- City of Dreams pumped in some extra junket liquidity ahead of the Galaxy Macau opening
- We still think Studio City might be back on the agenda possibly with MPEL investing in addition to procuring a management contract
- Galaxy Macau may be cannibalizing 30-35% of Starworld’s VIP volume
- We’re hearing that Galaxy may have pumped as much as HK$1.6-2.0 billion in liquidity to its junkets through the opening of Galaxy Macau
- Neptune and Sun City are finalizing deals with Venetian Macau to open up VIP rooms
- Staffing has been a problem so the rooms may not open until July/August
- LVS still struggling to grow its VIP share
- We’re skeptical that FS apartments will get approved anytime in the foreseeable future - the public airing of dirty laundry in the Jacobs case isn’t helping their cause
The U.S. equity market has now been trading below our key support lines for three days. Like most chaos theorists, we look at the number three as an important factor in verifying trends. A close today below 1,324, as outlined in the chart below, would be important verification of our bearish outlook for U.S. equities.
In terms of verification, the jobs report today provided even more verification that growth is slowing. If you didn’t know before today, now you know. After normalizing for the birth / death adjustment, the economy actually lost jobs in the month and the headline number from the Bureau of Labor Statistics was only an anemic +54,000. In combination with the weak labor market is, not surprisingly, the fact of weak weekly earnings growth. In fact, U.S. average weekly earnings has seen negative growth on year-over-year basis over the last two months.
Given this backdrop it’s likely not surprising that some of our best short ideas are in the consumer sector or related to consumer spending. A couple of our key short ideas are as follows:
1. Darden Restaurants (ticker: DRI) – Our view is that in an anemic consumer spending environment, tired brands with little in the way of new products will fare the worst, such as Darden. And, by the way, the CRB index is up roughly 35% on a year-over-year basis, which isn’t a positive leading indicator for restaurant level margins. Consensus estimates expect DRI to grow EPS 25% year-over-year in the coming quarter. Expectations are indeed the root of all heartache.
2. Henry Schein (ticker: HSIC) - Henry Schein has outperformed the SP500 by more than 1,000 basis points over the last two years. As our Healthcare Sector Tom Tobin recently wrote: “HSIC is largely tethered to the consumer one way or another as employment trends and/or discretionary income influence each of its North American business lines (Dental, Medical, Animal Health), collectively representing ~65% of 2010 revenue.” Needless, to say we think reversion to the mean cometh and that HSIC should be on your short list of shorts.
3. Wynn Casinos (ticker: WYNN) – Our Gaming Sector Head, Todd “The Axe” Jordan is bearish on Wynn. According to Jordan, their Macau business is set to slow due to their exposure to the VIP business which is being negatively impacted by the recent opening of Galaxy. WYNN is trading just shy of its all-time high, which to us suggests that a Macau slow down is not priced in. Just over 5% of the float is short, so this isn’t an overly consensus perspective.
With slowing economic growth globally and a broken U.S. equity market, we think it’s prime time to re-load on the short side. As the popular 50 Cent song goes, “Go, shorty. It's your birthday.” Given the status of the macro factors, we agree with 50 Cent on this one.
Daryl G. Jones