Fiat Fools

This note was originally published at 8am on July 12, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Any fool can know. The point is to understand.”

-Albert Einstein


To truly embrace the analytical incompetence of central planners tasked with managing globally interconnected risk, one has to accept that these people are Fiat Fools. Sure, any one of them can know what happened yesterday. But can they proactively predict risk?


We introduced the term Fiat Fool during the initial stage of the European Sovereign Debt crisis (2010). To understand what the Fiat Fools are doing to economies and markets alike, all you have to do is pay attention.


Fiat Fools fundamentally believe that they can smooth economic cycles and tone down market volatility. I guess that’s what the IMF’s latest dudette in Chief, Christine Lagarde, was trying to do this morning when she proclaimed her mystery of faith that “some of the Italian numbers are excellent.”


Hedgeye’s long-term conclusion has been that the Fiat Fools do two things:

  1. They shorten economic cycles
  2. They amplify market volatility

That’s it. There is no smoothing and toning. There is no “price stability.” And there most certainly is no “full employment.” So, it’s time for La Bernank to unite with his Keynesian storytellers in Europe and admit who they are, and what they do. Greenspan did.


Not that the Obama Administration wants to be held accountable for perpetuating Keynesian Economic Ideologies, but none of these political people who support Bernanke and Trichet should forget what their idol himself admitted to Henry Waxman (under oath) during the thralls of 2008.


HENRY WAXMAN: “Do you feel that your ideology pushed you to make decisions that you wish you had not made?”


ALAN GREENSPAN: “Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to -- to exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is, yes, I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact.”


No. I don’t think reminding professional politicians of context and causality is going to change them this morning. Sadly, these people are more concerned with their own career risk management than that of your markets and economy. So onto the next.


Back to the Global Macro Grind


Here’s our real-time risk management look at Global Equities:

  1. China was down -1.7% overnight to 2754, barely holding onto our immediate-term TRADE line of support = 2730
  2. India’s BSE Sensex dropped -1.8% to 18411, barely holding onto our immediate-term TRADE line of support = 18357
  3. Hong Kong got blasted for a -3.1% drop and remains bearish TRADE and TREND in our model (resistance = 22499)
  4. FTSE in London is breaking its intermediate-term TREND line of 5897
  5. DAX in Germany is breaking its intermediate-term TREND line of 7199
  6. MIB in Italy is crashing, down -22% since its February 2011 high (down another -2% this morning)
  7. IBEX in Spain looks awful (bearish TRADE and TREND)
  8. Greek stocks continue to crash (down -31% since their February 2011 lower long-term high), making lower 2011 lows today
  9. Russian, Norwegian, and Saudi stock markets are all breaking their intermediate-term TREND lines as Oil prices break down
  10. SP500 TREND line support is under attack in pre-open futures trading (Hedgeye’s line in the sand = 1317)

On the Commodity front, Deflating The Inflation remains our call:

  1. CRB Commodities Index (18 components) challenged TREND line resistance (349) last week and failed
  2. WTIC Oil’s TREND line remains at approximately $103/barrel (Goldman is the bull, Hedgeye the bear)
  3. Wheat and Corn prices are down another -2-3% this morning and have both broken TREND line support
  4. Cotton prices are getting slammed this morning (down -4%) and should alleviate some cost pressures out there
  5. Gold looks like a champ (as it usually does when real-interest rates are negative; UST Treasury yields plummeting again)
  6. Copper is the outlier on the bullish side, holding intermediate-term TREND line support of $4.20/lb

Currency and Credit Markets are all over the place:

  1. European Sovereign CDS in Spain and Italy are pushing toward (or above in Spain’s case) the critical Lehman Line of 300bps
  2. Italian Bond yield at Italy’s 12 month debt auction came in a lot higher sequentially versus last (3.67% vs 2.15%)
  3. EUR/USD is getting annihilated after breaking what we’ve called out as critical intermediate-term TREND support ($1.43)
  4. US Dollar Index is making a big bid for a TRADE and TREND breakout – this will continue to Deflate The Inflation
  5. US Treasury yields are all breaking down through TRADE and TREND line support (like they did in May-June)
  6. US Treasury Yield Spread continues to compress; 10-year minus 2-year yields = 250 basis points wide (long FLAT)

All the while, this morning’s high-frequency economic data was what I consider fine. Chinese Money Supply Growth (M2) came in at 15.9% (it’s been proactively cut in HALF by the Chinese since we got bearish on China at the end of 2009). Meanwhile German, French, and British Consumer Price Inflation (CPI) readings for June were benign enough to provoke Europe’s Fiat Fool in Chief to stop raising rates.


As for the Fiat Fools having anything in the area code of a modern day real-time risk management process, you can bet your Madoff that they don’t have one. Nor do they have any experience managing any of the aforementioned globally interconnected risk where it matters – on the tape.


My immediate-term support and resistance ranged for Gold, Oil, and the SP500 are now $1527-1558, $92.96-96.74, and 1297-1328, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fiat Fools - Chart of the Day


Fiat Fools - Virtual Portfolio

Measuring Time

“Observe due measure, for right timing is in all things the most important factor.”



On Monday I titled my Early Look “Timing Matters.” It still does.


If you are proactively prepared to play this game, you will capitalize on opportunities while your competition freaks out. Yesterday was a good example of that. If you were watching La Bernank back-pedal on QG3 (Quantitative Guessing III) real-time, you knew exactly what to do. Buy US Dollars, Short Euros, and cut your gross (and/or net) exposure to US and European Equities.


Or at least that’s what I did.


No, that’s not being overly “confident.” It’s called seeing the play develop and capitalizing on it. I’m not sure if it’s this industry’s very low expectations of sell side research or whether it’s just easier to universally accept mediocrity in “not being able to time markets”, but whatever it is, I like it. Championship teams have championship processes. They make calls when calls need to be made.


That’s just modern day risk management with a Global Macro overlay. Measuring political timing, as Canadian Prime Minister Elliott Trudeau once said, “is the essential ingredient of politics.”


Timmy Geithner’s message on timing yesterday was that there is “no way to give Congress more time.” Really Timmy? Thanks – we appreciate the fear-mongering about a debt position you’ve spent 47% of your born life helping create.


Assuming America’s political panderers abide by Geithner’s timing signal, you can bet your Madoff that this weekend sees an acute level of Congressional respect paid toward their own career risk management.


Rather than waking up to these embarrassingly timed notes out of Moody’s and S&P on US credit risk, what if you wake up on Monday to the thundering Squirrel taking a victory lap on a debt-ceiling compromise?


Perversely, that could be bad for stocks – in the very immediate-term. Why? Because that’s both US Dollar and US Treasury Bond bullish! In the long-run, that’s what America needs – a strong US Dollar, as opposed to a debauched one; a confident leadership-line drawn in the sand, as opposed to a politically obfuscated one; and a progressive American resolve, as opposed to a backward looking one.


Back to the Global Macro Grind

  1. I am long the US Dollar (UUP)
  2. I am short the Euro (FXE)
  3. I am Canadian

If you can’t have any fun with this game, don’t play it. Or at least we recommend not playing it against us. Hedgeye likes to stir the pot. And in case you missed our notes earlier this week on China – Big Alberta and his Chinese Cowboys in the Haven have brought out the mandarin ladle.


Despite La Bernank sending US stocks lower for the 4th day in the last 5, Chinese stocks closed up another 0.35% last night (they were UP for the 4th day out of the last 5). Good timing.


Meanwhile, European stocks are sucking on a Europig’s nipple this morning hoping that the rest of the real-time risk managing world doesn’t realize that the European Bank “Stress Test” Part Deux isn’t a joke. Hope, and “stress testing” banks using their 2010 numbers, is not a risk management process.


In terms of European positioning:

  1. I sold my Sweden (EWD) yesterday because we don’t like/trust their banks’ exposures
  2. I am long Germany (EWG), and I’m worried about it
  3. I am short Italy (EWI), and I like it

Conan O’Brian said that “early on, they were timing my contract with an egg timer.” And that sounds just about right in terms of the shortest of short-term durations that we’re talking about when we consider these Eurocrat and Congress market catalysts…


But, when Measuring Time in macro market moves, you have to be Duration Agnostic. Market catalysts can be short and/or long term in nature. Mr Macro Market doesn’t particularly care about our individual investment styles or durations.


I’ll walk through how we Measure Time with our all-star Global Macro team of analysts on a conference call at 11AM EST this morning. This is our Q3 Macro Themes call, and we’re right fired up to grind through it and get to the best part of the game – your Q&A session. Please send an email to our Sales Deck () if you need call-in info.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $94.68-97.34, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Measuring Time - 222. USD EL


Measuring Time - Virtual Portfolio


Best operator in the top performing market in the world – you bet it will be another beat.



We expect Steve Wynn will be grinning from ear to ear next Monday when WYNN presents its Q2 results.  Q1 was a stand-out quarter as EBITDA and EPS came in 28% and 89% above consensus.  We think Q2 will be another big beat, particularly on EPS—we’re at $1.30, 34% above the Street.  We’re also 12% higher on Adjusted EBITDA and 7% higher on net revenues.


While we remain confident in our Wynn Macau estimates, Las Vegas, as always, is a bit of a wild card.  Our Q2 Wynn LV estimate is above the Street, owing to a very strong May on the Strip and Wynn’s recent outperformance.


Macau surprised everyone again in Q2 as market revenues rose 46% YoY and even 13% sequentially.  WYNN will be the 1st gaming operator in Macau to report Q2 earnings but, despite the upside, may not even have the best quarter of the bunch.  We think top Q2 honors will go to MPEL.  However, a big WYNN beat on July 18th should sustain the positive momentum for the group.


Here are the details:



WYNN Macau

We project Q2 Wynn Macau net revenue of $985MM and EBITDA of $310MM, 6% and 8% ahead of Street, respectively

  • We estimate net gaming revenues will be $929MM or 38% YoY growth
    • VIP net win of $669MM
      • Assuming direct play of 10%, Rolling Chip of $33.4BN and hold of 2.9%
      • Rebate rate of 86bps
  • Mass table win of $191MM
    • Table volume of $789MM and hold of 24%
  • Slot win of $74MM
    • Handle of $1.43BN and win % of 5.2%
  • Non-gaming revenue, net of promotional expenses of $56MM
  • Variable expenses of $555MM ($474MM of gaming taxes and $75MM of incremental junket commissions above the rebate)
  • $25MM of recorded expenses for non-gaming revenues
  • Fixed expenses of $94MM

WYNN Las Vegas

We estimate that Wynn Las Vegas will report $355MM of net revenues and $94MM of EBITDA, 4% and 10% above the Street, respectively.

  • We estimate net casino revenues of $134MM, representing 14% YoY growth
    • Table win of $118MM, up 21% YoY: table drop of $534MM and 22% hold
    • Slot win of $42MM, up 3% YoY: slot volume of $699MM and 6% hold
    • Discounts and other as a % of Gross Casino Win: 16%
  • $266MM of non casino revenue and $44MM of promotional expenses
  • $49MM of SG&A and $4MM of doubtful accounts

Other stuff:

  • Corporate expense: $19MM
  • D&A: $101MM
  • Stock comp: $8MM
  • Net interest expense: $58MM

Tale of Two Deficits


Conclusion:  While the long term negative nature of both the U.S. trade and budget deficits is negative for the U.S. dollar, in the short term incremental improvement on the budget deficit should be positive for the U.S. dollar, especially as European sovereign debt dysfunction accelerates.


Positions: Long U.S. Dollar via UUP; Short the Euro via FXE

“We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and reach them.”


         -  Discourse of the Common Weal of this Realm of England, 1549


In the past couple of days, the U.S. government has released the most recent information on both the trade and budget deficits.  Interestingly, the trade budget, which generally garners less attention than the fiscal deficit, was much worse than expected and in fact came in a level not last seen since 2008.  In the chart below, we’ve highlighted the trade deficit going back nine years.


Tale of Two Deficits - d1


In simple terms, of course, the balance of trade is the difference between a nation’s exports and imports.  A country has a trade surplus if it exports more than it imports and trade deficit if the opposite occurs.   Since the 1980s, the United States has consistently had a growing trade deficit.  This is both because of the low U.S. savings rate and low cost production capabilities (labor primarily) of many Asian nations.  The net result of this, particularly due to the second factor, is that many foreign nations hold large amounts of U.S. government debt to fund the trade deficit with the U.S.


There is much debate over whether a negative trade deficit is actually positive or negative for an economy.   On the positive side of the ledger, many economists point to the case of the United States where in periods of more rapid GDP growth, and perceived economic prosperity, trade deficits have expanded.  Conversely, in periods of slower GDP growth, trade deficits have narrowed. 


Regardless of the long term implications, in the short term a trade deficit is negative in the sense that it is a drag on overall GDP growth.  In May, the U.S. trade deficit was -$50.2 billion, which was a sequentially increase from the April deficit number of -$43.7 billion.  The U.S. dollar basket was down ~-9.5% over the 12-month period ending July 1st, which grew exports to the second highest quarterly on record, but this was largely offset by increased input costs, especially oil which costs the most since August 2008.  In part, this expanding trade deficit underscores our below consensus GDP growth range for the next two quarters of 1.7 – 2.1%.


While the economic implications associated with a trade deficit is subject to debate, most economists, even Keynesians, would argue that a federal budget deficit eventually becomes negative if not kept at a manageable level.  The long term budget deficits in the United States are currently front and center, especially given the debt ceiling deadline looming in early August.  Interestingly, though, the June federal budget deficit actually came in at a better than expected level, at least on face value.


In June, the estimate for government revenue is $248BN and the estimate for expenditures is $294BN, which equates to a budget deficit of $-45BN.  They key delta, as outlined in the table below, is a dramatic decline in expenditures year-over-year.  In June 2010, U.S. federal government outlays were $319BN and they declined to $294BN in June 2011.  At face value this appears positive, though according to the Congressional Budget Office literally all of this improvement was attributable to net reduction in estimated cost of loan and loan guarantees and lower outlays for equity injections in to Fannie Mae and Freddie Mac. 


Estimates For June (Billions of dollars)


Tale of Two Deficits - d2


For the year-to-date, which is the first nine months of the government’s fiscal year, the Federal budget deficit has seen limited improvement.  Based on the reported government numbers, revenue is up 8.5% and expenditures are up 4.0%, so the deficit has improved by $31BN for the first nine months to -$973BN according the government’s numbers.  That said, if expenditures are adjusted for various one-time charges (primarily payments to GSEs), the deficit is basically flat year-over-year.  Currently, the budget deficit is on pace to be just under $1.3TN for the full year and is trending just above the 9% deficit-to-GDP level.


Obviously, given this massive budget deficit, the federal government will continue to have to aggressively borrow absent a long term deficit reduction plan being passed by Congress.  The financing expense is literally being seen in the deficit results.  Net interest on public debt has grown 17.8% year-over-year in the first nine months to $202BN. So, 11.6% of federal government revenue is going just to servicing debt.


Tale of Two Deficits - d3


While both the trade and budget deficits have different long term implications, there are both critical to watch and understand as it relates to having a perspective on the direction of the U.S. dollar and U.S. interest rates.  Longer term, both suggest the case for weak U.S. dollar, though in the short term positive news flow out of the debt and incrementally positive action on the deficit should support a strong U.S. dollar, especially versus the Euro.


Daryl G. Jones

Director of Research

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