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Grim Irony

This note was originally published at 8am on August 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.

“That the earth would give way beneath his feet was a grim irony for Mickey Mantle.”

-Jane Leavy in “The Last Boy

 

The end of Summer 2011 is approaching. I’m packing up my family for Thunder Bay. And I’m smack in the middle of a Twittersphere debate about arrogance, confidence, and success.

 

Some people think confidence and success is fleeting because, for them, it really is. Winning is hard – but great teams find a way to make it both achievable and repeatable. I wake up every morning not only accepting the Uncertainty associated with being right in this business, but swallowing the adversity that each market day and competitor brings.

 

Tired old processes that refuse to evolve are threatened by us. We get it. I’ve seen my fair share of Grim Irony in the arena of life. Whether accountability was my being punched square in the face in a Canadian Junior hockey barn or reality was being fired 5 days before the birth of my 1st son, I get it. No one owes me anything in life and there’s plenty of earth to give way beneath me yet.

 

Back to the Global Macro Grind

 

Mickey Mantle was the son of a lead miner. His Dad, Mutt Mantle, died young. Before his death, as a Yankee rookie The Mick had already blown out his knee and faced plenty of adversity both on the field and from tiring veteran teammates (DiMaggio). The lesson learned from Mutt though was simple – out of sight, our of mind - play the game that’s in front of you.

 

And so we will this morning…

 

I took down my Cash position yesterday from 70% to 64% as there were some asset classes on sale that I continue to like – Corporate Bonds (LQD) and Precious Metals (SLV).

 

The Hedgeye Asset Allocation Model positioning is currently as follows:

  1. Cash = 64%
  2. Fixed Income = 21% (Long-term Treasuries, US Treasury Flattener, Corporate Bonds – TLT, FLAT, and LQD)
  3. International Currency = 6% (Canadian Dollar – FXC)
  4. International Equities = 6% (China and S&P Dividend ETF – CAF and DWX)
  5. Commodities = 3% (Silver – SLV)
  6. US Equities = 0%

I didn’t buy Gold yesterday (I might today – immediate-term TRADE support = $1705/oz and I’d like to see that critical risk management line of support hold before I try to play hero – for our Gold levels, see the Chart of The Day by Darius Dale attached). Instead, I bought back the Silver position that I sold on August 19th at $41.37 (SLV).

 

Being able to buy something that you sold higher is a wonderful feeling. A lot of people in this business call that “market timing.” And a lot of those same people say that “you can’t time markets.” Trust them on that – most of them can’t.

 

But if you could hit a baseball 734 feet (Mantle on May 22, 1963 at Yankee Stadium) or you could revolutionize the way people consume Apples (personal computing), why wouldn’t you try? While everyone else is whining, why wouldn’t you try it confidently?

 

Confidence breeds success. Success breeds confidence.

 

I’m certainly not suggesting Hedgeye is Mantle or Steve Jobs. But I am explicitly saying that Hedgeye is the greatest investment team I have ever had the pleasure and privilege to play on. We’re young. We’re evolving. And we have just as good an opportunity as any great Wall Street firm that has come before us to change the way this game is played. That’s exciting.

 

Until yesterday I had a ZERO percent asset allocation in the Hedgeye Asset Allocation Model to both US and European stocks and the entire Commodities complex. On one of those two things (Commodities), that was a good thing. On another (Stocks), it wasn’t – until China closed up big overnight (up +2.9% - we’re long Chinese Stocks) and US stock market futures are indicated down, again.

 

Again is as again does.

 

Over and over and over again, the Perma-Bulls have been buying stocks and changing their thesis as to why as they go. At the end of 2007 (the SP500 is still down -24.8% since then, fyi), it was because “stocks were cheap” and corporate America was “awash with liquidity.” Today, I guess their portfolios are still awash with US Equity exposure and stocks are getting cheaper.

 

But what does all of their storytelling and finger pointing really do for this country? People don’t trust this economic system or the people who manage it. If calling opacity out on the carpet is “arrogant”, I’ll happily be transparency’s child. America trusts winning and the Grim Irony of all of this back and forth about who is “perma” this and “perma” that is that very few have been Perma Right.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1705-1809, $81.24-89.23, and 1108-1191, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Grim Irony - Chart of the Day

 

Grim Irony - Virtual Portfolio


THE M3: SANDS CHINA RULINGS; JUNKETS

The Macau Metro Monitor, August 30, 2011

 

 

SANDS CHINA STILL WAITING FOR COURTS TO RULE ON PARCELS 7 AND 8 Macau Business, Vegas Inc

No decision has been made by the Court of Second Instance regarding Sands China's appeal of Macau govt's rejection of its application for Sites 7 & 8.  Meanwhile, the Nevada Supreme Court has ordered Judge Gonzalez to take another look at whether Sands China is subject to being sued in Nevada.  The court ordered that proceedings in Jacobs’ lawsuit against Las Vegas Sands and Sands China be put on hold until that matter is resolved.  That process is likely to take months.

 

The Supreme Court order states, "The District Court’s order … does not state that it has reviewed the matter on a limited basis to determine whether prima facie (presumed to be true) grounds for personal jurisdiction exist; it simply denies petitioner’s (Sands China’s) motion to dismiss, with no mention of a later determination after consideration of evidence, whether at a hearing before trial or at trial. While the order refers to the District Court’s comments at oral argument on the motion, the transcript reflects only that the District Court concluded there were 'pervasive contacts' between petitioner (Sands China) and Nevada, without specifying any of those contacts."

 

JUNKETS 'ENCOURAGE MONEY LAUNDERING': WIKI CABLES Macau Daily Times

According to a leaked 2009 US diplomatic cable titled ‘The Macau SAR economy at 10: Even jackpots have consequences,’ the dependence on junkets is known as "a formula that facilitates if not encourages money laundering."  The report also says “oversights of both casinos and junket operators is limited and remains a serious weakness in Macau’s AML [Anti-Money Laundering] regime”.


FANTASTIC WEEK IN MACAU

Big week raises our August revenue projection to HK$24 billion

 

 

There was a big surge in Macau this past week with average daily revenues increasing to HK$891 million vs HK$705 million for the rest of August.  This past week generated the highest revenue since Golden Week in May – pretty astonishing.  High hold probably played a role but we are clearly not seeing any signs of a slowdown in volumes.  We are now expecting around HK$24 billion for the full month,  including slots, which would represent YoY growth of 56%.

 

There was very little movement in market share from last week.  In August, LVS, WYNN and SJM continue to track below recent trends while Galaxy and MGM are above.  MPEL at 14.7% is slightly higher than its post Galaxy Macau share.  For Q3 MPEL continues to have the most upside in EBITDA from consensus estimates (20% per our projection).  

 

FANTASTIC WEEK IN MACAU - macau28


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Feeling Good

“Feeling good about a judgment is a prerequisite to acting upon it.”

-Dan Gardner (Future Babble, 2010)

 

I moved the Hedgeye Portfolio to net short (more shorts than longs) for the first time since June 23rd yesterday.

 

Did I feel good about it? Did I feel as good as I felt about running net short in June of 2011? How good did I feel moving to one of my most net long positions (more longs than shorts) on August 8th, 2011?

 

The answers to these questions are uncertain. I never feel good about any position until it’s working. And there is usually a huge difference between what I am feeling versus what I am actually doing with my longs and shorts.

 

“Confirmation bias” is a term that was coined by cognitive psychologist and Master Chess player, Peter Wason, in the 1960s. Per Wikipedia, the simple definition of confirmation bias is the “tendency for people to favor information that confirms their preconceptions or hypotheses regardless of whether the information is true.”

 

Confirmation bias, as Dan Gardner astutely calls out on page 84 of “Future Babble – Why Expert Predictions Fail and Why We Believe Them Anyway”, “is as simple as it is dangerous.” As Global Macro Risk Managers, we need to be thinking long and hard about that.

 

“In Peter Wason’s seminal experiment, he provided people with feedback so that when they sought out confirming evidence and came to a false conclusion, they were told clearly and unmistakably, that it was incorrect. Then they were asked to try again. Incredibly, half of those who had been told their belief was false continued to search for confirmation that it was right.” (Future Babble, page 85)

 

Can you imagine if Wason’s sample study was today’s short-term performance chasing hedge fund community? Never mind half – that number would be a lot higher than 50%. After all, we hedge fund people were born on this good earth to be able to judge sales, margins, and “valuations” light-years beyond our contemporaries who are still caged up in the Bronx Zoo.

 

Back to the Global Macro Grind

 

While I was right in my call for a “Short Covering Opportunity” (time stamped 10:47AM August 8th, 2011) in early August, I was wrong last week in suggesting that the SP500 could breakdown to lower-YTD-lows.

 

Being wrong happens. Most people just don’t like to admit it does. The key in this profession is being right a lot more than you are wrong. And not being really wrong when you aren’t right.

 

When I decided to move the Hedgeye Portfolio to net short yesterday, it was a conscious decision based on my multi-factor, multi-duration, Global Macro Model – not solely on what the SP500 was doing.

 

That’s not to say what the SP500 is doing doesn’t matter. What it has been doing does too (SP500 returns):

  1. DOWN -22.7% from its October 2007 top
  2. DOWN -11.2% from its lower-long-term high established in April 2011
  3. UP +8.1% from its higher-immediate-term low established in August 2011

Now a Perma-Bull will quickly snort … but but but, “we’re up huge from the 2009 low.” And we all get where that is coming from – what the bull means is that the US stock market is up +78% from the 2009 low. His client’s money isn’t.

 

Math doesn’t uphold the principles of storytelling or confirmation bias:

  1. The SP500 lost 57% from October 2007 to March of 2009
  2. In order to “break even” on that loss, your buy-the-dip bull would need to be up +131% off the bottom
  3. That, of course, assumes he nailed every move along the way (for 3 years)

So when the manic media is hammering you with “Greek stocks are having their best day ever” yesterday (they did on a percentage basis), remember that on Friday Greek stocks had crashed (down -48% since February 2011) and they’d need to “rally” +92% “off the lows” to get you back to break even versus only 6 months ago.

 

Or how about Bank of America? How good am I “feeling” about shorting that stock again yesterday in the Hedgeye Portfolio?

  1. Early September 2010 when we were shorting BAC, the stock was at $13.21
  2. By August 23, 2011, BAC had lost 52% of its “value” in less than a year
  3. BAC needs to rally +110% “off the lows” to get back to a 1 year break even return

I didn’t feel good about shorting BAC yesterday. I felt as uncertain as I should feel when a short position is -11.28% against me. While our Financials Managing Director, Josh Steiner, and I have shorted this stock 10x since 2010 (and been right 10x), that and a case of Molson Canadians will maybe make us prolific horseshoe players down at the lake tonight – nothing more.

 

If I was being paid what I used to be overpaid working at hedge funds and I said that in a morning meeting, everyone who wanted me to fail would be whispering “uh, it doesn’t sound like Keith has conviction anymore does it”…

 

That’s Wall Street. They want everyone to be “Feeling Good” about their “best ideas”, all of the time.

 

My immediate-term TRADE ranges of support and resistance for Gold, Oil, and the SP500 are now $1, $85.03-88.62, and 1163-1219, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Feeling Good - Chart of the Day

 

Feeling Good - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

THE HEDGEYE DAILY OUTLOOK

 

TODAY’S S&P 500 SET-UP - August 30, 2011

 

With the S&P 500 up +7.7% in a week, the bulls are back and plenty of pundits have once again claimed to have nailed it calling another bottom.   As we look at today’s set up for the S&P 500, the range is 56 points or -3.89% downside to 1163 and 0.74% upside to 1219.

 

SECTOR AND GLOBAL PERFORMANCE

 

Two other Sectors closed marginally above their TRADE lines yesterday for the first time in 6 weeks – Consumer Staples (XLP) and Healthcare (XLV). While this is a very defensive setup, it tells you everything you need to know after the fact. Top 3 Sectors 2011: XLU, XLP, and XLV.

 

With 8 of 9 Sectors bearish TREND and 6 of 9 bearish TRADE, the next few days of price/volume/volatility data will be critical. From a volume perspective, we’ve registered 22%-31% lower volumes studies in the last week of trading than we did during the thralls of August selling. Volatility (VIX) remains in a Bullish Formation (bullish TRADE, TREND, and TAIL).

 

THE HEDGEYE DAILY OUTLOOK - levels 830

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +2824 (+455)  
  • VOLUME: NYSE 912.20 (-18.51%)
  • VIX:  35.59 -10.49% YTD PERFORMANCE: +100.51%
  • SPX PUT/CALL RATIO: 2.26 from 1.65 +36.92%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 32.05
  • 3-MONTH T-BILL YIELD: 0.02% +0.01%
  • 10-Year: 2.28 from 2.19    
  • YIELD CURVE: 2.08 from 1.99

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45 a.m./8:55 a.m.: ICSC/Redbook weekly retail sales
  • 8 a.m.: Chicago Fed president Charles Evans on CNBC
  • 9 a.m.: S&P/Case Shiller, est. M/m 0.0%, Y/y, (-4.6%)
  • 10 a.m.: Consumer Confidence, est. 52.0, prior 59.5
  • 11:30 a.m.: U.S. to sell $30b 4-wk bills, $30b 14-day cash- mgmt bills
  • 12:15 p.m.: Minneapolis Fed President Narayana Kocherlakota to speak in Bismarck, N.D.
  • 2 p.m.: FOMC Minutes released
  • 4:30 p.m.: API inventories

 

WHAT TO WATCH:

  • The FDIC filed an objection to Bank of America’s proposed $8.5b mortgage-bond settlement with investors
  • FDA Advisory panel on post marketing issues for silicone gel- filled breast implants
  • Tropical Storm Katia forms in Atlantic
  • Italy PM Berlusconi agreed to overhaul the EU45b austerity plan that persuaded the ECB to support Italy’s bonds

COMMODITY/GROWTH EXPECTATION

 

COMMODITIES: Gold back below a hyper momentum line of support ($1809) this morning.  The immediate-term TRADE support now $1733/oz.

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • Chan Exits Sino-Forest 22 Years After Tiananmen ‘Nightmare’
  • Northgate Takeover Proving Cheapest With Record Gold: Real M&A
  • Gold May Gain in London After Decline Spurs Demand by Investors
  • Oil Near 2-Week High as Spending Counters Forecast Supply Gain
  • Copper Climbs Fifth Day on Optimism U.S. Economy Will Recover
  • Wheat Declines on Speculation Rain May Help U.S. Winter Sowing
  • Disruptions to Food Supply to ‘Ratchet Up Prices,’ Olam Says
  • Sugar May Drop as Europe, India Boost Supplies, Kingsman Says
  • Monsanto Says 100,000 Acres of Corn May Have Resistant Bugs
  • Oil Falls From Near Three-Week High on U.S. Supply Forecasts
  • China Pork Prices Have ‘No Room’ to Climb, China Agri Says
  • China’s Jiangxi Rare Earth Mines to Halt Output, Xinhua Says
  • Oil Erases Gain in New York on Concern Crude Supplies to Climb
  • Copper Climbs a Fifth Day on U.S. Recovery Optimism: LME Preview
  • Rubber Climbs to Three-Week High on Improved Spending in U.S.

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • GERMANY – as Germany goes so does the entire European continental market system and the German market continues to tell us that mid-late September isn’t going to be an enjoyable period for the bulls (vote on EFSF date); DAX was the 1st major market to turn red this morning and continues to crash – down -24.8% since May!
  • GREECE – it’s a good thing most in the media doesn’t do geometric math. On Friday Cyprus and Greece were down -59% and -38% for the YTD respectively. Greece “rallies the most in forever” yesterday, then goes straight back down this morning (-3%) and obviously remains down -43% since the February YTD high and would need to “rally” another 75% to recover that -43% loss.
  • ITALY  - business confidence unexpectedly rose in August as manufacturers become more optimistic about demand; the manufacturing-sentiment index rose to 99.9 from a revised 98.8 in July; est 97.1

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: oddly mixed again overnight with Japan strong +1.2% and China down for 2nd consecutive day (-0.38%); Thailand down -0.2%; Korea +0.8%

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


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