“Willful blindness of the non-linear core nature, has led to the attempts to manipulate the markets certainly by government.”
-Martin A. Armstrong
It is the nature of a man who is in the business of being bullish to be bullish. It is in the nature of a woman who is in the business of being bearish to be bearish. Human Nature’s Manipulations of market storytelling is what it is. People push their own book.
Over the last 3 years I have been accused of being both a raging Republican and a Yale campus Democrat. In 2009 I was, allegedly, a “reckless” bull. In 2011, I am, allegedly, a Perma- Bear. All the while, across 1,377 positions that I have taken since founding Hedgeye in 2008, my long versus short positions are close to dead even (660 LONGS, 677 SHORTS). Time stamps matter.
Perma-Process? Perma-Risk Manager? Perma-Mullet? Who knows. What I do know is that if I am not more right than I am wrong on the big stuff, we don’t get paid. Despite Perma-Bulls claiming they nailed it in August, both the US and Global Equity markets got decimated.
Across our Global Macro model’s Global Equity market league tables, here was the score for August 2011:
- Greece = down -23.9%
- Germany = down -19.2%
- Italy = down -15.6%
- Russia = down -13.4%
- Austria = down -12.7%
- South Korea = down -11.9%
- France = down -11.3%
- Argentina = down -10.7%
- Sweden = down -10.6%
- Taiwan = down -10.4%
So, I guess, the US stock market bulls who were expecting 3-4% US GDP growth and SP500 returns of 15-20% in 2011 were a little off in August, but they weren’t crashing like everything else (SP500 and Russell 2000 down -6.1% and -8.7% for AUG, respectively).
That must be bullish. And I must have been too bearish.
Heck, just look at how high US stocks bounced “off the lows” in August. That’s just gotta be bullish, no? Without any economic data to back it (US consumer confidence hitting 1970s type lows; housing/mortgage demand at 14 year lows, global stock markets getting smoked, etc), the bears must be too bearish. Right? Ah to be a connoisseur of consensus…
While the answer to who called the August bottom AND actually called the April top remains unclear, what remains crystal clear is that people who are in the business of being bullish bought stocks into August month end.
In the Hedgeye Chart of The Day, Darius Dale, illuminates the simple reality of institutionalized career risk management:
LAST 6 DAYS OF THE MONTH (in the SP500):
- APRIL = +2.0%
- MAT = +2.1%
- JUNE = +2.6%
- JULY = -3.8%
- AUG = +4.9%
FIRST 6 DAYS OF THE MONTH:
- MAY = -1.3%
- JUNE = -4.9%
- JULY = +1.8%
- AUG = -13.4%
- SEP = ?
Now, if you want to roll the Bernanke Bones on this, maybe this time will be different. After all, that’s what the Keynesians and Fiat Fools have been telling us all along. But if it’s not, the US stock market could have a big problem in September. That +4.9% month-end markup into August end was the most aggressive yet and, as you can see, the higher they mark’em up, the harder they fall.
Arresting economic gravity is difficult. But Obama is scheduled to release his new bag of goodies next Thursday and, all the while, Charlie Evans can pop in from the Chicago Fed for another US Dollar Debauchery interview (not that his being paid by The Commodity Inflation or sitting on the Chicago Metropolis board with CBOT and UBS execs is a conflict of interest versus the Fed’s “independence” or anything like that).
So sit back and enjoy some price volatility in September as the Fed keeps cranking on full employment and “price stability”! We really need these guys to do a lot more of what didn’t work with QG2. Nature and the non-linear interconnectedness of Global Macro markets be damned.
Today’s risk/reward in the SP500 is dead even. I have 1203 and 1234 as immediate-term TRADE support and resistance. After moving off of my 0% asset allocation to US Equities last Friday (bought Utilities and were up +3.3% on that already) we’re long XLU (Utilities) and short Financials (XLF). Where could I be wrong? All over the place I guess. My every morning starts and ends with Uncertainty.
My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $85.98-89.72, and 1, respectively.
Best of luck out there in September,
Keith R. McCullough
Chief Executive Officer
MPEL and LVS going in opposite directions. Is this still the most important Macau metric, Mr. Adelson?
It’s time for an update on Sheldon Adelson’s favorite Macau metric: EBITDA share. He may not want to put this quarter in the marketing brochure, however. Sands China lost 4% in EBITDA share QoQ to 26.4% (lowest to date), as opposed to share gains for MPEL and Galaxy. The opening of Galaxy Macau boosted the parent's share. MPEL improved its share the most at 4.7% QoQ to 15.8%, partly due to high hold. Q2 was a record high for MPEL as cost improvements and stellar volume share growth contributed to the strong quarter.
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Conclusion: The Philippines is shaping up to be one of the better country-level fundamental stories in Global Macro over the intermediate term and our core three-factor quant model is supportive of our bullish thesis.
Position: Long Filipino equities (EPHE).
Today Keith initiated a long position in Filipino equities within our Virtual Portfolio, giving us exposure to one of the few remaining positive fundamental stories out there. Specifically, what we like about the Philippines are accelerating economic growth, slowing inflation, and sound monetary and fiscal policy – the same three factors which cause us to get behind any country on the long side.
On the growth front, our models pin the country’s second quarter real GDP growth rate of +3.4% YoY (reported today) as an intermediate-term bottom. Specifically, we see over 100-200bps of upside over the next two quarters. Even amongst a deteriorating global growth outlook, our view on Filipino economic growth is supported by accelerating domestic demand within the defensive, consumption-led economy (private consumption accounts for just over 73% of GDP).
We see demand growth accelerating for two key reasons:
- Inflation is slowing; and
- “The Aquino Put”
To the former point, CPI appears to have peaked in June, with July coming in a +5.1% YoY and our model is pointing to lower-lows from current levels over the intermediate term. This is supported by our Deflating the Inflation thesis and sequentially tougher comparisons across the commodity front in the coming months.
Interestingly, Fed Head Chuck Evans went on an inflation marketing campaign yesterday on CNBC and attempted to verbally debauch the U.S. dollar to lower all-time lows. Whether the Fed actively pursues such a strategy in the form of incremental policy remains to be seen; we do, however, continue to believe that Bernanke is in a box at least for the next 3-6 months regarding being able to hint at/implement Quantitative Guessing Part III. For now, slowing inflation should provide a much-needed tailwind to Filipino consumption growth.
An incremental tailwind for the Filipino economy at large could come in the form of monetary easing over the next couple of quarters – particularly if we remain correct on the slope of global growth (negative) and global inflation (flat-to-down). Today, Economic Planning Secretary Cayetano Paderanga affirmed our view, saying that the central bank had “more flexibility” regarding the setting of its benchmark overnight borrowing rate, as “inflation is slowing”.
Additionally, Banko Sentral ng Philipinas Deputy Governor said today that “lower economic momentum will be an important consideration” in the next monetary policy meeting (next Thursday). As things continue to unravel in Europe, we expect to see the Banko Sentral ng Philipinas board use popular central banking terms like “uncertainty” when describing the global economic outlook as a reason to hold rates flat (after +50bps of hikes YTD) – joining several other key economies from Asia to Latin America to have done so in recent weeks, most notably Australia and Mexico.
Most importantly, should global growth accelerate to the downside in the coming quarters, Filipino policymakers are well-equipped to weather the storm, with an ability to cut the country’s 4.5% benchmark interest rate, a low and shrinking deficit thanks to President Aquino’s aggressive tactics over the past year (-2.25% of GDP), and a relatively low debt/GDP ratio of 47.3%.
If needed, the Filipino government’s healthy fiscal metrics will allow the country to enact what we have termed “The Aquino Put”. Simplistically, the outspoken president has pledged to increase expenditures on infrastructure in the form of $17 billion worth of investments in the country’s roads, airports, and schools. Specifically, Budget Secretary Butch Abad said today that policymakers may choose to pull forward and implement projects originally scheduled for 2012 “to help the economy recover”.
All told, we are all bulled-up on Filipino equities from a fundamental perspective and our core three-factor quant model is supportive of our bullish thesis. For these reasons, we have chosen to go long of the securities in our Virtual Portfolio.
Overall direct play slowing. So much for eliminating the middle man.
Hidden in the explosive growth in VIP and Mass revenues, direct VIP play growth has been slowing. Even the direct play king - Sands China - realizes it. Junkets aren't going away. In fact, they are growing in power. Junket VIP remains the fastest growing Macau revenue source. We've put together the data and here are some of our observations:
- Direct play growth has slowed down considerably in the 1H of 2011, growing 23% YoY compared to junket RC growing 51% over the same period.
- In 1Q11, direct play grew 24% YoY compared to junket RC growth of 55%. In 2Q11, direct RC grew 22% YoY vs. junket RC growth of 48% over the same period in the prior year
- LVS direct play volume growth went negative in 2Q11, falling 8% YoY. 1Q 2011 showed 8% growth while 2010 grew 93% YoY. LVS has made it clear that they will be making a big push with the junkets in 2012 finally putting a nail in the coffin of their strategy to eliminate the junket middle man.
- MGM also experienced a marked deceleration in direct play growth with 1H11 growing only 4% YoY compared to 32% in 2010 and 114% in 2009. This is no surprise since Mr. Kwong’s strategy was to grow the junket business which has contributed to the strong growth at the property since he joined last year.
- As the chart below shows, direct play as a % of VIP RC for the five operators fell to 10% in 1H11 compared to 15% in 2010 and 12.5% in 2009
- In 2Q11, every operator experienced a decline of direct play as a % of total VIP RC
- MGM direct play % dropped 10% in 1H10 to just 8.2% from 17.8% in 1H10
- LVS’s direct play % dropped 6% in 2Q11 to 22% from an all-time high of 27% in 2Q10
- Wynn’s direct play % dropped 3% in 2Q11 to just 8.4% - an all-time low for the property
- MPEL’s direct play dropped 1% in 2Q11 to 9% from 10% in 2Q10
- In 2Q 2011, Galaxy Macau’s direct play as a % of VIP RC was 3.8%.
Athletic apparel sales decelerated last week, however, taking hurricane Irene into account there was little change. That said, the facts are the facts and the sales disruption due to Irene’s visit very real. Moreover, next week will reflect the bulk of Irene’s impact giving us further clarity regarding the disruption. As a result, we fully expect storm related commentary to be the callout du jour from retailers tomorrow as they explain sales trends.
In an effort to quantify the storm’s impact on Saturday and Sunday sales when consumers were either hunkered down or redirected in their purchasing, we created the following sensitivity analysis below, which suggests a 40bps-to-220bps impact on the week. Our calculation assumes equally-weighted sales per day based on weekly sales dollars and was then adjusted to reflect the roughly 25%-30% of sales effected by the storm nationwide.
The takeaway here is that based on athletic apparel sales through Sunday, Irene appears to have had a 10bps-60bps impact on monthly August sales. Assuming more significant disruptions both Monday and Tuesday of -25%+, we expect many Softline and Broadline retailers to highlight a 2-3 point hit to August comps as a result of the storm.
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