Being the Critic

This note was originally published at 8am on September 15, 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 critic has to educate the public; the artist has to educate the critic.”

-Oscar Wilde


Life is short.  So short, in fact, that we should all try to find time to do things that we enjoy and derive some amount of satisfaction from doing them.  I’ll be honest, I think most Hedgeyes enjoy what they do every day.  As for other financial firms, I’m not so sure.


According to reports this morning, UBS lost roughly $2 billion from “unauthorized trading by a trader in its Investment Bank”.  Not to name names, but if you work at a certain investment bank this morning, that kind of sucks.


So, here’s the bottom line, Hedgeye is hiring. What are we looking for? Well, quite simply, people that have a passion for doing great research.  No, we aren’t going to offer anyone a super duper 3 by 10 guaranteed bonus, but if you do love what do and think your research is differentiated, well, then email me :  Keith calls me Big Alberta and I’m more commonly known as the Director of Research at Hedgeye.


Back to the global macro grind. . .


Far be it for the lads at Hedgeye to be contrarian, but, are you sitting down, the SP500 is currently giving us a bullish immediate-term TRADE signal.  Not only that, but 7 of 9 S&P sectors are giving us the same quantitative signal.  Aye carumba ! Are the Hedgeye lads getting all bulled up? Well, at least for a trade. . .


Currently, the only two sectors that remain bearish on our TRADE duration are Financials (XLF) and Industrials (XLI).  In the Virtual Portfolio, we are long Utilities (XLU) and short Industrials (XLI).  Not only has this worked in the year-to-date with Industrials down -10.1% and Financials and Utilities up 7.0%, but we think it will continue to work.


It has been an interesting few weeks for us at Hedgeye.   In dramatic fashion, we have seen many of the largest sell side economists capitulate to our view on the economy and growth.  For those of our subscribers that read us somewhat regularly, they know being bearish is not new to Hedgeye.  In fact, by way of a time stamp, attached is an article that I wrote for Fortune on December 31st, 2010:


If you don’t have time to read it, I will highlight one quote, which is as follows:


“Currently, according to a Bloomberg survey of the strategists from 11 of the largest brokerage firms in the United States, the mean consensus target for the S&P 500 by year end 2011 is roughly 10% above current levels. Further, every single strategist is expecting a positive performance out of the index in 2011.”


As my 9-year old niece might say, OMG ! Indeed, it is somewhat scary to think that the reputed smartest economists on the street got the target for the most relevant stock market in the world so wrong. 


Yesterday CNBC hosted its Seeking Alpha Conference, which on some level was entertaining to watch.  Actually, it was entertaining on many levels. The most interesting excerpt was from Leon Cooperman who, and I’m paraphrasing, indicated that he recently had lunch with his top friends in money management and they are all under allocated to U.S. equities.  Now, obviously, Mr. Cooperman isn’t always right, but he has been around the block and his statement yesterday was insightful.  Incidentally, and not that we planned this, our current weighting to global equities is currently 24%, which is our highest allocation since early July . . . aye carumba, indeed !


In the longer term, we are not so bullish. In fact, in the Chart of the Day today, we highlight the long term interest rates of Japan.  Or as our Asian Analyst and former Yale lineman Darius Dale likes to characterize it : ZIRP.   For those of you that don’t know what ZIRP means, it stands for Zero Interest Rate Policy.  In the chart, Darius has outlined the dangers of ZIRP.


While conventional wisdom would have you believe that ZIRP means that equities are cheap on a relative basis, the history of Japan actually suggests otherwise. ZIRP was instituted in Japan in 1999 and the Nikkei has returned -37.4% since the start of that year. So while risk assets, like equities, look cheap vis-à-vis interest rates, it all depends on the assumed economic growth rate implied by interest rates.


On a totally non-linear note, I would like to end with a quote from a book that Keith is currently reading called “Gates of Fire”.  As Keith emailed the team late last night:


“There’s an excerpt in Gates of Fire where the Spartan officer, Dienekes, was told (on the eve of battle) that the Persian archers were so many in number that when they fired their volleys, the mass of arrows would block out the sun.

Dienekes looked at the messenger and said …


“Good. Then we will have our battle in the shade.””


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Being the Critic - Chart of the Day


Being the Critic - Virtual Portfolio

Angry Shorts

“Habit will be your champion.”



I covered some shorts and got longer again yesterday (14 LONGS, 8 SHORTS in the Hedgeye Portfolio) because that’s what my process was telling me to do. Coming into the day we were long the US Dollar and effectively long the American Consumption that’s associated with a strong US Dollar.


Strong Dollar Deflates The Inflation. Period.


Habit, discipline, process – these things matter. Since I am a hockey head, our competition likes to think that they can work less hard than us because they are smarter. Smart is as smart does. And as the great Spartan officer Dienekes went on to say in Gates of Fire, “habit is a mighty ally.”


The habit of fear and anger, or the habit of self-composure and courage” (Gates of Fire, page 139). As a professional Risk Manager, what are your habits?


Self-composure in a down market is as critical as not getting angry about getting squeezed on the short side in an up one. This morning’s headline “news” is that Italy is being “downgraded” by one of the most lagging of lagging indicators – a ratings agency. Italian stocks are down -39% since February. S&P’s view is not new “news.” Stocks rallying on the “news” is…


Courage is building a team and a risk management process that includes people other than yourself. In a globally interconnected marketplace, you have to be able to trust and depend on both your teammates and sources – or just get new teammates and new sources. Collaboration of experience is the only path to victory. Individualism dies young in this market’s battlefield.


Back to the Global Macro Grind


Let’s start with what we’ve called The Correlation Risk. That’s the risk that QE2 would inflate asset prices and that a policy to inflate would perpetuate Growth Slowing. Check, check, check. That’s your 2011 Global Growth Slowdown. It’s old news.


What happens if we reverse the causal mechanism in inflating commodity prices? What happens if we strengthen the US Dollar? Bottoms are processes, not points, but yesterday was a very good day not only for American Consumers but for Global ones: 

  1. US Dollar Index held its long-term TAIL of support = $76.45
  2. CRB Commodities Index (asset inflation) got blasted for a -1.8% drop on the day
  3. WTI Crude Oil prices broke my immediate-term TRADE line of support ($86.96) and moved back into a Bearish Formation 

Despite the SP500 being down -1% yesterday, the Consumer Discretionary Sector (XLY) closed up +0.24% on the day (the Energy Sector was down -0.88%). That, and Chinese/Indian equities rallying on the Italy “news”, made perfect sense to me. New “news” to the 95% of this world that couldn’t care less about Ben Bernanke is that prices at the pump are going down.


Is that good for Energy, Financials, or Basic Materials stocks? No. Is it good for Consumer and Healthcare stocks? Yes. What’s best for Americans, Indians, and Chinese? Policies to inflate? Or a strong US Dollar that Deflates The Inflation?


Don’t ask your local Washington/Wall Street revisionist “economist” about that. Ask The People.


From a sentiment perspective, and I highlighted this in last week’s Early Look, the other people (Wall Street consensus) are getting really bearish after global market prices have melted down. This shouldn’t be a surprise. This is the habit of fear and anger that you want to avoid in both your professional and family life.


Last week’s Institutional Investor Sentiment Survey showed the nastiest bear growl that we have seen in 2011. For the first time this year, the Bears outnumbered the Bulls. And not by a little – by a lot: 

  1. Bulls dropped from 39% in the week prior to a fresh YTD low of 35.5%
  2. Bears ramped from 38% in the week prior to 41%
  3. The Bull/Bear Spread flashed a Buy Fear signal at -550 basis points wide (Bulls minus Bears) 

At the same time, both the Volatility Index for US stocks (VIX) broke its TRADE line of support (34.67) and the SP500 rallied above its TRADE line of resistance (1180).  On the margin, that’s more bullish than it is bearish. It would take a 2011 Bear to know.


To be clear, these are immediate-term TRADE signals (3 weeks or less in duration). But every risk management point should have a but, and every TREND is born out of a TRADE. If the US Dollar Index continues to hold TREND line support ($74.62), I’ll continue to have the courage to buy and cover on red days. Selling on green is the easy part.


My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $1 (Gold’s immediate-term TRADE line of $1819 is broken), $86.03-86.98, 5029-5527, and 1187-11228, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Angry Shorts - Virtual Portfolio

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The Macau Metro Monitor, September 20, 2011




Secretary Tam said that MPEL will have to submit an application to the government in order to include gaming amenities at Macao Studio City. 


WYNN COTAI 'NOT YET APPROVED': Francis Tam Macau Daily Times

Secretary Tam said, " Wynn Macau’s land concession in Cotai has not been approved yet. Companies may release their news, and the news should correspond to reality. Anyhow, these news release won’t affect the process...The process of reviewing land concession requests follows specific rules....The government has already said that land concession requests for gaming projects filed before 2008 would be approved. But those submitted after 2008 would not. Wynn is one of the operators that filed the request before that timeline...Some land in Cotai has not yet been granted, but that will likely happen in five-year’s time. The government did not say it would not approve [Wynn’s land request], but the final decision is not official yet.”



Secretary Tam said the Macau Government would cap gaming table growth to 3% after 2013.  The restrictions will last at least 10 years until the current gaming concessions expire.



LVS filed a lawsuit against Steven Jacobs alleging he misappropriated trade secrets.  This is the 1st time LVS has directly sued Jacobs in Nevada.





MPEL's share gain is not just hold related, market overall may be holding low despite the top line strength, and Galaxy struggling with staff. Read on.



Here are some of the things we're hearing in Macau.

  • Market hold % may be below normal in September. A strong month so far was actually stronger than expected
  • Estimated MTD hold: MPEL 4.1%; Starworld under 2.5%; Wynn about 2%.
  • MPEL hold % and MTD revenue share of 17.9% implies hold adjusted share of close to 16%, still well above the recent trend of 14.5%.  Should be a big Q3 for the company. 
  • Neptune is opening a room in what is now the Playboy club at Sands. It is also finalizing a deal to come into the Four Seasons (ground Floor) late Oct/Nov.  LVS is finally getting aggressive on VIP.
  • Golden Group (Angela Ho's only operation at SJM now) will also likely go to LVS, possibly Four Seasons.  They also want to have a presence at Sites 5 & 6.   
  • Galaxy is losing gaming staff – lost 200 or so employees, partly due to poorly trained gaming staff.  Galaxy do not have enough staff to fill in the gaps to retrain people.  They also have policies to close tables.  Wynn is converting some mass tables to VIP on the main floor and as a result, they need more staff.  
  • Dennis Andreaci – Galaxy Macau's head of gaming ops – has left GM and is coming to Philippines to manage a casino there.  There could be more departures.
  • Wynn’s main gaming floor is starting to get messy with all the junket operated tables but they are doing better volume
  • MGM is genuinely surprised why they haven’t gotten approval on their Cotai site yet
  • No change in Visa policy.  The rumor floated after a Chinese analyst was not allowed entry into Macau 
  • Golden Week is shaping up well with all the hotels booked (with junkets).


The full text report, including July final accounting period numbers, was released this evening.


We expect a slowdown in headline Knapp Track sales data as we go deeper into the back half of the year.  The August Knapp Track numbers show a significant decline from July on a two-year average basis, even when adjusting for weather.


Knapp Track casual dining sales growth sequentially slowed in August from July on a two-year average basis.   The sales environment weakened considerably in part due to hurricane Irene but also because of consumer confidence declining in August also had an impact.  Knapp contends that the current situations metric, which declined less than the expectations component in August, is more pertinent for restaurant sales.  Regarding Irene, it is also pointed out in the report that there was a strong bounce-back in restaurant sales in the week following Irene as power outages forced consumers to eat out.


Estimated comparable restaurant sales growth in August was +0.1%.  When adjusted for the weather impact of hurricane Irene, according to Knapp, the comparable sales number is +0.7%.  Final July comparable restaurant sales growth was +1.5% (versus the prior estimate of +1.4%).  The sequential decline from July to August, in terms of the two-year average trend, was -105 basis points.  When adjusted for the 60 basis point adverse impact of weather, the decline was -75 basis points.  Whether or not one uses the weather-adjusted or non-weather-adjusted number, the sequential decline in August’s two-year trend was the largest since ’09.


Comparable guest counts in the casual dining space came in at -1.5% in August on a year-over-year basis.  The final July guest counts growth number was +0.5% (versus the prior estimate of +0.3%).  The sequential decline from July to August, in terms of the two-year trend, was -150 basis points.



Howard Penney

Managing Director


Rory Green


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