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Leading From The Front

This note was originally published at 8am on September 29, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We will all sleep as I do, in the open.”

-Leonidas

 

At the end of chapter 22 of “Gates of Fire”, King Leonidas gives an epic speech to his officers about leadership.

 

“I am telling the Spartans what I tell you now. You are the commanders; your men will look to you and act as you do. Let no officer keep to himself or his brother officers, but circulate day long among his men. Let them see you and see you unafraid.”

 

Compare and contrast that sense of responsibility and selflessness versus the putrid lack of accountability we have to wake up to as modern day capitalism comes under left-leaning Keynesian assault:

 

“Monetary policy is not a panacea. There are certainly some areas where other policy makers could contribute.”

-Ben Bernanke (in a speech yesterday)

 

There is no legitimate leadership in this country’s economic policy making inasmuch as there is none in France or Italy this morning. Losers are pointing fingers and making excuses rather than bellying up to the bar like Red Sox GM Theo Epstein did last night:

 

You can’t sugarcoat this. This is awful. We did it to ourselves and put ourselves in a position like this to end our season.”

 

The winners in this country who bleed red, white, and blue get accountability. Our academic and political policy makers, who have never had to meet a payroll in their life, do not.

 

Back to the Global Macro Grind

 

In Monday’s Early Look I outlined this week’s calendar of Global Macro catalysts. The last 2 catalysts left for the Big Government Intervention “is the best path to long-term economic prosperity” club, were a vote for the Euro-TARP bailout in the Bundestag and month-end markups.

 

If the German vote was your catalyst to be long anything European or US Equities, that catalyst is now gone. What do you do now? Hope for another left-leaning central plan to suspend economic gravity? Or just say hey – this whole Keynesian thing “is not a panacea?”

 

Rather than lean on the losing side of this year’s Global Macro trade, it’s time to get back to winning again here this morning. From New Haven, Connecticut to St. Louis, Missouri, we’re issuing a friendly challenge to all of the winners of the 2011 game of Globally Interconnected Risk to unite.

 

First, let’s stick with this week’s game plan:

  1. Monday, I cut our asset allocation to US Equities to 0% again (sold Utilities, XLU)
  2. Monday, I cut our asset allocation to Commodities to 0% again (sold Gold, GLD)
  3. Tuesday, I moved the Hedgeye Portfolio back to net short (more shorts than longs)

This isn’t being “over-confident”, “uber bearish”, or whatever the losers and the haters out there want to call us. This is simply a reminder that we have a repeatable risk management process at this firm that has saved our clients and their clients a lot of money in both 2008 and 2011.

 

"Winning takes talent, to repeat takes character."

-John Wooden

 

Winning doesn’t require bailing out losers. It doesn’t require extending the short-selling ban like the French are doing again this morning either. Winning requires accountability, confidence, and trust. If people don’t trust you or your economic policy making process, you should be fired.

 

The SP500 is down -26.5% from the October 2007 high. It’s down -15.6% from the April 2011 lower-long-term high. This is called losing. And the best way to start winning again is to end whatever it is that these people keep doing to our markets, over and over and over, again.

 

No more whispers, rumors, and squirreling around in the shadows of this fiat system. No more bailout money printing as the elixir of short-term political life. Stop.

 

I want to see shields flashing like mirrors, for this sight strikes terror into the enemy” (Leonidas in Gates of Fire, page 226). Give me transparency, or give me a place of American mediocrity where I can sleep in.

 

My support and resistance ranges for Gold, Oil, the German DAX, and the SP500 are now $1567-1667, $77.91-83.69, 5449-5741, and 1113-1171, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Leading From The Front - Chart of the Day

 

Leading From The Front - Virtual Portfolio


THE M3: SEPT GGR; AMBROSE SO

The Macau Metro Monitor, October 4, 2011

 

 

MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DSEC

Macau September Gross Gaming Revenue came in at 21.24BN MOP (20.63BN HKD, 2.65BN USD), representing YoY growth of +38.8%.

 

SJM REMAINS CONFIDENT DESPITE STOCK SELL-OFF Macau Daily Times

SJM CEO Ambrose So said, “I’m not too worried about the slowdown in China. Basically the growth is still in this region....We want to have a very strong growth. In the first few days [of October] we see that the trend is keeping up, despite the fact that people are talking about a slowdown in China and in this region. But we haven’t felt the impact yet....We are still waiting for a Government response to our application for a plot in Cotai close to the Macau Dome."



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Theory vs Practice

“In theory there’s no difference between theory and practice, but in practice there is.”

-Yogi Berra

 

In theory, money printing and piling more debt-upon-debt was going to save the world’s biggest banks. In theory, Old Wall Street had Ben Bernanke’s back on +3-4% US GDP Growth for 2011. In theory, the Yankees should have beaten the Detroit Tigers last night too.

 

Then again, I’m a conflicted, compromised, and constrained Yankee fan – and with that theory, I may as well be a Keynesian this morning. In practice this is called marked-to-market risk management and the question this morning isn’t an ideological one – it’s, what do you do?

 

When I joined the hedge fund elite 12 years ago, I didn’t have to have a Global Macro view. Today, I do. In practice, this game of Globally Interconnected Risk is A) always on and B) always changing. Today, I have to play the game that’s in front of me.

 

Back to the Global Macro Grind

 

Immediate-term TRADE oversold is as oversold does. Today we’ll register the 3rdShort Covering Opportunity we’ll have called for in the last 2 months (the 1st call we made to cover shorts on August the 8th, 2011).

 

Here are the US Equity, Commodity, Currency, and Fixed Income factors that help me decide what we do now: 

  1. The SP500 is immediate-term TRADE oversold in the 1180-1197 range
  2. The Volatility Index (VIX) is immediate-term TRADE overbought at 47.11
  3. This is the first day in the last 6 trading days in US Equities where there’s more immediate-term upside vs downside
  4. The US Dollar Index is immediate-term TRADE overbought at $79.43
  5. The Euro/USD pair is immediate-term TRADE oversold at $1.31
  6. WTIC Oil is immediate-term TRADE oversold at $76.19
  7. Copper is immediate-term TRADE oversold at $2.95/lb
  8. US Treasury Yield Spread is putting in an oversold YTD low of 153 basis points wide
  9. US Treasury 2-year Yields are holding immediate-term TRADE support of 0.21%
  10. Goldman is cutting their Global Economic estimates across the board 

On top of the price/volume/volatility signals that help construct the 10 aforementioned factors in my model, we have a very newsy event on the tape with Deutsche Bank’s CEO (Ackerman) guiding Q3 down, big time.

 

In theory, this is all bad. In practice, a lot of what Goldman and Deutsche Bank are saying isn’t in the area code of what Hedgeye clients would consider new. Our Managing Director of Financials research, Josh Steiner, has been bearish on the banks since February.

 

The US Financials ETF (XLF) is down -29.3% for the YTD. That’s called a crash – and it’s readily apparent in the rear-view mirror. So is the SP500 having collapsed -29.8% and -19.4% from their October 2007 and April 2011 easy-money highs.

 

Today is a day to notice what no one will be focused on. In theory, your Risk Manager should have a process to impute everything that’s happening in the world as of last price. In practice, most money managers will be freaking out this morning making emotional decisions.

 

Capitalize on that.

 

What do I see that’s better than bad that people aren’t talking about this morning? 

  1. South Korean inflation (CPI) dropped sequentially to +4.3% for SEP versus +5.3% in AUG (on the margin that’s not bad)
  2. Chinese non-Manufacturing PMI rose sequentially to 59.3 for SEP versus 57.6 in AUG (China is not collapsing, yet)
  3. USA’s ISM report for SEP rose sequentially (month-over-month) to 51.6 versus 50.3 in AUG (Growth Slowing? not new) 

Again, I’m not calling for a new bull market. Neither am I saying that Growth Slowing has ended. I am simply suggesting that you see this for what it is in most things US Equities (and some things Asian and European Equities) this morning – a Short Covering Opportunity.

 

My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $1 (Gold is now bearish TRADE and TREND), $76.19-81.09 (Oil remains in a Bearish Formation – bearish on all 3 of our risk management durations), 5091-5439 (that TRADE line break in the DAX yesterday mattered), and 1080-1130, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Theory vs Practice - Chart of the Day

 

Theory vs Practice - Virtual Portfolio


Q3 HOTEL TRANSACTIONS UPDATE

Not as robust as earlier in the year but much higher than 2010

 

 

Market M&A Trends for Q3

  • Q3 US hotel transaction volume fell to $3BN from $4BN in Q2 and $5BN in Q1. But 2011 YTD volume is almost double that of 2010’s total.
    • Q3 US Upper Upscale Hotel Volume tumbled 65% QoQ as there were fewer transactions and a couple of fire-sales.  Average Price per Key fell to $250k in Q3.
  • REITs were not as active; JVs controlled much of the market
  • Portfolio deals picked up steam
  • The most prominent deal was the sale of W London at an average price per key of $1.6MM
  • Hotel delinquencies continue to trend around the 14% level. 
  • According to SHO CEO Kenneth Cruse, CMBS spreads have widened by 60-100bps from a rate of LIBOR+242bps a year ago

 Luxury Segment

  • Average Price per Key
    • Q3 2011
      • US average: $632,270  (2 transactions)
      • Other average: $858,612 (2 transactions)
    • Q2 2011
      • US average: $406,250 (4 transactions)
      • Other average:  $788,461 (3 transactions)

Upper Upscale Segment

  • Average Price per Key
    • Q3 2011
      • US average: $253,736 (8 transactions)
      • Other average: $338,661 (4 transactions)
    • Q2 2011
      • US average: $355,382 (13 transactions)
      • Other average: $250,152 (2 transactions)

 

Q3 HOTEL TRANSACTIONS UPDATE - hotel


Bearish Formation: SP500 Levels, Refreshed

POSITION: Short Consumer Staples (XLP)

 

No change in my view here as there is no factor in my model that is making me change, yet.

 

Across risk management durations, the SP500 remains in what we call a Bearish Formation (bearish TRADE, TREND, and TAIL): 

  1. TAIL = 1266
  2. TREND = 1237
  3. TRADE = 1182 

There is an even shorter-term duration I use (almost hyper short-term to stress test for crash scenarios) that is building in a lower-high of resistance now at 1157. This is not encouraging as it puts pressure on the downward bound of my immediate-term TRADE range (1113).

 

At 1113 or wherever we wash out next, I’ll likely call that a Short Covering Opportunity. Nothing more. Don’t forget the US Employment Report is due out on Friday and a 50,000 payroll add (expected number) is no layup. Neither is closure on a Euro-TARP bazooka before October 17th (EU Summit).

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bearish Formation: SP500 Levels, Refreshed - SPX


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