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Fade Fear

This note was originally published at 8am on November 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.

“Fear is nothing more than a state of mind.”

-Napoleon Hill

 

Hedge Funds fear being short. Mutual Funds fear missing Santa Claus. Central planners fear-monger.

 

What is a Global Macro Risk Manager to do?

 

Fade Fear.

 

Last night, while the elephantine academic intellect of Larry Summers was engrossed in The Munk Debates in Toronto (I LIVE tweeted the entire debate from 700-830PM EST), at one point he paused and stated, “in a democracy, fear does the work of reason.”

 

Fade Larry Summers.

 

Last week, as the Euro was punching up against my $1.37-1.38 TRADE wall of immediate-term resistance, Goldman’s currency strategist said fear the short squeeze and buy the Euro.

 

Fade Thomas Stolper.

 

Last month, after the biggest stock market rally ever in October (ever is a long time), JP Morgan’s Thomas Lee said to stop thinking about everything else and chase beta.

 

Fade Thomas Lee.

 

With the US stocks down a full 1% yesterday, they are down for both November and 2011 YTD. Some Santa Claus rally we’re having here in mid-November…

 

I’m short the SP500 (SPY), long the Long-Bond (TLT), and long the US Dollar (UUP) – and relatively loud about all three of those positions. If you’ve been fading me since October 2007 or April 2011, you still have some Thanksgiving hay to bail (for November 2011 to-date, Hedgeye is 12 for 14 in the Hedgeye Portfolio).

 

To get back to SP500 breakeven:

  1. You’ll need to be up +25% (from here) to recapture the -20% from October 2007 watermark
  2. You’ll need to be up +8.9% (from here) to recapture the -8.2% from April 2007 watermark

Geometric math is hard to fade.

 

But since the Keynesians continue to attempt to ban gravity, I supposed they could move towards banning math after this morning’s drawdown in Global Equities too. If we’re fundamentally scared out of our bloody minds, there is no telling what central plan is possible.

 

Back to The Munk Debates - I thought David Rosenberg won last night. For those of you who missed it, the debate was between the teams of David Rosenberg/Paul Krugman and Larry Summers/Ian Bremmer.

 

What was crystal clear after the opening statements was that Krugman and Summers were actually on the same team.  Rosie, The Canadian, was quick to figure that out and proceeded to physically poke his debate partner (Krugman), then proceeded to tell Summers he was “dropping the gloves” … reminding Larry of how bad his economic “forecasts” have been…

 

Fade Keynesian Economics.

 

Summers was literally quoting Keynes during the debate as he and Krugman agreed that the only answer to this mess is to do a lot more of what has not worked.

 

If you’re going to fear anything this morning, fear that.

 

My immediate-term support and resistance ranges for Gold, Oil, France’s CAC, Germany’s DAX, and the SP500 are now $1735-1808, $96.13-99.73, 3031-3179, 5771-5959, and 1233-1269, respectively. If 1233 in the SP500 holds, I’ll consider covering SPY there.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fade Fear - Chart of the Day

 

Fade Fear - Virtual Portfolio


BYI: TRADE UPDATE

Keith bought BYI in the Hedgeye Virtual Portfolio at $35.53.  According to his model, there is TRADE and TREND support at $34.26 and $32.01, respectively.

 

 

From a fundamental perspective, we've been positive on BYI since G2E in early October.  Visibility is improving in BYI's systems business - its secular growth engine - and significant growth should emerge in the latter half of FY2012.  Replacement demand has been accelerating for a few quarters - though the sell side is only just starting to acknowledge it - while visibility on new markets is beginning to emerge.  We believe the industry could be at the beginning of a 3-5 year bull market.

 

BYI: TRADE UPDATE - BYI1


WYNN: TRADE UPDATE

Keith shorted WYNN in the Hedgeye Virtual Portfolio at $124.33.  According to his model, there is solid TRADE and TREND resistance at $131 and $139, respectively.

 

 

As we mentioned in our notes "Macau Observations" and "Receivables Don't Look Out of Whack" (published on 11/16/11 and 11/17/11, respectively), we believe LVS's recent aggression on junket commissions and credit will affect the other Macau operators.  Wynn Macau is in sort of a Catch 22 - either they raise commission rates and/or expand junket credit or continue to lose share, possibly at an accelerated rate.  Should they pursue a more aggressive junket strategy, they risk losing the  perception of invincibility in the eyes of investors.   

 

WYNN: TRADE UPDATE - wynn


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Santa Mario

“We should not be waiting any longer.”

-Mario Draghi

 

In one of the more suspicious central planning moves to-date, it appears that the new Italian Chief of Central Planning, Mario Draghi, is working on changing the date of Christmas.

 

Santa, as you can see, is really red. This whole thing about the Nasdaq and US Small Caps being down for 3 consecutive weeks in November (SP500 down -3%) has Bernanke’s central plan for reaching “escape velocity” from the chimney under fire too.

 

If Americans and Europeans change all of the rules and all of the dates, there’s really a lot we can do. You see, this is what these people fundamentally believe – they can save us from, well, just about any problem they perpetuate.

 

The aforementioned quote came from Santa Mario this morning where he started calling out the Germans in Frankfurt. “Where is the implementation of these long standing decisions?” Draghi asked.

 

Q: Qu’est ce qui ce passe avec Le Bazooka pour les banks? demanded Monsieur Sarkozy.

 

A: “If politicians believe the ECB can solve the problem of the Euro’s weakness, then they’re trying to convince themselves of something that won’t happen.” –Angela Merkel

 

Bad German Santa. Bad.

 

Back to the Global Macro Grind

 

Yesterday I covered shorts and bought some of our Hedgeye Best Ideas on the long side (ask for the replay of our analyst team’s Best Ideas Call from last Friday), taking my net long position in the Hedgeye Portfolio to one of its most bullish leans in November (12 LONGS, 8 SHORTS).

 

That doesn’t mean I believe in Le Pere Noel or that a few Keynesians by the name of Mario are going to save me on the long side either. It simply means that I am doing what my risk management process allows me to do – Fade Beta.

 

Fading Beta means buying on red and selling on green. It’s not as complicated as figuring out the European catalyst calendar. It’s just math. I base these decisions on a model that I’ve built. I don’t have to ask my boss for permission to act on its signals.

 

The risk management signals aren’t perfect, but they’ve been better than being Bad Beta in November. We’ve booked 13 consecutive gains on the long side of the Hedgeye Portfolio and have gone 17 for 19 in November. Beats believing in Santa too.

 

Like all of you, I’m proud of my team and process when they are working together. I’m not a whiner. I celebrate winning. And hopefully that message is resonating with your process. At the end of the day, this business is all about the score. Winning matters.

 

Where do we go from here?

 

On the bounce, sell on green, again.

 

Why?

 

All low-volume rallies to lower-highs in Asian, European, and US Equities are to be sold until consensus fundamentally starts to come to grips with what the Germans are saying. 

  1. If any European banks are going to be bailed out, German banks get to go first (Deutsche Bank, Commerzbank, etc).
  2. If any French or Italian banker thinks Lagarde or Draghi are getting them a priority pass ahead of German banks, they should think that through again…
  3. If and when all of these Greek, French, Italian, etc banks prove that they can’t raise money (read: secondaries in the public market), they have to tap their sovereign leaders first, then start begging for the EFSF funding. 

Like intermediate-term tops in markets, the deleveraging of balance sheets is a process, not a point. There have been plenty of points in the last 3 to 24 months where pundits have made the call that “this is it – this is the bottom for the banks”, but the process of marking bank stocks and their equity values to market continues to trump all hopes.

 

Hope (and begging for Santa Mario), is not a risk management process. And “printing money”, according to Merkel’s spokesman on the economy this morning, “… at the end of the day means inflation…” and “every German is very much scared about inflation.”

 

As Ben Bernanke anchors on the 1930s (instead of the 1970s Stagflation), the German Zeitgeist is anchoring on the 1920s. Interconnected risk is not managed on one duration to suit the needs of one country’s central banking narrative over another’s. Interconnected risk is multi-duration, multi-factor, and global.

 

If you don’t get that yet, you probably still believe in Santa coming this November too.

 

My immediate-term support and resistance ranges for Gold (bought more yesterday), Oil (Bullish Formation and inflationary), French CAC (Bearish Formation), and the SP500 (Bearish TAIL; Bullish TREND) are now $1, $98.12-101.96, 3002-3146, and 1.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Santa Mario - Chart of the Day

 

Santa Mario - Virtual Portfolio


FL: Q3 Quick Take

 

FL reported a solid Q3 with EPS of $0.43 vs. $0.39E reflecting continued execution at the company level on top of strength in the athletic specialty channel. The company came in ahead of our expectations on every metric with the exception of SG&A.

 

Based on our model, we have Fx accounting for ~$7mm of the SG&A increase with the other $26mm reflecting a 9% increase in core organic spending and a continued sequential acceleration.

 

We’ll need to drill down exactly where these dollars went. If it was higher investment spend at the store level or into marketing initiatives like Champs and Europe to fuel growth, then we’re perfectly cool with that. But if it was deferred maintenance or higher incentive comp, then we’re not quite as jazzed.

  

Comps of +7.4% came in above consensus…again – though in-line with our 7.5% estimate. We’ll learn more about the composition of sales and just how Europe fared relative to e-commerce on tomorrow’s conference call.

 

Gross margins of +220bps came in better than expected and better than our above consensus +160bps estimate. With our model suggesting just over 100bps in occupancy leverage, we assume the balance can be chalked up to higher merchandise margins coming in better than the +90bps contribution realized in Q2. Having just faced the toughest comp of the year and with inventory growth in check, this is positive for FL’s Q4 outlook.

 

As for inventories, this is the first time since the company was renamed Foot Locker from Venator that the Sales/Inventory spread was positive seven quarters in a row. Having previously been what we called ‘Nike’s best off-balance-sheet asset’ FL was perennially in a position with a negative sales/inventory spread, and down gross margins.

 

Cycle or no cycle, this is a different company.

 

We’ll have more to add following the call.

 

 

 

 

Casey Flavin

Director

 

FL: Q3 Quick Take - FL SIGMA

 

 


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