No Surer Means

This note was originally published at 8am on December 12, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”

-John Maynard Keynes


If you study the history of John Maynard Keynes and his economic ideas, experiments, and failures, you’ll come to a very simple conclusion – he was a world class storyteller, not a Risk Manager.


Before he became politically conflicted and compromised (in his early 40s), Keynes had it absolutely right on what debauching a currency functionally does to a society. After World War I, the policies to inflate across Eastern Europe made that crystal clear.


Ironically enough, explaining this in the 1stbook to make him world famous – The Economic Consequences of Peace (1919) – is what made Keynes popular with the Austrian, German, and Russian people:


“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency”, wrote Keynes. “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” (Wapshott’s Keynes Hayek, page 22).


Tomorrow at the FOMC meeting, someone should ask Ben Bernanke what he thinks about that.


Back to the Global Macro Grind


I call out this linkage between currency and inflation this morning because last week’s stabilization of the US Dollar continues to improve not only my outlook on the US economy but the Consumer Confidence within it. US Consumption, don’t forget, represents 71% of US GDP.


Closing flat week-over-week at $78.63, the US Dollar Index has gained +7.6% since Ben Bernanke signaled the end of Quantitative Guessing II. We’ve called it guessing, because that’s what it was – a guess that a second stock and commodity market inflation could magically boost the US economy into what Bernanke calls “escape velocity.”


On the two mandates that he is scored on – full employment and price stability – guessing didn’t work out for him.


What has actually worked quite well for Bernanke is getting out of the way. Since the elixir of QE3 hope has been temporarily removed from the almighty table of letting losers win, 3 big things have materialized:

  1. Strong Dollar
  2. Deflating The Inflation
  3. Rising Consumer Confidence

Last week’s preliminary December reading on US Consumer Confidence from the University of Michigan improved again, sequentially, to 67.7 (versus 64.1 in November). It’s not a great reading. But it’s certainly better than bad.


Last week’s Deflating The Inflation (Hedgeye Macro Theme from Q311) was also additive to US Consumer Purchasing Power:

  1. CRB Commodities Index (basket of 19 commodities) = -2.2% week-over-week
  2. Oil Prices (Brent and WTIC blended avg) = -1.2% week-over-week
  3. Gold and Copper = -2.0% and -0.8% week-over-week, respectively

Just as an fyi, most Americans don’t have enough money to buy an ounce of Gold, nor should they if their outlook is in line with Hedgeye’s for a potential US Dollar appreciation of another +5-10% higher from here.


That’s not to say we don’t want you to own some gold. That’s just a friendly reminder that the idea is to buy low, not high. Gold’s intermediate-term TREND line of resistance remains overhead at $1743/oz and there is no long-term TAIL support to $1568/oz.


Back to what Strong Dollar means for America…

  1. Stronger Employment
  2. Stronger Consumption
  3. Stronger Society

If you can have a Keynesian refute Keynes’ view of the same to me, just tweet me @KeithMcCullough.


My immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1683-1732, $107.11-109.55, and 1233-1270, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


No Surer Means - Chart of the Day


No Surer Means - Virtual Portfolio

Looking For Improvement

“Socialism told us that we had been looking for improvement in the wrong direction.”

-Friederich Hayek


I’ve been writing about this from my gut since I started the firm in 2008, but I think it’s worth stating plainly again this morning because it’s the one solution to this mess of economic common sense that we have not yet tried – stop what we are doing.


That’s it. Instead of do more, spend more, centrally plan more. Just stop.


As we have learned since 2007, central plans can only suspend economic gravity for short periods of time. In the long-run, we all have to find a way to let free market capitalism live. The best way to ensure that is to let market prices clear.


Hayek’s views are often ignored and/or misrepresented primarily because the entire Western system of economics education is founded on the idea that Big Government Intervention can “smooth” the business and price cycle.


How’s that smoothing mechanism treating everyone?


I don’t wake up every morning looking to whine. I want to win. Like many immigrants, that’s what I came to America to do. I’m Looking For Improvement in markets every day.


I’m looking to invest in a Strong Dollar. I’m looking for someone in this country’s political leadership to embrace the long-standing economic fact that a Strong Currency empowers not only a nation’s purchasing power, but the confidence of its People.


Taking a step back – and I mean going all the way back to the arenas of meritocracy that hosted the great debates of the Roman Empire (pre 49BC) – this is all we want. We want to be able to have an idea in this country and compete with the broken ideas of the status quo.


If we lose, we can deal with that. If we win, we can change the world. As the great American hockey Coach, Herb Brooks, said, “Again!” – stop what we are doing so that we can all start over.


Back to the Global Macro Grind


US Consumer Confidence is rising as the US stock market is falling.




Yes, while this may shock people who are in the business of seeing stocks go up, the other 80-90% of us get paid when the price at the pump goes down. At Hedgeye, since our Q211 Global Macro Themes call, we’ve coined this commoner’s phenomenon “Deflating the Inflation.”


Metaphorically, maybe this is why Hayek’s economic perspective resonates with so many people. When “Hayek disembarked at the passenger liner quay on Manhattan’s West Side in March 1923 with just twenty-five dollars in his pocket… he decided to take a job until Jenks returned, and was offered one washing dishes in a Sixth Avenue restaurant…” (Keynes Hayek, page 27)


While he didn’t make his name in dishwashing, this does remind readers what it takes to make it in this world.  On Saturday mornings in the 1980s, after my Dad got off the nightshift at the fire-hall, we’d literally scrub the local GM Auto Body shop’s floor with de-greaser, clean the toilets, and sweep the floors.


And liked it…


I mean that with all sincerity. There was an innocence maybe, but also a recognition of reality. That job put more money in our pockets than we’d have had if we didn’t do it. That job, when completed, also gave me a personal sense of accomplishment and responsibility.


This is the real-world folks. And it’s time we start liking that American idea again too.


In May 1924... Hayek set sail back across the Atlantic … and would not return to America for another twenty-five years.” (Keynes Hayek, pg 28)


That’s an American academic tragedy. Since Hayek’s English was awful, he had a very hard time communicating with the British academic elite (which instructed the American academic elite on economics).


However, by 1932, after Keynes had blown up most of his capital being long corn, rubber, etc. (you know, the Debauch the Currency, Buy Commodities trade), Hayek was gaining traction.


His argument – all of your central plans since 1928 have not worked. They have perpetuated the inflation and slowed Consumption growth.


His solution – stop what you are doing.


Was 2007 this Canadian-American’s 1928? I hope not. But hope is not a risk management process. And if I really take a step back and see how much money I made being long inflation (2003-2007), I can’t say it made me any more proud than the glimmer of that GM shop floor.


My immediate-term support and resistance ranges for Gold (bought it yesterday), Brent Oil, German DAX, and the SP500 are now $1, $104.94-108.61, 5, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Looking For Improvement - Chart of the Day


Looking For Improvement - Virtual Portfolio

Early Look

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The Macau Metro Monitor, December 15, 2011




The Urban Redevelopment Authority said developers sold 1,701 units of private homes, excluding executive condominiums in November this year.  This is up 22% MoM.  November's home buying demand was largely driven by strong sales from mass market projects.


CHINA'S NEW LOANS HIT 562B YUAN IN NOV China Daily, Today Online

According to the People's Bank of China, new yuan-denominated lending in November rose 7.8 billion yuan YoY to 562.2 billion yuan, beating estimates of 550 billion yuan, but was down 4% MoM.  October loans stood at 586.8 billion yuan.



Three large openings in the spring could impact CYQ4 earnings for the suppliers.



Shipment timing of three large properties opening in March/April will also materially affect supplier market share.  Although the open date is officially listed as May 15th, Revel is likely to [soft] open in late March or early April.  Horseshoe Casino Cleveland and Hollywood Casino Toledo should open in Ohio in March and April, respectively.


It is our understanding that some Revel units may ship in December.  We are hearing Revel was asking for payment terms that were extended more than what’s normal.  One supplier told us that Revel wanted to make no down payment on the machines and asked to pay for them over the course of several years, which means that the company would have to book a large long-term receivable.  It also means that the suppliers could have some revenue recognition issues and would most certainly have to book a reserve.


There seems to be some chatter regarding WMS’s very low market share (~11-12%) at Revel.  While this is clearly another strike against WMS, we would note that the Atlantic City market has a higher concentration of steppers than the rest of the country.  Steppers are not a strong point for WMS, so it’s no surprise that they would have a much lower share at Revel than at other new openings. 


Other Revel tidbits:

  • IGT: 40% ship share and system forecasted to ship in the March quarter
  • Konami: 9-10% ship share; will ship in January
  • BYI thinks that some will ship in December but the orders haven’t gone out yet.  BYI should get a healthy market share since they are strong in steppers.

As it relates to the Ohio casinos, licenses are still pending for operators and manufacturers.  We don’t anticipate any licensing problems or delays since Ohio already hired a 3rd party to help with the licensing process.  PENN, CZR, and the manufacturers are already licensed in other jurisdictions so the consultant can simply repurpose all the information needed for licensing and resubmit that data to Ohio regulators.  We believe that most of the units will ship January or early February for these two facilities.

  • Konami ship share (11.0-12.5%)
  • IGT forecasts shipping to both Ohio casinos in the March quarter

Buying the Gold Blood


Position: Keith bought GLD for the Hedgeye Virtual Portfolio this afternoon at $152.22.


Gold had its largest one-day drawdown since September amidst a strong dollar and forced selling via margin calls; we took the opportunity to buy the blood, as the precious metal hit our long-term TAIL line of support, $152.22.


Most important, the US Dollar is immediate-term TRADE OVERBOUGHT after busting a 2.5% move higher in the last three sessions; given that the 15-day correlation between gold and the US dollar is -0.94, we believe gold will spring back when the dollar stops going up.


And as an aside, we view owning gold is a call option on government and central bank intervention is asset markets.  [Gold rallied 2% on November 30, the day that the world’s major central banks cut and extended swap lines to lower short-term borrowing costs for financial institutions.]  While the timing and scope of such an event is impossible to predict, the probability of further action to ease financial stress increases on the margin as asset prices fall.


Our quantitative setup for GLD is: TAIL line support at $152.22 (0.4% downside) and TREND line resistance at $164.11 (7.3% upside).


Buying the Gold Blood - GOLD


Kevin Kaiser


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