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THE M3: SANDS CHINA HK PROBE DONE

The Macau Metro Monitor, December 19, 2011

 

 

SANDS CHINA SAYS PROBE IS OVER WSJ

In a written statement to the Hong Kong Stock Exchange on Sunday, Sands China said it had received confirmation from the Securities and Futures Commission that the investigation has been concluded and that no further action will be taken against the Company at this time.  Sands China said in March that the commission had asked the company to produce documents for an investigation into alleged breaches of the Securities and Futures Ordinance.  LVS remains under investigation by U.S. federal and state regulators.

 


Correlation Crash

This note was originally published at 8am on December 14, 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 thus appears to be an inverse correlation between recovery and psychotherapy.”

-Hans Eysenck

 

With The Correlation Risk whipping around faster than a Keynesian can drum up the next big central plan, I’ve decided to source my morning quote from a psychologist. If I have to deal with managing risk today like I did yesterday, I think I might need one.

 

The late Eysenck was a “German-British psychologist … best remembered for his work on intelligence and personality… at the time of his death, Eysenck was the living psychologist most frequently cited in science journals” (Wikipedia).

 

The Big Government Intervention experiments of Japanese, American, and now European social scientists may not be cited in the scientific journals of our children as successes. I’m thinking maybe more like pre-Einstein “scientists” are remembered from Berlin.

 

After Ben Bernanke’s FOMC proclamations of faith yesterday, I was reminded of what the President of the United States should be holding him accountable to (his job):

  1. Achieve full employment
  2. Establish price stability

In the Transparency, Accountability, and Trust school of questioning perceived academic wisdoms, I give the Chairman of the Federal Reserve and the policies he has perpetuated globally to inflate very low grades.

 

Sure, somewhere in between what he thought was going to be an employment recovery and psychotherapy, I can be convinced that the man got lucky with some inverse correlations (driving commodities and stocks up with the Dollar Down). But for now, it’s the Correlation Risk (i.e. the other side of the trade), that’s ungluing just about everything that he believed would stick.

 

Back to the Global Macro Grind

 

As the SP500 bumped up against (and failed at) my immediate-term TRADE line of resistance (1249) yesterday, I sold my long position in the SPY (957AM EST, #TimeStamped).

 

While that’s a 180 versus what I was outlining yesterday, there’s also a 180 degree difference between the SP500 at 1229 and 1249. There’s an even bigger difference on a TRADE line breakdown through 1232. Risk works both ways.

 

Contextualizing why you make immediate-term TRADE decisions requires an intermediate to long-term risk management process. That’s why we call our model Duration Agnostic.

 

If you take a step back and consider our most fundamental intermediate-term TREND view in Global Macro right now, it’s a lot easier to see why we’d have a 0% asset allocation to something like Commodities.

 

Hedgeye Global Macro Themes for Q411 (introduced in mid October):

  1. King Dollar – an explicitly bullish view of the US Dollar across durations
  2. Correlation Crash – an explicitly bearish view of Global Equities, Commodities and Foreign Currencies
  3. Eurocrat Bazooka – a view that the Europeans would ultimately fail in keeping rumors in line with reality 

So far, so good.

 

Our competition (shh, even in a fair share world, it really still is a competition) has had plenty of opportunity to follow the leader on these Global Macro Themes. But, sadly, they have chosen the path most travelled by Old Wall Street sell-side firms and stayed the course with what didn’t work for them in 2008 and certainly is not working now. Same broken models.

 

Not to name names, but whether it was Goldman saying buy Commodities in October (then buy the Euro in November!), or Tom Lee at JP Morgan just saying buy buy buy, it’s all one and the same old thing. I’m not the only one who should be considering psychotherapy.

 

Back to The Correlation Risk

 

Yesterday I heard a few pundits talk about how interesting it was that the “correlations are starting to come undone.” Not sure what that means (they were saying it when US stocks were up on the day actually), but here’s the latest math:

 

Immediate-term inverse correlations between the US Dollar Index and the big Macro that matters:

  1. CRB Commodities Index = -0.87
  2. SP500 = -0.59
  3. EuroStoxx = -0.73
  4. Gold = -0.82
  5. Silver = -0.89
  6. Corn = -0.84

Now maybe if you are US stock centric and not paying attention to Global Macro Correlations other than the SP500, this data could be spun as half-true (SP500 was a -0.8). But C’mon Man – interconnectedness is what’s been driving the Alpha bus for all of 2011. Period.

 

Since we authored this very basic thought, we do agree that the best path to long-term prosperity in America is through a Strong Dollar. Correlation Risk is not perpetual. With time, Strong Dollar = Strong US Consumption. Strong Consumption (71% of US GDP) will ultimately save this country from the Keynesians themselves - like it did in 2009.

 

Unfortunately, this is not yet 2009. Bottoms are processes, not points. And this Correlation Crash still needs to run its course.

 

My immediate-term support and resistance ranges for Gold, Brent Oil, German DAX, French CAC, and the SP500 are now $1637-1718, $107.12-109.56, 5667-5842, 3026-3133, and 1214-1232, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Correlation Crash - Chart of the Day

 

Correlation Crash - Virtual Portfolio


MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION

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Margin Debt in November

We publish NYSE Margin Debt every month when it’s released. 

 

 NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May of this year. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which retraced back to +0.43 standard deviations in September, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in October and November’s print of +0.78 and +0.55 standard deviations.  But overall, this setup represents a material headwind for the market.  

 

One limitation of this series is that it is reported on a lag.  The chart shows data through November.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Margin Debt

 

* The TED spread made a new YTD high at 56.8 bps, indicating risk in the banking system continues to rise. We consider the TED spread to be a more sober reflection of systemic risk in the banking system.  This is a strong cautionary note amid widespread equity gains.  

 

*Credit default swaps for Eurozone countries were a mixed bag on Monday. German sovereign swaps widened by 6.3% while Spanish swaps tightened by 5.6% compared to the prior week. 

 

* Our composite MCDX monitor shows municipal default risk making steadily higher highs and higher lows. While it has not yet returned to the post-Whitney/Build America Bonds levels, it is on track do so in the not too distant future.

 

 * Our macro quantitative model indicates that in the immediate term (TRADE), there is currently around 2 times more downside than upside in the XLF (2.2% downside vs. 1.0% upside).

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 11 improved / 4 out of 11 worsened / 6 of 11 unchanged
  • Intermediate-term (MoM): Negative / 2 of 11 improved / 5 of 11 worsened / 5 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 10 of 11 worsened / 1 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Summary

 

1. US Financials CDS Monitor – Swaps widened for 19 of 27 major domestic financial company reference entities last week.   

Widened the most vs last week: C, MET, HIG

Tightened the most vs last week: ALL, MBI, AGO

Widened the most/ Tightened the least vs last month: BAC, SLM, RDN

Tightened the most vs last month: ACE, ALL, CB

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - CDS  us

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 28 of the 40 reference entities. The average widening was 2.7% and the median widening was 0.3%

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - CDS  euro

 

3. European Sovereign CDS – European sovereign swaps showed mixed results last week. German sovereign swaps widened by 6.3% (+6 bps to 107) and Spanish tightened by 5.6% (+24 bps to 410).

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 5 bps last week, ending the week at 9.01 versus 8.96 the prior week.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - High Yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -5 points last week, ending at 1573.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - LLI

 

6. TED Spread Monitor – The TED spread rose 2.6 points last week, ending the week at 56.8 this week versus last week’s print of 54.2.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC indexfell -4.34 points, ending the week at -24.5 versus -20.16 the prior week.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - JOC

 

8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.  The Euribor-OIS spread tightened by 2 bps to 94 bps versus last week’s print of 96 bps.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Euribor

 

9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding.  Last week the facility hit its periodic low, but this level was higher than the previous cycle, indicating growing risk. 

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - ECB liquidity deposit2 

 

10. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads widened, ending the week at 190.4 bps versus 184 bps the prior week.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - MCDX

 

11. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index fell -34 points, ending the week at 1888 versus 1922 the prior week.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Baltic Dry

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 162.29 bps, -21.11 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 2.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - xlf

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 

 

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 19, 2011

 

In a consensus world that was begging for the next Big Government Intervention (and didn’t get it), dead cats can still bounce.  The only problem between now and whenever the Correlation Crash ends is real-time prices.  As we look at today’s set up for the S&P 500, the range is 19 points or -1.04% downside to 1207 and 0.52% upside to 1226. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 1219

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE:  721 (-26volu) 
  • VOLUME: NYSE 1788.63 (+105.63%)
  • VIX:  24.29 -3.27% YTD PERFORMANCE: +36.85%
  • SPX PUT/CALL RATIO: 1.36 from 1.80 (-24.72%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 56.82
  • 3-MONTH T-BILL YIELD: 0.00%
  • 10-Year: 1.86 from 1.92   
  • YIELD CURVE: 1.62 from 1.66

 

GLOBAL MACRO DATA POINTS (Bloomberg Estimates): 

  • 10am: NAHB Housing Market, Dec., est. 20 (prior 20)
  • 11am: Export inspections: Dec. 15, corn, soybeans, what
  • 11:30am: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 12:30pm: Fed’s Lacker to speak in Charlotte
  • 1pm: U.S. to sell $35b 2-yr notes

 

WHAT TO WATCH:

  • Bank of Ireland sells Burdale to Wells Fargo Bank (WFC) for c €690M in cash
  • Chipotle Mexican Grill co-CEO would like politicians to fix US's immigration system – WSJ
  • Rep John Boehner says no to two-month payroll-tax-cut extension – WSJ
  • JC Penney employees uncomfortable as they await details of CEO Ron Johnson's plan for company - NY Post
  • South Korean shares fall sharply after news of Kim Jong-Il's death
  • Prince Alwaleed bin Talal, his investment co. agreed to buy $300m stake in Twitter
  • France’s credit outlook lowered by Fitch late Friday; S&P has also threatened to cut rating
  • Euro-area finance ministers to hold call to discuss $261b in additional funding through IMF, mechanics of so-called fiscal compact negotiated at Dec. 9 EU summit
  • U.S. online holiday sales up 15%: ComScore

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

COMMODITIES – amidst all of the final countdown to year-end markup fun (or are they markdowns?), Dr Copper is down another -0.7% this morning – that’s pretty sad considering Copper dropped -6.2% last wk; Brent Oil is now in a Bearish Formation w/ immediate-term downside to $101.98/barrel; Gold’s refreshed range = $1

  • Investors in ‘Fetal Position’ as Goldman Sees Rally: Commodities
  • Sino-Forest Defaults on Two Bond Issues, Seeks Waivers
  • Eldorado Agrees to Acquire European Goldfields for C$2.5 Billion
  • Oil Falls a Fourth Day on Europe Debt Concern, Kim Jong Il Death
  • India Inflation Hurting as Bad Roads Compound Power Deficit
  • Gandhi Bill Strains India Finances to Give Food to Nation’s Poor
  • Philippine Floods, Landslides Kill 652 in 2011’s Worst Storm
  • Copper Drops for First Day in Three on Fitch, China Home Prices
  • Iron Ore May Remain Below $140 as Chinese Mills Limit Purchases
  • Oil Rebounds From Near Six-Week Low as European Equities Advance
  • Soybeans Rise to Three-Week High on South America Crop Concerns
  • Tin Export Ban From Indonesia ‘Broken,’ Industry Group Says
  • China to Buy Corn, Soybeans for Stockpiling, Grain Center Says
  • Palm Oil Climbs for Second Day as Dry Weather May Cut Soy Crop
  • Copper Drops for First Day in Three on Chinese Demand Concerns

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

 

EUROPE – contextualizing a dead cat’s bounce matters; don’t forget last week alone the CAC, MIB, and FTSE were all

down between -5.9-6.3%, so a +30-90bps bounce is what it is – another round of lower highs. Fitch downgrading France actually still matters to insolvent French banks who are going to have the negative P&L impact of ratings uplifts going away (higher funding costs).

 

 THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST (HEADLINES FROM BLOOMBERG)

  • Prince Alwaleed, Kingdom Buy $300 Million Stake in Twitter
  • Gulf Keystone Jumps on Report Exxon Considering Making Offer
  • Etihad Raises Air Berlin Stake to 29.2% to Boost Cooperation
  • RAK Outpaces Global Sukuk on Abu Dhabi Backing: Islamic Finance
  • HSBC Says Bigger Is Better for Persian Gulf Bonds: Arab Credit
  • Hungary’s Mol Jumps Most in Month on Exxon Iraqi Deal Report
  • Exxon Weighs Deal With GKP for Kurdish Oil, Independent Says
  • Emaar Raises 3.6 Billion-Dirham Financing Backed By Dubai Mall
  • Gulf Has $25 Billion of Bonds Falling Due in 2012, Al Bayan Says
  • Libyan, Iraqi Output Lead OPEC to Raise Target: Persian Gulf Oil
  • Iran and Russia’s Tatneft Sign $1 Billion Oilfield Accord
  • Saudis Domestic Crude Oil Use Nears 10-Year High in October
  • Alwaleed Tops Arabian Business Rich List With $21.3 Billion
  • CIA Spy 'Confesses' on Iranian TV
  • OPEC Ceiling Adds ‘Strong Upside Risks’ to Oil, Goldman Says
  • Saudi Arabia’s Oil Output Fell in October as Demand Fluctuated
  • Taqa Says Statoil, Vattenfall Energy Are Bergermeer Customers
  • Abu Dhabi Shares Drop to Lowest Since 2009 on Europe Debt, Asia

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

The Hedgeye Macro Team

Howard Penney

Managing Director



What's True?

“Do you like learning? Do you like finding out what’s true?”

-Ray Dalio

 

Unless you’re long Venezuela or Pakistan (the only 2 markets in the world up double digits YTD), this was not a good year to be long stocks. Most of you know that by now. The final few weeks of 2011 might change the storytelling. Then again, they may not.

 

What’s True?

 

During what I thought was the best Global Macro Risk Management interview of the year, that’s what Bridgewater’s Ray Dalio leaned across the table and asked of Charlie Rose.

 

Can we, as a profession, look into the mirror and answer that question? Or are we failing to learn? Are we accepting mediocrity?

 

Re-think, Re-work, Re-build.

 

Rather than give you some completely random wire-to-wire December 31st“Outlook for 2012”, my risk management goals for the coming months, quarters, and years are:

  1. Don’t lose money
  2. Embrace Uncertainty
  3. Be Right

In order to achieve these goals, I have a lot of learning to do. We have an opportunity to learn something from markets every day.

 

Back to the Global Macro Grind

 

What’s True about Global Equity markets in November and December of 2011 is that they are down. This morning, after seeing Asia make fresh new lows (China and India down -21.0% and -25.2% YTD, respectively), we’re seeing another dead cat bounce from oversold levels in European Equities. Don’t forget that France, Italy, and the UK were down -5.9%-6.3% last week.

 

Last week’s macro moves were largely explained by our Top 3 Global Macro Themes for Q411:

  1. King Dollar – up another +2.1% week-over-week
  2. Correlation Crash – USD up = most things highly correlated (inversely) to the USD down
  3. Eurocrat Bazooka – no dice

What’s True about the Correlation Crash as it pertains to Commodities is that they went straight down last week:

  1. CRB Commodities Index = -3.6%
  2. Oil prices (Brent) = -4.9%
  3. Gold = -6.9%
  4. Copper = -6.2%
  5. Palladium = -8.9%

What’s True about Palladium is that if you dropped it on your head, it would hurt.

 

But, aside from consensus being paid to call precious metals “currencies” over the course of the last 4 years, What’s True about the causality embedded in that consensus assumption?

 

In order to attempt to answer to that question, we need to taking a step back, and Embrace The Uncertainty associated with the Ben Bernanke policy to inflate:

 

“Let us experiment with boldness… even though some of the schemes may turn out to be failures, which is very likely.”

-John Maynard Keynes in the 1920s (Keynes Hayek, page 33)

 

What’s True about the Keynes model away from what he called it himself? Well, the man did blow up his entire net worth by being long The Inflation Trade (Commodities) in 1928…

 

P&L doesn’t lie; Keynesian politicians talking about “price stability” do.

 

Ray Dalio’s thoughts on this generational debate that’s occurring on Old Wall Streets, in our offices, and on the Twitter-sphere is quite simple: “there is not a quality conversation about what is true.”

 

So either President Obama or the next President of the United States figures this out or there is going to continue to be a social tension amongst The People. Americans may not know the specific how or why, but they do know they are being lied to.

 

My first solution to this mess is simply to stop what we are doing (stop lying). Dalio’s is to have a conversation about What’s True. Somewhere in between those ideas is a beautiful American bridge that can Re-build what we broke – America’s trust.

 

Otherwise, as Dalio solemnly reminded Rose in October of 2011, “… the cost of being wrong is a terrible thing.”

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1, $101.98-107.18, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

What's True? - Chart of the Day

 

What's True? - Virtual Portfolio


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