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,



Keith R. McCullough
Chief Executive Officer


What's True? - Chart of the Day


What's True? - Virtual Portfolio


Keith just shorted Buffalo Wild Wings in the Hedgeye Virtual Portfolio.  From a fundamental perspective, this is one of our favorite names on the short side.


Buffalo Wild Wings’ share price has popped nicely today on a sell-side upgrade.  We have not seen the report but were told that EPS numbers for the next two quarters and the year were being reduced but the price target was being raised from $63 to $78.  Again, we have not seen the report so cannot refute it directly but our thesis remains intact; chicken wing prices are heading higher (already north of $1.40/lbs) and that means the promotional strategy the company has implemented to drive sales will not be viable in 1Q12 when wing prices are likely to be up roughly 50-60% year-over-year.  The Street is modeling a moderate price increase that we believe is far too low.  Margins are almost certain to come down under the wing price scenario we are anticipating.


BWLD: TRADE UPDATE - bwld margin vs wing prices



From a quantitative perspective, BWLD is nearing its TREND line of resistance at $62.69. See the chart below.


BWLD: TRADE UPDATE - bwld levels



Howard Penney

Managing Director


Rory Green


The Week Ahead

The Economic Data calendar for the week of the 19th of December through the 23rd is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - 2. call a

The Week Ahead - 2 call b

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Selling GLD: Immediate-term Overbought


Keith sold our long position in the gold etf GLD this afternoon at $155.10 for 1.9% gain.  


He remarked on the trade, "Buying a distressed situation on Wednesday in Gold was backed by the only thing we know - our process. Selling it here is the same."


GLD is immediate-term TRADE OVERBOUGHT with resistance at $155.66 (0.2% upside); long-term TAIL line support is at $152.16 (2.0% downside).  Risk outweighs reward by 10-to-1 at the current price on the immediate-term TRADE duration. 


Selling GLD: Immediate-term Overbought - gold


To see the note we published on Wednesday upon opening the GLD position, click the link below:


Kevin Kaiser



Here is where we stand on the upcoming earnings season for the big cap US listed operators.  MPEL looks like the standout.



With two months of detailed Macau data in hand, we feel pretty good about our Macau projections.  Las Vegas, as always, is a wild card but aside from MGM, who really cares?  Singapore is also more difficult to predict but we are fairly certain MBS will lose some share when the numbers are tallied.  We’re still trying to understand the seasonality but it appears that Genting’s leisure exposure should boost its Q4 share vs MBS.


As can be seen in the following table, we are significantly above the Street for MPEL’s EBITDA, and it’s not just hold driven.  Hold is trending a little above normal but below last year and below Q3.  We think the biggest delta versus consensus is in the Mass segment where MPEL gained significant MoM and YoY share thus far in Q4.  MPEL’s Mass margins remain below the US based operators due to player rebates in its significant premium Mass business.  However, a mix shift towards Mass still benefits the company’s overall margin.  Remember that MPEL’s exposure to the high-end premium Mass allowed it to emerge unscathed from the opening of Galaxy Macau and will certainly help when Sands Cotai Central – another mid-level Mass property – opens next year.


On the downside, our Q4 EBITDA estimate for WYNN is 6% below consensus, concentrated in Macau.  Wynn Macau continues to lose share and growth has been a little disappointing.  We are fairly in-line with the Street on LVS, although higher on Macau EBITDA due to junket-related share gains and a little below in Singapore due primarily to seasonality.  MGM looks like a beat at this stage of the quarter.



Weekly European Monitor: Hobbling Along

No Current European Positions in the Hedgeye Virtual Portfolio

Asset Class Performance:

  • Equities: The worst country index performers w/w: Cyprus -10.7%; France -6.3%; Italy -5.9%; Spain -5.2%; Finland -5%; Germany -4.8%. Best performers w/w: Russia (RTSI) +1.2%; Hungary +0.1%; Ireland -50bps; Switzerland -100bps
  • FX: The EUR/USD fell -2.7% w/w. Divergences: RUB/EUR +1.2%; HUF/EUR: -90bps
  • Fixed Income: 10YR sovereign yields broadly declined w/w, led by Spain -75bps; Belgium -29bps; and Italy -20bps.  [We’ll be keying off this coming Monday’s ECB’s SMP weekly bond purchasing report for the prior week for insight into these waning yields.  Last week the SMP bought only €635M vs previous weeks in the low single digit billions of EUR – See our European Banking Monitor on Mondays for follow-up].

Weekly European Monitor: Hobbling Along - 1. yields



Call Outs:

The European week was dominated by three themes:


1.)    Credit Rating Agencies downgrades on Sovereigns and Banks post S&P’s CreditWatch Negative rating of 15 Eurozone countries on 12/5:

  1. (12/12) Moody’s says it will review its ratings of all EU sovereigns in Q1
  2. (12/14) Fitch cuts Credit Agricole 1 level to A+
  3. (12/15) Fitch cuts ratings of BNP Paribas (to A+ from AA-), Credit Suisse (to A from AA-), Deutsche Bank (to A from AA-), and Barclays (to A from AA-)
  4. (12/16) Fitch places Belgium, Spain, Italy, Ireland, Slovenia, Cyprus on rating watch negative 

Hedgeye’s Take: The three major credit ratings agencies are classic lagging indicators, yet their downgrades of sovereigns and banks will move the market.  We’ve long said that France will lose its AAA status.  Solving for how the EFSF, a facility built on its AAA credit status, will continue to raise money at favorable levels will be one more headwind for Eurocrats to address.



2.)    Lending disagreements on an additional €200B loan to the IMF from global central banks for troubled Eurozone states

  1. Legally Complex Problems - ECB President Draghi stated in his press conference on 12/8 that “given the spirit of [the EU] treaty, the ECB can’t channel money to circumvent the treaty.  If NSBs want to lend to the IMF, which would then lend to say China, that is fine. But if the IMF uses the money to buy bonds in Euroarea, this is not compatible with the treaty.”
  2. Increased push back from the US, Germany and the UK on contributions

Hedgeye’s Take: Even under a scenario in which €200 Billion was pledged by contributing members (which we think is highly improbable), it, along with €500B (across the EFSF and ESM) is far short of our $2-3 Trillion estimate to support Eurozone banks and sovereigns.  The Fiscal Union proposed in the 8-9 December Summit is far from the Bazooka the market is looking for to support intermediate term gains in capital markets.



3.)    Russia’s Cabinet Restructuring:

  1. (12/4) Putin’s United Russia wins a majority of 238 of the 450 seats in the parliament (Duma), but lost 77 seats, ahead of Presidential elections in March
  2. (12/10-11) 50k+ anti-Putin protesters over the weekend
  3. (12/12) Billionaire Mikhail Prokhorov announces he will challenge Putin
  4.  (12/14) Boris Gryzlov, the speaker of Russia's State Duma, the lower house of parliament, resigns. He was speaker since 2003 and a loyal ally of Putin’s

Hedgeye’s Take: It’s difficult to sift through where we’ll be in the next weeks and the ultimate outcome in a few months time.  Opinion seems very split with the extremes being A) Russia is having a ME moment (and Putin doesn’t have a chance at winning the Presidency) and B) Putin will rule with an iron fist for the next 12 years.  While the latter seems more likely to become reality, an important alternative view comes from Paul Starobin in that what we’re seeing is a “popular rejection of a strongman who has overstayed his welcome [Putin]—not a rejection of the model of strongman rule.”


The 50k demonstration over the weekend was impressive, nevertheless there’s no indication we’re at a tipping point yet.  Prokhorov entering the ring adds another element given his money, western know-how, and large public profile, however if Starobin is right that there’s no real support for Russian Liberalism, Prokhorov too doesn’t have a chance. (


Further commentary worth noting:

  • Medvedev “is basically toast,” Jan Techau, director of the Brussels-based European center of the Carnegie Endowment for International Peace, said in a telephone interview.  “There’s no chance Medvedev will stay on as prime minister, but they can’t just discard him as a member of the inner circle and will find something nice and meaningless for him to do.”
  • Medvedev may resign before the end of the year, Otkritie Financial Corp. said in a note to clients.  That would allow Putin to become acting president and remain in power rather than resigning his post as premier in the run-up to the election, as required by Russian law, according to economists led by Vladimir Tikhomirov at the brokerage that is partly owned by state-run VTB Group, the country’s second-largest lender.

In a scenario of a Putin defeat, or defeat of a candidate backed by Putin, we think the risk of it being viewed as a destabilizing event is outsized…read global investors pulling out and Ruble weakness.  There are also many questions about just who is running the Finance Ministry.  Returning to the idea of the Ruble as the world’s reserve currency we think it is very improbable.  If any is to take over the USD, it’s the Yuan, but well off in the horizon.

Interestingly, the WTO announced today that it is set to accept Russia as a member after 18 years of negotiations.  



Interest Rate Decisions:

(12/14) Norges Bank Cut Benchmark Rate 50bps to 1.75%

(12/15) Switzerland SNB 3M Libor Target Rate UNCH at 0.00%


Chart of the Week:

-We’d caution against getting overly optimistic about the one month positive inflection in the 6M forward looking German ZEW Economic Sentiment number for December.  Germany’s largest trading partners remain its European neighbors – so as long as the region is mired in this sovereign debt and banking crisis, trade will continue to contract.  Germany’s growth outlook may simply be the best of a decidedly contractionary group in 2012.


Weekly European Monitor: Hobbling Along - 1. GERMANY ZEW



CDS Risk Monitor:

-On a w/w basis, CDS was largely flat across the periphery.  Spain saw the largest pullback at -26bps.  On a m/m basis, Spanish CDS is down 52bps and Italian CDS is down 37bps.


Weekly European Monitor: Hobbling Along - 1. cds a


Weekly European Monitor: Hobbling Along - 1. cds b


Data - The West:

-Dec flash PMIs of Services and Manufacturing came in better than expected, and largely improved M/M, yet remain at or below the 50 line that divides contraction (below 50) and expansion (above).


Weekly European Monitor: Hobbling Along - 1. Manu


Weekly European Monitor: Hobbling Along - 1. Services


Eurozone Composite 47.9 DEC vs 47.0 NOV

Eurozone CPI was unch at 3.0% NOV Y/Y vs the previous month



Data - The East:

-ZEW released its December market survey for Eastern Europe (EE).  We key off of the 6-month forward looking “Economic Expectations”.  Of note is that EE will be held hostage to:

  • Weak trade demand from Western Europe (WE)
  • Foreign currency loan leverage, in particular to the CHF and EUR, especially as domestic currencies are under pressure

Weekly European Monitor: Hobbling Along - EE ZEW



Polish Zloty -12.0%

Hungarian Forint -8.4%



Polish Zloty -13.6%

Hungarian Forint -10.0%

Romania Leu -2.7%

Czech Koruna -2.5%


-Alternative View: Could EE and its currencies benefit from capital flows exiting the US and China?




-We’d short the cross at $1.33 for an immediate term TRADE.  The EUR/USD remains broken long term TAIL ($1.40) and intermediate term TREND ($1.42) in our models and we think the lack of resolve from the newest proposals for a fiscal union will encourage greater downside. 



The European Week Ahead:


Monday: Oct. Eurozone Current Account; Dec. UK GfK Consumer Confidence Survey


Tuesday: Jan. German GfK Consumer Confidence Survey; Oct. Greek Current Account; Riksbank Interest Rate Announcement


Wednesday: Nov. Dec. Eurozone Consumer Confidence; Bank of England Minutes Released; Q3 Italian GDP


Thursday: Q3 UK GDP and Current Account; Q3 Denmark and Netherlands GDP


Friday: Q3 France GDP and Producer Prices; Dec. Russian Money Supply



Matthew Hedrick
Senior Analyst