“Do you like learning? Do you like finding out what’s true?”
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.
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:
- Don’t lose money
- Embrace Uncertainty
- 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:
- King Dollar – up another +2.1% week-over-week
- Correlation Crash – USD up = most things highly correlated (inversely) to the USD down
- Eurocrat Bazooka – no dice
What’s True about the Correlation Crash as it pertains to Commodities is that they went straight down last week:
- CRB Commodities Index = -3.6%
- Oil prices (Brent) = -4.9%
- Gold = -6.9%
- Copper = -6.2%
- 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
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.
From a quantitative perspective, BWLD is nearing its TREND line of resistance at $62.69. See the chart below.
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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.
To see the note we published on Wednesday upon opening the GLD position, click the link below:
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.
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