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What's True?

This note was originally published at 8am on December 19, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1568-1608, $101.98-107.18, and 1207-1226, 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


THE M3: CHANGI TRAFFIC; SINGAPORE HOTELS

The Macau Metro Monitor, December 22, 2011

 

 

MONTHLY BREAKDOWN OF PASSENGER MOVEMENTS Changi Airport Group

Singpoare Changi Airport passenger traffic increased 7.4% YoY to 3,890,535 in November.  This is the slowest YoY growth since March 2011.  Traffic was helped by strong visitation from Middle East and Northeast China.

 

S'PORE HOTELS SEE STRONG BOOKINGS THIS HOLIDAY SEASON Channel News Asia

Singapore hotels are enjoying an increase of between 5-30% in occupancy this holiday season.  Those in Marina Bay and Sentosa said occupancy rates have increased by as much as 30%.  A few are running on full capacity from Christmas Day to the middle of January, due to an increase in the number of tourists, as well as locals who prefer to take "staycations".

 

 

 

 



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Multiplier Effect

“… every job created by the government would add a further job to supply that new worker with goods.”

-Nicholas Wapshott (Keynes Hayek, pg 58)

 

John Maynard Keynes had more personal and P&L issues over the course of his career than Time Magazine. His biggest losses (both in terms of academic credibility and in his personal account) came in the late 1920s when “corporate profits were good” and debauching the British Pound came to an end.

 

Sound familiar? It’s a good thing they don’t let Bernanke trade his p.a.

 

The aforementioned quote comes from a passage in Keynes Hayek where Nicholas Wapshott does a nice job reminding us of the context of Keynes’ big marketing idea for Lloyd George going into the 1929 British Election. The idea, much like the central planning ideas of Big Government Liberals today, was to “stimulate” economic growth via government spending.

 

The Liberals lost that 1929 election (the Conservative Party’s Ramsay MacDonald formed a minority government), and like most politicized people who can’t get paid putting their own capital at risk, John Maynard Keynes, “ever the pragmatist...” (Wapshott), pulled a Bernank and shifted his central planning ideas to the other party line.

 

“This marked the end of Keynes’ long dalliance with the Liberals.” He “… now directed his energies toward persuading the new government to accept his prescriptions.” (Keynes Hayek, pg 58)

 

*Note: Since 1929, while tested and tried by Charles de Gaulle (France in the 1950s), and Jimmy Carter (USA late 1970s), the Keynesian concept of the Multiplier Effect has not worked.

 

Back to the Global Macro Grind

 

There was one big thing that changed yesterday that had me thinking about the 1 narrative of “but corporate profits are good and stocks are cheap” consensus – Oracle trading down -14% on the open.

 

Oracle isn’t exactly a small company ($130B in market cap – only about 20% of the size of yesterday’s LTRO leverage slapped onto insolvent European bank balance sheets). It’s also a company whose revenues are highly correlated to the corporate profit cycle.

 

Yes, a blind intellectual squirrel can tell you what corporate profits are, after they’ve occurred. But how many of the gargantuan intellects in our profession can tell you when the Global Growth and Profit Cycle is about to slow?

 

Not a trick question.

 

The answer, last I checked, on who nailed both the 2008 and 2011 Global Growth Slowdowns, is, not many.

 

How do we translate this thought about investing at the Top Of A Corporate Profit and Margin Cycle to our daily risk management positioning?

 

Well, the market has already started to do that for you. Look at the S&P Sector Returns for the YTD:

  1. Utilities (XLU) = +13.4% YTD (lead the market higher yesterday, closing +1.6%)
  2. Technology (XLK) = -0.7% (lead the market lower yesterday, closing down -1.7%)
  3. Financials (XLF), Basic Materials (XLB), and Industrials (XLI) = -19.8%, -13.4%, and -4.1% YTD, respectively.

In fact, the market has been telling you what we’ve been telling you on Global Growth Slowing since February – so this is not new. Neither is Utilities (dividends) moving into a raging bull market if we are on the cusp of what ISI’s Ed Hyman called for earlier this week (a Q4 surge in US GDP to 4%?).

 

Fortunately, the bond market has figured this out. Hyman actually taught me that, so I don’t get why he’s not following his own leading indicator process. Long-term US Treasuries (which we’ll be buying more of today and tomorrow, and really until the math tells us not to) remain in a bull market of their own.

 

Across all 3 of our risk management durations, both 10 and 30-year UST Bonds are in what we call a Bullish Formation (yields are in a Bearish Formation) with TRADE, TREND, and TAIL lines of resistance for the 10yr at 2.05%, 2.09%, and 2.82%, respectively.

 

Now before my Ivy League classmates who are endowed with the high powers of determining “valuation” better than I start yelling at me this morning that “stocks are cheap relative to bonds,” I’ll just take a moment to whisper, softly, in their 2011 ears… the market doesn’t care about what you think is “cheap”… it’s getting cheaper…

 

The corollary, of course, to where US Government Bonds can go in a Growth Slowing environment that is perpetuated by the piling of debt-upon-debt is Japanese Government Bonds (or JGBs).

 

Looking at last night’s reported non-resident holdings of JGBs as a proxy for TLT demand (long-term US Treasury ETF), they hit a new all-time record of 76 TRILLION Yen. That’s a lot of yens. And 15 years after Paul Krugman told them to “PRINT LOTS OF MONEY and stimulate”, Japan is still waiting for the Multiplier Effect to reach “escape velocity”…

 

My immediate-term support and resistance ranges for Gold (shorted it yesterday), Oil (Brent), German DAX, French CAC, Shanghai Composite (down every day this week), and the SP500 are now $1, $106.03-109.16, 5, 3059-3118, 2152-2341, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Multiplier Effect - EL Heut

 

Multiplier Effect - VP 12 22


CCL: TRADE UPDATE

Keith bought CCL in the Hedgeye Virtual Portfolio at $32.82.  According to his model, there is TRADE and TREND support at $32.51 and $32.19 respectively.

 

 

Carnival came out yesterday with a guarded outlook on 2012 which led to a barrage of analysts lowering estimates and price targets on the stock.  However, we believe Carnival was over-conservative in its 2012 yield forecast as outperformance from the Caribbean and Mexico should support yields in the near-term.  Our most recent Cruisers Price Matrix showed that for Q1 2012, improvements in Caribbean pricing is sustainable and robust pricing in Mexico could drive better than expected results, even in the face of difficult YoY comps.  Continued weak pricing from Southern Europe is well-known but comps ease starting mid-February and any meaningful improvement either in occupancy or pricing during Wave Season would be a positive surprise.  Carnival would also be well-positioned with lower fuel prices ahead, as forecasted by our Hedgeye Macro team.  

 

CCL: TRADE UPDATE - CCL


Shorting Religion: GLD Trade Update

Earlier this afternoon, Keith shorted the SPDR Gold Shares ETF in our Virtual Portfolio. This is on the heels of us booking a near 2% gain (vs. our Dec 14th cost basis) in the security last week.

 

The bull case for gold is both well-known and well-understood, as there are a great number of investors – both institutional and retail alike – who religiously believe in and consistently preach the fundamental thesis behind owning the shiny rock that is gold.

 

Price, however, is set at the margin – not at the absolute levels of supply and demand. To the marginal buyer or seller of this asset, the case for gold as a haven away from world reserve currency debauchery is becoming less supportive. In short, we’ve been saying that Bernake’s Box + Eurocrat Bazooka (or lack thereof in some respects) = a King Dollar breakout.

 

Statistically speaking, the underlying commodity itself carries an inverse correlation to the U.S. Dollar Index of r² = 0.92% on our immediate-term TRADE duration. Correlations are neither causal nor perpetual; that said, however, r-squareds in this area code do signal to us that a singular trade or set of fundamentals is driving the bulk of the price action. It is our task as risk managers to: a) have a view on the expected duration of that trade, and b) have an outlook for the slope(s) of those fundamentals.

 

While the long-term story behind owning gold is still very much intact (for now), our research and our multi-factor, multi-duration quantitative analysis suggested to us that the short term price outlook carries asymmetric risk to the downside. Throw in the behavioral aspect of continued investor liquidations into and through year-end and we have ourselves a short idea.

 

Where could we be wrong? Simple – Bernanke coming out of left field and doing more of what he’s spent his entire life learning to do and defending. As my colleague Kevin Kaiser summarizes in his recent Early Look note, economics itself is soft science that functions as an ideology for central bankers – very much akin to partisan belief system that is behind the gridlock we’ve come to expect out of Capitol Hill. We must never forget the ever-present risk that is ideology-based policy-making and the impact that has on our P&Ls.

 

In short, QE3 could make us very wrong on King Dollar and gold. Thankfully, we in this industry get paid a lot of money to do the work, Embrace Uncertainty, and make tough decisions every day so that our clients don’t have to.

 

Darius Dale

Senior Analyst

 

Shorting Religion: GLD Trade Update - 1


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