“Expert intuition strikes us as magical, but it is not.”
This weekend I finally started reading Daniel Kahneman’s “Thinking, Fast and Slow” and was pleasantly surprised to see him cite one of my favorite American thinkers, Herbert Simon (read “Models of My Life”), in the Introduction:
“The situation has provided a cue; this cue has given the expert access to information stored in memory, and the information provides the answer. Intuition is nothing more and nothing less than recognition.” (Thinking, Fast and Slow, page 11)
Pattern recognition is the fulcrum principle of Chaos Theory. While neither Kahneman nor Simon have drawn that parallel to Global Macro Risk Management, if they did what we do every day I think they probably would have.
Back to the Global Macro Grind…
While consensus has spent 2012 caught in the vacuum of 2011’s news (European Crisis and Growth Slowing), we’ve been letting this globally interconnected marketplace of colliding factors give us cues on Growth Slowing’s Bottom (Q1 Hedgeye Macro Theme):
- Strong US Dollar = Stronger US Consumption, Confidence, and Employment
- Deflating The Inflation = Growth Slowing at a slower rate in Asia (China in particular)
- German Fiscal Conservatism = Bullish German Stocks on both our TRADE and TREND durations
There should be no surprises about what’s happening in US, Chinese, or German stocks this morning. Our leading indicators have been giving us Crystal Clear Cues for the last 3 weeks. That’s why we have our largest asset allocation to US Equities in over a year. That’s why we’re long Chinese and Hong Kong Equity exposures. That’s why we’ll open this morning with no European shorts.
In the order that these Expert Cues appear in my notebook this morning:
1. CHINA – closing up +4.2% overnight, the Shanghai Composite had its best move since October of 2009. Growth Slowing in China is a 2-year stale story that we have signaled in real-time. Looking at the higher-frequency economic data that was reported closest to now (the December data, not the quarterly), China appears to be seeing Growth Slow at a Slower Rate. Chinese Industrial Production for DEC accelerated to +12.8% y/y (vs +12.4% in NOV). Meanwhile, Singapore’s Export Growth for DEC jumped to +9% y/y (vs +1.4% in NOV). You’ll recall we use Singapore as a leading indicator for Eastern demand.
2. GERMANY – trading up another +1.7% to an impressive +7.2% for 2012 YTD, the German DAX is proving that this morning’s concurrent indicator of confidence (the German ZEW reading) was better than bad for good reason. It was actually the biggest 1-month pop in the ZEW reading ever – and ever is a long time. Germany is proving that fiscal conservatism can support strong domestic employment (6.8% vs USA’s 8.6%). Not pandering to the political winds of the Keynesian bailout beggars should also be commended.
3. USA – holding above both my long-term TAIL line (1267 support) and the closing high of October 29th, 2011 (1285), the SP500 is proving that Strong Dollar = Strong Consumption works where it matters in the American economy – on 71% of US GDP Growth. Neither we (nor the US Treasury Bond Market) are suggesting US Growth is great, but the US Currency and Equity markets aren’t signaling a US recession either. Provided that the US Dollar remains strong (Romney winning in South Carolina this week will continue to help), we think US Growth’s Bottom could very well be happening in Q411 through Q112.
With Expert Cues in hand, we derive our summary positioning in the Hedgeye Asset Allocation Model:
- Cash 58% = down from 70% at the end of 2011
- US Equities = 18% (Consumer Discretionary, Consumer Staples, Utilities – XLY, XLP, and XLU)
- Int’l Currency = 15% (US Dollar – UUP)
- Int’l Equities = 9% (China and Hong Kong – CAF and EWH)
- Fixed Income = 0%
- Commodities = 0%
That’s a very different mix in my asset allocation than what I was carrying from April-November of 2011. I’ve moved from a big allocation to Growth Slowing at an accelerating rate (Long Fixed Income) to long Growth Slowing’s Bottom (Long Equities).
What hasn’t changed is my position in the US Dollar and Commodities. I still think that Strong Dollar = Deflates The Inflation, so look for me to potentially short some Commodities today.
Having a repeatable risk management process isn’t magical. Neither is it perfect. It’s just what we do.
My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Comp, German DAX, and the SP500 are now $1, $110.20-114.33, $1.25-1.28, $80.72-81.97, 2, 6151-6329, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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There are signs that WMS may be pulling forward earnings.
WMS will report earnings next week and while we don’t think the bottom line number will be as awful as recent quarters, quality should be low. More importantly, beyond the quarter, we see cracks in the health of WMS’s underlying business. It seems like WMS is continuing to pull earnings forward - never a good sign. Some warning signs are:
- WMS is booking Revel units in the December quarter – the only supplier to do so. It seems strange to rush this booking since no cash will be received for several quarters, if not longer.
- WMS is the only “Big 5” supplier to sell units to Maryland Live rather than lease them, thus boosting near-term profits at the expense of a long-term, steady cash flow stream
- If our estimates are correct, WMS will be the only supplier to post a YoY decline in replacements
- WMS was the only supplier to take a material charge in Mexico. Either WMS was operating in some grey areas or everyone else’s accounting is that much more aggressive.
Turning to the December quarter, this quarter may mark the 5th straight quarter that WMS misses Street expectations. Our best guess is that WMS reports $0.28, falling 2 cents short of consensus, although it’s possible they make the quarter through the cost side.
FQ2 2012 Projections:
$103MM of product sales at a 51% margin
- 5.3k new unit sales with 3.2k from NA
- 680 new units and 2,500 replacements
- WMS shipped just over 300 units to Revel in the December quarter. We believe that it may be the only large manufacturer recognizing revenue from Revel in that quarter. We’re pretty sure that WMS will also be booking receivables rather than collecting cash for their placement (as are all the other manufacturers shipping to cash poor Revel). The only other opening/expansion of any size is the Northern Edge Navajo Casino in AZ. WMS booked shipments to both Kansas facilities and Miami Jai Lai last quarter.
- While replacements will be up sequentially, we’re pretty confident that they will be down YoY
- ASP of $16.1k, down 3% YoY and QoQ. With higher pricing than the other products, the xD platform contributed 32% of sales in the September quarter.
- $17.5MM of other product sales
- Conversion kit sales will be down materially QoQ as September was an ‘unusual’ quarter for WMS. We assume that WMS sells 2,500 kits
- WMS also noted that used game sales have plateaued. We assume that 2k used games were sold in December – but at more ‘normal’ prices then what was realized in the September Q.
- Despite realized cost reductions in the production of BB2 and xD cabinets, margins should be roughly flat sequentially. September benefited from an outsized number of conversion kits sales which have over 90% margins.
Projecting $68MM of gaming operations revenue at a 79% gross margin:
- We expect a small decline in the install base (45 units) and slightly lower yields due to seasonality
- R&D: $26MM
- SG&A: $35MM
- D&A: $23MM
- Interest and other income: $2MM
- Tax rate: 35.5%
No change to January projection
Average daily table revenue (ADTR) dropped from HK$782m per day in the first 8 days of January to HK$546m this past week. However, volumes typically fall off dramatically prior to the Chinese New Year (CNY) celebration. While the second week of January’s ADTR only increased 3% this year versus last year, ADTR was an estimated 30% higher than the corresponding lead-in week to CNY last year. Our HK$23-24 billion (+32-40% YoY growth) January forecast remains unchanged.
Market shares were relatively consistent with last year with the exception of a shift of about 200bps back to SJM from LVS.
This note was originally published at 8am on January 11, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
"America should be lifted up by our desire to succeed, not dragged down by the resentment of our success."
In what I thought was the most progressive Strong Dollar, Strong America speech I’ve heard in the last 3 years last night, Mitt Romney hammered that Red, White, and Blue point home like maybe only Obama could. Strong.
Romney was alluding to crushing the “Most Popular” (most read) story on Bloomberg yesterday titled “Gingrich Attack Film Shows Romney As Ruthless Rich.” I don’t know one person (whose financial industry expertise I respect) who considered that Bain commercial anything short of a Michael Moore production. Apparently the State that says “Live Free, Or Die” agrees.
To be clear, I’m not a Republican or a Democrat. I simply want to get this country’s economics right. Clinton should have provided as much inspiration to President Obama to balance a budget as Reagan may have inspired Romney’s great hair. When it comes to the economic policy in America, Keynesian Academic Dogma failed both Bush and Obama. It’s time for change.
Can Obama be the change that Ron Paul is with the Youth/Change Vote in this country? Yes He Can. Will he? I have no idea. He’s certainly not going to get any non-groupthink ideas on economics from Tim Geithner. As of this Romney win in New Hampshire last night, this ½ Clinton ½ Reagan race to the US Presidency is officially on.
Back to the Global Macro Grind…
Game on. I love this. I really do. I’m going to light up our 11AM EST conference call line like a Christmas tree this morning as Big Alberta and I officially roll out our Q1 Global Macro Themes for 2012.
Our clients already know what our Q1 Themes are, but if you’re new to this Canadian-American tire pumping game, here they are:
1. Strong Dollar = Strong Consumption
2. Deflating The Inflation, Part Deux
3. Growth Slowing’s Bottom
Yesterday’s breakout in US Equities confirmed a lot of what we have been signaling for the last 3-4 weeks. We’ll go through this in depth (45 slides) on our call this morning, but the data doesn’t lie – perma-bulls forced to perma-change their bullish theses do. A Sustainably Strong and Stable US Dollar provides a coincident benefit to Employment, Confidence and Consumption.
That’s the fundamental research view – our quantitative risk management view supports this fundamental shift:
- SP500 closing above its October 29th, 2011 closing high of 1285 yesterday (1292 close) puts 1363 in play
- US Equity Volatility (VIX) is already down -11.6% for 2012 YTD (bearish TRADE and TREND)
- US Equity Volume studies are starting to change (up +31% day/day on yesterday’s up move, down on down moves)
Backcheck, Forecheck, Paycheck – that’s a PRICE, VOLATILITY, and VOLUME win in my model – and my model has not changed.
People who didn’t see our team make the shift from bearish to bullish on US Equities in early 2009 are still insecurely scrambling to put me on their Top 10 People Not To Listen To List of 2012 (some journalist from the Old Wall yesterday at Marketwatch). Why? They want to (or should I say need to) put me in the perma-bear box in which they need to think.
Thinking inside of a box is no way to live. Being perma bullish or bearish doesn’t work. What works is having a repeatable process that allows you to make money in both up and down markets.
What would make me go back to bearish on US Equities?
- President Obama not engaging in the ½ Clinton ½ Reagan strategy and imposing more of what didn’t work in 2011
- Ben Bernanke implementing a QE3, stoking inflation
- Geithner convincing his cronies of some socialized “mega refi” idea for US Housing (blowing up the MBS market)
Our desire to succeed in this country is based on having prior successes. If you’ve won a few games in your life, but have not yet won a Championship, you’re not thinking about the standard of success I am. America has an opportunity to be great again.
My economic strategy message should resonate as much with Democrats as it does Republicans. Both the US Currency and Equity markets are getting fired up about change in this country. That’s what real winners in real-life do. They don’t Resent Success.
My immediate-term support and resistance lines for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, and the SP500 are now $1596-1655, $111.91-116.01, $1.26-1.29, $80.55-81.53, 2239-2297, and 1273-1298, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer