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Too Strong?

This note was originally published at 8am on February 08, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I would think we do a Quantitative Easing 3 if the Dollar gets too strong.”

-Larry Fink


Wow. Larry Fink is the CEO of Blackrock – they run $3.5 Trillion in client assets – and after a +101% move in US stocks from the 2009 low, he told Bloomberg yesterday that “investors should be 100% in Equities.”


Game on.


Fink is probably a good guy. We probably have a few things in common too. For one, we both started our careers at First Boston. He eventually ran their bond department. I eventually left.


Evidently, one thing that we do not have in common is the concept of Wall St 2.0 Global Macro Risk Management. There’s tremendous responsibility in being trusted with real-time recommendation. Time and price really do matter. With my own money, I’d never be 100% in anything – never mind stocks, after their best start to a year in decades.


The other thing Fink and I don’t have in common are political aspirations. He’d like to replace Geithner as head of the Treasury. I’d rather be a one-legged duck swimming in a circle.


When you consider the aforementioned currency quote within the context of where some of this country’s thought leaders are relative to my Strong Dollar = Strong America vote, Fink and I are not even in the same area code of having a debate.


Is my opinion Too Strong? After testing 40-year lows during Qe2 of last year, was the US Dollar Too Weak? Is Larry Fink’s view of arresting gravity and not letting America’s currency trade at its non-Fed intervention free-market price Too Strong?


So many critical questions. So little time left.


Back to the Global Macro Grind


With Santorum sweeping 3 states last night, President Obama’s probability of re-election (Intrade contracts) are going up and the US Dollar Index is going down. It sounds like Fink’s goal in advising Obama will be to keep the Dollar down. I guess if you’re in the business of seeing asset prices inflate, that makes some sense.


But does it make sense for American Savers and Consumers?


You tell me. I’m already telling you what I think. It’s no different than what I thought when Larry Fink was bullish on US Equities in February of last year. US Dollar Debauchery drives inflation. Inflation slows real GDP growth.


Now if you take Bernanke or the US government’s word for it, we don’t have inflation. Notwithstanding the fact that Bernanke cites a US inflation calculation that has been changed 9x since 1996, the “deflator” in this past quarter’s US GDP report was only 0.4%.


What does that mean?

  1. Q4 US GDP Growth for 2011 was reported at 2.75%
  2. Q4’s “Deflator” (you subtract inflation from the reported number for a real GDP #) was 0.39%
  3. With Consumer and Producer Price inflation running 10x that 0.39% “deflator”, US GDP was grossly overstated

I don’t use the word “grossly” very loosely. Neither does Clarium Capital’s Peter Thiel use the word “fraud” casually. Last night, like two non-Keynesian ships in the night, Thiel (founder of Pay Pal) and I were on separate sides of Yale University’s campus hosting spirited discussions with students and faculty about the alternative debate to currency debasement (he called Keynes a fraud).


Back to these feisty little critters called Inflation Expectations that slowed US GDP Growth in its tracks at 0.36% in Q1 of 2011 (yes, before the Europe that every guy who was wrong on his 2011 US GDP forecast by 60-80% blamed), here are some facts:

  1. US stocks haven’t had 1 down day of more than 0.57% in 2012 YTD (yes, stock prices are inflating)
  2. Brent Oil is trading at $116.35/barrel this morning = up +6.5% since Bernanke debauched the US Dollar on January 25th
  3. Gold has gone from $1622 on the morning of January 25th(pre FOMC statement) to $1749 this morning = +7.8%

If someone wants to explain to me that markets aren’t expecting the Chairman of the Federal Reserve to inflate, I’m ready to debate them in any public forum – any time, any place.


Russian stocks (driven by expectations of Petro-Dollar prices = Dollar Down, Oil Up) are up another +1.3% and up +19.5% YTD! Both the central banks of Australia and South Korea have come out in the last 48 hours and said no more rate cuts with inflation running higher. India, who is highly dependent on foreign oil, just saw its yield curve go back to flat as inflation expectations ramped.


I could (and do) go on, and on, and on about this … because the data that supports it does…


The bottom line is that people who get paid (including me because I am long Energy (XLE) and Gold) by inflation expectations rising are the same people who generally say there is no inflation.


Calling that out for what it is isn’t Too Strong. It’s called the truth. Respect and leadership in America isn’t allocated by your title. Its earned each and every day. There may be bailouts for people losing client capital. But there is no bailout for losing credibility.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now $1736-1766, $112.71-116.85, $1.30-1.32, $78.59-79.09, and 1327-1354, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Too Strong? - Chart of the Day


Too Strong? - Virtual Portfolio

CHART OF THE DAY: Legislating Inflation


CHART OF THE DAY: Legislating Inflation - Chart of the Day

Legislating Inflation

“Inflation is taxation without legislation.”

-Milton Friedman


Since one of America’s chief champions of free-market capitalism, Milton Friedman, died in 2006, we’ve had Ben Bernanke running the US Federal Reserve. Bernanke has never raised interest rates. Never is a long time.


The Bernank’s fans (most of them get paid by inflation) will tell you that, in the short-run, Legislating Inflation is what we need to stop The Deflation (i.e. free-market prices falling). In the long-run, I think that conflicted and compromised policy for the few will be dead.


It’s a good thing President Obama is considering a cut in the US corporate tax rate today – because Bernanke’s 2014 cheap money policy is imposing a Consumption Tax on the 71%.


Back to the Global Macro Grind


The way that my Keynesian Economics professors at Yale taught me to calculate US GDP Growth is as follows:


GDP = C + I + G + (X-M)


C = Consumption. That’s 71% of US GDP. Genius calculus will reveal rising “export/manufacturing” doesn’t budge the GDP number.


So, if you have a Policy To Inflate via US Dollar Debauchery, you are putting a Consumption Tax on the American People. Most human beings who drive to work, pay for their kids to go to school, and feed their families get this.


Yesterday, the US Dollar Index was down another -0.45%.


At the same time: 

  1. Oil was up another +2.5%
  2. Gold was up another +2.0%
  3. Energy Stocks led SP500 advancers at up +0.7% 



On the day, the SP500 barely closed up (+0.07%).


So, this whole Legislating Inflation thing that is occurring both fiscally (no budget yet; no deficit discipline either) and monetarily, is only good for the US stock market to a point.


This revelation, of course, is not new. Almost the exact same thing happened to commodity and stock prices into the highs of February 2011. All the while, Obama’s central planning advisors (David Axelrod, Larry Summers, Tim Geithner, etc) couldn’t believe that US Growth slowed like it did in Q1 of 2011 (down to 0.36%!).


How? Who? Why?


After you calculate the C + I + G + (X-M), you have to subtract what we call the “Deflator” from the GDP number. As inflation rises, the deflator gets bigger, and yes, sorry, real economic growth (adjusted for inflation) gets smaller.


This is why we are so intensely focused on the marginal relationship between Growth and Inflation. Since everything that matters in Global Macro is priced on the margin, this is what we need to solve for within the aforementioned GDP equation.


My call here is as crystal clear as it was at this time of last year. From this time and price, Inflation Expectations Rising Will Slow Growth sequentially (as in month-over-month). Markets typically don’t like that.


Where’s the Inflation Rising data? 

  1. Hong Kong’s Consumer Price Inflation rose to 6.1% in JAN vs 5.7% DEC
  2. India’s Consumer Price Inflation rose to 7.7% in JAN vs 7.5% (WPI) DEC
  3. Italy’s Consumer Price Inflation stayed sticky at 3.2% JAN vs 3.2% DEC 

Where’s the Growth Slowing data? 

  1. Germany’s manufacturing PMI stopped improving in FEB at 50.1 vs 51.0 JAN
  2. Japanese Exports plummeted to -9.3% y/y in JAN and Japan printed their largest monthly trade deficit ever!
  3. Taiwan Exports were down -8.6% y/y in JAN (lowest demand reading since 2009) 

*Some obvious points about all this data: A) its Global Macro data, not Greek, B) there’s plenty of January data here instead of February and C) the inflation data (causal in slowing real growth) has only accelerated to the upside here in February.


So, do we suspend all disbelief and chase 3-year highs in US Equity prices because the Dow is approaching a big round number? If I’m paid to do it with other people’s money, I might roll the bones on that. Then again, I might not.


Until we stop Legislating Inflation to cheer on stock and commodity markets (David Axelrod), we won’t A) stop seeing shortened economic cycles and B) amplified market volatility.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1, $118.72-121.78, $1.30-1.33, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Legislating Inflation - Chart of the Day


Legislating Inflation - Virtual Portfolio

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TODAY’S S&P 500 SET-UP – February 22, 2012

As we look at today’s set up for the S&P 500, the range is 13 points or -0.75% downside to 1352 and 0.20% upside to 1365. 












  • VOLUME: NYSE 797.99 (-11.07%)
  • VIX:  18.19 2.31% YTD PERFORMANCE: -22.26%
  • SPX PUT/CALL RATIO: 1.42 from 2.31 (-38.53%)


GROWTH – pick your overnight economic data point, from German PMI slowing sequentially in FEB to 50.1 vs 51 JAN to Taiwan Exports dropping -8.6% y/y in JAN, we think we’re just getting started here. What happens on the margin m/m matters most. Inflation, from these levels, slows growth.


INFLATION – Italian CPI +3.2% y/y JAN (stagflation), India CPI pops to +7.7% JAN vs 6.6% DEC, and Hong Kong CPI up to 6.1% JAN vs 5.7% DEC –these are all JAN numbers that don’t include this rip in the CRB Index, Oil, etc in FEB.

  • TED SPREAD: 42.65
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.05 from 2.06
  • YIELD CURVE: 1.75 from 1.76

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage, week of Feb. 17, (prior -1.0%)
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 10am: Revisions: Existing Home Sales
  • 10am: Existing Home Sales, Jan., est. 4.66m (prior 4.61m)
  • 11:30am: U.S. to sell $40b 4-week bills
  • 1pm: U.S. to sell $35b 5-yr notes
  • 4:30pm: API inventories


    • Quinnipiac University holds news conference on national poll on 2012 GOP contenders, presidential matchups, 10am
    • Republican presidential candidates face off in Mesa, Ariz. in debate sponsored by CNN, 8pm
    • House, Senate not in session


  • Obama administration said to propose today to cut U.S. corporate tax rate to 28% from 35%
  • Sales of previously owned U.S. houses may have climbed 1.1% in Jan. to highest level since May 2010, economists est.
  • J&J picked Alex Gorsky to be new CEO
  • SAP said to partner with Samsung to push corporate use of Google’s Android
  • U.S. Consumer Financial Protection Bureau starting inquiry into bank checking account overdraft policies
  • Peugeot says in alliance talks after report of GM discussions
  • European services and manufacturing output unexpectedly shrank in February
  • France Telecom cut its dividend forecast
  • Goldman Sachs cut its 12-month forecast for commodity returns to 12% from 15%
  • Shell bids $1.6b for African oil explorer Cove Energy
  • Pimco said to be quitting American Securitization Forum over silence on foreclosure settlement
  • Solyndra begins piecemeal auction after failing to attract bids for whole company


    • Donaldson (DCI) 6am, $0.71
    • Lamar Advertising (LAMR) 6am, $0.00
    • Quanta Services (PWR) 6am, $0.36
    • RR Donnelley (RRD) 6:30am, $0.43
    • Rogers Communications (RCI/B CN) 6:45am, C$0.65
    • Chico’s FAS (CHS) 6:55am, $0.11
    • El Paso Electric (EE) 7am, $0.19
    • AGL Resources (GAS) 7am, $0.93
    • Windstream (WIN) 7am, $0.20
    • Dollar Tree (DLTR) 7:31am, $1.58
    • Canadian Utilities (CU CN) 8:07am, C$0.95
    • TJX Cos (TJX) 8:22am, $0.63
    • MGM Resorts International (MGM) 8:30am, $(0.20)
    • Washington Post (WPO) 8:30am, N/A
    • Eaton Vance (EV) 9am, $0.43
    • Analog Devices (ADI) 4pm, $0.48
    • Equity One (EQY) 4pm, $0.28
    • Whiting Petroleum (WLL) 4:00pm, $0.97
    • Express Scripts (ESRX) 4:01pm, $0.85
    • Jack in the Box (JACK) 4:01pm, $0.25
    • Williams Cos (WMB) 4:01pm, $0.41
    • Williams Partners LP (WPZ) 4:01pm, $0.98
    • Fluor (FLR) 4:05pm, $0.82
    • Hewlett-Packard (HPQ) 4:05pm, $0.87
    • QEP Resources (QEP) 4:05pm, $0.45
    • Flowserve (FLS) 4:09pm, $2.29
    • Boston Beer (SAM) 4:15pm, $1.10
    • Hertz Global Holdings (HTZ) 4:18pm, $0.20
    • Yamana Gold (YRI CN) 4:28pm, $0.24
    • Concho Resources (CXO) 4:30pm, $1.18
    • Ltd Brands (LTD) 4:30pm, $1.46
    • Continental Resources (CLR) 4:34pm, $0.78
    • Liberty Global (LBTYA) 5:00pm, $0.16


  • Record Nickel Supply Expanding Glut Thwarts Rally: Commodities
  • Goldman Lowers Commodity Return Forecast, Stays Overweight
  • Copper Falls as Chinese, European Manufacturing Keeps Shrinking
  • Crude Oil Falls From Nine-Month High on Signs of Europe Slowdown
  • Russia Seeks ‘Foothold’ in Asian Wheat Market to Rival U.S.
  • Cocoa Climbs in London After Gains in New York; Sugar Advances
  • Soybeans Decline as Rainfall in Argentina May Improve Crops
  • Gold May Decline as Rally to Two-Week High Spurs Investor Sales
  • BHP Billiton’s $5.25 Billion Bond Offer Leads New-Issue Revival
  • Rubber Climbs to 5-Month High on Declining Supply, Greek Bailout
  • Investor Rogers Compares Myanmar Reforms to China’s Opening
  • Seaway Seen Sending Oil Supply to 5-Month High: Energy Markets
  • Obama, Bush and Reagan Show Threat to Gold Run: Chart of the Day
  • Spring Lambing in U.K. Turns Deadly as Schmallenberg Kills Young
  • Russia to Keep Exporting Grain to Iran Unless UN Imposes Ban
  • Shell Bids $1.6 Billion for African Oil Explorer Cove Energy
  • Risk of Oil-Price Surge Rising on Supply, Goldman Sachs Says













YEN – complete meltdown on our immediate-term TRADE duration with the Japanese Yen in free-fall, accelerating to the downside this morning to 80.16 vs USD. At the same time, short-term UST’s are spiking above our TREND line of 0.26% and 10s are above the critical 2.03% line this morning. Big sovereign debt maturity spike in Japan in March.










The Hedgeye Macro Team





Hold adjusted RWS Q4 EBITDA of S$300 million was extremely disappointing. Cautious tone on near term.



"The economic challenges in Europe and the United States of America continue to cloud the short-term outlook of the Asian economies. As the next 12 months remain volatile, we continue to remain cautious in our dealings and prudent in our approach."




  • Announced a dividend of 1 cent per share - way of saying thank you to shareholders
  • Got an A- from Fitch and a BBB- from Moody's
  • VIP business was in-line with their expectations and cautious lending outlook
  • 3.9% hold in 4Q
  • Transformers opening helped USS visitation
  • MICE operations: They welcomed more than 1MM visitors and hosted more than 200 events in 2011. 
  • Once construction is complete, management will be able to completely focus on revenue growth - including pursing new projects
  • Singapore dollar denominated perpetual preferred? 
    • 5 banks are the book runners on this offering and for this purpose, they have obtained credit ratings
    • No comment on use of proceeds or offering size
  • QoQ change in RC volume?
    • down 26% QoQ but win was higher because win was 3.9%
    • They notice when they have high hold, they have lower volumes
    • They have also taken a more cautious tone on credit extension, and you can see that in their provisions as well which have come down dramatically
  • They are still remaining cautious for the next 2 quarters with respect to credit extension but cautiously optimistic on 2H12
  • Only put in full complement of their new ETG's and slots in early February.  Can only have 2,500 machines. They were just a little shy of 2,500 machines.
  • Mass was down a little (2%). 
  • What was their rebate in 4Q? 
    • 1.2-1.3% range - hasn't really moved that much Q to Q
  • 4Q: 2,051 slot machines on average
  • VIP: Decline in 4Q - was it seasonal? 
    • They don't really know. They don't have enough operating history. 
    • They did pull back their credit extension so they are unclear how much impact that had
    • Without junkets they don't expect to see much growth in the VIP market
  • Expect the market to grow with junkets
  • If they are looking to project, they would look at all of 2011 and perhaps overweight trends in the 4th quarter
  • Lower impairments and lower credit risk is not the new norm either. Risk taking has a lot to do with their assessment of the overall economic environment.  Expect to take more risk later this year
  • The dividend was a show that they are cognizant of investor's desire of a dividend. 1 cent is not small compared to their EPS of 8 cents per share.  Growing the dividend depends on their assessment of growth opportunities
  • Net gaming revenue breakout
    • VIP: 44%
    • Mass: 56%
  • Gross VIP win is 52% of total gross win
  • Hold adjusted EBITDA using 2.85%: S$300MM
  • Still optimistic on junket approval
  • The visitation numbers to their casino were pretty steady.  VIP visitation and volume aren't very correlated though.
  • 80-90% of the people who come to the casino are coming from outside of Singapore
  • Still expect junkets to get approved in the next few months
  • Can't really compare their current margins to 2010 results since their non-gaming amenities weren't open then. Their non-gaming amenities have lower margins than the gaming business.
  • They have a lot of employees in the Marine Life Park and training them, but there is no associated revenue and won't be until the Park is fully open in the 4th Q
  • 2012 is going to be a transitional year for them since there are many employees (life guards, veterinary professionals, etc) that don't really exist in Singapore and therefore they need an extended training period.  Hired about 600 incremental employees between the Marine Life Park and the hotels that opened.
  • There will likely be some more rooms opening at Equarius which will reach 200 rooms
  • The Park will open in late 3Q.  In about 4 weeks time, they will start filling the tanks with water.  Have a quarantine center for animals... want to be very careful. By end of May they will fill the larger tanks. The tanks need to be flushed and cultured with good bacteria. Only once the water is stable they will start putting the fish in.  When the animals come into Singapore they first need to go into a quarantine center (2-4 weeks). 
  • Japan: somewhat optimistic that something may pass in Japan. They continue to track the development there as well as seriously looking at a few opportunities elsewhere. 
  • They have 559 total tables
  • Dec 31: 1502 slots and 549 ETG's
  • Mass share was 46% on the volume side (for slots as well); GGR share was 47%
  • The West zone has a very tropical and laid back setting - more of a Bali setting. 
    • They did a soft opening with 4-5 villas during CNY and their clients were very happy. They still aren't completely open yet.
    • Originally they were going to target the ME & and Eastern European market, but the Chinese customers also like it
  • Slot ramp from 3rd to 4th quarter? 
    • Win per slot went up a little bit despite the addition of new machines
  • There will be no new project announcements from them until 2H2012: The projects that they are looking at range from an equity commitment of S$500 to S$3/4BN.
  • 1/3 of the tables are VIP
  • December is a holiday month- they see a lot of traffic into the casino and the resort
  • Market share of RC: 47% 
  • By CNY they actually had 12 villas ready but decided to only open 4/5 of them - given the vegetation looking scrawny. It's very difficult to know how much impact the villas will contribute. To date only 12 customers have stayed in those Villas.
  • Half of the Equarius hotel is currently open and it is also meant for VIPs
  • Capex for 2012: S$600MM
  • Maintenance capex should be S$100-200MM once everything is complete. 
  • They will pursue opportunities anywhere in the world? Genting Malaysia has spend a lot of money in NY and they also bought the site in Miami - so they don't really have much money left to pursue new projects. They are the only other subsidiary of the Genting Group with any kind of real fire power so they would be the vehicle with which the Group would pursue any new opportunities globally
  • They do not intend to be at the S$300MM level for EBITDA in future quarters. The S$400MM level has been pretty consistent for them and should continue to see that kind of level/ floor



  • Genting Singapore reporting Adjusted EBITDA of S$398.8MM and revenues of S$786.3MM
    • RWS Adjusted EBITDA of S$405.9MM and revenue of S$782.5MM
      • S$644.8MM from gaming revenue and S$137.7MM from nom-gaming revenues
  • USS drove non-gaming growth with 10,250 daily visitors and average spend per visitor of S$86/day
  • Hotel occupancy was 89% with ADR of S$322
  • "The higher profit was attributable to the higher adjusted EBITDA of Singapore IR by 8% due to the lower impairment loss on trade receivable by S$36.2 million; and lower tax charge."
  • 2011 Capex:S$1,234MM 
  • "Equarius Hotel and selected Beach Villas opened in February 2012. The rest of the West Zone comprising a world-class destination Spa, Water Park, one of the world’s largest Marine Life Parks and the Aquarium will be fully operational by the second half of the year. With this last phase of development, the resort will be fully completed in 2012"
  • "Genting Singapore’s efforts are focused towards identifying, evaluating and investing in new projects that provide revenue growth and net income streams to the Group. The continuing uncertain economic climate also presents some potentially attractive investment opportunities."

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