Emotional Conclusions

This note was originally published at 8am on February 13, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The dominance of conclusions over arguments is most pronounced where emotions are involved.”

-Daniel Kahneman


Intraday on Friday we finally had a -1% down move in US Equities and a +1.5% up move in long-term US Bonds. So, I covered our short position in the SP500 (SPY) and sold our long position in US Treasuries (TLT) on that. Buy red, Sell green.


Buying on red and Selling on green? That’s meant to be an over-simplification of what it is that I do. I love saying it, tweeting it, and doing it – because actually finding it within me to do it when I have so many other risk management signals banging around in my head is quite difficult.


On page 103 of “Thinking, Fast and Slow” Kahneman compartmentalizes what’s happening in my little brain and reminds me that I am hostage to what his psychologist buddy, Paul Slovic, coined as “The Affect Heuristic.” It helps explain why “people let their likes and dislikes determine their beliefs about the world.”


Back to the Global Macro Grind


At least in my own head, I’m crystal clear that I dislike Big Government Interventions, Socializations, and Regulations of free-market pricing. If all I did was trade on the Emotional Conclusions that are embedded in those thoughts, I’d be wrong a lot more than I am. Separating what should happen versus what is going to happen is critical in markets that whip around like this.


What whipped around last week?

  1. The US Dollar Index finally stopped going down (1stup week in the last 4) = up +0.3%
  2. Commodity Inflation (18 component CRB Index) stopped inflating = down -0.6%
  3. US Equity Volatility (VIX) ripped to 20.79 = straight up +21.6%

What’s fascinating and sad about this all at the same time is that it reminds us how sensitive market prices are to a devaluation of the US Dollar. Emotional Conclusions drive expectations too. The US Dollar currently has an immediate-term +0.7 correlation to Volatility (VIX).


Emotional? Right before they stopped inflating, CFTC (Commodities Futures Trading Commission) data showed that in the week ended February 7th, 2012, money managers ramped up their net-long positions to commodity inflation by +13% week-over-week. At 929,199 contracts (, that’s the biggest net-long position since September of 2011. Atta boy Bernank!


For those of you who still remember who and what got crushed in September 2011, the CRB Index dropped from 343 to 293 by the first week of October 2011. That was a -14.6% vertical drop as the US Dollar Index ramped +7%. Got Emotional Conclusions about causality?


Or was that Correlation Risk? Or was it expectations? Or Europe?


Whatever it was, it was the real-time score.


That’s the thing about market prices. They could not care less about what you or I think. They do what they do when they do them, rendering our immediate-term opinions about valuation, supply, and demand useless.


We’re all book smart. Or at least, technically, that’s what the diplomas say. Being market-smart will be determined many years after we leave this game – when every week, month, and year of our risk management performance has been TimeStamped.


In the meantime, we need to know what we are going to do now. As in right now. Markets wait for no one. And now that the Greek “news” is out of the way, I think this week’s focus will turn to:

  1. Japan: nasty Keynesian Growth Slowdown (down -2.3% GDP Growth y/y for Q411) and pending sovereign debt maturity in March
  2. China: growth slowing (again) as global inflation expectations rise (again)
  3. USA: economic data to be reported this week which should already start to show inflating import, consumer, and producer prices

I’ve dropped the Cash position in the Hedgeye Asset Allocation Model from 91% on the day of Bernanke’s Policy to Inflate (January 25th, 2012) to 64% this morning. Effectively, I’m long Inflation Expectations Rising (Energy, Gold, etc.) and I’m right worried about it. If we see the US Dollar hold last week’s gains, I’ll have no problem selling inflated prices on green.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1714-1761, $114.89-120.01, $1.31-1.33, and 1338-1360, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Emotional Conclusions - Chart of the Day


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Timing of Chinese New Year should push Strip metrics into positive territory, despite flattish airport/taxi data and difficult hold comparisons.



With the eternal caveat of assuming normal hold percentages, we think Strip gaming revenue growth was likely in positive territory in January.  Any growth would be impressive considering the unfavorable calendar and difficult hold comparisons.  Of course, baccarat volume associated with the timing of Chinese New Year in January this year should be the big offset.


Airport traffic at McCarran increased only 0.3% in January while the number of taxi trips actually fell 0.9%.  The primary driver of the flattish transportation statistics was an unfavorable calendar.  January of 2012 contained one fewer Saturday.  We are also making the assumption that drive-in traffic from California was down YoY due to the one fewer Saturday and high gas prices.


So where does this leave our projections for Strip projections?  Overall, our model is spitting out growth of 3-7% for gross gaming revenues, driven by a 70% increase in Baccarat volume – 100% increase in revenue – offset by a 7% and 5% decline in slot and non-Bacc table revenue, respectively.  Last year’s slot and table hold percentage was higher than normal – except for Baccarat. 


Here are our projections:






TODAY’S S&P 500 SET-UP – February 27, 2012

As we look at today’s set up for the S&P 500, the range is 13 points or -0.64% downside to 1357 and 0.31% upside to 1370. 











  • ADVANCE/DECLINE LINE: 272 (-1042) 
  • VOLUME: NYSE 640.97 (-16.00%)
  • VIX:  17.31 3.04% YTD PERFORMANCE: -26.03%
  • SPX PUT/CALL RATIO: 2.26 from 2.12 (6.60%)


10YR – its been a while since the 10-yr bond yield was more wrong than the US stock market on growth expectations. At every turn in the last year, bond yields have told you all you need to know about US Growth Slowing. After failing at the 2.03% TREND line last week, snapping the 1.97% TRADE line puts 1.91% back in play. 

  • TED SPREAD: 39.40
  • 3-MONTH T-BILL YIELD: 0.09%
  • 10-Year: 1.94 from 1.98
  • YIELD CURVE: 1.65 from 1.67 

MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: Pending Home Sales, Jan., est. 1.0% (prior -3.5%)
  • 10:30am: Dallas Fed, est. 15.5 (prior 15.3)
  • 11:30am: U.S. selling $33b 3-month bills, $31b 6-month bills 


  • Obama hosts dinner for National Governors Association
  • House, Senate in session:
    • House Judiciary panel meets on “Regulatory Freeze for Jobs Act of 2012,” which provides that no agency may take any significant regulatory action until unemployment rate is hits, or falls below 6.0%, 4pm 


  • BP, plaintiffs suing over 2010 Gulf of Mexico oil spill said to be discussing $14b accord; liability trial originally scheduled to start today postponed for week
  • Elpida sought bankruptcy protection in Japan’s largest filing in two yrs; watch suppliers, Micron Technology
  • Nokia introduced lower-priced Windows phone at Mobile World Congress
  • Berkshire’s Warren Buffett says he’s “on the prowl” for large acquisitions
  • G-20 nations rebuffed German-led calls to come to Europe’s rescue as it battles the sovereign debt crisis
  • Vulcan Materials, Martin Marietta face off in Delaware Chancery Court tomorrow in trial over $4.7b takeover
  • HSBC said it’s on “clear trajectory” to meeting its profitability target next year
  • Russian, Ukrainian security services foiled plan to assassinate Vladimir Putin, Russia’s Channel One said
  • Sprint Nextel said to have abandoned plans to buy MetroPCS Communications 


    • AES (AES) 6 a.m., $0.22
    • Lowe’s (LOW) 6 a.m., $0.23
    • Quicksilver Resources (KWK) 6:44 a.m., $0.00
    • Visteon (VC) 7 a.m., $0.79
    • Dendreon (DNDN) 7 a.m., $(0.60)
    • El Paso (EP) 7:30 a.m., $0.30
    • El Paso Pipeline Partners (EPB) 7:30 a.m., $0.63
    • Charter Communications (CHTR) 8 a.m., $(0.19)
    • Valeant Pharmaceuticals (VRX CN) 8 a.m., $0.84
    • Southwestern Energy (SWN) 4 p.m., $0.47
    • (PCLN) 4:01 p.m., $5.06
    • Human Genome Sciences (HGSI) 4:01 p.m., $(0.41)
    • URS (URS) 4:05 p.m., $0.98
    • Western Gas Partners (WES) 4:05 p.m., $0.43
    • Sina (SINA) 4:30 p.m., $0.21
    • Universal Health Services (UHS) 5 p.m., $0.90 


  • Bullish Futures Exceed 1 Million First Time in 2012: Commodities
  • Iran Drives Hedge Fund Oil Bets to 10-Month High: Energy Markets
  • Oil Snaps Longest Rally in Two Years as IMF Warns on Economy
  • Commodity Investments May Climb as Much as $40 Billion in 2012
  • Copper Falls on Demand Concern as Europe’s Debt Crisis Persists
  • Gold Declines in London as Prices Near 3-Month High Curb Demand
  • BP Preparing New Plan With Reliance for India’s Biggest Gas Area
  • 8S.Korea Offers to Cut Iran Oil Imports by 15%-20%: Yonhap
  • Corn Falls on Speculation U.S. Growers to Boost Output to Record
  • South Korea Delays Bill Challenging Top-Emitter Ranking: Energy
  • U.K. Gas Rises on LNG Concern; Power Rises After Biomass Blaze
  • India Road-Building Hits Record as Builders Pay to Work: Freight
  • European Union Says Cereal Production May Reach Three-Year High
  • Iran Drives Fund Oil Bets to 10-Month High
  • Robusta Coffee Falls as Vietnam’s Exports May Rise; Sugar Climbs
  • Fuel-Oil Discount Widens; Gasoil, Naphtha Rise: Oil Products
  • BP Said to Weigh $14 Billion Gulf of Mexico Oil Spill Accord









FRANCE – another +0.6% sequential ramp in producer prices this month is only going to perpetuate the stagflation we see in France, Spain and Italy. Who cares about Greece when these 3 majors will have a much larger say in global growth expectations. The CAC’s TAIL remains broken and now the immediate-term TRADE line is under fire (3439). We re-shorted France (EWQ) late last week.





INDIA – obviously a country that is short oil is a country that is going to have a stagflation problem with oil prices ripping like this. That wasn’t new to the Indians last week, but evidently it mattered to their stock market today – at down -2.8% in a straight line, that’s the problem with bearish market SKEW. India’s Yield Curve has gone to flat.










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The Macau Metro Monitor, February 27, 2012




Three days after the Singapore government said it is considering more safeguards against problem gambling, it is also reviewing laws and regulations governing the integrated resorts (IRs), and will release more details in the second half of 2012.  Minister in the Prime Minister's Office and Second Minister for Home Affairs and Trade and Industry, S. Iswaran, said such a review is timely as the IRs have been in operation for two years.



MGM China's CEO Grant Bowie said, "We’re well advanced.  So far we’ve had three successful submissions on the project for Cotai, adding that the company is “almost in a position to submit the final drawing.”  Once the project gets government approval, it will take three years to build.  “Our Cotai venture will be financed with our cash flow, which is quite high, and a credit facility,” added Hubert Wang, MGM China’s CFO. 


“We are looking at some sort of show and some sort of exhibition opportunities,” Bowie confirmed. However, he added that MGM would not compete with Venetian Macau to host big exhibitions and conventions, two sectors that “have not developed as strong as we expected”.  Instead the company’s Cotai resort will focus on incentives trips as “companies in the region are growing and looking into premium destinations,” as well as meetings, the executive said. 


MGM's Cotai investment is ~USD 2 billion to USD 2.5 billion” (MOP 20 billion) with 500 tables, 2,500 slots, 1,600 rooms.



Former Co-COO Nicolas Naples has left MPEL on 2/27/2012 on mutual agreement.  Ying Tat Chan has been appointed as MPEL's sole COO.



Macau's unemployment rate for November 2011-January 2012 was 2.1%, down by 0.1% point compared with the revised figure of 2.2% in October-December 2011.  Total labor force was 345,000 in November 2011-January 2012 and the labour force participation rate held stable as the previous period, at 73.2%.

Complicating Life

“You should know that correcting your intuitions may complicate your life.”

-Daniel Kahneman


That’s just a great risk management quote from Chapter 18 of “Thinking, Fast and Slow” – Taming Your Intuitions. While the Storytelling about oil prices, what caused them, and what they mean to your portfolios can be creative, it can also complicate your life.


Complicating Life for the small some of us whose life will not change by prices at the pump is not what I mean. I’m talking about the most obvious of obvious of life’s complications – what’s in your wallet versus what you need to buy to feed your family.


While that may be the most intuitive statement of the year for the rest of the world’s consumer population, on Wall Street we are often numbed to believe that making the most obvious of obvious calls on markets and economies isn’t “smart” enough.


Back to the Global Macro Grind


One obvious call that we pounded on last week is that Global Consumption Growth has never not slowed with oil prices running north of $100/barrel. We’ll reiterate that very simple fact this morning. I couldn’t have repeated it enough in February of 2008.


Barron’s Mike Santoli did a nice job of bringing back those 2008 memories this weekend when he pointed out that the price of Brent Oil has not traded below $100/barrel for 269 days. Make that 270 days now. The longest streak (ever) prior to this was 110 days in 2008.


2008 and 2011 are the years that the willfully blind at both the Fed and Sell-Side groupthink-tanks would like to just forget. That’s why we like to remember them. When Growth Slowing happens every few years after the price of oil ramps, there’s something obvious Complicating Life for those of us who don’t hang our hats about being “dead” in the long-run.


To review the Dollar Debauchery, Oil Up trade last week:

  1. US Dollar Index was down -1.3% to $78.35
  2. Brent Oil price was up +4.9% to $125.47
  3. WTIC Oil price was up +6.4% to $109.77

And, of course, the headlines into the weekend were that Oil was rising because the “economic recovery” was picking up steam…


Then, a not so funny thing happened on the way to the pre-market US Futures forum this morning. Stocks fell down … because of “rising oil prices” … but, uh… oil prices this morning are falling…


Got Storytelling?


The sad fact of the matter is that many market participants need oil prices to rise to get paid. That’s just a sad fact for the country, not for absolute returns. At +25.2% and +21.8%, respectively, Russian and Venezuelan Equities are 2 of the Top 3 performing Stock Markets in the world for 2012 YTD. These are called Petro-Dollar markets – awesome, right?


It really is awesome if you are long Inflation Expectations Rising. The problem with that is 2 fold:

  1. That, ultimately, leads to Growth Expectations Slowing
  2. Most people on this earth are short inflation in their wallets

The other thing here Complicating Life is that our industry chases prices at tops and sells bottoms:

  1. CFTC data for last week shows bullish Commodity Options contracts up +7.3% week-over-week
  2. At 1.03 Million call options on commodity inflation, that’s the biggest number since the week of September 13, 2011
  3. From the CRB Index’s September 2011 high to its October 2011 low (292) we saw a -14% crash in commodities

Yes, Commodities Crashed. That was last year, remember?


Last year, post Qe2, expectations continued to build for a Stronger Dollar. So commodities crashed. Period. Commodities didn’t fall because growth expectations were slowing. US GDP Consumption Growth rose steadily as the price of oil fell with US GDP going from 0.36% in Q1 to +2.8% in Q4 of 2011.


I’m not saying it’s easy being a Macro man trying to navigate the whip-saw of Big Government Interventions. If I have written this 100 times I have said it 1,000 times over – cheap money Dollar Debauchery policies A) shorten economic cycles and B) amplify market volatility.


What I am saying is Ben Bernanke’s Policy To Inflate to 2014 is Complicating Life for the rest of the world’s consumption.


My immediate-term support and resistance ranges for Gold, Oil (Brent), Oil (WTIC), US Dollar Index, and the SP500 are now $1, $120.78-126.21, $105.44-110.66, $78.38-79.11, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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