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Old Habits

“He was a man of habits.”

-Benjamin Wallace


Earlier this week I cited a book I am enjoying, “The Billionaire’s Vinegar.” Today’s quote summarizes the unique persona of Michael Broadbent. Becoming the world’s most prominent wine auctioneer didn’t just happen.


Neither does risk in these globally interconnected markets. There is no such thing as “risk on” and “risk off.” In real life, risk is always on. Risk never sleeps.


Habits in this business can be as polarizing as a legacy media channel’s partisanship. Fortunately, Old Habits on Wall Street and News Media 2.0 are dying on opacity’s vine.


Back to the Global Macro Grind


I personally have a habit of selling on green and buying on red. Most of the time it saves me from grossly violating Rule #1 – Don’t Lose Money. Some of the time it doesn’t.


Buying too early is also called being wrong. The lynx-eyed Jeff Gundlach at Doubleline says “an investor is a trader who is under-water.” Great one liner – primarily because it royally annoys Captain Stock Picker. Especially after a day like yesterday.


Yesterday’s Short Covering Opportunity in everything that was immediate-term TRADE oversold was as obvious to me as the Short Selling Opportunities we were signaling 2.5% higher with the SP500 at its YTD highs last week.


On red, after a 3-day correction in Global Equities and Commodities, here’s what I’ve done in the Hedgeye Asset Allocation Model:

  1. Cash = 46% (down from 58% on Friday)
  2. Fixed Income = 24% (no change)
  3. US Equities = 18% (up from 12% on Friday)
  4. Commodities = 9% (sold Corn, bought Oil)
  5. International Equities = 3% (bought Canada)
  6. International FX = 0%

I’m not saying this positioning is right or wrong. The market will decide my fate on that. I’m just TimeStamping what I did. Repeatable Process is a habit too.


Getting longer here certainly has risks. In the Hedgeye Portfolio I went into yesterday’s open with 11 LONGS, 9 SHORTS. This morning I have 13 LONGS and 7 SHORTS. I’ll most likely tighten that up, selling some on green today.


Why sell on green? Isolating the USA, here are some of the risk management signals jumping off my notebook page today:

  1. SP500 broke immediate-term TRADE support of 1364 and now has a lower-high of resistance up at 1359
  2. Equity Volatility (VIX) broke out above immediate-term TRADE resistance of 17.72 yesterday; upside to 23.17
  3. US Equity Volumes continue to flash gnarly negative skew – accelerating volumes on the down days, not up ones
  4. S&P Sector Rotation call we made last week remains crystal clear (Utilities (XLU) best yesterday; Financials (XLF) the worst)
  5. S&P Sectors that have broken their immediate-term TRADE lines = 5 of 9 (XLB, XLI, XLF, XLV, and XLE)
  6. 10-year US Treasury Yields continue to signal Growth Slowing (trading below my TREND line of 2.03%)
  7. Yield Spread (10yr minus 2yr) is down 3bps week-over-week; benign but not bullish at 167bps wide
  8. US Dollar Index has moved back to bullish TRADE and TREND after Romney wins in Michigan and Ohio

That last point is probably the one that rings the political gong louder than any other. Why? Because people are partisan. But the math trumps partisanship and the fact of the matter is that the US Dollar Index is up +2.1% since Romney won in Michigan last week (see our newly minted Hedgeye Election Index). Causal? Correlated? Does it matter which?


Strong Dollar = Strong America. Period.


That’s the most bullish long-term (and sustainable) economic strategy I can paint for Americans right now. Sadly, it’s also the most unexpected. Old Habits, and the economists and politicians who get paid to pander to them, won’t agree with this because none of them have tried it in the last decade (i.e. so none of them can take credit for it when it works).


To get a stable and strong US Dollar will take both fiscal and monetary sacrifice. God forbid the stock market goes down for a few weeks to get there. But inflation expectations will go down too. Whether it was $20/barrel (average price of oil) between 1 or 1, these were the most bountiful decades or US job creation and economic prosperity, ever.


Ever is a long time. Old Habits of debauching your currency for short-term political votes should be held accountable to ever, too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $120.83-123.89, $79.32-79.91, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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The Macau Metro Monitor, March 7, 2012




An international law firm founded by Bill Gates' father, K&L Gates, has filed a writ at the High Court against MPEL.  The firm is seeking a court order to find out how much of MPEL's property represents money that ex-employee of K&L Gates, Navin Kumar Aggarwal, took, or his net winnings, or both, and to have MPEL pay what it owes.  K&L Gates claims that Aggarwal transferred at least HK$34 million from the client accounts to Melco and gambled with that money and other funds.  He made a net loss of at least HK$9.9 million.  K&L Gates also says MPEL received the misappropriated money knowing it was not entitled to do so, that the money did not belong to Aggarwal and that the former partner had a history as an unsuccessful gambler, among other things.


The filing says Aggarwal took millions of dollars from the escrow accounts of clients, including those four parties.  Four clients had been repaid a total of HK$117 million, the writ said.  The clients are Hui Kau-mo, Mark Lightbown, Golden Bridge United Holdings Group (HK), and Laxmi Niwas Jhunjhunwala.   


Initially the figure involved was put at HK$16.6 million. Prosecutors later revised it to HK$780 million.  The criminal case is scheduled for a brief hearing on April 2 at Eastern Court.



Macau's secretary for economy and finance, Francis Tam Pak Yuen, says Macau GGR growth is expected to be up only 'low double-digts or high single-digits' in 2012.  Macau government estimates regarding the growth of the casino industry are traditionally very conservative.


Taking into account the expected revenue from direct taxes from gaming included in the 2012 government budget, presented in November last year, that would actually mean a contraction of the sector, opposing the general view among industry players and analysts.


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ECB and BOE Preview

Thursday has announcements from the ECB and BOE on monetary policy. We do not expect moves from either bank in interest rate levels or calls for additional non-standard measures or QE.


Although the ECB does need to cut its main interest rate as the region is dragged into recession, we’ll likely see Draghi remain on hold due to the timing of the 2nd 36 month LTRO (€529.5 billion) just last week and given that there’s plenty of runway left in 2012 to cut off the 1.00% bound. Another gauge that may weigh on inaction is the improvement in the EURIBOR-OIS spread, down 40% year-to-date to 58bps. However, as the chart below shows, a fair amount of the LTRO’s credit may be flowing to safety in the ECB’s overnight deposit facility (which is hitting new highs), and not to its intended audience of corporates and personal loans.   


ECB and BOE Preview - 1111. MEIN


Remember, Draghi revised the language on the main outlook on the Eurozone economy in the last meeting (on 2/9) to “tentative signs of stabilization in economic activity at a low level” versus “substantial downside risks” in the previous report. We could see a return to his previous language.


Recent data since the last meeting that will weigh on the decision, and collectively hasn’t shown “tentative signs of stabilization”, includes:


Eurozone Q4 GDP -0.3% Q/Q vs 0.1% in Q4 2011

Eurozone M3 2.5% JAN Y/Y (exp. 1.8%) vs 1.6% DEC

Eurozone Unemployment Rate 10.7% JAN vs 10.6% DEC  (highest since ‘97)

Eurozone CPI Y/Y 2.7% FEB (exp. 2.6%) vs 2.7% JAN

Eurozone PPI 3.7% JAN Y/Y (exp. 3.5%) vs 4.3% DEC  [0.7% JAN M/M (exp. 0.5%) vs -0.2% DEC]


Eurozone Retail Sales 0.0% JAN Y/Y vs -1.3% DEC   [0.3% JAN M/M vs -0.5%]

Eurozone PMI Manufacturing  49 FEB vs 48.8 JAN

Eurozone PMI Services  48.8 FEB vs 50.4 JAN


Eurozone Business Climate Indicator -0.18 FEB vs -0.21 JAN

Eurozone Consumer Confidence -20.3 FEB Final vs -20.7 JAN

Eurozone Economic Confidence 94.4 FEB (exp. 94) vs 93.4 JAN

Eurozone Industrial Confidence -5.8 FEB (exp. -6.9) vs -7 JAN

Eurozone Services Confidence -0.9 FEB (exp. -0.6) vs -0.7 JAN



The BOE should also maintain its 0.50% benchmark rate and £325 Billion bond purchasing program, following a £50 Billion increase last month. Fundamental data hasn’t shown signs of material improvement, though improvement on the margin, but again, there’s a lot of runway left in 2012 for monetary policy and still much uncertainty surrounding the direction of the Eurozone, the UK’s main trading partner.


In the last meeting, David Miles and Adam Posen pushed for £75 Billion in stimulus, and looser monetary policy, so we’ll have to wait for the minutes to see if the two had any more influence on the committee.


Recent data weighing on the decision includes:


UK Q4 GDP -0.2% Q/Q vs 0.6% in Q4 2011

UK CPI 3.6% JAN Y/Y (exp. 3.6%) vs 4.2% DEC 

UK PPI Output 4.1% JAN Y/Y (exp. 3.7%) vs 4.8% DEC

UK PPI Input  7.0% JAN Y/Y (exp. 6.8%) vs 8.9% DEC


UK RPI   3.9% JAN Y/Y (exp. 4.1)  vs 4.8% DEC

UK ILO Unemployment Rate 8.4% DEC vs 8.4% NOV

UK Jobless Claims Chg 6.9K JAN (exp. 3K) vs 1.9K

UK Avg Wkly Earnings 2.0% DEC Y/Y vs 1.9% NOV


UK Net Consumer Credit 0.1 B GBP JAN vs 0.0B GBP DEC

UK Mortgage Approvals 58.7K JAN vs 55K DEC

UK M4 Money Supply -1.8% JAN Y/Y vs -2.5% DEC

UK Nationwide House Prices 0.9% FEB Y/Y (exp. 0.3%) vs 0.6% JAN


UK PMI Manufacturing 51.2 FEB vs 52.0 JAN  

UK PMI Services 53.8 FEB vs 56.0 JAN

UK PMI Construction 54.3 FEB (exp. 51.3) vs 51.4 JAN



Matthew Hedrick

Senior Analyst


An extra day and an easy weather comparison should produce a strong February and Q1 for the regionals.  If Missouri is any indication, it may not be good enough.



YoY gaming revenue growth in Missouri will come in between 3 and 4% for the month of February.  On the surface and relative to trend, that may seem like a positive.  However, there was a massive storm on February 1st of last year and Feb 2012 obviously contained one extra day.  We would argue that growth should be at least 5%.  January was an unfavorable month from a calendar perspective and same-store gaming revenues fell a combined 4% in the mature regional markets.  However, the regional gaming stocks spiked as calendar driven expectations were low.


The calendar tailwind continues for one more month.  March 2012 contains 2 extra weekend days versus last year. 


However, it all reverses in Q2:

  • April:  1 less Friday and Saturday; 1 more Sunday
  • May:  1 less Sunday
  • June:  1 less Friday and Saturday

If the regional markets are only going to be up 3-4% in January and February, that won’t bode well for Q2, particularly if gas prices continue to increase.  Of course, Missouri is only one state and one month from one state does not make a trend.  We’ll have more commentary after the states release gaming revenues over the coming weeks.


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