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Don't Hate The Debate

This note was originally published at 8am on March 01, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“You have to choose not to spiral into hate.”

-Izzeldin Abuelaish

 

On red yesterday I took up my positions in US Equities and Commodities to 12%, respectively, buying Utilities and Gold in the Hedgeye Asset Allocation Model. I also sold my entire US Dollar position (9%) on green. Don’t hate me for moving fast. Sometimes that’s just what I do.

 

‘Trading, Fast and Slow’ might be a good title for a new book (or maybe just a high-frequency tweet). It uses 3 words that some people in our business love to hate. Trading? Oh no, “I’m not a trader, I am an investor.” Ok. Do you invest fast or slow? Do you manage risk? Yes, we know – you actually have to trade to answer both of those questions.

 

While plenty of people from The Old Wall are just punching the over-compensation clock at this point, I think we have entered the thralls of creative destruction. These are the most exciting times of my 13-year career. There is so much to Re-think, Re-work, and Re-build.

 

We have an entire industry that needs to be debated. Every process. Every premise. Every minute of every day offers you an opportunity to not only get in the game, but be the change we all want to see in this profession.

 

If that sounds a little speechy, it’s because it is. As Ray Dalio at Bridgewater likes to say, this business is all about figuring out the truth. In the final pages of Izzeldin Abuelaish’s ‘I Shall Not Hate’, he comments on the same principles of risk management in the Middle East:

 

“I’m not talking about the light of religious faith here, but light as a symbol of truth. The light that allows you to see, clear away from the fog – to find wisdom. To find the light of the truth you have to talk to, listen to, and respect each other.” (page 196)

 

The partisan politics, economics, and investing styles that have failed us over the last 5yrs are broken. Don’t Hate The Debate. Embrace change and progress. We can always do better. We always have.

 

Back to the Global Macro Grind

 

One of the most heated debates I have with clients remains centered on the interconnectedness of the world’s reserve currency to market prices that are primarily denominated in that currency (US Dollars).

 

Since most of Western academia has not taught us to re-think markets this way, their dogma is now our dilemma. That’s why we need to slap on the accountability pants and hash this one out, fast. It’s time for the professors to be held accountable to the debate.

 

If you don’t think Fed Policy drives the US Dollar and Inflation/Deflation Expectations of assets priced in Dollars, try that theory at home with your own money. If the Fed were to even whisper about a rate hike, Oil and Gold would get hammered.

 

That’s why managing risk around big up/down moves in the USD is critical to getting Big Beta right. With the US Dollar Index up +0.8% on the day yesterday (one of its biggest up days of 2012), here’s what happened underneath the Globally Interconnected Market hood:

  1. Silver = down -6.9%
  2. Gold = down -5.5%
  3. Basic Materials (XLB) = down -1.9%

It’s a good thing the Dollar isn’t correlated to Apple.

 

Notwithstanding that the Chairman of the Federal Reserve didn’t mention the words (and hasn’t since 2006) CORRELATION RISK in his entire semi-annual testimony yesterday, we’re still not in the business of taking his word for it on what is or is not happening out there.

 

I know this is a touchy subject – particularly to the legions of Nobel Prize winners who get paid to be willfully blind to it. But this is America, not Russia. We, The People, have a fiduciary responsibility to hold central planners accountable.

 

Transparency, Accountability, and Trust?

  1. Transparency: Bernanke to Ron Paul yesterday on defining inflation - “I’ll talk to you about that offline”
  2. Accountability: Bernanke’s prepared remarks on his mandate for PRICE STABILITY -“as we expected, inflation was transitory”
  3. Trust: Bernanke on his forecasts – “my projections are considerably lower than last year”

Alrighty then.

  1. So there is no inflation because Bernanke chooses to define it with what’s just universally considered not true
  2. And as long as commodity markets oscillate between bubble and crash mode, price inflation/deflation is “transitory” and stable?
  3. And if you’re willing to take his word for it on forecasts that he’s had dead wrong, we can soft land this puppy perfectly

I really don’t hate the man. I Don’t Hate The Debate either. As an immigrant to what I genuinely felt was the last bastion of free-market of capitalism in the world, I just find being held hostage to an un-elected central planner who is obfuscating the truth un-American.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), Utilities (XLU), US Dollar Index, and the SP500 are now $1697-1735, $122.21-126.02, $34.74-35.68, $78.09-79.06, and 1363-1372, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Don't Hate The Debate - Chart of the Day

 

Don't Hate The Debate - Virtual Portfolio




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Experts vs Algos

“Why are experts inferior to algorithms?”

-Daniel Kahneman

 

That’s just another great risk management question from the guru of behavioral finance on page 224 of “Thinking, Fast and Slow.” If you don’t have time to read the entire book, definitely take the time to study and consider the implications of Chapter 21, Intuitions vs Formulas. In the last 4.5 years of my time away from a hedge fund desk, I’ve thought a lot about Experts vs Algos.

 

Understandably, algorithms scare people; particularly people who have zero analytical competence in modern math (i.e. 99% of the politicians and central planners running America). This contrasts sharply with the Chinese political leadership where 8 of China’s top 9 political dudes are mathematicians and/or scientists.

 

I started building my own predictive tracking algorithms so that I could attempt to remove the emotion when I hit buy and sell buttons. It helped me so much that we started plugging these predictors into our fundamental Growth and Inflation models for countries. That’s why our intermediate-term forecasts on things like GDP, PPI, etc. are so variant from the Old Wall’s consensus.

 

I’m not saying that what we have built is perfect. However, I am saying it’s better than what I used to use – and a lot of people on Old Wall Street still use what I was taught to use at A) the Keynesian School of Economics and B) the Sell-Side brokerage firms that perpetuate its dogmatic principles.

 

Kahneman’s answer to the aforementioned question is pretty simple. “One reason, which Meehl suspected, is that experts try to be clever, think outside the box, and consider complex combinations of features making their predictions. Complexity may work in the odd case, but more often than not it reduces validity. Simple combinations of features are better.” (page 224)

 

Kahneman goes on to remind us that “humans are incorrigibly inconsistent in making summary judgment of complex information.” And if there is one thing that any of you know about your own team’s investment meetings since late 2007, that’s God’s honest truth.

 

Back to the Global Macro Grind

 

Rather than attempt to handicap who has to chase S&P 1400 into options expiration tomorrow (there’s a massively skewed position in the 1400 strike calls vs puts), I’ll just rattle off what my Algos think on risk ranges, prices, and probabilities vs Experts:

  1. SP500 could easily trade to 1401 inasmuch as it could fall to 1369 – that’s my immediate-term TRADE range
  2. US Equity Volatility (VIX) holds its long-term TAIL line of 14.21 support like a champ; upside to $17.34
  3. US Equity Volume/SKEW signals are at least as bearish as the 1987 signals that started developing in Q1 of 1987
  4. The first 2 of 9 S&P Sectors that have snapped their immediate-term TRADE lines of support (XLE and XLB) did last yr too
  5. Size (as in the risk management factor to describe cap) flashed another bearish signal yesterday (Russell 2000 = -0.82%)
  6. US Basic Materials (XLB) and Small Cap (IWM) stocks have been making lower-highs since peaking YTD on Feb 3rd
  7. US Dollar Index has moved back into a Bullish Formation (bullish on all 3 risk mgt durations – TRADE, TREND, and TAIL)
  8. US Treasury Yields are ripping above their intermediate-term TREND lines of 0.26% (2yr) and 2.03% (10yr), respectively
  9. US Treasury Yield Spread has widened 20bps as the Financials (XLF) have moved to immediate-term TRADE overbought
  10. US Technology (XLK) Sector Study is flashing a grossly immediate-term TRADE overbought signal at $29.97

While it’s tidy to tell ourselves that everything in America is fine, what all of this is really saying is that if Apple (17% of the XLK) and the Financials (up in a straight line in the last 2 days in response to the rallying cry of “success” to a made-up test) stop going up, the SP500 will probably stop going up too, in the immediate-term (3 weeks or less), at 1401.

 

What are the rest of the world’s signals telling us?

  1. Japanese Yen is crashing (yes when a Top 3 world currency drops 10% in a straight line, that’s a crash)
  2. Japanese Equities (like European Equities did around this time last year – pre Sov Debt Crisis) like a crashing currency
  3. Chinese stocks, down for 2 consecutive days (-3.3%) post the US “stress test”, still see Growth Slowing
  4. Indian stocks, down -1.6% overnight, failing at immediate-term TRADE resistance of 18,023 again, don’t like oil up here either
  5. Germany’s DAX melts up to +20% YTD as German bond yield spreads versus US Treasuries widen (bullish for Germany)
  6. Spain’s stock market (IBEX) is flashing a very bearish negative divergence vs Global Equities (down -1.4% YTD)
  7. Spanish bonds, currency (euro), and stocks are now all falling at the same time – clean cut sovereign debt alarm bell ringing
  8. Greece’s stock market would need to close > 771 on the Athex to signal any accomplishment of quantitative support
  9. Israel’s Equity market (TelAviv25) up for the 3rdconsecutive day, holding 1081 support (post Gaza “truce”)
  10. Dr Copper agrees with China on Growth Slowing, failing to close above its long-term TAIL line of $3.98/lb, again

Obviously weaving throughout this Storytelling of “growth is back” (as US GDP Growth gets cut in ½ sequentially vs Q4) are US stock market centric people trying to tell you that Gold falling is a “bullish sign for US stocks” (like they did in FEB and SEP of 2011). My Algos vs Experts on that say God Speed. Bond Yields spiked, momentarily, as US Stocks topped in February of 2011 too.

 

I’ve tried to not get mad at my Algos since 2008. They don’t give me any lip, and they don’t make excuses when they fail. They may have not always made my risk management views popular either. But at the big turns, before big draw-downs in asset prices, they’ve also gotten me out of the way.

 

My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, Japanese Yen, and the SP500 are now $1, $105.02-106.49, $79.79-80.61, $82.71-83.98, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Experts vs Algos - 11. IBEX

 

Experts vs Algos - vp 3 15


GALAXY 4Q CONF CALL NOTES

GALAXY 4Q CONF CALL NOTES

 

 

PREPARED REMARKS AND Q&A

  • Infrastructure projects will drive visitation in 2012
  • Sees significant Galaxy Macau margin upside in 2012
  • Still at the beginning of their era in Macau
  • Galaxy Macau premium mass/mass business continues to ramp up
  • Galaxy Macau VIP also ramping up; will take 12-18 months to optimize
  • Reinvesting back into company is better use of funds right now. e.g. 86% ROI at StarWorld 
  • About $100-120MM related to higher than normal hold
  • Remaining capex for Galaxy Macau: $2.4 BN 
  • Galaxy Macau: grind and premium mass segments doing well
  • Galaxy Macau Mass is the main focus
    • Next week will open Pavilion Club; will open new high-limit mass tables
  • $1.2BN cash due to proceeds from RMB bond offering (Balance Sheet: Other Cash Equivalents line)
  • Effective in 2012, interest expense will be reduced due to a change in financing of a City Clubs loan
  • Wages increasing 5-6% in 2012
  • Everyone benefited when Galaxy Macau opened

 

HIGHLIGHTS FROM RELEASE

  • Q4 Group adjusted EBITDA: HK$2.1BN
    • StarWorld Q4 adjusted EBITDA: HK$827MM
    • Galaxy World Q4 adjusted EBITDA: HK$1.2 BN
  • Cash at end of 2011: HK$7.7BN (HK$2 BN restricted cash)
  • 2011 non-recurring items 2011: Galaxy Macau pre-opening expenses: HK$0.8BN; charges from the change in fair value of the derivative under the convertible notes of HK$0.2BN and net loss on buyback of guaranteed notes of HK$0.1BN.
  • 4Q Galaxy Macau
    • VIP turnover: HK$167 BN
    • VIP win: HK$5.5 BN
    • VIP hold: 3.3%
    • Mass drop: HK$5.7 BN
    • Mass win: HK$1.4 BN
    • Mass hold: 24.1%
    • Slot handle: HK$4.3 BN
    • Slot win: HK$269MM
    • Slot hold: 6.3%
  • 4Q StarWorld
    • VIP turnover: HK$175 BN
    • VIP win: HK$5.4 BN
    • VIP hold: 3.1%
    • Mass drop: HK$2.3 BN
    • Mass win: HK$0.5 BN
    • Mass hold: 20.9%
    • Slot handle: HK$1.038 BN
    • Slot win: HK$64 MM
    • Slot hold: 6.1%
  • Debt: HK$11.672 BN


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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