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Deflated Illusion

This note was originally published at 8am on March 26, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Failure deflates illusion, while success only makes illusion worse.”

-Nassir Ghaemi

 

“This isn’t a settled debate, and these interpretations could be proven wrong. But if they are correct, they raise several questions. Why do positive illusions occur? Can we only arrive at realism through personal hardship?” (A First-Rate Madness, page 55)

 

This weekend, as I was reading through Ghaemi’s provocative psychological discussion in chapter 3 of A First-Rate Madness (“Heads I Win, Tails It’s Chance”), I couldn’t stop thinking about our profession. Oh how the last 4 years have deflated our illusions of our analytical competence.

 

Or have they? Every time we’ve seen asset prices inflate (Q1 of 2008, Q1 of 2010, Q1 of 2011), we’ve seen the said seers of this business attempt to convince you that it’s “different this time.” Every time there is a “successful” rally, the consensus illusion of inflation morphing into sustainable growth gets worse.

 

Back to the Global Macro Grind

 

The good news is that you can only pretend Growth Slowing doesn’t matter for so long. You can only ignore some of the worst volume and skew signals in global market history until you can’t. Gravity eventually bites.

 

Instead of Greece or Apple, this morning’s Top 3 Most Read on Bloomberg are as follows:

 

1.       “Monti Signals Spanish Euro Risk as EU to Bolster Firewall”

2.       “China Soft Landing May Be Hard For Commodity Exporters”

3.       “Asia Stocks Fall as US Home Sales Damp Economic Outlook”


Hoo-wah!

 

Wasn’t Europe fixed? Isn’t China “decoupling” from the US? Can’t we pretend that Asian stocks and US Housing don’t matter until we get to quarter end?

 

“Under normal conditions, normal people overestimate themselves. We think we have more control over things than we do; we’re more optimistic than circumstances warrant…” (A First-Rate Madness, page 54)

 

There is absolutely nothing normal about the current Global Macro Economic conditions. Sure, you can be “optimistic” about life. I sure am. But realists tend to not blow their entire net worth to smithereens buying into fairy tales.

 

What is not normal and is not going away anytime soon?

  1. The Global Sovereign Debt Crisis
  2. The Bubble in Keynesian Economics (money printing)
  3. The Economic Reality that debt and inflation slow real (inflation adjusted) economic growth

If the US Stock market were to crash tomorrow, you’d have no business telling people you didn’t see any of this coming. This is the most obvious slow moving train wreck in world history – one that plenty of professionals still get paid to willfully ignore.

 

Since I doubt we’ll crash, that means the probability of a crash is going up as market prices do. Last week, global stock markets stopped going up (worst week for Asian and European stocks for 2012 YTD). Commodities have already started their decline.

 

Back to what’s just not normal:

  1. Sovereign Debt Crisis – we could have a healthy debate this morning as to who (Spain or Japan) has the more plainly obvious sovereign debt, deficit, and funding issues. The former Executive Director of the Bank of Japan (BOJ) said overnight that Japan has “crossed the Rubicon with really desperate measures.” Sounds like he was channeling his inner Hedgeye.
  2. Keynesian Policy Bubble – India (down another -1.8% overnight) has tried what every single Western academic dogma has suggested the Indians try, and it’s not working. They’ll be importing $125/barrel Brent Oil like the Japanese will in Q2 as their citizenry sees inflation running higher than real (inflation adjusted growth) = Stagflation.
  3. Inflation Slows Growth – yes, that is not only happening around the world (Commodity Inflation is generally priced in debauched Dollars), but you’ll see it in US Growth. So, when you see 3% US GDP growth for Q4 of 2011 (released on Thursday), pinch yourself and remind the person next to you that US GDP could be running at half of that growth rate right now.

The flip side of all this is that the success of our Global Macro model in forecasting intermediate-term growth slowdowns is making me delusional. Potentially, but that would imply that hedge funds who chased another top in commodity inflation are perfectly sane.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD) and the SP500 are now $1637-1675, 124.55-126.62, $79.09-79.61, $82.22-$84.02, and 1397-1411, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Deflated Illusion - Chart of the Day

 

Deflated Illusion - Virtual Portfolio



Optimistic Bias

“The optimistic bias may well be the most significant of the cognitive biases.”

-Daniel Kahneman

 

After a beautiful long Easter weekend with my family on the East Coast, I really don’t feel like writing negatively this morning. The S&P Futures will do that for you on their own.

 

Growth Slowing, globally, isn’t the “pessimist’s” view – it’s the realist’s view. As Risk Managers, we do not get paid to have an Optimistic Bias. We get paid to have a repeatable risk management process that is biased to the Global Macro data. On the margin, growth is either slowing or accelerating. We’re ok with being early in signaling either direction.

 

Since global growth data has been slowing for at least 6 weeks, why was Old Wall Street consensus so optimistic about the March Employment report? Some people call it perma-bull, but Kahneman’s behavioral psych explanation is a little nicer: we “tend to exaggerate our ability to forecast the future, which fosters optimistic overconfidence.” (Thinking, Fast and Slow, pg 255).

 

Back to the Global Macro Grind

 

Fortuitously, in the last 3 weeks, as Growth Slowing became more obvious, I raised the Cash position in the Hedgeye Asset Allocation Model to 79% (versus 61% two weeks ago). That should put us in a great position to buy on red this morning.

 

Or does it?

 

If I feel like I am too long this morning, I can’t imagine what my overly optimistic competition is feeling.

 

Today is not a day to freak-out and sell on red. Today is a good day to wait and watch. Since most of Europe is closed, the Top 3 Risk Management Signals to watch will be the US Dollar Index, SP500, and 10-year US Treasury Yield:

 

1.   US DOLLAR: after rising +1.4% last wk (its 1st up week in the last 4), the USD needs to show A) some follow through and B) no more policy to debauch it. If the US Dollar Index can hold its head above $79.51 intermediate-term support, that’s bullish.

 

2.   SP500: if the SP500 closes below 1391 support (my immediate-term TRADE line), that’s bearish and it puts 1331 in play over my intermediate-term TREND duration (next 3 months or more). Since 3 of the last 4 YTD SP500 tops occurred in the Feb-May periods, you want to be very careful on time and price here.

 

3.   TREASURIES: plenty who suggested “growth is back” and “bond yields could breakout (buy equities!)” have just seen the 10-yr yield drop -14% in a straight line (from 2.40% to 2.06%). That’s going to leave a mark on asset allocation moves. The long-term TAIL of Growth Slowing remains with 10-yr yield resistance up at 2.47%. Now we’ll see if 2.03% support holds.

 

This is the 3rdtime that Bernanke has made a formal decision to Debauch The Dollar with a Policy To Inflate (2010, 2011, and 2012) and the 3rd time that his policy has ignited short-term asset price inflation that, in turn, slowed growth.

 

Other than those who get paid by commodity price inflation, who wants QE 4, 5, and 6? Remember last year when Q1 GDP slowed to a halt (0.36%)? Back then, expectations were for 3.5-4% growth. Today, the perma-bulls are still talking about US Growth north of 3%. That’s an Optimistic Bias if I ever saw one.

 

Real (inflation adjusted) US Growth could get cut in half again from here if Bernanke decides to debauch further. If he doesn’t, Strong Dollar has every opportunity to emerge the victor in Bernanke’s War.

 

Strong Dollar Deflates The Inflation. Strong Dollar = Strong Consumption. Strong Dollar = Strong America.

 

The risk to all of that, of course, is that now I’m being the optimist.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, 10-year US Treasury Yield, and the SP500 are now $1, $121.61-124.18, $79.51-80.16, 2.03-2.18%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Optimistic Bias - Chart of the Day

 

Optimistic Bias - Virtual Portfolio


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THE M3: GENTING SECURITIES; MGM COTAI; CHINA MARCH NEW LOANS; KANGWON LAND

The Macau Metro Monitor, April 9, 2012

 

 

GENTING S'PORE TO OFFER UP TO S$500MM WORTH OF PERPETUAL SECURITIES Channel News Asia, Strait Times

The securities will have an annual coupon rate of 5.125% until October 2022 and 6.125% after that.  In the event of oversubscription, Genting added that it may issue up to an additional S$200 million worth of securities to satisfy the excess demand.  DBS Bank is the sole global coordinator for the offering and DBS Bank and OCBC Bank are the joint lead managers and bookrunners for the offering.  Just last month, Genting had launched S$1.8 billion in perpetual securities to fund its investment plans. 

 

"This round is really for the retail investors, the man on the street," said GENT's CFO Lee Shi Ruh. "The purpose of this is really to tap on a different pool of investors."

 

MGM COTAI TO ONLY HAVE 12% OF FLOOR SPACE FOR GAMING Macau Business

MGM China CEO Grant Bowie says the gaming operator has already handed all the necessary paperwork to the government for the approval process of its land request in Cotai.  “It is totally and absolutely in the hands of the Macau government,” said Bowie.  “From our current drawings, gaming represents less than 12% of the floor space of the property,” Bowie said.  The Cotai property will have 1,800 rooms but capacity to include additional towers and 500 gaming tables, pending government approval, he added.

 

CHINA MARCH NEW YUAN LOANS EXPECTED AT CNY770-840 BILLION 21st Century Business Herald

Citing sources close to a state-owned bank,  the newspaper said March new yuan loans data is likely to exceed CNY800B. The four state-owned banks have issued CNY294.6 billion of new yuan loans in March, up from People's Bank of China's expectation of CNY269 billion at the beginning of March.


S KOREA: KANGWON LAND CASINO TO CLOSE FOR INSPECTION NEXT WEEK Macau Daily Times

Kangwon Land, the only casino in the country open to Korean nationals, will temporarily shut down for the first time since it opened in October 2000.  The casino explained that the temporary closure from 6 a.m. next Tuesday to 10 a.m. Wednesday aims to prevent game fixing and fraudulent practices by staff.  According to donga.com, a person suspected of getting a hidden camera installed at Kangwon Land Casino to cheat at games is known to have fled to China.  Known to have been the middle man between scheming gamblers and casino workers, he is suspected of ordering the two staff members to move a card box with tiny video cameras installed to a baccarat table, promising them 10% of profits.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 9, 2012


As we look at today’s set up for the S&P 500, the range is 19 points or -0.79% downside to 1387 and 0.57% upside to 1406. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 


EQUITY SENTIMENT:


SP500 – our math says the SP500 closes higher than where the futures are trading, but it also says that a close below 1391 would be bearish if sustained – so wait/watch that line throughout the week as the inflation data domestically gets reported Wed-Fri (it will rise again sequentially) and earnings season, which will be one of the slowest growth ones in years, is upon us. 

  • ADVANCE/DECLINE LINE: -410 (1428) 
  • VOLUME: NYSE 719.28 (-13.60%)
  • VIX:  16.70 1.58% YTD PERFORMANCE: -28.63%
  • SPX PUT/CALL RATIO: 2.51 from 1.89 (32.80%) 

CREDIT/ECONOMIC MARKET LOOK:


BOND YIELDS – as far as 1-day moves go, Friday’s reaction in the 10yr was violent; now you have 10yr Treasuries yielding 2.06% (down 35bps in a month!) and the Yield Spread just compressed -14bps in 1-day, wow – just like that growth slowing gets marked to market before everyone thought they could get out. 

  • TED SPREAD: 39.79
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 2.06 from 2.05
  • YIELD CURVE: 1.74 from 1.74

MACRO DATA POINTS (Bloomberg Estimates):

  • 11:30am: U.S. to sell $31b 3-mo., $29b 6-mo. bills
  • 7:15pm: Fed Chairman Ben Bernanke speaks on economic stability at Atlanta Fed conference 

GOVERNMENT:

    • President Obama hosts Brazilian President Dilma Rousseff at White House
    • Newt Gingrich says Mitt Romney “far and away” most likely candidate to win the Republican nomination, said on “Fox News Sunday” will endorse Romney if gets majority of delegates 

WHAT TO WATCH:

  • AT&T says talks with CWA continue after labor contracts expire
  • China’s March consumer prices rose 3.6% Y/y, more than median 3.4% est. in Bloomberg News survey
  • March’s setback in hiring will prove temporary as U.S. economy, in 3rd yr of expansion, is better equipped to overcome a slowdown in Europe, rising fuel costs, economists said
  • Monthly casino results from Las Vegas, Atlantic City expected early this week
  • Great Wolf Resorts got $7/shr cash, or $234m, takeover offer from KSL Capital that tops Apollo a 2nd time
  • Sony to cut ~10k jobs, or 6% of its workforce: Nikkei
  • Global ad spending rose 6.2% Y/y in 4Q: Nielsen
  • European securities markets are closed, along with Hong Kong, Thailand, South Africa, Australia, New Zealand and Philippines
  • Abstracts released for American Urological Association annual mtg in Atlanta; watch for AGN’s Phase 3 Botox data
  • FDA briefing docs released for 4/11 advisory panel on closely held U-Systems’ Automated Breast Ultrasound 

EARNINGS:

    • Penford (PENX) 6am, $0.01
    • Greenbrier (GBX) 6am, $0.46
    • Zep (ZEP) 7:15am, $0.09
    • Healthcare Services Group (HCSG) 4:11pm, $0.14

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Hedge Funds Cut Wagers as Fed Signals Less Stimulus: Commodities
  • Gold Gains on U.S. Jobs Data, Outlook for Stronger Asian Demand
  • Copper Drops on Speculation China Won’t Add Stimulus After Data
  • Soybeans Climb to Seven-Month High as Drought Pares Stockpiles
  • Lower U.S. Crop Reserves Raising Food Costs in Election Year
  • Palm Oil Declines From 13-Month High on Production Speculation
  • Rubber Declines for Fifth Day as China’s Inflation Accelerates
  • Royal Bank Chooses Court Battle With CFTC Over Wash Trades
  • Oil Drops Third Time in Four Days on Economy Concern, Iran Talks
  • Oil Bulls Retreat as U.S. Production Accelerates: Energy Markets
  • McDonald’s Pursuit of Perfect Fries Risks Exposing Flaws: Retail
  • Myanmar Seeks ‘More Carrots’ as U.S. Begins Sanctions Rollback
  • China May Be Cautious on Easing After Inflation Pickup: Economy
  • Funds Reduce Bullish Bets for Second Week
  • Phillips 66 Looks to Pipes to Blunt Refining Volatility: Energy
  • Worker Shortage Dogs Trail King as South Dakota Jobs Go Begging
  • Obama and Rousseff to Talk Energy and Trade at the White House

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 

ASIAN MARKETS


CHINA – Dollar Debauchery (Bernanke on Jan 25th, pushing easy money to 2014) fired up commodity inflation sequentially in FEB/MAR, and accelerating inflation then slowed real growth, globally. Same model we have been using for 5yrs – China’s inflation data for MAR rises to 3.6% vs 3.4% FEB.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 


Athletic Apparel: NKE Outperforming

 

Athletic Apparel sales continue to show strength following a 3-week streak of negative growth in early March. Underlying trends accelerated across all channels driven by pricing.   

 

The industry is facing increasingly difficult top-line compares through May as we indicated last week ("Athletic Apparel: Underlying Trends Improving"). While last week’s +7% sales growth in the athletic specialty channel reflected a 20bps sequential deceleration vs. the week prior, the 2-year blended rate improved. Pricing continues to be the primary driver within the athletic specialty channel up +4.3% and +4.6% respectively outpacing unit growth with both posting positive results each of the last two weeks. While yy unit compares have been down over the past 5-weeks, next week marks an inflection point where comps become more favorable at the same time pricing compares get tougher.  

 

NKE led the industry in market share gains last week +453bps with sales up +18.1% on higher ASPs up +10.3%. Over the last 12 months, industry data suggests Nike holds 34% share of the overall athletic apparel market. As a result, Nike’s growth contributed about 6pts to the 4.3% overall growth we saw last week while most brands and the balance of the industry contracted (ADI -0.4%, Columbia -1.3%, UA -0.9%).

 

Matt Darula

Analyst

 

Athletic Apparel: NKE Outperforming - apparel main table

 

Athletic Apparel: NKE Outperforming - 2 yr apparel

 

Athletic Apparel: NKE Outperforming - ASP chart

 

Athletic Apparel: NKE Outperforming - NKE apparel

  


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