• run with the bulls

    get your first month

    of hedgeye free


Old School

Another morning wakeup call – “feet on the floor”, as my Dad would say. It’s time to deal with some more market volatility.

At 1260, the S&P 500 has picked up a sharp +4.9% from its intraday low of 1201 on Tuesday, and is making its bid to close up for the first week in the last seven. This morning we have to deal with what I dare say is an improving macro picture, but a deteriorating micro one. Earnings season is in full swing – Google and Microsoft are trading down -7% respectively, pre market open. It’s time for some old school trading.

Actually one of my partners from my prior days in the hedge fund business called it that this week – “old school” – and it’s appropriate. He manages billions in long/short assets now, and he is up double digits year to date. He knows how to trade, and he definitely knows how to manage risk in a down tape. If you can combine those go to market strategies with some bottoms up stock picking, you’re going to get paid this year. There are plenty of stock specific alpha bits to chew on in and out of their respective earnings releases. An old school market of stocks is emerging from a stock market.

On the Global Macro front, I simply have to call the cards as they lay. My thesis that raising rates here in the US will fix a lot of what troubles the collective wisdom of the crowd is playing out this week. Bernanke has finally admitted to the US stagflation problem, reported Asian economic growth has slowed, and the implication of near term Fed rate hikes has pushed both short and long rates up. This has crushed US bonds and stabilized the US Dollar.

This 3 day “Macro” move should be understood as a “Trade”, however. We still have a lot of hay to bail before we can open up the barns doors that we had Sally lock down, and call this a fundamental “Trend.”

For a macro “Trend” to manifest, I need to see some follow through in Bernanke’s ostensibly changed rhetoric – following through like leaders do, putting some action behind his words. I think he can raise rates by 75-100 basis points and nothing changes in terms of how Main Street America wakes up in the morning. This will help stabilize what continues to look like a pending US Dollar crisis, crush short term commodity inflation, and washout the remaining business models in this country who depend on free money leverage to earn fabricated returns.

If the US Dollar Index can close above $72.61, the CRB Commodities Index break down through the 427.96 line, and Oil close under $125/barrel, we have ourselves the right cocktail to head into our summer weekends.

For now, we’re going to head into this weekend with oil finding it’s Middle Eastern geopolitical risk bid, and the “Bear” market winning the benefit of the doubt.

Yesterday’s resistance level in the S&P 500 now becomes my support. If we break down today, and close below 1245, we could see an expeditious 30 point decline in the index.

Mr. Bernanke, the timing is perfect to draw an old school line in the sand!

Have a great weekend.


“All politics is local”. This quote is often attributed to former Speaker of the House Tip Oneill but actually was coined by his father. My analysis in the gaming sector has proved that “All economics is local”. Yes many components of the national economy are in rough shape, particularly consumer spending. However, the performance of the local economy is what is important. Gaming markets exposed to the energy economy (Louisiana via Texas) are outperforming others such as the Las Vegas locals market. Diving deeper I was quite surprised by the relative importance of individual economic factors.
  • The commonly held belief espoused by analysts and casino executives is that the unemployment rate is the major economic driver for gaming revenues. I think I’ve debunked that theory with some hard math. Over the last 10 years local median housing prices are more statistically significant in predicting local gaming revenues, not unemployment and not gross metro product (GMP).
  • The first chart clearly shows the strong correlation between average housing price changes across the locals casino markets (riverboat and LV locals) and average gaming revenue growth. With this in mind, look for LA to continue to outperform and the LV locals market to continue to struggle. In terms of stocks, PNK appears to be the prime beneficiary of the Texas regional strength with over 50% of its revenue derived from Louisiana.

  • The second chart provides a snapshot of the locals Las Vegas historical economic and revenue picture. Here, GMP actually proves to be the most important driver of gaming revenue historically in this market. Check out the economic volatility. Boom or bust in LV I guess. It’s no secret that Boyd Gaming and Station Casinos have been struggling during the local recession there.

    You can bet that we’ll continue to have our eye on local housing prices.

LEH: 72 Hours Later...

Lehman is up +52% from its closing price on July 14th. Was today’s +14% move the end of the pain trade, or just the beginning? I have a critical resistance level of $21.63, and would not be surprised to see LEH test that. If it fails there, on volume, it could go back to $10.11 in a hurry.

This stock epitomizes what we were talking about this morning. Very few US centric hedge funds have a risk management process to handle this kind of stock specific volatility. Winners and Losers will emerge.

If you’re not a trader. Don’t trade this stock.
  • LEH +14% Today on 72M shares
LEH 72 Hour Squeeze

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Oil Futures Charts...

Contango remains in the Oil Futures market. Now things get really interesting.

Andrew Barber
Research Edge
The sell-off in oil hit the front month hardest with heavy volume in the August contracts.
Although the liquidity gap is profound, as volatility has driven out smaller speculators and larger players increasingly build capacity in the physical market, the divergence in liquidity between front and back month contracts has actually CONTRACTED over the long term historical -narrowing contango.

China's Economic Growth Has Finally Slowed On A Reported Basis

China’s slowdown is finally on the tape, and we don’t have to engage in a debate about its probability of coming to fruition or not anymore. Chinese GDP was reported today at +10.1%. This is a sequential slowdown from the Q1 report of +10.6% year over year growth, and the second consecutive quarter of decelerating economic activity.

The Chinese Yuan reacted very negatively to the news, having its biggest down day since May 26th.

This of course, is better than bad for the US Dollar, which has been begging for a data point to go in its favor.
  • Chinese Growth Has Slowed


US weekly Jobless claims came in at 366,000 and that was higher than last week's 348,000, but the number was low enough to take the 4 week moving average lower for the 2nd week in a row.

As the facts change, we do. This number being more bullish than bearish, on the margin, implies that its more "OK" today for the Fed to do what I think they need to do, raise rates.

The US Dollar has reacted positively again today, trading up to 72.22.

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.