The Economic Data calendar for the week of the 28th of May through the 1st of June is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
POSITIONS: Long Healthcare (XLV), Short Industrials (XLI) and Basic Materials (XLB)
On red this morning, I moved the Hedgeye Portfolio to 9 LONGS, 4 SHORTS. Since the intermediate-term TREND remains bearish, that’s the best I can do here – get net long by managing my short book up/down aggressively.
Across risk management durations, here are the lines that matter to me most:
That 1316 line is a stealth line of support (yesterday it was resistance). That’s going to be my line in the sand right now in determining my net exposure. Seems simple, because it is – I like to be able to make decisions that are process based. It’s just math.
I’ll either tighten up my net exposure closer to 1336 (overbought), or do so on a break below 1316.
For now, I wait and watch.
Enjoy your weekend,
Keith R. McCullough
Chief Executive Officer
Slowing growth is real but other factors may be exaggerating the issue.
We’ve seen this Macau movie before. The sentiment pendulum swings too far, this time to the negative. However, there are some additional, more transitory factors to explain May’s disappointing revenues thus far. Don’t get me wrong: we’ve been on the growth slowing theme for a while and have been mostly negative on LVS, WYNN, and MGM over the past few months. So it’s not like we’re trying to justify Buy ratings.
Here are some thoughts on May:
Our conclusion is that May was actually not that bad. In fact, we think June could rebound to growth of 17-22%. Given how low sentiment and the stocks have gone in the past month, a rebound like this would be a big catalyst.
We like LVS and WYNN here for a trade. LVS’s market share will grow off the current 17.5%, evidence of which could come as soon as Monday when we get the weekly numbers. Wynn Macau may have been hurt the most by low hold in May and we believe their market share was probably in the 12-13% range assuming normalized hold versus the 11.1% generated MTD.
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This note was originally published at 8am on May 11, 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 optimistic bias may well be the most significant of the cognitive biases.”
If I had to pick three books that have been the most influential in my learning process in the last few years, they would be: 1. This Time Is Different (Reinhart & Rogoff) 2. The Road To Serfdom (Hayek), and 3. Thinking, Fast and Slow (Kahneman).
The only way out of getting caught off-sides by the groupthink of our profession is to get into books. I think it’s critical to remove your mind from the daily dose of hope and get real with what’s not only happened across generations of economic history, but what’s developing in terms of what we’re learning about ourselves.
I call this being Duration Agnostic in my risk management approach. Long-term mean reversions in big Global Macro data and immediate-term behavioral factors in our heads matter, all at the same time. Embrace Uncertainty.
Back to the Global Macro Grind…
If you loved the US stock market 7 trading days ago, you’re going to get married to it this morning. Or are you? Do you have to keep buying on the way down? When the facts change, do you? I don’t marry markets.
I can’t imagine anyone telling me with a straight face that they thought that JPM reporting a $2B loss on the eve of Durbin taking the Volcker Rule implementation to the Senate floor was either expected or reason to be optimistic. With both JPM and the Financials (XLF) having already broken my intermediate-term TREND lines of $41.14 and $14.99 support, respectively, timing here matters.
I’m not dog-piling bad news. In fact, from a leadership perspective, Dimon showed his stripes as being the real deal in terms of transparency and accountability last night. That doesn’t make this a ‘buy the Financials’ day though (see Chart of The Day).
On the margin, the fundamental news for the US Financials has been worsening for at least 2 months. As one of our top performing Risk Manager clients asked last night – “So, what do you think is already priced in?”
The short answer is I don’t know. We let the market tell us what to do next.
The more well rounded research and risk managed answer is something that our Managing Director of everything Financials, Josh Steiner, and I will host a conference call on at 830AM EST (email email@example.com if you’d like to join).
What else do we know?
We do Top-Down in 2-ways:
On the Global Macro front, here’s what I see across currencies, countries, and commodities right now:
In other words, the Correlation Risk is moving towards -1.0, again – and if you don’t remember how this movie tends to climax, you are definitely hostage to a serious Optimistic Bias. This is not a time to be recklessly long on a gross or net basis.
The Correlation Risk to the world’s reserve currency doesn’t always matter. But when you are in the soup like this, it’s basically all that matters. That’s the lesson of the 2008, 2010, 2011 Q1 peaks to the ultimate draw-down lows established sometime in Q3.
Valuation is not a catalyst right now. Events are. From a Top Down Industry perspective for the Financials, here’s what’s next:
Notwithstanding that the US Money-Center banks are going to have to also report earnings in July – and that one of the main drivers of those cash earnings, Net Interest Margin (NIM), has seen the Yield Spread (10yr minus 2yr yield) compress by 21% since it topped in mid-March, there’s a lot to think about here.
If every single major Global Equity market hadn’t already put in a lower long-term high in late-Feb to early April, I would answer my client’s question with a maybe (in whether or not I think this is all priced in). But they have. So my answer is not maybe. You don’t pay me to be optimistic – you pay me to be realistic about real-time risk.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Financials (XLF), JP Morgan (JPM), and the SP500 are now $1577-1637, $109.71-113.87, $79.42-80.39, $13.87-14.99, $36.83-41.14, and 1341-1367, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – May 25, 2012
As we look at today’s set up for the S&P 500, the range is 48 points or -2.02% downside to 1294 and 1.61% upside to 1342.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
CLIFF – first time we have written about the fiscal cliff in a while - that’s because it’s the 1st time we have had a quantitative signal to do so – short rates (2yr UST yields) are starting to hint at a breakout (0.28% = TRADE support). If we keep up w/ these ridiculous rumors and the denominator (GDP) keeps slowing, that US deficit/GDP ratio comes back on the table, faster.
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
RUMORS – back to the same playbook that has already killed European equity markets and, to a large degree, killed US inflows into Equities too – people don’t trust this casino, and they probably shouldn’t. Monti says that there is a consensus amongst countries that can’t fund on Eurobonds – I bet. But Germany doesn’t need a consensus.
CHINA – 3rd consecutive day of selling in the Chinese stock market after snapping our critical TREND line of 2373 support; markets don’t think growth is slowing at a slower rate there yet – it’s consensus (and has been), but that doesn’t mean consensus can’t be right for another few months. Our models have China’s growth slowing at a slower rate in Q3/Q4, not in Q2.
The Hedgeye Macro Team
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