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Happiness Oversold

This note was originally published at 8am on May 17, 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 happiness that Jack and Jill experience is determined by the recent change in their wealth.”

-Daniel Kahneman

 

Across Global Equities and Commodities, this morning our Globally Interconnected Macro Models are signaling the best immediate-term TRADE oversold signal we’ve had in 2012. The perma-bulls have been under siege for 2-3 months. Happiness from their February-March highs is oversold too.

 

In Chapter 25 of Thinking, Fast and Slow, Kahneman does a great job debunking one of the many dogmas of modern economics. He calls it Bernoulli’s Error – and it’s one that’s pervasive in our profession today. It’s the classic mistake of generalization in assumptions when it comes to utility curves and expectations.

 

“Bernoulli’s theory assumes that the utility of their wealth is what makes people more or less happy. Jack and Jill have the same wealth, and the theory therefore asserts that they should both be equally happy, but you do not need a degree in psychology to know that today Jack is elated and Jill is despondent.” (page 275)

 

Back to the Global Macro Grind

 

At the end of March, if Jack bought Chinese stocks (my son Jack indirectly did), and Jill bought US stocks, Jack is up +5% and Jill is down 7%. So, even if I had a daughter named Jill, Jack would be relatively happier than her if they were going shopping this morning.

 

If Jill’s Dad was right levered up long in everything US, Asian, and European stocks… and he had a side pocket of Gold, Oil, and maybe a special situation basket that included long JC Penney… Jill and her Dad are going to be eating hot-dogs instead of steaks this summer.

 

Anyone who has run real-money under the real-time performance pressure cooker for the last 5 years knows precisely what I am talking about. Timing Matters. If you buy high and are forced to sell low, you could wreck your year in a very short period of time.

 

What does immediate-term TRADE oversold mean?

  1. It doesn’t mean we are all bulled up about Global Growth Accelerating
  2. It doesn’t mean we are bullish on our intermediate-term TREND (3 months or more) duration either
  3. It means that, on a 3 factor basis (price, volume, volatility), stocks and commodities are simply oversold

So the first thing I do with that is start covering short positions. That gets me longer on a net basis. Then I start to slowly take up my gross invested position, selectively, in our best ideas.

 

I’ve screwed this up enough times to know that you really need to wait and watch on that second part. Your gross long exposure to the market is where you can get run-over; particularly if the market continues to trend lower with no mean reversion bounce.

 

The good news for US Stocks is that has already happened:

  1. US Dollar Index has been up for 12 consecutive days (new all-time record – all-time is a long time)
  2. US Stocks have been down for 10 of the last 11 days
  3. SP500 and Russell2000 draw-downs from the YTD tops in March-April = -6.7% and -8.7%, respectively

Jill (and her Dad) are not happy. And they probably won’t be until their hard earned capital gets back to break-even. That’s another concept that dysfunctional gamblers don’t quite understand until it’s too late either. The market doesn’t owe you a break-even. Mr Macro Market couldn’t care less about what’s in your pocket either.

 

The US Stock market (SP500) is down -15.4% and -6.7% from its 2007 and 2012 highs, respectively. That doesn’t mean if you’re up +6.7% from here you break-even. It means you have to be up +7.1% from here to get back to your April 2nd2012 break-even, then up another +10.3% from there to get back to your 2007 high-water mark.

 

This isn’t easy.

 

Neither is being happy in this business. But your greed can get overbought and your happiness can get oversold, in the meantime.

 

Immediate-term TRADE oversold lines, across asset classes in our model are as follows:

  1. SP500 = 1320
  2. Russell 2000 = 770
  3. Nikkei = 8709
  4. Shanghai Composite = 2338
  5. German DAX = 6341
  6. Spanish IBEX = 6548
  7. Gold = $1531
  8. Oil (Brent) = $109.78
  9. Copper = $3.44
  10. Apple = $543

That’s why we bought Apple (AAPL) yesterday. It was immediate-term TRADE oversold right where we bought it at 3:06PM EST. I took our US Equity Asset Allocation up to 12% with that (Cash down to 76%). I’d much rather buy AAPL at immediate-term oversold than buy Tech (XLK) which wasn’t yet signaling the same. Not all happiness gets oversold in the same way, at the same time.

 

Our immediate-term term support and resistance ranges for Gold, Oil (Brent), US Dollar, and the SP500 are now $1531-1588, $109.78-112.34, $80.48-81.55, and 1320-1351, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Happiness Oversold - Chart of the Day

 

Happiness Oversold - Virtual Portfolio


THE M3: MPEL/AUSTRALIA; MAINLAND BANKER DEBT

The Macau Metro Monitor, May 31, 2012

 

 

AUSTRALIA TO INVESTIGATE MELCO CROWN Macau Business

According to Business Daily, the Independent Liquor and Gaming Authority of New South Wales will investigate MPEL. Crown Ltd is looking to increase its stake in another Australian company with casinos in Sydney and Queensland and faces a “probity and suitability” test.  “This will involve liaison with a large number of regulatory and enforcement agencies, both nationally and internationally,” said the Independent Liquor and Gaming Authority of New South Wales.  The report also quotes sources saying that Crown chairman James Packer already has regulatory approval in two other Australian states and in Nevada.

 

MAINLAND BANKER BUSTED DUE TO GAMING DEBTS Macau Business

Yang Kun, an executive vice-president of the Agricultural Bank of China, has been detained by the Central Commission for Discipline Inspection of the Communist Party of China, over allegations he used customers’ money to pay gambling debts at Macau casinos.  



THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 31, 2012


As we look at today’s set up for the S&P 500, the range is 39 points or -1.39% downside to 1295 and 1.57% upside to 1334. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 5/30 NYSE -2264
    • Down from the prior day’s trading of 1709
  • VOLUME: on 5/30 NYSE 768.67
    • Increase versus prior day’s trading of 7.62%
  • VIX:  as of 5/30 was at 24.14
    • Increase versus most recent day’s trading of 14.79%
    • Year-to-date increase of 3.16%
  • SPX PUT/CALL RATIO: as of 05/30 closed at 2.35
    • Up from the day prior at 1.71 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 40
  • 3-MONTH T-BILL YIELD: as of this morning 0.07%
  • 10-Year: as of this morning 1.63
    • Increase from prior day’s trading at 1.62
  • YIELD CURVE: as of this morning 1.36
    • Unchanged from prior day’s trading 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: Challenger Job Cuts (Y/y), May, (prior 11.2%)
  • 8am: Fed’s Pianalto speaks on monetary policy in Cleveland
  • 8:15am: ADP Employment Change, May, 150k (prior 119k)
  • 8:30am: GDP (Q/q) (Annualized) 1Q S, est. 1.9% (prior 2.2%)
  • 8:30am: Personal Consumption 1Q S, est. 2.9% (prior 2.9%)
  • 8:30am: Core PCE (Q/q) 1Q S, est. 2.1% (prior 2.1%)
  • 8:30am: Initial Jobless Claims, week of May 29, est. 370k (prior 370k)
  • 9:45am: Chicago PMI, May, est. 56.8  (prior 56.2)
  • 9:45am: Bloomberg Consumer Comfort, week of May 27, (prior -42)
  • 10:00am: NAPM-Milwaukee, May, est. 53.4 (prior 52.9)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas change
  • 11am: DOE inventories
  • 11:00am: Fed to purchase $1.5b-$2b notes in 2/15/2036 to 5/15/2042 range 

GOVERNMENT:

    • CFTC meets on hedge, market-making provisions of Volcker rule
    • House in session, Senate holds pro forma session
    • House Energy and Commerce panel hears from FCC Commissioner Robert McDowell on international proposals to regulate the Internet, 10am
    • Woodrow Wilson International Center for Scholars holds forum on Chinese investment in North American energy, 9am
    • Trial begins in Apple suit seeking to block Samsung products from U.S. market, before a judge at International Trade Commission; lasts through June 6 

WHAT TO WATCH:

  • Retailers report May sales data before market opens
  • Euro-area inflation slowed more than economist est. in May
  • CGI Group to buy Logica for $2.6b cash
  • Oracle looked at Buddy Media before agreeing to acquire Vitrue
  • Prudential Plc to buy Swiss Re’s SRLC for $621m
  • German unemployment unchanged in May, adj. jobless rate falls
  • Graff cancels $1b IPO in Hong Kong, citing falling stock mkts
  • Maple provides update on plans for TMX Group at 12pm
  • United to cut 1,300 jobs at Houston’s main airport
  • U.S. stock exchanges propose changes to trading curbs
  • Short sales of U.S. homes reached 3-yr high in 1Q: RealtyTrac
  • Japan industrial production misses ests’ South Korea’s rises
  • Australian business investment rises 6.1%, more than forecast 

EARNINGS:

    • Canadian Imperial Bank of Commerce (CM CN), 5:50am, C$1.88
    • Joy Global (JOY) 6am, $1.96; Preview
    • Descartes Systems (DSG CN) 6am, $0.11
    • Ciena Corp (CIEN) 7am, $(0.04)
    • Movado (MOV) 7:30am, $0.25
    • National Bank of Canada (NA CN) 7:45am,  C$1.85
    • Esterline Technologies (ESL) 4pm, $1.29
    • Vera Bradley (VRA) 4:01pm, $0.29
    • Ascena Retail Group (ASNA) 4pm, $0.36
    • SAIC (SAI) 4:02pm, $0.33
    • OmniVision (OVTI) 4:18pm, $0.22 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • Nickel Slump Seen Ending as China Faces Ore Curbs: Commodities
  • Gold Gains in London Trading as Weaker Dollar Bolsters Demand
  • Oil Set for Biggest Monthly Drop in Three Years on Debt Crisis
  • Copper Advances, Narrowing Monthly Decline, on German Figures
  • Cocoa Rebounds on Speculation Lower Prices Will Spur More Demand
  • Palm-Oil Shipments From Indonesia Seen Climbing on Ramadan
  • China Plan to Open Metal Futures to Foreigners to Help LME
  • Felda Targets $3.3 Billion in Biggest Share Sale Since Facebook
  • PetroChina Seeks Oil Assets as Shale Gas Seen Years Away: Energy
  • Soybeans Poised for Worst Month Since September on U.S. Planting
  • Palm Oil Has Worst Monthly Loss Since 2009 on Europe Crisis
  • Commodity, Stock Price Link Near 16-Year High: Chart of the Day
  • Vale as Cheapest Miner Signals Buy to Aberdeen: Corporate Brazil
  • Oil Set for Monthly Drop on Debt Crisis
  • Marubeni to Borrow for Half of Gavilon Payment, Sell Assets
  • Rubber Slumps to Six-Month Low on European Crisis: Tokyo Mover
  • Dalian Soybeans May Drop on Bollinger Trend: Technical Analysis 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


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Proactively Prepared

This note was originally published at 8am on May 16, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Most people have the will to win, few have the will to prepare to win.”

-Bobby Knight

 

We don’t have to apologize, fear-monger, or point fingers while everyone is reacting to the news again this morning. This has been going on for 5 years. Get both the Slope of Global Growth (slowing) and the direction of the US Dollar right, and you’ll get a lot of other things right.

 

Winning in this country (or being right in this business) should be celebrated instead of shunned. It’s not easy out there – and it’s not going to get any easier any time soon. Life is hard.

 

Repeatable risk management processes trump pundits. Either our profession’s broken sources go away, or whatever is left of the trust, inflows, and volumes in our markets will.

 

Back to the Global Macro Grind

 

From a Global Macro perspective (currencies, countries, commodities, etc.) I am finally seeing the early signs of capitulation (immediate-term TRADE oversold) on the downside as the US Dollar approaches immediate-term TRADE overbought.

 

That’s what happens when The Correlation Risk goes “on.” Policy (or in this case the lack thereof in expectations of an iQe4 upgrade) drives the US Dollar; and the US Dollar drives mostly everything else (USD up for the 11th consecutive day today).

 

Correlation Risk has a reflexive impact on demand (markets that go straight down scare people), but it is not traditional demand in terms of how we measure it – it’s behavioral. Our Leading Indicators on Global Demand (Growth) have been slowing since February-March.

 

Commodities and Asian Equities stopped going up in February; most other major Global Equity markets stopped going up throughout March; and US Treasury bond yields stopped going up in March as well.

 

In other words, if you have a Globally Interconnected Risk Management Process (or just a Twitter feed with credible sources), why people are freaking out right now (instead of when they should have), should at least give you a chuckle.

 

People freak-out (buy high, sell low) because we have institutionalized asset management into a very short-term game of performance chasing. Sadly, gaming the game of the next policy move is paramount on people’s minds – and the intermediate-term draw-downs (from peak-to-trough) for the last 5 years have been epic.

 

Here’s how the draw-downs (losses of your capital from the YTD tops) look in some of the majors:

  1. Japanese stocks (Nikkei) = down -14.2%
  2. Hong Kong stocks (Hang Seng) = down -11.2%
  3. Indian stocks (Sensex) = down -13.0%
  4. German stocks (DAX) = down -11.3%
  5. Spanish stocks (IBEX) = down -25.1% (crashing)
  6. Russian stocks (RTSI) = down -22.3% (crashing)
  7. CRB Commodities Index = down -11.3%
  8. Gold = down -14.2%
  9. Oil = down -11.8%
  10. Treasury Yields (US 10yr) = down -24.8%

Bullish, right?

 

Right, right. And all of this, including JPM’s news is all about Greece, right?

 

C’mon. Let’s get real here before whatever is left of the world’s investors yank all their capital from our fee based businesses. Ben Bernanke may very well have dared you to chase yield on January 25th, but that doesn’t mean you should have taken on the dare. You have seen this Qe expectations game before. You should have sold into it.

 

US Equities, which I didn’t list in the top 10 draw-downs, have done a complete round trip from where we were banging the risk management drums here in New Haven. While the Russell2000’s draw-down is about the same as the Hang Sang’s (-8.2%), the SP500’s is just -6.3%. So, if you bought the April 2ndtop, you only have to be up about 7% (from here) to get back to break-even.

 

Break-even? Yes. That matters. And so does timing – that’s why we are so focused on both.

 

Check out the timing of this trifecta:

  1. Russell 2000 peaks on March 26that 846
  2. US Equity Volatility (VIX) bottoms on March 26that 14.26
  3. Obama’s probability of winning the US Election peaks on – yep, March 26th

Political pundits probably don’t read this Newsletter. But if they did, they’d think that last point can’t be true. After all,  it doesn’t come from Washington or the accepted wisdoms of partisan paralysis.

 

We call it objective analysis. That’s all the Hedgeye Election Indicator is, math.

 

So, as US Equity markets draw-down from their March/April peaks (as they have from Q1 to Q3 in every year of the last 5 other than in 2009 when we were the most bullish firm on Wall Street 2.0), that’s obviously going to be a headwind for Obama.

 

It’s also going to be a headwind for Ben Bernanke.

 

Don’t forget that any headwind for Obama is, on the margin, a tailwind for Romney. Anything compression in the spread between Obama versus Romney (Obama had a huge lead in March), puts Bernanke’s career risk in play.

 

That, dear friends of the risk management gridiron, is US Dollar bullish.

 

And, with the US Dollar Index breaking out across all 3 of our core risk management durations (TRADE, TREND, and TAIL), you want to continue to be Proactively Prepared for what may very well be the most epic economic debate of our generation.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1531-1598, $110.27-112.99, $80.04-81.22, $1.27-1.29, 1324-1358, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Proactively Prepared - Chart of the Day

 

Proactively Prepared - Virtual Portfolio



The Game

“The world is not the way they tell you it is.”

-‘Adam Smith’

 

That’s the opening sentence to one of my favorite books about markets, The Money Game, by George Goodman. He wrote it in 1967 under the pseudonym ‘Adam Smith.’ That was a metaphor for the anonymity of the game itself. It helped him tell it like it is.

 

When you call what it is that we do a “game”, most people feel something about that. Some people love it – some loathe it. But that doesn’t change the fact that, for me at least, this is the most competitive arena away from professional sport that I can find.

 

The irony is that this is a money game and money is the way we keep score. But the real object of The Game is not money, it is the playing of The Game itself. For the true players, you could take all the trophies away and substitute plastic beads or whale’s teeth; as long as there is a way to keep score, they will play.” (page 21)

 

Back to the Global Macro Grind

 

For those of us keeping score since Growth Slowing became obvious, globally in March, the game has largely been won by those who moved a significant amount of their asset allocation to Cash.

 

As a reminder, our Top 3 Global Macro Themes for Q2 2012 have been:

  1. Fed Fighting: The Last War (Growth Slowing)
  2. Bernanke’s Bubbles (Commodities)
  3. Asymmetric Risks (long US Dollar)

When you have Growth Slowing and Deflating The Inflation of Bernanke’s Bubbles (Commodities), at the same time, you get draw-downs in everything big beta (cyclical commodities, emerging market stocks, European bonds, etc.). You also see a “flight to quality” (i.e. low beta) like US Dollars, German Bunds, and US Treasuries.

 

Playing the game this way is not new. If you made this beta down-shift move at the end of Q1 in 2008, 2010, 2011, you won. At every Q1 turn, the Old Wall has been as dependable as the sun rising in the East in A) not taking down their GDP Growth estimates when markets implied they should and/or B) understanding the Correlation Risk associated with a Dollar up move.

 

So, while it’s fun to say “consensus is bearish”, it’s more fun when you say that at 1295. Winning is always more fun.

 

From a fundamental research perspective, consensus is not yet Bearish Enough on Growth. By the end of Q2 it might be. Market expectations change every day, so stay tuned. On that score, in the USA we’ll get 3 Big Hedgeye Mac-ro catalysts this week:

  1. Q1 2012 US GDP (to be revised well below Old Wall consensus that was running at 2.5-3% only 3 months ago)
  2. PMI and ISM readings for the month of May (expectations are high in the mid-50’s for both prints)
  3. US Employment Report (expectations are still relatively high for a 150,000 plus print on payroll adds)

From a quantitative risk management perspective in US Equities, here’s what I am looking for to register another buy/cover signal:

  1. VIX re-test of the 24-25 zone
  2. SP500 re-test of the 1 zone
  3. The II Bull/Bear Spread to narrow to +600bps wide or less (this morning it widened to the Bull side, back to +1500 bps wide as only 24% of those surveyed admit to being bearish – that’s called career risk management after an up week)  

Volume is another critical quantitative factor to consider relative to the games we’ve played coming out of Q1 2008, 2010, and 2011. The 2012 game has no volume on the rallies (most of those other years had volume).

 

Yesterday’s +1.1% up move in the SP500 to a lower-high (down -6.1% from the 1419 SP500 YTD peak) clocked a volume reading that was -26% below the average down day volume for the month of May alone.

 

Yes, that’s bad. So are the “flows.”

 

The flows are always key to the game. Sometimes I think they can be as important as any behavioral or quantitative risk management signal I can give you.

 

The flows (as in your money) are either flowing in or out of the market in real-time. Currently, in both commodities and equities, we have outflows, globally.

 

That’s where the run of the mill 2007-2012 Perma-Bulls get right whipped around buying high. They still think this is the 1990’s or the 2004-2007 period where money was easy (Greenspan and Bernanke) and the flows where rushin’ in.

 

The flows are like the fans of The Game. You can have the best game of your life, but if no one is watching, buying popcorn, and planning on coming back to the next game, who cares?

 

That’s why I have been so focused on the leadership principles of Transparency, Accountability, and Trust ever since I put on a Hedgeye jersey in 2008. I believe in the deepest part of my being that if we don’t, as a profession, get our free-market principles back – we’re not getting The People’s trust back.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $104.62-108.08, $81.87-82.91, $1.24-1.26, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Game - Chart of the Day

 

The Game - Virtual Portfolio


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