ENERGY: Under Pressure

In case you haven’t noticed, energy is under quite a bit of pressure lately and we are not referring to fracking here. Crude has been crashing since the $108 a barrel level in late April and continues to fall as the US dollar puts up strength and the inflation-induced commodity bubbles begin to burst.



ENERGY: Under Pressure - FTK TakeMeLower2



One of our best calls has been shorting Flotek Industries (FTK). We went short at $11 a share on June 7 with the thesis that as big name players like Baker Hughes (BHI) and Haliburton (HAL) get squeezed on costs and falling margins, they will need to cut costs somewhere and the suppliers of raw materials to the drillers are a perfect fit. It breaks down to three key factors, essentially:

  1. Top line growth slowing as drilling activity slows (strong dollar = lower oil)
  2. Margin compression due to lower chemical pricing and higher input costs
  3. Relative outperformance reversal and relative valuation call (FTK not cheap vs group)


We see FTK going lower if past performance is any indication of what the future holds (it’s not), it could happen much sooner rather than later.


The key takeaway here is that FTK isn’t the only company who stands to get squeezed from falling energy prices. Companies like CARBO Ceramics (CRR) will also capitulate to the major players as pricing agreements take to the wind and are renegotiated. Take note of CRR and as we believe it has the potential to become the next FTK as we become increasingly bearish on it.


The past week Macau GGR growth decelerated to just +2.1% YoY, generating average daily table revenues of HK$678MM. It’s unclear whether the deceleration was due to hold fluctuation or volume growth slowing.  Our full month June forecast is now for GGR of HK$22.5-23.5 billion or 12-16.5%.  While an improvement over May growth, we believe that this level of YoY growth could disappoint investors when coupled with the reduction in the UnionPay withdrawal limits and rumors of the lengthening of the IVS visa process.


Yesterday the Macau Daily News reported that UnionPay reduced its maximum daily transaction limit to on their debit cards to RMB$1MM from a prior limit of RMB$3-5MM. There is some speculation that this actually occurred back in April 2011, in which event, the tightening is likely having no impact on the recent decelerating trends we’ve been seeing. If the reduction limits are a more recent event then they are more likely to impact premium Mass business, as high rolling VIPs wager off of Junket and direct credit lines.  However, we have also heard that pawn shop business has dropped by 30% in Macau this month, which is having a negative impact on the VIP business.   


There was also an article in the Macau Daily News about rumored lengthening of the visa process for those on the IVS, which is speculated to be negatively impacting mainland visitation to Macau. We generally believe that as in the past, reaction to visa restrictions are usually overblown.




In terms of market share on a week-over-week basis, MPEL share saw a big move up from 9.5% last week to 16.1% this week while Galaxy saw the inverse move, losing 6.4% share week over week to 20.3%.  LVS’s share fell to 17.7% from 19.5% in the prior week, while Wynn gained 90bps getting its share to 12.1%.  The MTD share table is below:



Potent Weapon

This note was originally published at 8am on June 12, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Fear is a potent weapon in the hands of the power elite.”

-Chris Hedges


That’s an important quote in Death of The Liberal Class by Chris Hedges. If you believe, like I do, that risk management starts and ends with being empathetic to all politically polarized positions, I highly recommend this book. The first 50 pages will really make you think.


Imagine that, thinking for yourself within the context of how other people think. Instead of doing more of the same – more of what has not worked (print, bail, print), imagine a world where we aren’t centrally planned by Republican/Democrat economic policy dogma. Imagine a world where America wasn’t inching toward becoming Japanese European.


The power elite may have landlocked how Bernanke’s Fed and Geithner’s Treasury think about letting losers win, but they have not yet suffocated the rest of us free market capitalists into silence. Yesterday’s market reaction to the latest bailout scheme was a stiff reminder of that. For them.


Back to the Global Macro Grind


If you saw my market debate with the ING strategist on The Kudlow Report last night, you can see that I am pretty much #Fedup. I am tired of incompetent forecasting on both US and Global growth. I am done with letting these guys from the Old Wall change their perma-bull thesis to new ones every time they get the prior one wrong.




I think The People are done with it too. That’s why you see these outflows from stock and commodity funds. That’s why you see this American Zeitgeist of distrust in any idea that comes out of the Fed, Treasury, or IMF. That’s why you saw pretty near every pundit who was spewing about how high the market was going to go on yesterday’s bailout “news” get run right over.


“Fear is a potent weapon.” And our being right on Growth Slowing is not the fear I am talking about. That’s called being accurate. Fear is what both the Bush and Obama administrations run on. So did Nixon and Carter. Fear of Big Government Interventions and all their conflicts of political interest are what puts a confident and optimistic guy like me on hiring hold.


The Fed has a “full employment” mandate, so they think doing more of what has not worked is their job. To a degree, that’s their own problem – the inability to re-learn, re-work, re-think. But, from a bigger picture perspective, this is really a leadership problem. The Fed and Treasury take their policy making lead from the President of The United States.


Here’s what one of their chief group-thinkers (Chicago Fed Head, Charles Evans) had to say after yesterday’s market reaction:


“I’ve been in favor of pretty much any accommodative policy I’ve heard about.”


Great. Just really great, Chuck. You have got to be kidding me. If Obama created a tax shelter whereby I could hire you for free, I’d probably go for it just so that I could fire you. You and your cronies from Chicago who want Policies To Inflate commodity prices need a real life wake-up call.


I’m certainly not alone in feeling this way. And since I built this company with my own risk capital, I’ll write whatever I want. Chapter 1 of Death of The Liberal Class is called “Resistance.” That’s what I am doing. I have American kids, and I resist the institutional pressure to put short-term politics and stock/commodity market performance ahead of the long-term future of this country.


“Earnest Logan Bell, an unemployed twenty-five year old Marine Corps veteran, walks alone Route 12 in Update New York. A large American flag is strapped to the side of his green backpack… he is on a six-day, ninety mile self-styled “Liberty Walk” from Binghamton to Utica. He plans to mount a quixotic campaign…” (Death of The Liberal Class)


“Anger and a sense of betrayal: these are what Ernest Logan Bell and tens of millions of other disenfranchised workers express…” (page 6). If you don’t get that, you are completely out of touch with the real world in which central planners are forcing us to live.


So go ahead, get the US taxpayer to start back-stopping European and Japanese government losses through the IMF. Tim Geithner, I personally dare you to do that and explain it, as you like to say “deeply”, to the American people. Explain to us, with all your fear-mongerings, why we should trust you this time.


Sadly, for Bernanke and Geithner, this time is not different. The market gets that too.


In other Keynesian central planning news this morning:

  1. The IMF says the Japanese Yen is “overvalued” and that the Japanese should “stimulate”
  2. Italy’s Monti (who forecasted the European Sovereign Debt Crisis as “ending” in March) to meet with France’s Hollande
  3. India’s debt to likely lose “investment grade status” (whatever that still means)

Great. Just great. The Washington, DC based (and US tax payer backed) IMF now has market opinions on “valuation”, and Geithner is pushing Lagarde to pull a Krugman on Japan and Europe (1997 he told the Japanese to “PRINT LOTS OF MONEY”).


Great. (link to the CNBC debate


So was my 0% US Equity asset allocation yesterday. My unlevered and un-invested position Cash can be a Potent Weapon too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, Italy’s MIB, and the SP500 are now $1588-1598, $96.59-99.98, $82.01-83.17, $1.24-1.26, 5937-6667, 12238-13661, and 1284-1326, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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The Macau Metro Monitor, June 26, 2012




LVS said it would wait until September before deciding whether to build a mega casino development in Spain, either in Madrid or Barcelona.  There is also the chance of the project not going ahead, depending on Europe’s economy.  Less than three months ago, LVS had said its decision on the project would come in April or May.



The number of imported workers has again surpassed the 100,000 mark.  In May, the total number of non-resident workers in Macau stood at just under 101,000, up by 1.4% MoM.  Macau had a total of 104,000 imported workers in September 2008, but since then the figure had continually dropped month-to-month, following a set of measures introduced by the government to prevent a surge in unemployment among residents due to the 2008 global financial crisis.  The imported workers’ figure hit the bottom on May 2010, at 72,000, and has been ever since rising.  The number is expected to continue going up as several new casino projects on Cotai are in the pipeline.

Looking Back

“The farther back you can look, the farther forward you are likely to see.”

-Winston Churchill


It continues to both fascinate and frustrate me that our said leaders in our governments haven’t learned a damn thing about the relationship between debt and growth.


While plenty of both Bush and Obama’s economic advisors dismissed the seminal conclusion in Reinhart & Rogoff’s This Time Is Different, that certainly doesn’t mean that history isn’t rhyming.


Allow me to write this one more time in block letters. Once a country has crossed the proverbial Rubicon (90% Debt/GDP), DEBT SLOWS GROWTH. There is no other growth “policy” left other than getting out of the way.


Back to the Global Macro Grind


Breaking “news” this morning is that someone in Europe has a new plan to pile more debt-upon-debt. Great. Meanwhile, the US (via the Washington, DC based and US tax payer backed IMF) is wholeheartedly cheering it on. Just great.


Atta boy Timmy – you would have nailed it if you just had a bigger bazooka, right?


Right. And bears use baby wipes in the bush. Markets get how ridiculous all of this is becoming. Markets are now starting to get worried that the US fiscal cliff is getting closer too. Markets don’t lie; politicians do.


US Fiscal Cliff?


Get the denominator in the Deficit/GDP ratio right, and you’ll get the timing of the US Fiscal Cliff right. That’s just math. If #GrowthSlowing continues, GDP will fall and the Deficit/GDP ratio will rise, faster.


Looking Back, when we made this call in Q1 of 2010 on Europe, we signaled this sovereign “credit risk” pop on the short-end of the curve. We called it the “Sovereign Debt Dichotomy” (Hedgeye Macro 2010 Quarterly Theme) because not all debt maturity problems and sovereign credit risks occur on the same duration.


So, if you want a real-time risk management signal for the US Fiscal Cliff, we have your back in the Chart of The Day. Watch 2-year Treasury bond yields which have recently popped back above my long-term TAIL risk line of 0.28%. That is one of the biggest Bernanke balls that is still being held under water. When/if it pops, he’ll blame Congress.


Blame Congress? Blame Europe? Blame Hedgeye?


Yep, blame everyone that you can other than yourself. That’s US Politics 1.0. And it’s dying on opacity’s vine.


Looking Back, at all of this - and I mean all of it - from when Krugman told the Japanese to “PRINT LOTS OF MONEY” in 1997 to when Bush II gripped and ripped the money printing and spending handles, to Obama following through on both - I think the fundamental conclusions won’t be the same as Japan’s or Europe’s, but as Mark Twain would say, they will rhyme.




Where am I seeing the Growth Slowing signals accelerate on the downside this morning?

  1. Spain issued 3-month pig paper at 2.36%! (versus 0.84% at their last auction)
  2. Italian CDS is pushing back up towards 600bps after printing a bomb of a Retail Sales report (-6.8% y/y)
  3. Cyprus is asking for a Spanish style (or is it Greek) bailout equivalent of ½ the country’s GDP
  4. Japan passes its tax hike bill in the Lower-House (doubling the consumption tax to cover deficit spending)
  5. Germany’s DAX snapped its last line of consequential support (our immediate-term TRADE line of 6251)
  6. Chinese stocks are in the midst of their longest losing streak in 6 months (down -9.3% since May 2nd)

Oh, but that’s everywhere else. The USA is going to “de-couple” this time. This Time Is Different!

  1. US stocks are down for 3 of the last 4 days (down -3.2% since our 100% Cash call)
  2. US stocks (SP500) have snapped their immediate-term TRADE line of 1318 support
  3. US Treasury Yields (10yr) remain in a Bearish Formation, with a wall of resistance between 1.69-1.93%

Maybe you can click your red shoes and believe that there is no place like investing at home until month/quarter-end (Friday). But you better not be long anything pro-cyclically American in the meantime:

  1. Energy stocks (XLE) lead losers, down -2.53% for June (down -10.3% YTD)
  2. Industrial stocks (XLI) are 2nd worst, down -1.63% for June (barely up at +1.03% YTD)
  3. Tech and Consumer (XLK and XLY) stocks both broke immediate-term TRADE support yesterday

When both leaders (Tech) and losers (Energy) are snapping, that’s bad.


Oh snap. Looking Back, it’s only the countries that don’t find it in themselves to change that end up like Japan or Argentina have for the last 20-30 years.


Do not stand idle. We have to stop these people before it’s too late. Stand up, and be the change in our society. Be patriots, and lead from the front. We are already there. We are Hedgeye. And we are not Looking Back.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $88.27-94.27, $81.96-82.66, $1.24-1.26, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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