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Staying Flexible

This note was originally published at 8am on August 24, 2012 for Hedgeye subscribers.

"I know a lot of people have very strong and definite plans that they've worked out on all kinds of things, but we're subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible."

- Henry Singleton

 

I have to admit, I didn’t know who Henry Singleton was when I first read the quote above – I just really liked the quote.  Then I read a little bit about Mr. Singleton and I really liked him too.  He was what I would call a great American.

 

Singleton graduated from the Naval Academy in 1940 and went to work as an electrical engineer.  As the United States upped its involvement in World War II, Singleton was eventually sent to Europe as a member of the Office of Strategic Services, which was the forerunner to the CIA.

 

After serving his country, Singleton returned to the U.S. to get a graduate degree in electrical engineering from MIT.  He would then make his way out to California where he and a former Naval Academy roommate, with the backing of legendary venture capital investor Arthur Rock, would start  Teledyne, a company that had decades of success before being acquired by Allegheny Steel.  None other than Warren Buffett once said:

 

“Henry Singleton of Teledyne has the best operating and capital deployment record in American business.”

 

Lofty praise, indeed.

 

One of Singleton’s keys to success was his willingness to be flexible.  Nothing could be more accurate for those of us that actively invest in the stock market.  The ability to change your mind and change your exposures on new information is a critical to succeeding as a money manager.

 

Yesterday, I did a brief interview on National Public Radio.  The key question they wanted answered was why August was so quiet and whether that meant things were getting better. Now perhaps I’m being a little inflexible, but my response was that they shouldn’t confuse absence of news with good news.  In fact, as we look forward there are a number of major events that we need to manage risk around, such as:

  1. The U.S. Election – As we’ve noted, this race is basically a dead heat with Romney likely doing a bit better than many polls indicate based on higher voter engagement for Republicans.  We are confident in saying, especially with the addition of Paul Ryan to the ticket, that the economic policy outcomes will be very different under a President Obama or President Romney.
  2. The U.S. Debt Ceiling – Do you remember this little critter last summer that led to a dramatic sell off in risk assets and a literal shutdown in Washington D.C.? Well, it’s going to become an issue again very soon.  According to analysis from our healthcare team, the U.S. Treasury will issue $592 billion in debt through year end, which will put them in breach of the debt ceiling of $16.4 billion sometime before 2013.
  3. Fiscal Cliff – It’s funny how we are hearing less and less about the fiscal cliff these days, since the issue hasn’t gone away.  In 2013, we have the toxic short term growth combination of higher taxes and lower government spending coming our way (less government spending will be good in the long run, of course).  Reasonably this could be a 2% plus headwind to economic growth next year.  The non-partisan CBO actually has 2013 growth pegged at an anemic +0.5% in 2013.
  4. Japanese Debt Ceiling Debate – Just because Japan is in a different time zone, doesn’t mean it doesn’t exist.  Currently,   legislation to enable the Japanese government to sell debt to finance 40% of the federal budget is stuck in the upper house as the opposition party is attempting to force Prime Minister Nodo to fix an election date.  Japan’s government could run out of money by October if this legislation is not passed. 
  5. Chinese Growth – I highlighted the Chinese flash PMIs yesterday that showed inventories building and sales declining heading.  In the Chart of the Day, we show Chinese steel prices that illustrate much the same story economically.  Rebar, in particular, is required for large scale construction and to the extent prices are declining it bodes poorly for economic activity and suggests the upcoming quarters will be replete with negative economic data.
  6. European Debt – The Eurocrats are on vacation so the news flow has been minimal and, on the margin, that’s been positive.  That said, nothing has been solved and we will likely see more “solutions” and “summits” in the coming months.  In fact, news out this morning has the German finance minister stating they will be preparing for a scenario in which Greece leaves the Eurozone.

It’s Friday, so I do want to leave you on a more cheery note heading into the weekend, so I decided to leave out my 7th potential catalyst, which would have been the potential for an Israeli strike on Iran this fall.  Certainly, oil is signaling something along these lines lately.

 

On a much more cheery note, my colleague Jay Van Sciver, our Industrials Sector Head, will be joining our client call this morning to discuss his sectors and one of his favorite names, PACCAR.  Van Sciver has a differentiated view on the upcoming trucking cycle, which is likely to lead to fewer truck sales and more parts sales.  Get this, truck OEMs, such as PACCAR, actually make more money selling parts.  If you can’t join us for the call this morning, ping sales@hedgeye.com and get on a call with Van Sciver.  His long call on PACCAR is almost as compelling as is short case on United Airlines.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are 1627-1671, 113.96-116.21, 81.28-82.13, 1.23-1.25, 1.62-1.75% and 1398-1410.

 

Enjoy the weekend!

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Staying Flexible - Chart of the Day

 

Staying Flexible - Virtual Portfolio



At The Front

“No man can properly command an army from the rear; he must be at its front.”

-General William Tecumseh Sherman

 

I don’t force myself to write every morning. I have a passion to find the truth. I want to be on the front lines of that daily search.

 

On the Research Front, that doesn’t mean I’ll always find the truth; it just means I expect to. On the Risk Management Front, that doesn’t mean I am certain of anything markets will do; I am constantly humbled by their uncertainty.

 

That’s my life At the Front. Research (Growth Slowing) and Risk Management (market moves) are 2 very different things. Long-term, I think you are best prepared to have a process that embraces both. Winning and losing battles happens in every position, everyday. The war, however, is far from over.

 

Back to the Global Macro Grind

 

Hats off to them. I have no problem giving credit to my competition where it is due. The last 48 hours of global equity market trading has provided for one of the more impressive Keynesian Central Planning performances in at least the last 40 years.

 

Just think, it was only January of 2008 when you could have bought the SP500 at this very same price. You’d have had to have taken a very “long-term investor” view from that price… and mostly everything the buy-high bulls told you to buy on would have changed at least once every 3 months during the next 5 years… but now, after a little volatility, you are back to break-even, right?

 

Back to reality…

 

At The Front of real-time risk management this morning, yesterday is over. Now, what we really need to ask ourselves is what I have been borrowing from Ray Dalio’s Principles as of late, “What Is True?”

 

This usually happens when I am short-term wrong – I have more questions than answers:

  1. Is the US bond or stock market right on growth?
  2. What is the US stock market? the SP500 (higher-highs yesterday) or Russell2000 (lower-highs yesterday)?
  3. Is the European bond or stock market right on growth?
  4. Are German stocks (higher highs vs March this morning!) or the Eurostoxx600 (lower-highs) right?
  5. Is the Asian bond or stock market right on growth?
  6. Was the 1-day +3.7% rip off the YTD low in Chinese stocks the bottom or another lower-high?

If you have all the answers to these questions nailed down, across immediate to long-term durations, give me a buzz. On growth, the answer isn’t what the SP500 is “up year-to-date.” That’s just a short-term proxy for how less and less people get paid.

 

If that was the answer in Weimar Germany in 1923 or, say today in Venezuela’s IBVC Index (+155% YTD post currency debauchery), that would have been good and fine until revised as a very wrong answer. I guess they needed “more time.”

 

To review: stock and commodity market inflation is not economic growth.

 

The former is helpful to some, the latter is hurtful to many. I didn’t hear that coming out of either the RNC or DNC in the last few weeks. Why? Because both parties are Keynesian in their economic policy. Sadly, Obama and Romney look a lot more like Carter and Nixon, than they do Reagan or Clinton to me.

 

At this point, maybe I can appeal to both the far left and right of each party. Political strategists, you will love this storyline: when I came to this country (mid-1990s), I was an immigrant… son of a teacher and firefighter

 

I had no money… I was the beneficiary of two US Administrations (Reagan and Clinton) who had the three things that someone like me could believe in – Strong Dollar, Low Oil Prices, and Free-Market Capitalism. I worked 3 jobs; I took risks; got married, had 2 beautiful American children, and hired 50 people – a Made In America exporter of ideas…

 

Enough of the storytelling drama already. I didn’t earn any of this kissing anyone’s rear at the 2007 September-October stock market highs. I didn’t beg for bailout money at the 2008-2009 lows either. I sucked it up; I took my losses; and I carried on.

 

So don’t expect me to fade and not face the front lines this morning. From the top, to the bottom, and back again - it’s been a long 5 years writing to you – and there is still a war to be won.

 

My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $112.21-114.92, $80.98-81.61, $1.24-1.26, 1.56-1.72%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

At The Front - Chart of the Day

 

At The Front - Virtual Portfolio


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 7, 2012


As we look at today’s set up for the S&P 500, the range is 16 points or -0.92% downside to 1419 and 0.20% upside to 1435. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 3a

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT: 

  • ADVANCE/DECLINE LINE: on 09/06 NYSE 1763
    • Increase versus the prior day’s trading of -148
  • VOLUME: on 09/06 NYSE 736
    • Increase versus prior day’s trading of 8.93%
  • VIX:  as of 09/06 was at 15.60
    • Decrease versus most recent day’s trading of -12.06%
    • Year-to-date decrease of -33.33%
  • SPX PUT/CALL RATIO: as of 09/06 closed at 1.38
    • Down  from the day prior at 2.15 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 30.69
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.73%
    • Increase from prior day’s trading of 1.68%
  • YIELD CURVE: as of this morning 1.46
    • Up from prior day’s trading at 1.42

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Change in Nonfarm Payrolls, Aug., est. 130k (prior 163k)
  • 8:30am: Unemployment Rate, Aug., est. 8.3% (prior 8.3%)
  • 8:30am: Average Hourly Earnings M/m, All Employees, Aug., est. 0.2% (prior 0.1%)
  • 11am: Fed to sell $7b-$8b notes due 2/15/2013-2/28/2014
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • Washington Day Ahead
    • House, Senate not in session
    • Comments due on proposed revisions to current capital rules being considered by Fed, FDIC, 5pm
    • Medicare Payment Advisory Commission meets on outpatient therapy, hospital readmissions, 8:30am
    • Solyndra LLC, the solar-panel maker that received a $535m government loan guarantee, may win court approval of statement describing bankruptcy exit plan
    • EPA Administrator Lisa Jackson, Canadian Environment Minister Peter Kent hold signing ceremony for updated Great Lakes Water Quality Agreement
    • Obama Seeks Second Term on Harder Path Leading to Better Place

WHAT TO WATCH:

  • Less Hiring Probably Kept U.S. Jobless Rate Elevated in August
  • HTC Wins Dismissal of Patent Lawsuit Due to False Statements
  • HTC Patents Challenged by Apple Probably Valid, U.S. Judge Says
  • Amazon Challenges Apple With Updated Kindles in Crowded Market
  • Apple in talks for service similar to Pandora: WSJ
  • Samsung Chips Said to Be Kept From New IPhone on Pricing
  • FCC Said to Propose Market-Maker Role in U.S. Airwaves Auction
  • Glencore Raises Xstrata Offer Ratio to 3.05x; Not a Firm Offer
  • U.K. Industrial Output Jumps Most in 25 Years After Jubilee
  • Monti Says ECB Plan Reduces Stigma as Rajoy Stalls on Aid
  • Volkswagen Lowers Sales Target on European Debt Crisis Woes
  • AIG Sells $2 Billion AIA Stake as it Seeks Funds for Buybacks
  • Lufthansa Drops 1,000 Flights Amid Biggest Cabin Crew Strike
  • China Backs Roads-to-Subways Construction Sparking Stock Rally

     EARNINGS:

    • Lululemon (LLL CN) 7:15am, $0.31
    • Comverse Technology (CMVT) 7:30am, $0.08
    • Brady (BRC) 8am, $0.52
    • Kroger (KRO) 8:15am, $0.49 - Preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

COPPER – looks like everything else that’s gone straight down since the Feb-March highs on fundamental (demand slowing, supply building, etc.), squeezed right back up to a lower-high, hitting immediate-term TRADE resistance of $3.58/lb.

  • Copper Trade Most Bullish Since October on Stimulus: Commodities
  • Glencore Raises Xstrata Offer as Glasenberg Proposed as CEO
  • Shale Boom Cuts Gulf Oil Premium to 24-Year Low: Energy Markets
  • Crude Trades Near One-Week High as Slower Hiring Curbs Optimism
  • Asia Fuel-Oil Crack Widens; Gasoil Swaps Rebound: Oil Products
  • Hurricane Leslie to Resume Move Toward Bermuda After Stalling
  • Deutsche Bank Faces Fine for U.S. Power Market Manipulation
  • Soybeans Poised for First Weekly Loss Since July; Corn Declines
  • Robusta Coffee Rises as Inventories Drop Further; Sugar Gains
  • China’s Tin Demand to Decline as Europe, U.S. Economies Cool
  • Oil May Fall as U.S. Output Rebounds From Isaac, Survey Shows
  • Palm-Oil Shipments From Indonesia May Climb for Third Month
  • Sugar Output in India’s Biggest Grower Set to Rise 11% on Rain
  • Copper Traders Most Bullish Since October
  • Copper Heads for Biggest Weekly Gain in 10 on Chinese Projects
  • Record Corn Imports by China to Drive Rally, Rabobank Says
  • Gold Drops as Rally to Six-Month High Spurs Sales; Silver Falls

THE HEDGEYE DAILY OUTLOOK - 4A

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5A

 

 

EUROPEAN MARKETS


GERMANY – get this, the DAX is now trading higher than where it was before global #GrowthSlowing started in March; if you nailed that, congratulations, because I certainly didn’t – just thankful we’re not short it here, because we should have been on fundamentals; policies to inflate will only slow Eurozone growth (and global growth) further. Spain, Italy, etc still making lower highs vs March.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – more like 4mths down, 1 day up for Chinese stocks, but hoowah! What a move if you are a professional v-bottomer with a little looksy into headline rumoring; Shanghai +3.7% on rumors instead of reality; now what?

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


MACAU: COMMISSIONS TICK UP

Junket commissions remain consistent but all-in commissions tick up

 

 

The data is in.  Once again, we have seen a sequential uptick in all-in commissions, from 2H11 to 1H12.  Whether we look at commissions as a % of win or as a % of RC, the conclusion is the same.  However, we would argue that % of win is a more relevant metric since the majority of junkets and almost all the large ones are paid on a revenue share basis.

 

The charts below show the composition, by company, of all-in commissions among the straight junket commission, the rebate that goes back to the player, and non-gaming giveaways.  The first analyzes the dynamics on a revenue share basis, the second as a percentage of rolling chip.  

 

Main takeaways:  

  • The gap between the lowest and the highest all-in commission rate widened to 4.95% in 1H12 from 3.97% in 1H11 on a % of win basis and to 34bps from 22bps on a % of RC basis.  We believe this is directly a result of increased competition.
  • WYNN remains the least aggressive in its commission policy.  From 2008 to 1H11, the spread between the average all-in commission rate paid by WYNN vs. average of LVS, MPEL & MGM narrowed from 7.81% to 2.67%.  It gapped out again to 3.79% in 1H12.   
  • MPEL still offers the largest junket commission but until 1H12, they consistently had the lowest comps on non-gaming amenities.  That changed this interim period with non-gaming comps increasing to 3.68% of win up from 2.56% in 1H11 and 2.62% for all of 2011.  MPEL maintained one of the lower rebate rates which is surprising given the relatively large direct premium play business at City of Dreams.

Other observations:

  • Rebate rates
    • The average rebate rate for 1H12 was 32.8% (as a % of win) or 97bps (as a % of RC) vs. 32.3%/94bps in 1H11
    • WYNN had the lowest rebate rate in 1H12 at 30.2%/81bps
    • MGM had the highest rebate rate in 1H12 at 34.6%/121bps
  • Junket commission  
    • The average junket commission increased 2% in 1H12 vs 1H11 on a % win, and 4% on a RC basis to 8.2%/24bps
    • WYNN continued to offer the lowest commission rate  of 7.1%/19bps
    • MPEL continued to offer the highest commission rate of 9.2%/27bps
  • Comped non-gaming amenities
    • The average non-gaming comps increased 14% in 1H12 vs 1H11 to 4.5% as a % of win and to 13bps as a % of RC.
    • For a change, MGM offered the lowest comps at a rate of 3.25%/10bps
    • LVS continued to offer the highest comps at a rate of 5.85%/17bps, which is not surprising given that they have the largest % of their revenue base coming from non-gaming amenities.
  • The all-in commission rate
    • The average all-in commission rate increased to 45.53% in 1H12 from 44.35% in 1H11 on a % of win basis and from 1.29% to 1.35% on a RC basis
    • On a % of win basis, LVS paid the highest all-in rate at 49.2% in 1H12
    • On a % of RC basis, MGM was the biggest spender at an all-in rate of 1.48% in 1H12
    • WYNN held the line at 42.69%/1.14% in 1H12

MACAU: COMMISSIONS TICK UP - commission3

 

MACAU: COMMISSIONS TICK UP - commission1

 

MACAU: COMMISSIONS TICK UP - commission2


A Deceptive Rally

 

Hedgeye CEO Keith McCullough appeared on CNBC’s Fast Money this evening to discuss market moves and what lies ahead over the coming weeks. Mario Draghi’s announcement that the ECB would participate in “unlimited” bond buying was the de facto catalyst for today’s massive rally in US stocks. Keith believes this one day rally is not an indicator of things to come, however. If tomorrow’s jobs report is positive, the US dollar could catch a bid.

 

Sell the losers, ride the winners and remind yourself that growth continues to slow as evident in this week’s FedEx announcement and performance of cyclical names. Watch the above clip for Keith’s take on the market and more.


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