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Cheap Money

CHEAP MONEY

 

 

CLIENT TALKING POINTS

 

QE TAKES PRECEDENT

What matters most at the end of the day is how we can continue to juice the market further and further. It’s all about the easing these days and the Federal Reserve looks about ready to deliver another round of it. Friday’s jobs numbers essentially sealed the deal, all but guaranteeing the Fed will step into the markets yet again. We suppose that people don’t mind the high gas prices and $8 boxes of Pop Secret at the supermarket. It’s all part of the plan, so just go with the flow, right?

 

 

CHEAP MONEY

People are still going out and saying that stocks are cheap at these levels and there’s room to buy. They continually remind us that the market is up year-to-date. We kindly ask them to remember October of 2007 when the S&P 500 was at 1565 – was that considered cheap back then? 18 months later Starbucks (SBUX) was at $11 a share and you could go on a buying spree like a kid with a dollar at a penny candy store. Central planners continue to shorten economic cycles and amplify price volatility. This market is not cheap by any means. It is toppish and we are comfortable trading the proper risk and range.

 

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ASSET ALLOCATION

 

Cash:                  Flat

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: Flat  

 

 

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TOP LONG IDEAS

 

NIKE INC (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

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THREE FOR THE ROAD

 

TWEET OF THE DAY

“Today we learn how much more student debt and subprime GM loans US consumer took out in July” -@zerohedge

 

 

QUOTE OF THE DAY

“A pessimist sees only the dark side of the clouds, and mopes; a philosopher sees both sides, and shrugs; an optimist doesn't see the clouds at all - he's walking on them.” – Leonard Louis Levinson

                       

 

STAT OF THE DAY

$8.5 billion. The amount of money Japan Airlines is expected to raise in an IPO.

 

 


THE M3: MPEL/BELLE; LVS SANCTIONS

The Macau Metro Monitor, September 10, 2012

 

 


MELCO CROWN AND BELLE TO INK CASINO DEAL "BEFORE OCTOBER" Macau Business

According to Belle vice chairman Willy Ocier, talks between MPEL and Belle Corp over its Manila JV should be finalized 'before October'.  

 

ADELSON'S SANDS FACES SANCTIONS FOR NOT DISCLOSING FILES Bloomberg

LVS may be sanctioned in a lawsuit brought by Steven Jacobs for not disclosing that evidence it said couldn’t be taken out of Macau was already in the U.S.   LVS was ordered to explain to a Nevada judge in Las Vegas how and why files from its Macau operations, requested by Steven Jacobs as evidence in his breach-of-contract case, ended up in the U.S. while LVS claimed that Macau law prevented it from transferring them overseas.

 

 


MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY

Takeaway: QE3 confidence & "unlimited" ECB asset purchases made for quite the centrally-planned rally last week. China remains a focus of concern.

Key Takeaways 

* Last week saw the largest single week of improvement in credit default swaps ever for EU sovereign credits on the heels of the ECB's Draghi pledging "unlimited" asset purchases. Spanish, Italian, German and French bank as well as sovereign credit default swaps were sharply lower, reflecting optimism that the ECB will avert the crisis.

 

* High yield and leveraged loans found renewed bids last week, pushing both indices to new, post-crisis highs

 

* Commodities were similarly affected. The JOC index turned higher again this week. Expect higher prices at the pump and at the grocery store. 

 

* China seems to be the only country left out of the global rally -  Chinese steel fell another 3.4% WoW.

 

* Negative Short-term Setup: In spite of last week's impressive squeeze higher, our Macro team’s quantitative setup in the XLF shows a negative short-term setup with 0.4% upside to TRADE resistance of 15.74 and 2.9% downside to TRADE support of 15.23.

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 9 of 12 improved / 1 out of 12 worsened / 3 of 12 unchanged  

• Intermediate-term(WoW): Positive / 8 of 12 improved / 2 out of 12 worsened / 3 of 12 unchanged  

• Long-term(WoW): Positive / 8 of 12 improved / 2 out of 12 worsened / 3 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Summary

 

1. American Financial CDS – Credit default swaps tightened sharply last week across all U.S. Financial institutions. Some of the most improved were BAC & C with 17-18% declines week-over-week along with GS down 15% WoW. Currently, none of the big six banks/brokers are trading north of 300 bps. 

Tightened the most WoW: BAC, C, GS

Tightened the least WoW: MBI, AGO, TRV

Tightened the most WoW: BAC, C, GS

Tightened the least MoM: TRV, COF, ALL

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - American

 

2. European Financial CDS – Italian, German, French and British bank default swaps were down approximately 20% across the board last week, on ECB commentary.   

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - European

 

3. Asian Financial CDS – Chinese and Indian bank CDS tightened while Japanese banks were mixed. 

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Asian

 

4. Sovereign CDS – European sovereign default swaps plunge. Spanish and Italian sovereign default swap premiums fell by 33% week-over-week on the ECB's "unlimited" pledge. Ireland saw its swaps decline 24%, while Portuguese swaps fell 20%. Even France and Germany benefited with 16% declines each. 

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Sovereign Table

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Sovereign CDS 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 20 bps last week, ending the week at 6.86% versus 7.06% the prior week.

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 7.2 points last week, ending at 1,716.

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Leveraged Loan Index

 

7. TED Spread Monitor – The TED spread fell 4 bps last week, ending the week at 30 bps versus 34 bps last week. 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - TED

 

8. Journal of Commerce Commodity Price Index  The JOC index rose 3.0 points, ending the week at +1.0 versus -2.0 the prior week. This is the first time the index has been positive since  August 8th 2011. 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - JOC

 

9. Euribor-OIS spread The Euribor-OIS spread tightened by 3 bps to 18 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.

 

 MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - ECB

 

11. Markit MCDX Index Monitor – Last week spreads tightened 2 bps, ending the week at 152 bps versus 154 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - MCDX

 

12. Chinese Steel - Steel prices in China fell 3.4% last week, or 118 yuan/ton, to 3388 yuan/ton. Over the last four months, Chinese construction steel prices have fallen ~20%. This index continues to reflect significant weakness in China's construction market. Chinese steel rebar prices have been generally moving lower since August of last year. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - CHIS

 

13. 2-10 Spread –  Last week the 2-10 spread widened to 141 bps, 9 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure. 

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 2.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - XLF

 

Margin Debt - July: +0.61 standard deviations 

NYSE Margin debt fell  to $278 billion in July from $285 billion in June. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. Overall this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.  The chart shows data through July. 

 

MONDAY MORNING RISK MONITOR: KEEPING ONE EYE ON CHINA AMID AN IMPRESSIVE RALLY - NYSE margin debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser.  

 


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.

Bear Bangers

This note was originally published at 8am on August 27, 2012 for Hedgeye subscribers.

“Bear banger is a slang or colloquial term sometimes used to describe exploding projectile wildlife deterrents.”

-Ursus International

 

Bear spray or bear banger? When you go for a run down by the McCullough Lake House in Northwestern Ontario, what do you use? Inquiring Risk Manager minds want to know.

 

After running up to a bear during our family vacation last week, my wife Laura asked the original Thunder Bay Bear (my Dad) for some reinforcements. Instead of the go-to bear mace that most locals use, he opted to buy her something that makes noise.

 

The twist on the noisemaking part is that Bear Bangers sound more like a shotgun than a firecracker. I wouldn’t put a loaded one in your running shorts.

 

Back to the Global Macro Grind

 

Running from your US or European Equity shorts at last week’s short covering highs was not a good risk management idea. Neither was selling your Fixed Income exposures at last week’s lows. Bear Banging works, but your timing matters.

 

Last week’s intra-week high for the SP500 was 1426. The intra-week low for 10-year US Treasury Bonds was close to 1.90%. However, those weren’t closing highs and lows. And it’s closing prices that matter most in our globally interconnected macro model.

 

From those no-volume intraday levels to the other side of the risk management trade:

  1. SP500 dropped a full -2% to 1398 intraday on Friday morning
  2. 10yr US Treasury Yields dropped just over -10% to close the week at 1.69%

So, I covered all but 4 shorts in the Hedgeye Portfolio at 1398 and sold almost 50% of our Fixed Income Exposure in the Hedgeye Asset Allocation Model week-over-week.

 

For those of you who are new to what we do, the Hedgeye Portfolio and the Hedgeye Asset Allocation Model are 2 mutually exclusive risk management products.

 

The Hedgeye Portfolio is simply a real-time idea list of risk managed long/short ideas that focuses on Rule #1 (don’t lose money), whereas the Asset Allocation Model attempts to be more dynamic than the Old Wall’s 60/40 stocks/bonds thing.

 

As time and prices change, we do.

 

When confronted with a live bull or bear, sometimes you have to move fast; sometimes you don’t have to move at all. If you’ve survived the last 5 years of this whipsaw, you get that the only perma you need to be is permanently flexible.

 

To be clear, I wouldn’t dare set foot in the Shuniah dump pit with a baby black bear (and no mama bear in sight) inasmuch as I’d short-and-hold stocks into a central planning event at Jackson Hole…

 

Being bearish on bonds at last week’s bottom was as bad a decision as buying last week’s 1426 top in US stocks. Being bearish on bonds means you believe growth isn’t slowing. Being bullish on stocks, at any price, just means you don’t sell on green.

 

Being bullish on commodities up here is something that I am not. While Bernanke claims “price stability and full employment”, what’s really happening here is that people are front-running him, getting all lathered up in what slows real (inflation adjusted) consumption growth (rising commodity prices).

 

Got causality? Last week’s CFTC (Commodities Futures Trading Commission) data revealed an all-time high in outstanding futures and options contracts:

  1. Week-over-week gain in total contracts of +10% to 1.32 million (eclipsing the Feb/Mar 2012 highs)
  2. Gold contracts were up a stunning +35% wk-over-wk to 110,623
  3. Oil contracts were up another +18% wk-over-wk to 179,526

Fed inspired (US Dollar Debauchery) commodity inflation is not growth. It slows growth. And when this entire centrally planned game of Bailout Begging ends, the 3rd of the Greenspan/Bernanke asset bubbles (commodities) will be in for one heck of a Bear Banger.

 

Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yields, and the SP500 are now $1634-1679, $112.31-115.87, $81.16-82.11, $1.23-1.25, 1.65-1.76%, and 1398-1419, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Bangers - Chart of the Day

 

Bear Bangers - Virtual Portfolio



Surviving Tops

“The first definition of victory is survival.”

-Hampton Sides

 

Tops are processes, not points. From both an intermediate and long-term perspective, at least that’s what we have learned in the last 5 years. Big Central Planning in what used to be “free-markets” continues to A) shorten economic cycles and B) amplify price volatility.

 

But, Keith, the market is up year-to-date.” Yep. And the SP500 was up double-digits for the year-to-date on October 9th, 2007 too (1565 for those of you who still remember that cost basis and the people who told you to buy there). Just think, only 18 months later you could have bought Starbucks $SBUX at $11 (i.e. 78% lower). That’s when stocks were “cheap.”

 

Cheap is as cheap does. People get that. How else can you explain money flowing out of Equity funds in the latest Lipper data (-$6.8B in outflows last week)? People also remember late 2007 and all the storytelling about growth recovering via centrally planned “shock and awe” rate cuts back then too. I never thought we’d get back to that same sell-side narrative. Never say never, I guess.

 

Back to the Global Macro Grind

 

The aforementioned quote is the last one I wanted to highlight from this summer’s reading about the founding of the 19th century American West (page 469 in Blood and Thunder). It was a creed Kit Carson lived by. And it’s one I’ve embraced as a Risk Manager of my own capital too. Spending 5 years of your life trying to get your investors’ capital back to break-even is no life to live.

 

Getting back to break-even is another way to think about why I am constantly measuring LOWER-HIGHS across intermediate to long-term investing cycles. Those define memory, losses, and pain. If you have a friend who bought the 2007 top in the SP500, he only has another +10% higher to go (from here) to get back to his high-water mark. I hope he didn’t use leverage.

 

Across intermediate-term durations (since February-March 2012), here are some LOWER-HIGHS to think about (across asset classes):

  1. US Treasury Bond Yields (10yr) = 1.66% (down from 2.4% in March 2012)
  2. EUR/USD = $1.27 (down -5.2% from March 2012)
  3. CRB Commodities Index = 311 (down -4.4% from March 2012)
  4. Gold = $1736 (down -3.2% from February 2012)
  5. Oil (Brent) = $115 (down -9.2% from March 2012)
  6. Copper = $3.69 (down -7.1% from February 2012)
  7. Russell2000 = 842 (down from 846 on March 26th,2012)
  8. Chinese Stocks (Shanghai Composite) = 2134 (down -13.2% from March 2012)
  9. Japanese Stocks (Nikkei225) = 8869 (down -13.5% from March 2012)
  10. European Stocks (Eurostoxx50) = 2533 (down -2.9% from March 2012)
  11. Spanish Stocks (IBEX) = 7861 (down -11.9% from March 2012)
  12. Italian Stocks (MIB) = 16,050 (down -6.3% from March 2012)
  13. Russian Stocks (RTSI) = 1468 (down -16.2% from March 2012)
  14. Brazilian Stocks (Bovespa) = 58,321 (down -14.7% from March 2012)

In other words, if you bought any of these asset classes and went short and/or “underweight” Treasury Bonds, you are underwater since Growth Slowing began to be obvious, globally in March of 2012. That side of the research call has been dead on.

 

Are there any outliers?

  1. SP500 = 1437 (up +1.3% from March 2012)
  2. German Stocks (DAX) = 7217 (up +0.8% from March 2012)
  3. US Equity Volatility (VIX) = 14.38 (up +0.8% from March 2012) 

Hoowah, what a return versus the risk you had to take! (*note: SPX and RUT had 10 and 13% draw-downs from March to June)

 

To be fair to the “growth is back, earnings are great, and stocks are cheap” bull crowd of economists (rewind the tapes and/or read their Feb/Mar 2012 research), Venezuelan, Egyptian, and Pakistani stocks are right ripping since March 2012. So bullish.

 

But let’s not fuss about the details on why “the market is up-year-to-date” (Bernanke doing Qe3 on January 25th, pushing 0% rates to 2014; and the market baking in a Qe4 or push for 0% rates to 2015 now)…  

 

Let’s not talk about the real-time P&L impact of this little detail called timing in anything pro-cyclical since March. The very same economists and Old Wall Street strategists weren’t fussing about it in September-October of 2007 either.

 

This isn’t my 1st rodeo with perma-bulls. They are loud and they change their thesis to suit last market price. That’s why Surviving Tops isn’t easy. Particularly when the storytelling, groupthink, and performance chasing is coming on thick.

 

My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, 10yr US Treasury Yield, and SP500 are now $1, $113.39-115.02, $80.11-81.29, $1.24-1.28, 1.56-1.70%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Surviving Tops - Chart of the Day

 

Surviving Tops - Virtual Portfolio


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