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Noisy Truth

“We think we want information, when we really want knowledge.”

-Nate Silver


Within the context of the always-on tweeter-net, I thought that was a really thoughtful quote from the introduction to Nate Silver’s new book, The Signal and The Noise. I’ll be reviewing his framework for forecasting in the coming weeks.


Silver says the “signal is the truth” and “the noise is what distracts us from the truth” (page 17). Without having read the bulk of the book yet, I can already assure you that doesn’t hold when attempting to proactively predict Risk Ranges in real-time markets.


Our most immediate-term risk management duration (TRADE) is, by definition, noisy. Whereas our intermediate and long-term (TREND and TAIL) work can often be mistaken as truth when the noise isn’t confusing our confirmation biases.


Back to the Global Macro Grind


Whether we like hearing it or not, we all have confirmation biases. That’s because we are human. At a bare minimum, I think Nate Silver and I agree on that. Thinking, Fast and Slow’s Daniel Kahneman would too.


Our risk management day involves grinding quantitative economic realities (data) with behavioral finance (timing). In order to make a probability-weighted forecast (taking a long or short position) we always look back, across durations, before looking ahead.


For us, the signal (and the noise) is real-time market prices – here’s what they did last week, across asset classes:

  1. US Dollar Index =up +0.4%, closing up for the 3rd week in the last 4 at $79.65 (bullish on both TRADE and TAIL durations)
  2. EUR/USD = down -0.7%, looking like the upside down of the USD Index (bearish on both TRADE and TAIL durations)
  3. CRB Commodities Index = down -0.3% (down -4.7% from the Bernanke Top, printing to Infinity & Beyond)
  4. Oil (blended Brent and WTIC) = up +2% (WTIC down -4.3% from the Bernanke Top)
  5. Gold = down -1.4%, as it continues to make a series of lower long-term highs (vs the 2011 Bernanke Bubble top)
  6. Copper = down -2.2% (bearish on both TRADE and TAIL durations)
  7. SP500 = down -2.2% (bearish TRADE resistance = 1448; bullish TREND support = 1419)
  8. Nasdaq = down -2.9% (bearish TRADE resistance = 3129; bullish TREND support = 3022)
  9. US Equity Volatility (VIX) = up +12.6% (bullish on both TRADE and TAIL durations)
  10. US 10yr Treasury Bond Yield = down -5% to 1.66% (bearish on both TRADE and TAIL durations)

In other words, there were plenty of signals and noises, across durations, in last week’s closing prices. There is also a confirmation bias in attempting to describe what happened because I, unlike Keynesian policy makers, believe that central planners are the primary causal factor in driving currency values and market correlations.


In the private sector, it’s ok to have a confirmation bias – you just have to be right more than you are wrong. If you’re wrong more than you are right, it’s ok - just go work for the government.


What do you do when you are wrong? For us, it’s pretty simple – we hold ourselves accountable to the mistake, try to learn from it, and grow. What other people do when they face adversity is up to them.


With the SP500 not having an up day in the last 6, what is the truth? Do growth and #EarningsSlowing matter? Or did it from the price where a lot of people thought Bernanke’s money printing meant the “fundamentals don’t matter”?


What are the fundamentals?

  1. US GDP Growth of 1.26% in Q2 2012, or consensus expectations of +3-4% growth 6 months ago?
  2. Global GDP Growth of 1.3% (Singapore just reported that for Q3 2012) or +3% as far as the excel model can see?
  3. The worst preannouncement ratio (4:1) of #EarningsSlowing misses since Q3 of 2001, or stocks are “cheap”?
  4. US Technology Sector (XLK) down -3.5% in the last month, or what it’s “up YTD”?
  5. US Financials Sector (XLF) down -1.6% last week on JPM/WFC earnings, or what they are “up YTD”?
  6. Chinese inflation down sequentially to +1.9% (SEP) or India wholesale inflation up sequentially to +7.8% (SEP)?

Some might say all of this doesn’t matter, and all you need to do is know where a 1-factor/1-duration simple moving average model tells you where the market is and everything is either fine. Some might say that all of it matters and is measurable. That’s closer to the Noisy Truth.


Our signals say all this noise adds up to us having 12 LONGS and 9 SHORTS for this morning’s US stock market open. Provided that the SP500 doesn’t close > 1448, we’ll likely sell on green bounces, and buy on red corrections closer to 1419.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $112.68-115.08, $79.34-80.05, $1.28-1.30, 1.61-1.71%, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Noisy Truth - Chart of the Day


Noisy Truth - Virtual Portfolio


The Economic Data calendar for the week of the 15th of October through the 19th 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.



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Takeaway: New data suggests the world economy could potentially experience an outright contraction in real GDP over the intermediate term.



  • All told, new data suggests the world economy could potentially experience an outright contraction in real GDP over the intermediate term.
  • Specifically, the latest Singapore GDP report, rhetoric from Chinese policymakers and the latest occurrences involving the China/Japan territorial dispute are all in support of this view.
  • As such, we maintain our bearish TREND-duration bias on “risky assets”, broadly speaking. Like he did in mid-to-late 2007, Ben Bernanke has lulled international investors to sleep with his aggressive monetary easing – perpetuating systemic risk for a rude awakening across asset classes if and when the data fails to meet inflated expectations over the intermediate term.


If you look past what many are labeling as a desperate attempt domestically to embellish recent consumer-facing (i.e. voter-facing) economic data ahead of the NOV 6 election (Unemployment Rate; Jobless Claims; UMich Consumer Confidence), one would easily arrive at the conclusion that global growth continues to slow. We’ve been calling for this explicitly since mid-MAR, so this topic is nothing new for clients of our Macro research. What is new, however, are our increasing concerns that the global economic growth slowdown could morph into an outright economic contraction over the intermediate term. As we pointed out in our OCT 1 note titled, “ASIA’S NOT HELPING THE GROWTH BULLS”:


“The list of potential negative TREND-duration economic catalysts is long and their respective probabilities are all rising, not falling. To recap:

  1. Some combination of fiscal tightening in the US if the Fiscal Cliff is not completely skirted;
  2. An incremental slowdown in global industrial production activity due to continued weakness in the Chinese economy (i.e. Chinese demand fails to match hopeful expectations that anticipate some degree of large-scale stimulus);
  3. Outright tightening of Chinese monetary policy or incremental tightening in its property market;
  4. A resurgence of European sovereign debt and banking risk (that crisis is far from over);
  5. A meaningful acceleration of global geopolitical risk (Israel/Iran? Syria? US consulates?);
  6. An accelerated bout of protectionism due to the Sino-Japanese tensions and/or due to Obama/Romney China bashing.
  7. A potential Japanese sovereign debt scare; and
  8. A noteworthy deterioration in the US labor market as corporations reduce headcount amid cost-cutting initiatives in a desperate attempt to meet lofty consensus EPS forecasts in a slowing top line environment (2007-08 re-do?).”


We will continue to provide updates on each of those catalysts – specifically whether their respective probabilities are rising or falling – in our written work. For a collection of the recent, relevant notes or to engage in a deeper discussion with our team, feel free to reach out to us anytime.


Jumping ship, we thought we’d flag a few more noteworthy data points that came across our screens this AM during our daily Global Macro grind:



Overnight we learned that Singapore’s Real GDP growth slowed to +1.3% YoY in 3Q12 from +2.3%; QoQ SAAR: -1.5% vs. +0.2% [revised up from -0.7%]. Excluding 2Q11’s +1.2% YoY pace, this is slowest rate of YoY Real GDP growth in Singapore since 2Q09.


A topic we’re written extensively on in recent years is the relationship between Singaporean economic growth and global economic growth – specifically in that Singapore is one of the better barometers out there (see our latest note: GLOBAL GROWTH UPDATE – WHAT GROWTH?):


  • At 211% and 223% of GDP, respectively, Singapore and Hong Kong are far and away the most export-oriented countries in Asia – far more levered to global demand than other noteworthy exporters (China: 29.6%; South Korea: 52.4%; Japan: 15.2%; Thailand: 71.3%; and Taiwan: 58.9%);
  • The ratio of Singapore and Hong Kong’s share of world exports to their individual shares of world GDP are 7.1x and 7.5x, respectively – besting the next closest economy in Asia (Malaysia) on this metric by at least 3.7 turns; and
  • Singapore and Hong Kong are home to the world’s second and third-busiest container ports, handling 28,431,100 and 23,669,242 TEUs, respectively, per the latest yearly data from the American Association of Port Authorities. 


Since the turn of the century, Singapore has registered a positive correlation to World Real GDP growth of r² = 0.69. Per this polynomial regression model, Singapore’s incremental growth slowdown implies global growth could come in around +1.4% in 3Q12 on a YoY basis – roughly in line with our +1.3% forecast we initially published in our 3Q12 Macro Themes presentation back on JUL 11th (slide 6):




It’s worth noting that Bloomberg Consensus for 3Q12 World Real GDP was at +2.2% YoY then; it has since come down by -50bps to +1.7% YoY. Chaos theory/embracing uncertainty continues to be the most effective way to stay ahead of the Street on modeling the marginal deltas in GROWTH/INFLATION/POLICY. Our updated world GIP outlook is highlighted in the chart below:




Elsewhere in Singapore, the Monetary Authority of Singapore refrained from easing monetary policy today (out of line with our expectations for easing), citing a “build-up of inflationary pressures”. “Core prices will face upward pressure from higher food and services costs, while overall inflation will remain elevated for some time,” officials remarked.


With domestic economic growth slowing to near ~3YR lows and overseas demand for their exports continuing to soften, it’s interesting to see the MAS resist the urge to ease as Singapore continues to import the U.S.’s #1 export in recent years – commodity price inflation. This is 100% in line with what we have been forecasting in recent months – specifically in that the trend in global disinflation has concluded, with inflation poised to accelerate on a reported basis over the intermediate term. For more details on this topic, refer to our SEP 6 note titled: “GLOBAL INFLATION WATCH: ARE BERNANKE AND DRAGHI WEARING THE SAME JERSEY?”.






Perhaps the biggest red flag from Singapore’s latest economic data is that a country home to the world’s #1, #7 and #8 healthiest banks (per a Bloomberg index which takes into consideration comparisons of Tier 1 capital to risk-weighted assets and the share of nonperforming assets, among other factors) and which the World Economic Forum rates as the #2 most competitive economy in the world in its 2011-12 Global Competitiveness Index (behind #1 Switzerland and ahead of the U.S. at #5) is only growing at +1.3% YoY on an inflation-adjusted basis. That’s simply not good; nor does it bode well for places like Western Europe and the U.S., where the influence of and reliance upon central planning has accelerated to generational highs in recent months.



Overnight, China reported its SEP New Loans figure, which slowed to CNY632.2 billion MoM from CNY703.9 billion. On a YTD run-rate basis, new bank loan growth accelerated to +18% YoY from +16.8% in AUG. On an system-wide basis, total domestic financing growth (including bank loans, trust loans, corporate debt/equity issuance, etc.) accelerated to +19.5% YoY in the YTD through SEP from +7.4% YoY in the YTD through AUG.




While those certainly are headed in the right direction, we’d be remiss not to flag official concern over the pace of loan growth in mainland China. While Chinese playmakers haven’t officially announced a 2012 full-year target for lending to our knowledge, it is being floated around the press that they are eyeing a CNY7.5-8 trillion figure. That leaves roughly CNY1.5 trillion through year end (YTD through SEP = CNY6.7 trillion), which suggests the pace of loan growth in China is actually poised to slow in 4Q – a key risk to consensus forecasts that are calling for Chinese economic growth to v-bottom in the third quarter and accelerate well in to 2013.




The following two quotes, sourced directly from the Chinese brass today, draw attention to the systemic risks embedded in the Chinese banking system that we have been flagging in recent months:


  • “China’s central bank is worried about a rebound in bad loans. Worsening bank loan quality is associated with the condition of the Chinese economy. [The] outlook for Chinese economic growth is full of uncertainties.” – PBOC Vice Governor Liu Shiyu
  • "Unsurprisingly, although Chinese banks' non-performing loans are at a low level of 0.9%, the potential risks are worse than the official data suggest.” – Chairman of the Board at Bank of China (and potential successor to Zhou Xiaochuan as PBOC Governor) warning of the risks associated with off-balance sheet assets for Chinese banks


For our detailed thoughts on this subject, refer to our latest notes on China:



Taken in conjunction, those two notes should help bring you up to speed with our extensive, long-held expectations for China’s murky long-term TAIL GROWTH, INFLATION and POLICY dynamics – specifically in that investors should not anticipate a meaningful rebound in rates of Chinese economic growth or a substantial fiscal and/or monetary stimulus package amid an oft-dismissed, policy-led drive to rebalance the Chinese economy:


“As of 2010, gross domestic capital formation contributed nearly half of all of China’s economic growth (48.6%) – 1,360bps higher than India, which we’d argue is a comparable country in both size and economic development. Additionally, at nearly half of GDP, modern-day China is more levered to gross domestic capital formation as a means of economic growth more so than Malaysia, Thailand, Indonesia, South Korea, and Hong Kong were in the years leading up to the 1997-98 Asian Financial crisis.


Given the long-term headwinds facing both China’s property market and banking sector (which we have quantified in recent notes; email us for copies), it’s likely that the peak in these ratios is in the rear-view or within reach. 


Whether China will be able to gracefully rebalance its economy towards a more consumer-driven growth model in the process – as outlined in the current 5yr plan which calls for only +7% economic growth rates – will go a long way towards determining the slope of global economic growth over the long-term TAIL – particularly given the debt, deleveraging, demographics, property market, and structural unemployment headwinds facing the U.S. and parts of the E.U. Obviously this has major implications for a great [number of] corporations and investor portfolios worldwide.


Indeed, that is a TAIL risk worth pondering for any long-term investor. As the law of large numbers reminds us, as China continues to grow larger (now the world’s second-largest single-nation economy), a structural downshift in rates of Chinese economic growth is not at all out of the band of probable outcomes over the long term.”



It appears to us that Chinese policymakers are more or less content with the current pace of economic activity. For example, PBOC Board Member Yi Gang recently said full-year growth should come in around +7.8% YoY – equivalent to the 7.8% pace established in 1H12. That means no major reflation is likely to be pursued – in line with Gang’s view that recent “policy fine tuning” measures to support growth with begin to show in 4Q12.


It’s worth noting that only CNY275 billion of the CNY700 billion road and subway construction projects approved by the National Development & Reform Commission in the YTD has been accounted for; the rest needs to come front Chinese banks – institutions who appear hesitant, to say the least (Bloomberg reports they haven’t been taking advantage of the recently-announced 30% discount to official lending rates when extending credit, maintaining the previous up-to-10% discount on new loans underwritten).


In this light, it literally blows our mind that local governments in China have allegedly (according to JPMorgan) announced investment plans totaling CNY19 trillion (~37% of 2012E GDP) from MAY-SEP. If Chinese banks and Chinese banking regulators are officially concerned about the specter of rising NPLs and inflationary pressures emanating from the property market, where do local governments plan on getting the funding from? Local governments in China are only allowed to issue municipal debt on a trial basis in select municipalities and land sales are off -16.2% YoY (a key source of their revenues).




All told, Chinese stimulus talk remains just that – talk. When expectations on the sell-side and at the corporate level worldwide are for Chinese policymakers to act, the lack of meaningful action could be a negative catalyst in and of itself as incremental orders and backlogs start to dry up amid rising inventories for industrial equipment and/or industrial commodities. Some ~400YRS since William Shakespeare’s death, expectations remain the root of all heartache.



A day after Noda publically called for diplomatic talks to assuage Sino-Japanese tensions, Japan and China agreed to talks aimed at reducing tensions a day after Japanese Prime Minister Yoshihiko Noda warned that the world’s #2 and #3 largest economies would incrementally slow amid rising protectionism. Specifically, Japan's foreign ministry said last night that officials from both countries agreed to hold vice-ministerial level discussions at an unspecified date.


The dispute is playing out exactly as we had anticipated in our SEP 19 note tiled: “ARE CHINA AND JAPAN HEADING FOR WAR?”, specifically in that the clash has caused a severe amount of economic hardship – mostly experienced by Japan, which we outlined as having more to lose on that front. The SEP China sales figures from the large Japanese auto manufacturers were all down YoY in the range of -35% to -45%. Moreover, Japan’s Cabinet Office earlier today downgraded its assessment of the economy for the third-consecutive month – the longest streak since 2009.


SEP Vehicle Sales in China (per StreetAccount):

  • Toyota: -49% YoY
  • Nissan: -35%YoY
  • Honda: -41% YoY
  • Suzuki: -43% YoY
  • Mazda: -35% YoY
  • Mitsubishi: -63% YoY


After seeing the ratty China sales numbers from each of the Japanese auto manufacturers, Noda is likely feeling political pressure to ease up and acquiesce to China’s stern position on the  islands. It’s important to note that the automotive industry remains an important part of Japan's economy; data from Research and Markets shows carmakers and automotive suppliers together employ over 5.3 million workers, which is equivalent to 8.5% of the country's total workforce and that the industry generates 10% of the country's tax revenues and makes up 15% of the manufacturing sector, which, in total, generates roughly 20% of Japan's GDP.


That said, however, Noda bowing down to China ahead of a parliamentary election (by AUG ’13) could spell political disaster for the DPJ. Bloomberg data shows Noda’s approval rating was a lowly 34% in a Yomiuri newspaper poll published OCT 3, compared with 65% when he took office 13 months ago. Support for his DPJ was at 18%, while that of the LDP was 28%. Almost 45% had no party preference.


As such, we continue to believe that the uncertainty over the future leadership of both countries (pending Japanese parliamentary elections; Chinese leadership transition) is contributing to what we’d highlight as a delayed response to diplomacy – in spite of the recently agreed-upon talks (i.e. “vice-ministerial discussions at an unspecified date” are probably not going to cut it)! Moreover, we continue to envision accelerating protectionism (either de facto or de jure – same result) and further economic pain as leaders from both nations are in a bind both culturally and politically – at least for now. Weakness likely won’t be tolerated by either populace and, from a behavioral perspective, pride often trumps economic logic in the decision-making process of most men.


To this tune, Japan’s new Economy Minster Seiji Maehara, proclaimed that “Japan has no intention of backing down in a damaging spat with China over the disputed islands regardless of the negative impact it might have on economic ties with its largest trading partner.” The FT article, from which the aforementioned quote was sourced, said Maehara's comments reflect the determination of a handful of hard-line Japanese policymakers to stand firm against pressure from China to acknowledge its claim to the string of islands. Growth Slows as Pride Accelerates?



All told, new data suggests the world economy could potentially experience an outright contraction in real GDP over the intermediate term. As such, we maintain our bearish TREND-duration bias on “risky assets”, broadly speaking. Like he did in mid-to-late 2007, Ben Bernanke has lulled international investors to sleep with his aggressive monetary easing – perpetuating systemic risk for a rude awakening across asset classes if and when the data fails to meet inflated expectations over the intermediate term.


Have a wonderful weekend with your respective families,


Darius Dale

Senior Analyst


Takeaway: No recovery in slot volume in the near-term

  • Las Vegas Strip slot volume could continue to decline through Q1 2013.  2012 slot volume is expected to fall 2.5% YoY.
  • Slot revenue has outpaced slot volume growth for years as the player payout continues to decline 
  • We blame demographics – younger generations are just not interested in slot machines.  Unfortunately, those baby boomer gamblers won’t live forever.



CAT, Sany and Chinese Land Sales

Takeaway: Executive shake-ups at $CAT & Sany not a positive sign. China land sales off ~50% by value. $CAT 2013 sales guidance likely below street.

CAT, Sany and Chinese Land Sales

  • CAT Management Changes: While it is hard to read the tea leaves in CAT’s management shake-up, it is unlikely that business unit heads would seek (or be encouraged) to retire if results were coming in above goals.
  • Sany Heavy Management Changes:  In a late Friday night regulatory filing, Sany Heavy appears to have announced significant changes at the top, with Mao Zhongwu leaving the Chairman role to work in the mining truck unit, which is not a promotion.  CEO Zhou Wanchun is leaving the CEO role, another demotion.
  • Two Management Shake-ups?  Turnover at two major heavy equipment producers in as many days is not a positive sign.  Boards and corporate owners tend not to fire managers that are producing excellent results and encourage top performing executives to stay on. 
  • Chinese Land SalesMunicipal land sales in China are off roughly 50% in Yuan terms in the top 4 cities and nearly 20% in square meters in recent months country-wide (see chart below from Darius Dale on our Macro team).  That should impact Chinese demand for construction commodities, like iron ore, and construction equipment.  Lower land purchases suggest less development activity on the commercial and residential side, while lower municipal revenues from land sales may impact local infrastructure spending.  Weak construction activity in China is a driver of lower expectations for CAT and Sany.

CAT, Sany and Chinese Land Sales - land



  • CAT Guidance:  We should get CAT’s guidance for 2013 top line when the company reports a week from this Monday.  We may see consensus for 2013 trend lower into the report as we suspect management may guide to a 2013 revenue decline. 


Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012



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