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Learn Together

“We can do anything if we do it together.”

-William S. Knudsen, 1938

 

That’s how great business men and women think. Since its their own capital at risk, they know that the only way to win is through trust, teamwork, and collaboration. Markets didn’t see any of that from President Obama yesterday. Markets have a vote too.

 

The aforementioned quote comes from the beginning of Chapter 3 in Freedom’s Forge, “The World of Tomorrow.” Pre WWII, Post Depression, was arguably the greatest period of collaboration between competent US Business leaders and Washington in US history. Unfortunately, it took a crisis for politicians to cooperate with credible business sources. Maybe we need another.

 

From both a global growth and US earnings cycle perspective, this is not the late 1930s. “In 1939, the American steel industry was at its lowest capacity in twenty years” (page71). Today, American corporate profit margins are coming off all-time peaks. If Romney Republicans and Democrats alike are being advised by Neo-Keynesians, don’t expect them to get what I see. They haven’t all year.

 

Back To the Global Macro Grind

 

Setting aside the money printing thing (and investors being forced to chase stocks into their April and September tops), the biggest Global Macro Research call of 2012 has to be Global Growth surprising on the downside.

 

Since piling more debt-upon-debt-upon-debt structurally impairs long-term economic growth (Reinhart & Rogoff 101), this really shouldn’t have surprised as many economists and strategists as it did.

 

Like Americans of the late 1930s, we need to evolved our risk management, modeling, and forecasting processes. We need more doers advising Washington – less talkers. They do not know what they don’t know.

 

Risk happens fast…

 

The SP500 snapped our long-term TAIL line of 1364 yesterday and then quickly drew-down another 9 handles to close the day down another -1.4%. From The Bernanke Top, that puts the SP500’s correction at -8.1% (Russell 2000 down -10.5%). That’ll leave a mark.

 

But what have we learned? How many more times do you want to go through this? Japan has been doing it for 20 years and is now quadrupling-down on the same monetary policy that has not worked.

 

The Japanese Yen is getting hammered again this morning as the leader of the LDP (Abe) is begging for “unlimited easing” going into Japan’s December 16th election. Don’t blame them – they are doing precisely what Princeton and Yale taught them to do.

 

So, down Yen = up Dollar… and the Correlation Risk associated with Strong Dollar is on:

  1. US Dollar up for the 8th of the last 9 weeks (bullish TREND – see Chart of The Day)
  2. Euro snaps TREND line support of $1.28 (EUR/USD)
  3. Yen drops back into a Bearish formation at $81.22 (USD/JPY)

I know, I know – I should be whining about the US fiscal cliff this morning. Not. With Italian GDP -2.4% y/y in Q3 and France seeing the fruits of a socialist Hollande vote (going into a recession), do not forget that the rest of the world’s fiscal and monetary risks do not cease to exist. They’re all going off the #KeynesianCliff now.

 

We all knew this would end badly. So don’t tell me “stocks are cheap” if you use the wrong numbers. You are better than that. Tell me you’ve learned something since the October of 2007 all-time high in US Equities and proactively prepared for this moment.

 

Across our core risk management durations, here’s why I am more bearish today than I was yesterday:

  1. CHINA – Shanghai Composite down another -1.3% overnight to a 1 month low (-17.5% since #GrowthSlowing began)
  2. JAPAN – Nikkei getting whipsawed by Hilsenrath like attempts to scare Equities higher, but remain -13.9% since March
  3. SOUTH KOREA – KOSPI down another -1.2% overnight almost back to flat YTD remains bearish TREND in our model
  4. GERMANY – DAX was the last holdout of the European majors; now snapping its 7118 TREND line
  5. SPAIN – stocks are trying to rally on another “request for bailout” rumor; that’s so Q2; IBEX is bearish TRADE and TREND
  6. RUSSIA – RTSI continues to crash (down -21.8% from the Global #GrowthSlowing top of March 2012)
  7. BRAZIL – Bovespa down another -2.1% yesterday, moves back into the red YTD (bearish TAIL remains)
  8. CANADA – TSX Composite cracked its TREND support of 12,131 this week, down -1.6% yesterday post Obama’s presser

Sure, that’s just a snapshot of globally interconnected risk across the majors of Global Equity markets. But guess what – if you look at what’s happening in Commodities and Currencies, from a volatility perspective, it’s even worse.

 

We’ve said this for a very long time, and I’ll say it again this morning – the USD arresting a 40-year decline is the most asymmetric risk that can occur, across asset classes, to what you’ve been used to for the last 10 years of your investing life.

 

Yes, there’s a lot going on. It’s a lot of hard and humbling analytical work to contextualize – which makes it next to impossible if the media and political elite refuse to acknowledge our voices. Rise up, and help us help them understand this together.

 

Our immediate-term risk ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $108.19-111.10, $3.41-3.47, $80.58-81.33, $1.26-1.28, 1.53-1.68%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Learn Together - Chart of the Day

 

Learn Together - Virtual Portfolio


Moving Fast

This note was originally published at 8am on November 01, 2012 for Hedgeye subscribers.

“The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow.”

-Rupert Murdoch

 

A friend of mine in Connecticut just sent me that quote. Like most of us on the East Coast, he’s up and at it early this morning. Risk happened fast. Now it’s time to slap on a pair of jeans, fire up our generators, and take on the day.

 

In The Signal And The Noise, Nate Silver calls out what physicist Didier Sornette alludes to as the “fight between order and disorder” (page 368). That fight isn’t new. However, through chaos theory, we are beginning to understand it more clearly.

 

Not unlike the world and its weather, I think about the Global Macro marketplace as one of interconnected factors that are colliding within a complex system. “Complex systems like this can at once seem very predictable and very unpredictable… they periodically undergo violent and highly non-linear phase changes from orderly to chaotic and back again.” (Silver, page 369)

 

Back to the Global Macro Grind

 

For most things Big Beta, October was gnarly. We won’t know what the fallout looks like on the buy-side until it’s old news. But the new news is that buying high-beta stocks and/or commodities at the Bernanke Top of September 14th, 2012 left a mark.

 

That’s not to say there weren’t what perma-bull marketing pundits tried to sell you yesterday morning as a “hurricane Sandy buying opportunity.” You just need to be selective about what you buy and when.

 

In the US stock market alone, look at the S&P Sector performance divergences for October 2012:

  1. SP500 = -2.0%
  2. Financials (XLF) = +2.0%
  3. Utilities (XLU) = +1.4%
  4. Basic Materials (XLB) = -2.1%
  5. Technology (XLK) = -6.3%

Markets rarely make perfect sense to me but, from a research perspective, these Sector divergences did.

  1. SP500 = bearish TRADE and TREND, so pervasive weakness into month-end made sense
  2. Financials = that’s the 1st Sector you buy if you think Romney wins (his closing the gap was enough, for starters)
  3. Utilities = that’s the low-beta trade that we recommended downshifting to last month; we’re still long it
  4. Basic Materials = get the Dollar right (Romney momentum = anti Bernanke momentum), you get commodities right
  5. Technology = Growth and #EarningsSlowing (our Top Macro Theme for Q412) matters, in the end

Where to from here? Let’s start with the Hedgeye Asset Allocation Model:

  1. Cash = 58%
  2. Fixed Income = 21% (Treasuries, Treasury Curve Flatteners, German Bunds – we still like them all during #GrowthSlowing)
  3. International FX = 15% (Strong US Dollar, stick with it unless it becomes clear that Obama is going to win)
  4. US Equities = 6% (Utilities and Financials we think continue to work; buy them on red)
  5. International Equities = 0% (with markets like Russia moving back into crash mode (-19.1% since March) we’re in no hurry)
  6. Commodities = 0% (we’ve been calling it Bernanke’s Bubble since March – sticking with it)

The asset allocation model isn’t for everyone. It’s actually for me. It’s how I think about my own money and what I am willing to put at risk at a given time and price. Since I own a lot of Hedgeye stock, my Cash position is overstated. This is meant to be a product whereby I can signal when/where I’d be adding to or subtracting from big liquid asset classes, on the margin.

 

The most important principle in my decision making process is uncertainty. I embrace it every minute of the day and reserve the right to change my mind, fast. That’s not for everyone. And I get that. I also get that, sometimes, it’s better than being slow.

 

After all, that’s what Rupert Murdoch is alluding to in the aforementioned quote inasmuch as the world’s largest sovereign governments have been reminding you of, almost daily, for the last 5 years. While Too Big To Move can be a problem for you when you have an 80 foot tree hanging on power lines across your driveway, you still need to be fast to adapt and change.

 

Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Technology (XLK), AAPL, and the SP500 are now $1691-1730, $107.41-109.09, $79.56-80.39, $1.28-1.30, 1.70-1.75%, $28.29-29.44, $586-616, and 1388-1419, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Moving Fast - Chart of the Day

 

Moving Fast - Virtual Portfolio


SJM 3Q12 CONF CALL NOTES

CONF CALL NOTES

  • EBITDA margin increase was due to the increase in mass market mix of their business
  • In late September, they added most of the gaming tables they have obtained from Satellite casinos to floors 9 & 10 of Grand Lisboa
  • Cotai expansion: 70,468 Meters of land. See completion 3 years after starting construction, hopefully in 2013.

 

Q&A

  • Tables that came out of Greek Mythology and went into Grand Lisboa didn't come online until the end of the quarter.  Their margins at GL decreased because the growth in VIP came from their largest junkets which get the highest commissions.  They also had to train staff from Greek Mythology before they were able to start producing revenue.  So you will see some net margin pressures next quarter as well but not as much as this quarter and there should be net revenue growth.
  • It's not easy to move tables from the their Satellite Casinos.  They are planning to add more tables at GL. There is a plan to renovate Jai Alai and that is one of the easier ways to move tables to their casinos.

 

HIGHLIGHTS FROM THE RELEASE

  • Adjusted Group EBITDA of HK$1,891MM and total revenue of HK$19,052MM
    • Gaming revenue: HK$18,892MM or 26.1% of the market
    • VIP gaming revenue: HK$13,314MM
      • VIP RC: HL$409BN; Hold: 3.05%
    • Mass market revenue: HK$6,040
    • Slot revenue: HK$370MM
    • 601 VIP tables and 1,158 Mass tables
  • Grand Lisbao gaming revenue of HK$7,315MM and Adjusted EBITDA of HK$1,148MM
  • Other self-promoted Casinos revenue of HK$2,591MM and Adjusted EBITDA of HK$271MM
  • Satellite Casinos revenue of HK$8,986MM and Adjusted EBITDA $HK$371
  • Cash: HK$24,880MM and Debt: HK$3,695MM
  • Comparable GAAP EBITDA margin of 17.3%.  "If the Group’s revenue is further adjusted to include the net revenue of self-promoted casinos plus the net revenue contribution (after reimbursed expenses) of the Group’s Satellite Casinos, the Group’s Adjusted EBITDA margin would be 29.4%."
  • Capex: HK$233MM

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TAIL Time: S&P 500 Levels, Refreshed

Takeaway: This is the first time where we’re going to legitimately test our 1364 TAIL line of support. If that line snaps, buckle up.

This note was originally published November 14, 2012 at 11:59 in Macro

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)

 

Today is TAIL time. This is the first time where we’re going to legitimately test our 1364 TAIL line of support. If that line snaps, buckle up. Because there’s no real intermediate-term support from there to 1258.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE resistance  = 1391
  3. Immediate-term TRADE support = 1351

 

In other words, my model is already signaling that a breakdown through 1364 is probable. Meanwhile, my immediate-term Risk Range is flagging lower-highs and lower-lows for the first day since May (1351-1391).

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

TAIL Time: S&P 500 Levels, Refreshed - SPX


TAIL Time: SP500 Levels, Refreshed

Takeaway: This is the first time where we’re going to legitimately test our 1364 TAIL line of support. If that line snaps, buckle up.

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)

 

Today is TAIL time. This is the first time where we’re going to legitimately test our 1364 TAIL line of support. If that line snaps, buckle up. Because there’s no real intermediate-term support from there to 1258.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE resistance  = 1391
  3. Immediate-term TRADE support = 1351

 

In other words, my model is already signaling that a breakdown through 1364 is probable. Meanwhile, my immediate-term Risk Range is flagging lower-highs and lower-lows for the first day since May (1).

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

TAIL Time: SP500 Levels, Refreshed - SPX


Housing: Post-Sandy Surprise

Mortgage activity is bouncing back in the aftermath of Hurricane Sandy. Last week mortgage applications to buy homes rose +11% to an index level of 190. This compares with a decline of 5% in the previous week, reflecting the dislocation caused by Hurricane Sandy. Taken together, however, the two-week change was +5.45%, a fairly strong showing. 

 

Housing: Post-Sandy Surprise - MBA Apps  Shark

 

Refinance applications rose 13% following a decline of 5% in the previous week, snapping a 5-week streak of declines in the refi market. Housing continues to build momentum and prices are rising adequately as sentiment shifts; people prefer to own a home over renting. Thanks to the Federal Reserve, interest rates will remain low for a long period of time, helping to encourage lending.

 

Housing: Post-Sandy Surprise - Shark

 

Of course, the fiscal cliff looms on the horizon and should the automatic tax hikes go into effect along with spending reductions, that will hurt the market and slow the progress we’ve made since the 2008 crisis.

 

Housing: Post-Sandy Surprise - YoY


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