Treasuries Take Hold

This morning, the yield on the 10-year Treasury Note hit 2.0%, a level not seen since April of 2012. Despite moving back down to 1.95% shortly after, the 10-year continues to hold above our TAIL risk line of support at 1.84%. We could soon see the 10-year yield flirting with 2.4% over the next three months, particularly if our call on US unemployment stabilizing continues to take hold. #GrowthStabilizing is good for stocks, bad for bonds. Friday's jobs report should play a role in determining if a yield above 2.0% is here for good.


Treasuries Take Hold - JAN28

Still Bullish: SP500 Levels, Refreshed

Takeaway: We anticipate that downside will be reasonably contained as the market pulls back from immediate-term TRADE overbought.

The Bloomberg quote of the day form this AM read:


“I’ve failed over and over again in my life and that is why I succeed”

-Michael Jordan


While not at all comparing ourselves to MJ, his six titles and his decade-plus of unparalleled dominance in the modern era of basketball, we do share a similar experience in that our failures also tend to sow the seeds for eventual success(es).


Long-term clients of our Macro research product know that we haven’t traditionally been the bulls’ huckleberry at the top-end of market melt-ups in previous years as various Polices to Inflate have appropriately led us to discounting eventual slowdowns in economic and/or earnings growth. This time, however, we too are cheering on those gains with the backdrop of not much incremental in the way of such policies.


As we outlined in our note from Friday titled, “1565?: SP500 Levels, Refreshed”, we think the balance of risks underpinning the US equity market from both a fundamental research and quantitative risk management perspective remains demonstrably in favor of further upside.


More importantly, we think there are a number of investors who may not have fully participated in the melt-up; they and “the flows” will likely be buying the dips at/around our immediate-term TRADE and, if necessary, our intermediate-term TREND lines of support:


  • Immediate-term TRADE Overbought = 1509
  • Immediate-term TRADE support = 1486
  • Intermediate-term TREND support = 1434


If you’re still bearish on this market or do not necessarily believe it has further upside, that’s totally fine; to each his/her own. We just don’t think it's prudent to short this puppy at least until you see a quantitative breakdown through the aforementioned level(s) of support that is also confirmed by a deterioration in the fundamental backdrop.


Right now, however, that scenario is about as probable as sustained flows into fixed income funds throughout 2013 (i.e. “not very”).


Darius Dale

Senior Analyst


Still Bullish: SP500 Levels, Refreshed - SPX

MACAU: Smoke On The Water

The partial smoking ban that went into place this month has yet to have a material impact on Macau casinos. Average Daily Table Revenue (ADTR) was HK$775 million this past week, in-line with the prior week and well below the first two weeks of the month. The pre-Chinese New Year timing is also a factor in the decline in ADTR. 


We expected the smoking ban to play a significant role in revenue but it has yet to do so. Since January 1st, 9000 people have been fined for smoking in public areas. The partial smoking ban allows casinos to have smoking areas in up to 50% of the gaming floor area. The rules do not set up a minimum ratio for the number of slots and tables to be included in smoking and non-smoking area. 


MACAU: Smoke On The Water - macau1

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Daily table revenues averaged HK$775 million this past week, in-line with the prior week and well below the first two weeks of the month.  The pre-Chinese New Year timing is clearly a factor.  Our full month projection remains at +7-11%, probably a bit lower than consensus.  So far, it doesn’t look like the smoking ban has had much impact, much to our surprise.




MPEL continues to have a strong month in terms of market share while LVS and MGM remain below recent trend.  



XLP: Treasuries Weigh In

Over the last few weeks, the spread on the 10-year Treasury and the yield of the Consumer Staples Select Sector SPDR ETF (XLP) has decreased by 0.44% (from -1.39% to -0.95%). This represents a combination of price performance of the XLP combined with the fact that yields have crept higher. Why does this matter? We’ve noticed that the XLP has become increasingly sensitive to changes in yields on government securities in recent years.


XLP: Treasuries Weigh In - Yield spread

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Ruffling Feathers

Japan is ruffling the feathers of China and Korea as it devalues the Yen in order to keep that “2% inflation target” in check. If it doesn’t end well, Japan won’t have China there to bail them out like Europe did. Caveat Emptor. What’s interesting is that while US equities are busy ripping higher week after week, South Korea, Brazil and China saw their stocks drop last week:


1.       South Korea = KOSPI -2.1% (breaking TRADE and TREND support)

2.       Brazil = Bovespa -1.3% (holding TRADE and TREND support)

3.       China = Shanghai Composite -1.1% (holding TRADE and TREND support)


When the TRADE and TREND support snaps, we wait and watch rather than buy the dip. When support holds, we’ll buy ‘em. Anyone who bought China on Friday is enjoying the upside surprise this morning to the tune of +2.4% on the Shanghai Comp. Korea’s KOSPI is doing the opposite and is heading lower after last week. It goes to show you that markets work until they don’t.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“US Durable Goods Orders rip the bears a new one, +4.6% vs +2% ‘expected’” -@KeithMcCullough



“Most people are other people. Their thoughts are someone else's opinions, their lives a mimicry, their passions a quotation.” -Oscar Wilde



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