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Wind and Rain

“Wind extinguishes a candle and energizes fire.”

-Nassim Taleb

 

On my way to Kansas City, Missouri last night I started reading Taleb’s new book, Antifragile. The aforementioned quote is the opening sentence to his prologue. It’s an interesting introduction. He uses a basic contrast of a few elements, and makes up a new word (what he calls the opposite of fragility).

 

While Taleb doesn’t market himself this way, there is a lot of Chaos Theory at the core of his framework. From an economic policy perspective, he is anti-academic dogma, anti-government, etc. “This is the tragedy of modernity: as with neurotically overprotective parents, those trying to help are often hurting us most.” (pg 5) And I’ll obviously second that.

 

Having not read it yet, the questions I have with this highly-promoted book are threefold: 1. Is there anything new here that I can apply to my risk management process? 2. Is it a book for market practitioners or an attempt to become academic in its own right? and 3. Will it help me save and make people money? I’ll review it and let you know.

 

Back to the Global Macro Grind

 

After seeing both the SP500 and Russell2000 close at fresh YTD highs yesterday (all-time high for the Russell) and then seeing China and Japan close at new highs again overnight, the question is: was being long stocks and out of Gold, Bonds, etc. just dumb luck?

 

Well, Nassim says, “I’d rather be dumb and antifragile than extremely smart and fragile, any time.” But I don’t think any man, woman, or child aspires to be dumb, do you? Thinking you are smarter than the Mr. Market – well, that’s an entirely different problem.

 

The most brainless/emotionless risk management exercise I can do to assure myself I am no smarter than anyone else, is shut up and listen to the price/volume/volatility signals in my Global Macro model. Here’s what they are signaling today in the USA:

  1. US Stocks (SP500) immediate-term TRADE overbought in the 1 range
  2. US Equity Volatility (VIX) immediate-term TRADE oversold in the 11.98-12.04 range
  3. US Dollar Index immediate-term TRADE oversold at $79.41
  4. US Treasury Yields (10yr) immediate-term TRADE overbought at 2.04%

These immediate-term signals are A) contextualized by my intermediate-term TREND and long-term TAIL durations and B) augmented by my research team’s fundamental updates (we have a morning meeting every day at 830AM EST).

 

In Asian Equities, the most important immediate-term TRADE signals this morning are as follows:

  1. CHINA – Shanghai Composite +1% overnight to immediate-term TRADE overbought at 2391
  2. JAPAN – Nikkei225 +2.3% overnight to immediate-term TRADE overbought at 11,124
  3. S.KOREA – KOSPI +0.43% overnight, recaptures TREND support (1959) but remains below 1976 TRADE resistance

In Europe:

  1. EURO – versus the USD, the Euro is immediate-term TRADE overbought at $1.35
  2. GERMANY – the DAX is immediate-term TRADE overbought at 7887
  3. ITALY – the MIB Index (equities) snapped immediate-term TRADE support of 17,714 this morning

All the while, Oil prices are testing an important breakout level of $114.79 (Brent). Wind and fire, meet another element: rain. Oil prices rising from these levels will be a brand new headwind to Global #GrowthStabilizing.

 

So, there’s a lot going on out there – but there always is.

 

Markets don’t care about your positions or processes. That’s why they tend to impose the most amount of pain on most of the people, all at the same time. That’s also why studying the Behavioral side of markets is as important as considering their fractal dimensions.

 

Got pain? Perma stock market bears are going to need a heck of a lot of rain to tone down this bullish bonfire. For 2 months The Pain Trade has been to the upside in stocks (and to the downside in Treasury Bonds).

 

That’s not new. Waking up to snow this morning in Kansas City is new. So I had to A) adapt or B) freeze when I walked over to Sonic to get breakfast.

 

Every day we are offered an opportunity to Embrace Uncertainty and risk adjust our decisions accordingly. If we’re scared of Black Swans and/or uncertain about our process’ ability to absorb uncertainty, I guess Taleb would say we aren’t antifragile.

 

One way to not be emotionally fragile is to keep moving.

 

Now that this morning’s Consensus Signal of The Day pinned a new high (II’s Bull/Bear Spread moves to +3,200 basis points wide to the Bullish Side – it was only 960bps wide in mid-November), you can sell some stocks at our immediate-term TRADE overbought signals. It may not be Taleb’s answer to the game – but for me, it’s just another solid risk adjusted decision to make.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1, $112.71-114.79, $3.65-3.72, $79.41-79.98, $1.33-1.35, 89.88-91.66, 1.92-2.04%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Wind and Rain - Chart of the Day

 

Wind and Rain - Virtual Portfolio


THE M3: TAIWAN GAMING DRAFT; MPEL SR NOTE OFFERING

The Macau Metro Monitor, January 30, 2013

 

 

GAMING LAW DRAFT TO BE SENT TO EXECUTIVE YUAN: MOTC HEAD China Post

A gaming law draft will soon be sent to the Executive Yuan, Minister of Transportation and Communications Mao Chi-kuo announced yesterday.  Mao said that the draft was based on a premise of strict regulation of gaming businesses that will be legally allowed once the legislation is passed at the Legislative Yuan.  There are two laws in the draft, according to Mao.  One is “Tourism Casino Management Regulation” and another one is called the “Gaming Management Bureau Organization Act.”

 

Administrative Deputy Minister Chen Jian-yu of the Ministry of Transportation and Communications (MOTC) said that many departments under the MOTC proposed different options during the discussion regarding the amendment.  “One of the departments proposed an idea that the future gaming authority could be under the supervision of the MOTC or under another ministry....We hope to attract international gamblers to the casinos instead of domestic gamblers,” said Chen

 

MCE FINANCE LIMITED ANNOUNCES PRICING OF SENIOR NOTES OFFERING MPEL

The offering consists of US$1,000 million aggregate principal amount of 5.00% senior notes due 2021.  The notes were priced at 100.00% of par and MCE Finance intends to use the net proceeds from the offering (i) to repurchase in full MCE Finance's US$600 million 10.25% senior notes due 2018 issued on May 17, 2010 and fund the related redemption costs, and (ii) the entire remainder of the net proceeds thereafter for the partial repayment of RMB2.3 billion (equivalent to US$364.9 million) 3.75% bonds due 2013 issued by Melco Crown Entertainment on May 9, 2011.

 

MPEL will not be a guarantor for the notes.  Approval in-principle has been received for the listing of the notes on the Singapore Exchange Securities Trading Limited (the "SGX-ST"). 


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Consensus War

This note was originally published at 8am on January 16, 2013 for Hedgeye subscribers.

“The time had come for the Anglo-Americans to fight; to not fight was to lose the war…”

-William Manchester, The Last Lion

 

In the summer of 1942, Hitler “finally moved fourteen divisions against Sevastopol… and took the city in twenty-three days.” Since Sevastopol was the “largest Soviet naval fortress on the Black Sea” (The Last Lion, pg 546), this mattered to the Americans, big time.

 

Big is as big does, and the world’s Currency War (Rickards) is getting big. While I am not trying to equate the human devastation of WWII with what’s being driven by economic central planners today, I think it’s fair to use historical metaphors that draw on global conflict. In today’s case, every country’s politicians are fighting for themselves.

 

Whether these academic bureaucrats want to admit the scope of their experimentation or not, Keynesian Policies To Inflate via sovereign Currency Debauchery are both causal in their intentions and correlated in their impacts on real-time market prices.

 

Back to the Global Macro Grind

 

This morning I woke up to one of those aha moments where the German enemy was on the ground (snow in CT) and the Russians were coming. Well, sort of. I actually love all types of snow, other than the yellow kind.

 

What the Italians and Russians don’t like is their currency going straight up into the right. South Koreans don’t like it either. Maybe the only country that loves it is Canada – maybe that’s because they are one of the few that recognizes it as winning.

 

Russian Central Bank First Deputy Chairman (fancy titles over there), Alexei Ulyukayev, explicitly called this a “Currency War” today in Moscow and went on to add that “Japan is weakening the Yen and other countries may follow.”

 

Ya think?

 

This isn’t new. It’s going to be a new global consensus however. And I think that’s what makes 2013 as exciting (and trade-able) a year as I can remember. If you don’t have a multi-factor process that incorporates countries, currencies, policies, etc. built into your process however, you might think I am right out to lunch.

 

Well, if you trade currencies and bonds like you trade stocks, your lunch might get eaten too. These markets are much more glacial than the high-frequency insider trading networks that have developed in small cap equities. Maybe that’s why some of the largest macro hedge fund gurus have retired. The Global Macro game of risk doesn’t really have the inside trade anymore.

 

When it comes to leveling the playing field and democratizing access to market edge that is legal, I am all in. What is your edge today isn’t what it was 5, 10, and 30 years ago. I think today’s market edges live and breathe at the intersection of Behavioral Economics and Chaos Theory (math).

 

How do we risk manage this?

  1. The process starts and ends with Embracing Uncertainty – anything can happen, literally, any hour of the day
  2. We let the signal (market price/volume/volatility) tell us where to swing at high probability pitches
  3. We then either confirm or disconfirm the quantitative signal amidst #OldWall’s qualitative research noise

Any hour of the day? Yes, of course. If you have half of America begging for centrally-planned markets, what kind of market do you expect? So don’t whine about it – understand it, and play the game that’s in front of you.

 

Yesterday’s intraday signal (on the selloff to the lowest intraday price we have seen in a week) was to cover shorts and buy Best Ideas on the long side. So this is what we did on the cover/buy front:

  1. We bought Apple (AAPL) at immediate-term TRADE oversold
  2. We covered Metals (XME) at immediate-term TRADE oversold
  3. We covered Phillip Morris (PM) at immediate-term TRADE oversold
  4. We bought Singapore (EWS) at immediate-term TRADE oversold

That doesn’t mean we love Apple (AAPL) long-term here (see chart). It just means what it means – we are at war with consensus and our quantitative process was signaling immediate-term exhaustion on the sell side of a stock that we risk manage like an ETF.

 

Before I get AAPL geniuses in a heat about that, here are the last 3 big signals our process has delivered:

  1. June 1, 2012 at $571.86 = BUY  
  2. September 28, 2012 at $677.74 = SELL
  3. December 17,2012 at $502.50 = BUY

No research. Just math, and some behavioral context.

 

How many people in our profession thought/think that it’s their own unique, non-inside info, qualitative research edge that made them “smart” being long AAPL? I don’t know. All I know is that a lot of hedge funds have gone away for doing the inside info thing, and a lot more research-only funds that don’t have a quantitative risk management overlay get mad at me.

 

That’s progress.

 

So is fighting for something you believe in. I believe in evolving this profession. I believe in playing by the rules. I believe in transparency, accountability, and trust.

 

Keep fighting the good fight.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1644-1681 (Gold fails at TRADE resistance), $109.33-111.48 (Oil broke its TAIL line again), $79.29-80.08 (USD holds TAIL support again), 1.31-1.34, $88.06-89.88 (Yen oversold), 1.81-1.85% (Treasuries overbought), and 1465-1477, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Consensus War - Chart of the Day

 

Consensus War - Virtual Portfolio


LVS YOUTUBE

In preparation for LVS's 4Q earnings release Wednesday, we’ve put together the recent pertinent forward looking company commentary.

 

 

POST-EARNINGS ANNOUNCEMENTS

 

1/28/13: SANDS CHINA GETS APPROVAL FOR 200 NEW TABLES: CEO 

 

1/28/13: SANDS CHINA ANNOUNCES INTERIM DIVIDEND OF HK$0.67 CENTS PAYABLE ~FEB 28  

 

1/28/13: SHERATON MACAO HOTEL AT SANDS COTAI CENTRAL ADDS 2,067 NEW ROOMS 

 

11/26/12: LAS VEGAS SANDS BOARD OF DIRECTORS APPROVES $2.75 PER SHARE SPECIAL DIVIDEND PAYABLE DEC 18 

 

YOUTUBE FROM 3Q CONFERENCE CALL

 

MACAU

  • "Holiday Inn is running at extremely high rates. The Conrad has more demand than it has supplies and the Sheraton just opened recently last month and we're doing splendidly at the Sheraton."
  • Parisian Macao:  "As soon as government approval comes, we will put piles in the ground and begin the construction period which will last a little bit more than 30 months, and hope to be opened in that property by the end of 2015."
  • [Macau malls] "We've got about $9 billion to $10 billion today. And I'm not going to sell Macao until we finish the bridge which is next month, in December, and we let in the cross traffic....If it does impact it well, I think we could probably reach another billion or maybe more....In terms of monetizing it, we should wait until we get the approval for the Tropical Mall and we put the new retail in Lot 3. So we're still in the midst of that in any event, this is a good turn. There's a good cap rate." 
  • "We also have 26 more stores opening in the Four Seasons, 43 more stores opening and five in Cotai Central, and the potential of an 800,000 square foot, 300 store mall next to the Sheraton on the Tropical Garden space. So there's a lot more retail to mature for us to essentially maximize that retail facility."
  • "Sands Cotai numbers are good, but they can be better. Again, the margins are hurting a bit due to a lack of premium mass."

SINGAPORE

  • "We're implementing new marketing programs to both the premium mass market and VIP markets, beefing up our sales force and investing in aircraft. The customers we are targeting with these efforts will come from the areas surrounding Singapore: Indonesia, Malaysia, Thailand, and the wider Southeast Asian region as well as from Hong Kong, Taiwan, China, Japan, and Korea, and Vietnam."
  • "We're putting a team on the ground, incentives on the ground to try to drive more of that premium mass customer into Singapore, more tourist-driven and we think it's going to be very successful. We have started that a few months ago. We're looking to put a lot of boots on the ground and our belief is that's the growth in Singapore in the near future."
  • [VIP RC trends] "I think it's stayed pretty flat....Singapore looks like a $45 to $50 billion annualized gold market at this time... We don't fear the credit side. We just would like to see more demand in the right kinds of customers. So our bigger challenge, very candidly, is going to be to make sure that premium mass growth returns again. That's the margin 65% plus we'd like to get back to and that's the segment we're really focusing on as far as we think there's short-term appreciation hope."
  • "Slot revenue has decreased by 8% this quarter... because of a decrease in local play. This concerns us and we are putting strategies in place in terms of how we can replace that business with additional business that we're after. The hotel room and MICE businesses have performed exceptionally and are operating at near capacity. There is rarely an empty room in the Marina Bay Sands these days. Retail has also grown meaningfully and we are in the process of developing additional dining and entertainment offerings in our mall."

DEVELOPMENT OUTLOOK & UPDATES

  • "In Japan, we are awaiting legislation, which is supposed to be submitted in April to the Diet. After that, there will be an approval process for a year or maybe two as it goes through the Japanese procedures. We're looking at sites in both Osaka and Tokyo and we continue that investigation and have people hired on the ground working on our behalf."
  • "In Korea, we have met with government officials at the federal government level, as well as the city levels in Seoul and Busan, Korea where we're interested in attractive sites for our business. I want to emphasize in Korea that we have non-negotiated tax rates, that it's also a must that we have some kind of local play available to us in order to pursue our Korean activities and we expect to have a situation where we have presented a Singapore type of restriction on local play, so that we can in fact get into the Korean market."
  • "Vietnam, we have looked at numerous sites in Vietnam. We continue to work with the government there. Our eyes are on Ho Chi Minh City and Hanoi. Progress is being made. However, there's a longer way to go there at the present time than in the other areas."
  • "We've also been on the ground in Taiwan. We are not interested in islands offshore. We're interested in the mainland in Taiwan. We haven't made much progress there, but there is some interest going forward."
  • "In Europe, our operation in Madrid for the Euro Vegas Strip continues. We continue to meet with the government. There continues to be activity in the area of grants and incentives, in the areas of the tender for land acquisition as well as the financing. We are expected by the government to present our plans in some detail in early January, and at that time we will also have more information on what the legislation is that will be passed in our favor."
  • "In North America, we are working with the Ontario Gaming Commission as far as a potential downtown site in Toronto. We have decided on the location. There are lots of things in the way at this point, including the approval of the Toronto City Council."
  • "In South America, we have had people on the ground in Brazil, both São Paulo and Rio de Janeiro, looking at opportunities there, and we have started initial investigations in Argentina."
  • "There's been some press about Willets Point. We've looked at it, continue to look at it."

 

OTHER

  • "We have every intention of increasing the dividend in the years ahead as our business and cash flows continue to grow."
  • [Las Vegas]  "We had some group cancellations since last quarter but the volume of group bookings for 2013 looks quite a bit stronger."

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