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Dangerous Theories

This note was originally published at 8am on February 11, 2013 for Hedgeye subscribers.

“For a theory is a very dangerous thing to have.”

-Nassim Taleb

 

I just got back from an island in the Bahamas and I’m flying to London this morning. As a result, February will be a very productive month of reading. I just finished grinding though both The Last Lion and Antifragility. I’m digging into Ike’s Bluff next.

 

The problem with self-education is that the more you read, the less you know. This helps contextualize how clueless the people who are trying to centrally plan your life actually are. Particularly when it comes to economic policies, I agree with Taleb that their “theories are superfragile.”

 

He also goes on (and on and on) to differentiate between social and hard sciences: “Physics is privileged; it is the exception, which makes its imitation by other disciplines similar to attempts to make a whale fly like an eagle.” (Antifragility, pg 116)

 

Back to the Global Macro Grind

 

After closing up for the 6th consecutive week, the US stock market is flying like something – and it’s not the London Whale. On almost no volume on Friday (down -21% from my YTD average for market up days), the Russell2000 made yet another all-time high.

 

As we like to say at Hedgeye, all-time is a long time… but now we’ve been writing about all-time for a pretty long time too. For perma-bears, this has to be leaving a mark. Last week’s II Bull/Bear Sentiment Survey saw Bears capitulate to a fresh new YTD low of 21.1%.

 

Other than playing with my kids in the Bahamian sun, what did I like about last week?

  1. STRONG DOLLAR – the US Dollar moved back into a Bullish Formation, closing up +1.4% wk-over-wk at $80.25
  2. DEFLATING THE INFLATION – the CRB Index (19 commodities) closed down another -1.3% on the week at 301
  3. I discovered a tasty new beach beer, Kalik Light

I know some of our competitors keep talking about the risk of raging inflation – but that’s a Dangerous Theory to have if the US Dollar continues to make a series of long-term (40 year) higher-lows.

 

We’re not theorizing that Bernanke’s Bubbles (Commodities) will continue to pop from their all-time highs (2008-2012). They are already popping. Oil topped in 2008; Gold and the CRB Index stopped going up in 2011; and Food Prices put in their all-time highs in 2012.

 

If your theory was that the Fed would print to infinity and beyond and you bought Gold, Silver, etc. on that in 2008-2009, great call. But what happens to your theory if employment and housing #GrowthStabilizes in 2012-2013 and the Fed gets out of the way?

 

What didn’t I like about last week?

  1. TREASURIES – US Treasury Yields stopped rising (10yr yield down 6bps wk-over-wk to 1.95%)
  2. YIELD SPREAD – 10yr yield minus 2yr yield stopped expanding (down 5bps wk-over-wk to +170bps wide)
  3. GLOBAL EQUITIES – both European and Emerging Market stocks closed down on the week

Since everything that matters in our macro model happens on the margin, what we call negative divergences (they do bad things when the US stock market headlines are doing good things) really matter.

 

Some clean-cut negative divergences vs the SP500 closing at its YTD high (1517) were as follows:

  1. Friday’s highs came on down volume (you want expanding volume on the way up, not flailing volume)
  2. Friday’s highs came on an immediate-term TRADE signal in the VIX for a higher YTD low of 12.42 (you want lower-lows)
  3. Global Equities were down wk-over-wk = Emerging Markets -1.1%, MSCI World Index -0.4%, EuroStoxx600 -0.3%

Then, in terms of positive divergences (US Equities), some of the Bullish Style Factors we have been bulled up about got as extended as they have been versus the SP500’s +6.4% YTD return:

  1. High Short Interest Stocks = +9.2% YTD
  2. High Beta Stocks = +9.2% YTD
  3. Top Earnings Growth Stocks (top 25%) = +9.1% YTD

Since A) I have extension (immediate-term TRADE overbought) in our most bullish factors and B) I’ve finally been issued some fairly broad based negative divergences across asset classes, my decision late last week was to take down Global Equity exposure and raise Cash.

 

That’s not theorizing. That’s doing it in real-time and holding ourselves accountable to explaining the decisions we make. I guess that probably makes us dangerous too. But that’s just a theory.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), CRB Index, US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1659-1683, $116.38-118.83, 299-303, $79.79-80.39, 92.67-94.41, 1.93-2.01%, and 1507-1521, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Dangerous Theories - Chart of the Day

 

Dangerous Theories - Virtual Portfolio


Corn - We Still Think Prices Can go Lower

Worse Start to Year versus 2012



Current moisture conditions in crop regions (in particular west of the Mississippi) are no doubt much worse than a year ago (see progression below).  However, conditions have improved since the start of the year and with some projected moisture events coming up, we continue to think the bias is downward in terms of corn prices.  The futures curve would seem to agree with us.  Further, the set-up on the futures curve appears identical to this year versus 2012.

 

Corn - We Still Think Prices Can go Lower - Drought Monitor 2.21.12

 

Corn - We Still Think Prices Can go Lower - Drought Monitor 1.1.13

 

Corn - We Still Think Prices Can go Lower - Drought Monitor 2.19.13



We think it’s very difficult to be long corn at this point (as supported by recent CFTC data that shows non-commercial buyers becoming less long corn), with significant time (and weather) remaining until the crop goes in the ground.  As it currently stands, we would not be surprised to see 97 million acres of corn planted in the U.S this year – the USDA’s current estimate stands at 96.5 million acres.  The incentive certainly exists for farmers to plant as much corn as possible.

 

Corn - We Still Think Prices Can go Lower - Corn Cost Curve

 

Corn - We Still Think Prices Can go Lower - CFTC Corn

 

We aren't in the habit of making bets on Mother Nature, but we do try to estimate what is currently priced in with respect to various assets and it appears to us that ADM at current levels remains a reasonably priced option with respect to the quantity and cost of the upcoming corn crop.



After a very nice run post EPS and with the news that Berkshire Hathaway is an investor, ADM has traded off its highs as the balance of the agricultural complex (fertilizer stocks) have languished in the face of broadly weaker commodity prices.  To be clear, ADM is not a play on higher corn prices – lower corn prices benefit ethanol margins and a larger crop benefits merchandise and handling margins – think big crop with no price spikes, and ADM can continue to work from its current level.

 

Lower corn prices would also be constructive for protein stocks (SFD, TSN, PPC, SAFM) - though at current levels, only SFD interests us on the long side.

 

Have a good week,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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P:



Matt Hedrick

Senior Analyst




Final Thoughts post-CAGNY

We would characterize CAGNY 2013 as largely uneventful and in some cases downright boring.  We didn’t hear much that changed our thinking relative to how we came into the year or how we left Q1 earnings season.  Briefly, the key themes running through the presentations were:

  1. Innovation – it’s the cost of doing business in the “new normal”.  Consumers will pay a premium for value, perceived or real.  Given the prominence of this topic, we wonder if companies are finding it necessary to spend more to stay in place?
  2. Advertising – companies have to communicate the benefits and differences of product offerings, old and new, to both consumers and retail partners
  3. Emerging markets – characterized as a “once in a generation” opportunity, the potential represented by an expanding global middle class was consistently referenced
  4. Productivity – doing more with less is necessary in a world where pricing is elusive, consumers are fickle, private label is growing and commodities are a wild card
  5. M&A – not a presentation topic, but certainly a topic of cocktail conversation – who’s next?  We don’t see the Heinz deal as a catalyst for wide spread M&A across staples.  However, some names make sense as potential targets – HSH, for one.

Where did our thinking change?



We won’t rehash the presentations, but as a quick summary:

 

CPB – less likely to want to short as core soup business potentially stabilizes

 

KRFT – one of our favorite presentations, would be a buyer lower – upside to low $50s

 

HSH – again, one of our favorite presentations, more constructive

 

BG – doing more work here on the long side after an awful quarter, good long-term theme

 

PG – less impressed with potential progress on top-line, but cost-savings likely preserve EPS

 

CLX – can’t abide by the multiple, but with good visibility on margins and innovation, tougher short

 

MDLZ – feels earlier, but risk/reward profile strikes us as very favorable over longer duration

 

NWL – we liked the story going in, presentation reinforced our belief that the stock can continue to rerate.

 

KO – interesting commentary on incremental bottler consolidation.  Does Iberia represent a new potential acquirer for German assets?

 

We are, of course, happy to discuss any and all names in greater detail.

 

Enjoy your Sunday,

 

Rob

 




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.

THE WEEK AHEAD

The Economic Data calendar for the week of the 25th of February through the 1st of March 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.

 

THE WEEK AHEAD - WeekAhead


CZR YOUTUBE

In preparation for CZR's F4Q earnings release Monday, we’ve put together the recent pertinent forward looking company commentary.

 

 

YOUTUBE FROM 4Q CONFERENCE CALL

  • "When we announced the sale of Harrah's St. Louis to Penn, we said we'd redeploy capital into projects and regions that present the best opportunities for higher returns. In 2013, we plan to use a portion of these proceeds and the capital we obtain through it to update many properties across our Las Vegas footprint."
  • [Linq] "We're on pace to open the dining and retail offerings in phases beginning in the second half of next year and we plan to open the High Roller early in 2014."
  • "We also plan to open the Thistledown VLT facility near Cleveland in the first half of 2013. In Baltimore, the investment group that we are leading is in the process of refining and completing our detailed construction drawings and is in the process of seeking construction permits. We expect to begin construction in the second quarter of next year with a targeted opening in the middle of 2014."
  • [Las Vegas] "I don't think you're going to see a big difference in the fourth quarter versus the third, recognizing there are large portions of the fourth quarter that are seasonally low anyway. I understand Jim was a bit more optimistic about convention and meeting business trends in 2013 and 2014 and I think we're encouraged by those trends in 2013 and 2014 as well, but I don't see anything in the fourth quarter that's especially notable."
  • [Capex 2012 guidance] "For CEC, it's between $520 million and $560 million, primarily that would be spend in the CEOC entity, which is $480 million to $510 million, and then the balance will be in CMBS of $40 million to $50 million....Regarding 2013, generally you're correct, we have mentioned how our focus is going to be on continuing to reinvest in the business, in particular allocating the funds that are going to be generated from the sale of the St. Louis property into areas, where we identify higher return potential, a lot of that is going to be in Las Vegas next year, and we'll be targeting some specific room renovations at properties around the city."
  • "In the quarter, we experienced about $50.8 million of cost savings and have identified yet-to-be achieved savings that we will expect to materialize over the next six quarters or so of $204.3 million."
  • "You've seen a lot of political debate among the parties about online gaming and the potential for its moving in the lame duck. I'm not terribly optimistic, I think it's possible. But I think there are some very pressing issues for the country's finances that remain in front of the Congress in the lame duck session, and surely we all hope that they get attention. It's possible that the online gaming question will be called in that period, but I think it's probably less likely rather than more likely."
  •  [Vegas] "We do anticipate we will enjoy a meaningful ADR improvement once the renovations are complete. So, if you take, for example, one of our towers at Bally's which has rooms that are in need of renovation, we sell those at a discount as a result of their current circumstances. And once they're renovated, I think we'll see a meaningful improvement in ADR as we have with some of the other older buildings like the Flamingo where we've done some very I think innovative renovations of those rooms and we've enjoyed an almost immediate improvement in ADR."

CHART(S) DU JOUR: VIP CORRELATION

This note was originally published February 21, 2013 at 14:46 in Gaming

Both were up in Q4 but Singapore VIP volume surged while Macau grew only modestly.  Prior to Q4, the correlation was much higher.

 

  • Singapore 4Q VIP rolling chip (RC) volume soared 50% YoY while in Macau, 4Q VIP volume only gained 5% YoY.
  • Correlation between Singapore RC volume and Macau RC volume prior to Q4 was 0.86
  • Low hold usually drives higher volumes since people keep playing when they win.  Singapore held very low in Q4 while Macau was close to normal.  Singapore's a relatively new market so VIP business should grow faster than that in Macau.
  • Genting today was upbeat regarding VIP volume growth while Macau's VIP volume growth thus far in 2013 has been subdued
  • It remains to be seen if Singapore is taking VIP share from Macau. 

CHART(S) DU JOUR: VIP CORRELATION - s2

 

CHART(S) DU JOUR: VIP CORRELATION - s4


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