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TRADE OF THE DAY: FCX

Today we shorted Freeport-McMoRan Copper & Gold (FCX) at $31.94 a share at 10:07 AM EDT in our Real-Time Alerts. Back to the ole well, FCX is one of our favorite ways to be short the Mining Capex (Bernanke) Bubble. We'll be keeping an eye on the US dollar as well - if it continues to strengthen, that won't bode well for Freeport-McMoRan.

 

TRADE OF THE DAY: FCX - image001


Missed Our Mining & Construction Equipment Black Book? Here Are 5 Key Charts

Takeaway: Mining capital spending is likely in for a multi-year decline even if commodities flatten. All construction is not US private construction.

Missed Our Mining & Construction Equipment Black Book?  Here Are 5 Key Charts

 

 

 

Below, we show five of the key charts from our mining and construction equipment black book.  You can access the full deck and replay here:

 

MATERIALSCLICK HERE

REPLAY:  CLICK HERE

 

 

Since mining is a mature industry, capital spending does not need to add much capacity on average.  When capital spending shoots well above trend in a rising commodity price environment, a subsequent flattening (not decline) of commodity prices can lead to dramatic declines in resource-related capital investment.

 

Missed Our Mining & Construction Equipment Black Book?  Here Are 5 Key Charts - 1r

 

 

Currently, mining and other resource-related capital spending is well above depreciation and amortization, a rough measure of long-run steady-state capital spending.

 

Missed Our Mining & Construction Equipment Black Book?  Here Are 5 Key Charts - 2r

 

 

We highlight a number of reasons for the commodity bull market, but investor belief in the commodity bull market is likely a key factor.  Depending on the opinions of strangers may be a risky strategy.

 

Missed Our Mining & Construction Equipment Black Book?  Here Are 5 Key Charts - 3r

 

 

CAT placed emphasis on dealer inventory reductions for recent operating challenges.  The data from CAT dealer Finning and other dealers (as well as CAT itself) suggests that the draw-down may take longer than many expect.  At Finning, it has yet to start.

 

Missed Our Mining & Construction Equipment Black Book?  Here Are 5 Key Charts - 4r

 

 

For those who think of CAT as a construction equipment company (CAT's Construction Industries segment is a much smaller portion of CAT's operating income than either Resource Industries or Power Systems), the US private sector, where construction is actually rebounding from cyclical lows, is only a small portion of the global construction equipment end-market.

 

Missed Our Mining & Construction Equipment Black Book?  Here Are 5 Key Charts - 6r

 

 

 


#2 CHART DU JOUR: SINGAPORE RECEIVABLES

Some volatility in the quarterly numbers but receivables have been consistent since Q4 2011

 

  • Genting Singapore has said that it was comfortable with the levels of credit it had extended, while MBS has been much more cautious, describing Singapore as the ‘most challenging credit market'.
  • Since jumping from 3% to 6% in 2011, Genting Singapore’s credit policy has been stable at 4.5% of direct RC volume in 2012
  • At the end of 2012, MBS  receivables as a % of direct play was 5%, close to where it started the year, although there was some QoQ variability

 

#2 CHART DU JOUR: SINGAPORE RECEIVABLES - ss


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

CHART DU JOUR: MACAU RECEIVABLES

Sands China continues to be the most aggressive lender but overall market receivables are down

 

  • Sands China continues to extend the most credit in the market as a % of direct play, climbing to a record 11.4% at the end of 2012
  • MPEL receivables as a % of direct play fell to 6.9% - a new low for the company
  • MGM China and Wynn Macau remain in the bottom in terms of extending credit
  • The total market receivable as a % of direct play rate fell from the peak in 2Q 2012 to 7.3% at the end of 2012

CHART DU JOUR: MACAU RECEIVABLES  - m


"Shrinking" The Markets

How Many Investors Does It Take To Change A Lightbulb? – Quantifying psychological drivers of global economy

Hedgeye hosted an Expert Call today with Dr. Richard Peterson, a psychiatrist who also trained as an electrical engineer.  Dr. Peterson has rolled his psychological expertise and quantitative skills into a unique specialty in behavioral market economics.  He is the author of Inside the Investor’s Brain and founder and CEO of MarketPsych Data, where he leads a global team of ten brilliant analysts with diverse expertise developing quantitative models using emotional indicators to identify market trends.

 

You’re So Predictable!

Dr. Peterson’s work as a psychiatrist showed him there are patterns to human behavior.  His work developing trading algorithms showed that there are patterns in markets.  And, since markets are made up of decisions made by human beings, it wasn’t long before Dr. Peterson started to identify market patterns based on the emotions that go into our decision-making.

 

In brain scientific terms (don’t worry, this is all we’ll include), strong emotions tend to shut the cortex – the “rational brain” – out of the decision-making system and turn everything over to the amygdala – the instinctive “animal brain.”  If you think this probably leads to poor decision-making, Dr. Peterson would agree 1,000%!

 

MarketPsych Data, founded in 2004, has developed a massive database of global sentiment, using data derived from social media: blogs, Twitter, Facebook, and a plethora of global forums.  They combine sentiment with reported news to identify trends, asking modeling questions like, How do most people view a political development, and how will that affect a nation’s currency?

 

MarketPsych’s database draws information from over two million actively monitored news and social media sites, going back to 1998.  It covers over 3,000 sentiment points and individual topics relating to 40,000 separate assets or entities.  The data spans 200 countries, 60 commodities, 30 currencies, and 5,000 individual public companies in 40 different industries.  MarketPsych’s data output is produced in a series of proprietary indices distributed under license through Thomson Reuters, and available by subscription.

 

If It Feels Good – Don’t Do It!

The big surprise – or not – in Dr. Peterson’s presentation is, whatever you feel like doing, you’re probably wrong.

 

As laid out in highly readable detail in his book, Dr. Peterson explains that most investors are unconsciously driven by emotions.  In his research, Dr. Peterson asks two questions:

1)      Why are people non-rational in their decision making?  And;

2)     Can we change their approach?

 

It’s a twist on the old joke about psychiatry: How many investors does it take to change a limit order?  The limit order has to want to change.

 

MarketPsych’s global team of experts find certain types of news stories spark strong emotions.  Stories around vivid events, with potentially catastrophic outcomes, trigger powerful emotions, especially fear and anger.  And, since the newsmedia report nothing but Vivid Events with potentially Catastrophic Outcomes, Fear and Anger are rampant.

 

Which is bad for your investment portfolio – but very good for Dr. Peterson and his clients.

 

Dr. Peterson’s work – and other work available in such recent bestselling books as Thinking Fast and Slow, by Nobel Prize-winning behavioral economist Daniel Kahneman – indicates just how delicate the brain / emotion link is, and how little it takes for the emotions to completely take over our decisions.  Experiments indicate that even a random fleeting glimpse of a photograph of a happy, sad or angry face can have a huge impact on a person’s subsequent decisions.  Imagine how your trading must be affected after you read a headline saying “North Korea Authorizes Nuclear Attack on the US.”

 

Happy Is The Land

As concrete examples of his work, Dr. Peterson shared some recent strategic insights.  Analysis of national sentiment indicates that extreme sentiments are typically followed by contrarian reversals.  Thus, MarketPsych ranked the top 40 nations on a “country joy index” and built an investment approach around shorting the four most joyful nations, while going long the four least joyful, resulting in a “pairs arbitrage” position.  The reasons markets top out is because everyone has become optimistic.  When the last buyer has gleefully bought into a rising market, there is no one left to take that market higher.  Similarly, when everyone is bearish, that’s when markets make bottoms.   At a national level, the next move for a joyful populace should logically be towards dissatisfaction, and for people who are thoroughly unhappy, there’s nowhere to go but up.

 

Simplistic as it sounds, the work that goes into building these models is robust, and the outputs continue to be rigorously tested and refined. 

 

Government instability frightens investors away – leaving buying opportunities for contrarians.  MarketPsych’s country ideas include one-year long positions on Russia and Pakistan (high government instability, looming disasters, low joy).  Meanwhile, currency ideas include a one-year long position on the Australian dollar, in the face of rising commodity pessimism and fears it will wreck their economy. 

 

Fed Up?

At the national government level, going short trust / long mistrust turns out to be a fruitful strategy.  Shorting a well-respected central bank, while going long a despised one could pay off.  (We leave it to you and your financial adviser to figure out the implications for Mr. Bernanke’s Federal Reserve.)  Significantly, Dr. Peterson’s work indicates low budget deficits are a negative for investing in a country (too much stability).

 

Perhaps the most graphic depiction of this is a chart indicating that Optimism is one of the greatest enemies of market stability.  MarketPsych provides a graph of the precipitous decline in the S&P 500 index triggered when, in September 2008, Congress rejected the first proposed rescue package, saying the financial sector was strong and did not need bailing out.

 

 

"Shrinking" The Markets - ETF congress

 

 

On the equities side, Dr. Peterson singled out Carnival Cruise Lines (CCL) – a stock Hedgeye has been negative on.  Dr. Peterson’s work indicates CCL could be an attractive long position: lots of anger, lots of disaster – both actual and anticipated – a company that has fallen from grace and is now almost universally demonized.


Conclusion: The #1 Mistake Investors Make

Dr. Peterson says the single most controversial aspect of his work continues to be the mere notion that our investment decisions are driven by emotion.  For starters, this means you should drop out of that MBA program and get master’s degree in psychology. It also means you are better guided by seeing your shrink, rather than your stockbroker.

 

One of the key points in Dr. Peterson’s book, in fact, is that investors are willing to pay a premium for professional advice, even when it is consistently average – or even wrong.  Facing powerful emotions all day long takes its toll – ask any seasoned trader.  (Ask any seasoned psychiatrist!)  Writes Dr. Peterson (p. 83) “Investors feel less emotional when deferring some responsibility for financial outcomes onto another.”  This raises the same troubling issue that Hedgeye has been battling since we came into existence: the financial industry is highly conflicted.  Its primary interest is in creating ways to pay itself, rather than coming up with ways to make you money.  Not everyone can be the Smart Money.  But in a field so shrouded in mystery, it doesn’t take much skill to serve as an emotional crutch.

 

Dr. Peterson says that by far the biggest mistake investors make over and over again is that they hold onto losers far too long, suffering greater and greater losses. 

 

We would add the Hedgeye Corollary: Most investors hold onto mediocre advice far too long.  Because let’s face it, it’s hard to be wrong about your investments so often.  Much better to have a professional who you pay to be wrong for you.

 

For more information about Dr. Peterson’s work, please email info@marketpsychdata.com.

 


XLF: Holding The Line

The Financial Select Sector SPDR ETF (XLF) has been able to hold above its TRADE line of support at $17.93 for nearly a month. Currently, it's attempting to overcome its line of resistance on the TRADE duration at $18.33. Our macro team shows 1.7% upside to TRADE resistance and 0.6% downside to TRADE support.

 

XLF: Holding The Line - XLF1


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.

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