"Fail to prepare. Prepare to fail."
I was on a plane from Philadelphia to Pittsburgh for the last hour of yesterday's US trading session. I missed the opportunity to buy and cover positions on the close but, patiently, I had been adding to our invested position in the Asset Allocation model throughout the last few days. We're now up to a 39% invested position in US Equities (as a percentage of our max allocation to an asset class) and down to a 44% in Cash.
With the exception of having to endure CNBC in my hotel room (they don't have Bloomberg TV), this morning's global macro factors look great. Across global equity, currency, and commodity markets, today looks as opportunistic as setups come. Opportunistic? Yes. We are moving into a proactively predictable trading range. In our Q3 Macro Investment Theme call yesterday, I called it "Range Rover" (if you'd like a replay of that call, please email ). Buy low, sell high.
Trading (or managing risk) around a range that we have prepared for is what we do. While we continue to have a hard time understanding what it is that some other people do, all we can focus on is what we do. That's it. That's our process.
As plenty of reactive investment managers sell low for the same reasons (the SP500 broke the 200-day moving average (884) yesterday), this is when you get in the game and take advantage of their groupthink. You don't have to go to college to wake-up to a market quote and say "hey, we broke the 200-day, that's bearish." In fact, it's rather sad that the sophistication of some perceived US fiduciaries only runs that deep.
We use the 200-day as an observation deck, of sorts. It's kind of like being at the zoo actually. Bring out the bananas in and around the timing of that 200-day line, and the behavior of the monkeys is quite predictable. For those of you who are ready to throw the keyboard at me for printing that - I'll get you a banana too. Evolve.
In the US stock market, here are the intermediate term TREND lines of quantitative support (3-months or more), that currently matter to my macro model:
1. SP500 = 871
2. Nasdaq = 1694
3. Russell 2000 = 477
I left out the Dow Jones, primarily because that's an index that is much narrower in reach (30 inputs) and more compromised in scope (companies that need financial leverage to earn a return), than the other three. We have only been on the short side of the Dow in 2009 as a result. On my and the monkey's scorecards, the Dow Jones Industrial Index remains broken.
Being long financial leverage (Dow, FTSE, Swiss SMI, etc...) is not where you want to be right now. From a risk management perspective, we refer to this as a "factor." No, it has nothing to do with your latest and favorite corporate access "One-on-One." It has nothing to do with anything you'll "fundamentally" analyze in a sell-side research report. It has everything to do with the embedded macro risks that you are holding in your portfolio.
We want to be "long of" the economic leverage associated with Chinese demand. We want to be "long of" liquidity. We do not want to be long financially geared returns.
Sorry Mr. Levered Long Private Equity man who bought something at the top in 2007. That's you. As we roll into the 4th quarter of 2009, the US Federal Reserve will be forced to follow the long end of the US Treasury curve. As a result, interest rates will move higher as we push into 2010 as access to capital starts to tighten again. This will create the mother load of all private equity sponsored bankruptcy cycles. Alongside John Merriwether blowing up another hedge fund this morning, that's what you hear in this low volume US stock market folks, the changing of the billionaire hedge fund/private equity guru guard.
How do we invest in such an environment? Timing is critical, as is price. Don't be a US equity centric "buy-and-hold" investor. Invest tactically, across asset classes around the world, at the right price.
Here are some important intermediate term global macro TREND lines of support to consider:
1. China (Shanghai Exchange) = 2597
2. Hong Kong (Hang Seng) = 16,185
3. Australia (AORD) = 3752
4. Germany (DAX) = 4658
5. Russia (RTSI) = 892
6. Canada (TSE) = 9656
7. Brazil (Bovespa) = 47,859
8. WTIC Oil = $58.92
9. Copper = $2.08
This is our investment process. These are the macro TREND lines that matter. Today is a great opportunity to get invested.
From the 3 US indices to the 9 aforementioned global macro lines, if we I see them break sustainably, I will be prepared to move. As one of the budding young stars on the Research Edge analyst team, Rory Green, reminded me the other day (from one of his homeland idols, Irish soccer legend Roy Keane): "Fail to prepare. Prepare to fail."
Best of luck out there today,
USO - Oil Fund-We bought USO on 7/6 on a pullback in oil over the last week. With the USD breaking down, oil should get a bid.
EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.
QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 and added to the position on 7/7 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.
EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.
XLE - SPDR Energy - We think Energy works higher if the Buck breaks down. XLE is working against us as one of the worst sectors in the market right now. TRADE and TREND are negative.
CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.
TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.
XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/29. Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.
GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold. We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.
XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17. Added to the position on 7/1, as our stance on the consumer is no longer bullish like it was in Q2, when gas prices and mortgage rates were dramatically lower.
SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.
"Fail to prepare. Prepare to fail."
SANDS MULLS HONG KONG IPO scmp.com
Sheldon Adleson, the chairman and CEO of Las Vegas Sands, stated that LVS wants to raise US$3 billion to US$4 billion and is considering an IPO of its Macau assets in Hong Kong along with several other options. Mr. Adelson also believes that "we are at the trough of the recession", and things will improve from here.
Sands may choose to sell stakes to private equity firms or to get construction companies involved in its projects to assemble their own financing. Adelson denied that Sands would consider a bond issue in the United States. In May it was reported that LVS had hired Goldman Sachs to look at a potential Honk Kong listing for its Macau assets and the firm planned to cut approximately 4,000 jobs in Macau. Analysts estimate that LVS needs US$1.5 billion to US$2 billion to finish its developments in Macau.
MACAU RANKS TOP 20 IN TOURISM LIST macaudailytimesnews.com
Tourists spent US$13.6 billion in Macau during 2008, according to World Tourism Organization statistics. The SAR is in 17th place in the world list, with 10.6 million visitors coming to Macau in 2008.
The WTO showed that from January to April, international tourism decreased 8% to 247 million and revised the predictions for the remainder of the year to include reductions of between 4% and 6%.
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Smith Travel Research (STR) materially altered its forecast for 2010 US RevPAR. STR now forecasts that RevPAR will decline 3.7% next year. Research Edge has been predicting negative 2010 RevPAR since we wrote "A GIRAFFE FROM HEAD TO TAIL" on January 29th, 2009. That's quite a while ago.
It's not that STR hasn't been vocal on the US lodging market; one of STR's recent updates (dated 5/3/2009), projected a 1.5% increase in 2010. The difference in these projections is significant, especially given the brief span of time between the respective reports being published. The sell side is still projecting flat-to-slightly up RevPAR in 2010. We doubt the industry has many cost levers left to pull. Estimates need to come down.
The negative catalysts we discussed in our 06/10/09 post, "JOIN THE CLUB" are still very much in play so we are not yet certain down 3.7% is enough. Although with 2009 progressing the way it has (see below) the comp continues to get easier.
Taiwanese exports for June released today registered at -30% on a year-over-year basis, the 10th consecutive negatively monthly reading. Exports to the mainland were down by almost 36% Y/Y, while coming in at the highest absolute dollar level since October of last year at $4.7 Billion USD. At 27% of the total, exports to the mainland are continuing to demonstrate resilience and have stabilized Taiwanese production levels overall -if not providing the surge that many bulls have been hoping for. Thus far, Chinese demand has not broadened significantly with consumer electronics and communications devices continuing to be the primary focus of Chinese buying.
This data continues to support our thesis on the Chinese recovery process. We will continue to closely follow export data from trading partners looking for marginal signs of change.
Our recent note, "REGIONALS: DISCERNING A TREND", outlined some key catalysts influencing the regional gamers. The disappointing revenue numbers in May (even while lapping negative factors such as the IL smoking ban and the MO loss limit), do not paint an optimistic picture, nor does the skyward trajectory of the gas price chart. Anecdotally, we are hearing June is likely to come in weak, despite an easier comparison.
Unemployment is a key variable and we take a look at that metric in this note. The unemployment chart below shows a different picture than that depicted in our 12/07/09 post, "THINK LOCALLY". The y-o-y declines are of greater magnitude. However, there are signs of stabilization in some gaming markets.
The employment situations in Houston, Dallas, Shreveport, and New Orleans are not great but they are relatively better. The sequential difference in the rate of change of unemployment in May from Q1 was generally flat in these metropolitan areas. In the fall of 2008, these were some of the most toxic employment markets we monitored. On the margin, this is positive for PNK, which derives 75% of its EBITDA from the Louisiana market. Houston and Dallas are important sources of traffic for casinos in the Bayou State.
Omaha clearly has a relative advantage over other gaming markets when it comes to unemployment. Along with St. Louis, it is one of only two metropolitan areas we examined that saw a decrease in unemployment from Q1 to May. ASCA derives 15% and 27% of its EBITDA from the greater Omaha and St. Louis areas, respectively. However, Chicagoland's unemployment picture is as bad, if not worse, than any other we monitor. ASCA and PENN have significant exposure to the Chicagoland market.
Las Vegas unemployment remains high and increased month-over-month in May. Los Angeles, which feeds some of the local LV customers, is showing some signs of relative stability. The year-over-year changes in unemployment for LA and Vegas were constant in May. While we have written that housing is the most statistically significant macro factor for Las Vegas Locals (LV LOCALS: HOUSING TRUMPS EVERYTHING, 11/30/08), the deteriorating job market will hamper economic growth. While the LV unemployment picture is not good for BYD, 2009 has already been discounted investors. We remain more optimistic on 2010 due to continued population growth.
The national unemployment picture is important for the Las Vegas Strip, which depends largely on tourist visitation to drive revenues. The y-o-y change in unemployment for May was 3.9%, worse than 1Q but identical to April. This is far from encouraging. The "less bad" thesis has played out and anecdotal evidence suggests the Strip is not getting any stronger.