Duration Mismatch

“If a man takes no thought about what is distant, he will find sorrow near at hand.”



There are a lot of things about this business that are challenging, but what we refer to internally as Duration Mismatch is at the top of the list. With an increasingly interconnected global marketplace changing the facts on our screens every day, the perpetual collision of investment durations creates both noise and opportunity.


Are you really an investor “for the long run”, or does that narrative only apply to your money manager who has learned that the art of managing money is having money to manage? Are you a short term “trader”, or are you a risk manager? Are you allowed to change as the facts change or does your investment mandate draw a box around your head? Do you own your duration?


By learning the hard way (losing money), I have come to the conclusion that it’s best to be duration agnostic. You show me a market that crashes to the upside for a +52% move since March 9th, 2009, and I’ll show you a market that I would have liked to have bought and held for that duration. You show me a market that crashed -57% like it did from October 10th, 2007 to the downside, and I’ll show the efficacy of daily risk management. Everything has a time and a price.


In the US market this morning I am presented with the following durations to consider:


  1. Immediate term TRADE = bullish (month end)
  2. Intermediate term TREND = bullish (provided that the Buck continues to Burn)
  3. Long term TAIL = bearish


The beauty of Wall Street is that, not only do people fancy themselves as some of the most intelligent people on earth, they actually are. That beauty provides tremendous opportunities. Being too intelligent quite often results in having duration mismatch.


Whether it was all of the “smart people” being short the US Housing stocks in Q2 of 2004 or their being short the US stock market in Q2 of 2009, it’s all one and the same. It’s called being too early. Timing in this business is everything. Show me a fund manager that has crushed it every year for the last 9 years, and I will show you Bernie Madoff.


Back to durations here in the US stock market, here are my immediate term TRADE levels of risk management this morning:


  1. SP500 support = 1017, resistance = 1041
  2. Nasdaq support = 2006, resistance = 2058
  3. Dow support = 9452, resistance = 9703


In the immediate term, I remain long the Nasdaq and short the Dow. In the intermediate term, that setup of long liquidity (Nasdaq) and short leverage (Dow) continues to prove to be a winning strategy (Nasdaq is +28.6% YTD and the Dow is +8.8%). In the long term, as cost of capital rises and access to it continues to tighten, I want to maintain this investment “style” – again, long liquidity, short leverage.


In the long term “we are all dead” – we don’t need Keynes to reveal that, but for whatever reason when considering investment durations, his whisper is always reminding us of investor mortality. Successful investment durations and styles are not perpetual. Our risk management role, in the long term, is to constantly evaluate the immediate term relevance of these strategies and their effectiveness.


In today’s long term, these are the two most important global macro factors: The US Dollar’s price and Chinese demand.


In today’s immediate term, the US Dollar Index remains broken and so is China’s Shanghai Index. Yes, one of those things is not like the other. China breaking down through both the immediate term TRADE line (3166) and the intermediate term TREND line (2962) is as new as last Wednesday (on 8/26, China closed above the TREND line). That’s why we sold out of it.


Context is always critical. We have been bullish on China since December of 2008, and Andrew Barber called for a -17% correction when we published our long term “China Black Book.” But after last night’s -6.7% smack down in the local Shanghai Composite exchange, there are no “buts”… we’ve already played the risk management hand that is in front of us, and if we hadn’t, we would be doing so, and promptly, this morning.


Early last week, we booked another gain in the China closed end fund (CAF) and replaced that stylistic Chinese exposure via the lower volatility, lower beta H-shares (EWH) in Hong Kong. While we are still bullish on China for the “long run.” That doesn’t mean we have to own it at every time and price.


Whether you are long China here or short US Energy stocks on the heels of a big merger Monday (Baker Hughes $5.5B for BJ Services), everything has a time and a price. Every investment’s success is largely determined by timing. Every day our goal remains managing how “smart” we think we are alongside our greatest risk, Duration Mismatch.


Best of luck out there this week,






XLV– SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.


EWH – iShares Hong KongThe current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.


EWZ – iShares BrazilPresident 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 reflation call.


QQQQ – PowerShares NASDAQ 100We bought Qs on 8/10 and 8/17 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.


CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.


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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.


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.





LQD – iShares Corporate Bonds – Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.


DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10, 8/3, and 8/21.


EWJ – iShares Japan –While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.


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.



LVS has handed Barclays its first role in a Hong Kong initial public offering in a decade.  Barclays will work on the deal alongside Goldman Sachs, LVS’ regular advisor, which could net the banks $75MM of fees.   Barclays earned the role by helping secure a crucial debt covenant lifeline from its banks after the casino firm almost breached its Macau loan agreements earlier this year.  Sands owes US$3.2 billion to its Macau lenders out of a total debt pile of US$10.4 billion. 

LVS wants to sell US$2.5 billion worth of shares in its Macau unit to repay debt and restart stalled casino projects.  Sand’s bankers face the challenge of convincing investors that it is a good time to invest in Macau and also that the company, highly indebted and with many projects running over schedule, is an attractive investment.  The timing of WYNN’s $1BN IPO in HK may also impact the success of the offering since many portfolio managers may not have room in their portfolios for both listings.



Construction of the Hong Kong-Zhuhai-Macau Bridge will commence on December 20, on the 10th anniversary of Macau’s return to the motherland.  Zhuhai Vice Mayor Chen Honghui is reported to have announced the date while attending a public function.  The construction of the 29.6km bridge will take five years to complete.  The Bank of China will provide 22 billion Yuan of the total 37.6 billion Yuan of project financing.  The balance of the 70 billion Yuan or $10 billion USD in total investment needed to complete the bridge will be provided by the central government and by the governments of the province of Guangdong and the special administrative regions of Hong Kong and Macau.



Macau’s real gross domestic product contracted 13.7% year-over-year in the second quarter of 2009, following an 11.9% (revised) decline in the first quarter, according to the Statistics and Census Service.  The statistical office said that this was the worst GDP decline since records began.


Taiwan has clearly made a statement by repealing its gaming ban after more than 15 years.  Penghu, Kinmen, and Matsu are possible new gaming jurisdictions.



Referenda coming up in Penghu and possibly Kinmen will determine the fate of gaming in Taiwan.  We believe that the earliest timing of opening would be 2011/2012 with approximately 2,000 slots maximum.  Penghu is the frontrunner at present, with a referendum already scheduled, and the best infrastructure of the three possible new gaming jurisdictions.  The incentives are clear; in the last few years, 5% of visitation to Macau has been from Taiwan.  Below are the details for Penghu.


The Process:

  • Two licenses are expected to be issued
  • The deadline for bidding for licenses is September 21, and the selections will be announced the following day
  • Bids for drawing up a regulatory framework are expected to be announced later this year
  • Bids must include minimum investment levels, the scale of operations, review mechanisms, and potential international investors if any
  • Bids must also address how the proposed project will be differentiated from other gaming markets in the region


The Requirements:

  • Casinos must be established within international tourist resort areas
  • The selected contractor is expected to assist the Minister of Transportation and Communications (MOTC) determine the scope and management of local integrated resorts, including the decision surrounding the mix of gaming and non gaming facilities in future resorts
  • Both domestic and international investment will be welcome but the acceptable percentage of international ownership is to be determined



  • Infrastructure in Penghu (although most advanced of the three possible new gaming locations) needs improvement and ease of travel from China to Penghu needs to be suitable for tourists
  • Airport runway is being extended to accommodate larger passenger jets
  • Charter flights between Penghu and 21 Chinese destinations have been approved and plans to ease visa restrictions for Chinese residents visiting Penghu are underway


Potential bidders:

  • AMZ group has been widely cited as a possible developer. 
    • Navegante Group which operates casinos in Las Vegas and Canada, would be the operator. 
    • AMZ plans on investing $300m to build a give-star 500 room resort in order to win a casino license.  The company owns 11 hectares of land on Penghu.
  • Melco - The head of the Democratic Progressives Party’s Kinmen chapter, Chen Chang-chiang, has been quoted in the press recently as saying that Lawrence Ho toured Kinmen August 7 and expressed a “keen interest” in tapping the market.  Kinmen has also been touted as a possible new casino location.  A referendum on the establishment of casinos may be held there soon (a petition demanding such has been handed in with signatures that need verification).
  • WYNN – We’ve only heard rumors that Wynn is involved but given their success in Macau, it wouldn’t surprise us.

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 of the 31st through the 4th will be busy, with a large number of economic data points scheduled for release in North America and Europe (while Asia will have relatively few).  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.  


Monday August 31


North America

Q2 GDP for Canada will be released at 8:30 am. In the US, August USDA Agricultural Prices and Chicago PMI will also be released on Monday.



Eurozone aggregate and Italian CPI data for August will be released on Monday morning, as will Italian Retail Sales for July. The UK markets will be closed.



On Sunday evening Japanese Production, Shipments and Retail Sales for July, as well as August PMI will be released. Despite all the data, attention this weekend will be focused on the results of the national election as the LDP loses its grip on power after almost half a century.  


Indian Q2 GDP  will be announced on the 31st. CLSA PMI data for August will also be released in China on Monday morning, as will Japanese housing and construction data for July. The 31st will also see the release of South Korean Industrial Production data for July and trade data for August; South Korea is one of our favorite economies to follow and we expect that both production and shipments will continue to improve sequentially. Q2 Current Account Balance figures will be released by the Australian Bureau of Statistics.  


Tuesday September 1


North America

On Tuesday Morning US ISM Manufacturing and Prices reading for August will be published, as will Construction Spending for July and Domestic Auto Sales for August. Weekly ICSC, Redbook and ABC Consumer Comfort index data will also be released.



Reuters PMI data will be released on Tuesday morning for the Eurozone and its major economy components. Switzerland will publish Q2 GDP on the 1st, while Eurozone unemployment and German Retail Sales for July are also slated for release. BOE lending, mortgage and M4 data for the UK in July will be announced at 4:30 AM EST.



Glenn Stevens will lead the RBA board meeting on Tuesday morning while Australian Q2 GDP will be announced on Tuesday evening. India will announce Trade Data for July while South Korea is scheduled to release FX Reserves and CPI for August.  Japanese Auto Sales data will also be released that morning.


Wednesday September 2


North America

Factory Orders and Inventories for July will be released in the US as will Q2 productivity and Labor Cost data from the Department of Labor. Weekly MBA Mortgage application data will be released on Wednesday morning along with EIA oil gas and distillate stock levels. On Tuesday at 2PM the FOMC notes from the meeting on August 11-12 will be released.  



On Wednesday second release Q2 GDP, Household consumption, Government expenditure and Trade data will be released at 5AM by Eurostat. German unemployment data and UK HBOS House Prices for August will also be released that morning.



A fairly quiet day for economic data in Asia with Australian Good and Services for Jul and August PMI figures from Singapore are the only major releases scheduled.


Thursday September 3


North America

After a slight decline last week, the market will be focused on Initial Claims data for the week of the 28th when it is released at 8:30 AM. ISM Non-Manufacturing and Priced data for August will be released at 10 AM, while weekly Natural Gas stock data will be announced at 10:35 by the EIA (a closely followed data point in the wake of the prior week’s bearish reading). Also on Thursday morning the Treasury Department will announce 3, 10 and 30 years.



Reuters August  Services PMI for the Eurozone and its Major Economy components will be released on the 3rd, as will Eurozone Retail Sales for July. Both France and the UK will be holding bond auctions on Thursday morning (with Her Majesty’s Treasury attempting to place 2.25 GBP Billion in 30 year paper at 4.25%). A regularly scheduled ECB Rate press conference will be held at 7:45 AM.



Another light schedule with Weekly Wholesale Inflation data from India and MOF Q2 Capex data from Japan will be the primary releases   


Friday September 4



North America

Both the US and Canada release August employment and Wage data before the market opens on Friday morning, With the Canadian figures scheduled for 7AM and US data Scheduled for 8:30. At 10 AM August IVEY PMI for Canada will be released.



Italian Trade data for June and Swiss GDP for August are scheduled to be released on Friday morning.



On Friday morning Taiwanese FX Reserve levels for August will be released.


Eye on Cotton

Cotton prices are down roughly 10% over the last 10 sessions to $0.55/lb., though there’s enough vulnerability in the supply chain whereby meaningful weakness through year-end might be tough for the bears to bank on. Heading into ’10, this translates to ‘long pricing power’ and short commodity exposure. 


Stockpiles:  The most recent data point from China, released by the National Development and Reform Commission, was that China imported 131,400 tons in July, which was down 38% yy albeit a slight improvement from 41% yy declines in the 1H. This has led to a tightening of world stocks as reflected in a global stocks-to-use ratio of 51.0% in August down from 51.3% in July. In addition, there has been recent speculation that China might increase cotton volume import quotas over concerns that state stockpiles will not be able to supplement the shortage of supply. Since China is the world’s largest cotton importer, this could be bullish as it relates to future cotton prices.


Production: Global production levels are down with the U.S. at its lowest level in 11 years and estimates for India’s output (world’s second largest producer) is down 15-20% because of drought conditions.


Demand: We’re not making a bull case around global consumer demand, but we find it very difficult to make a compelling bear case. Inventories in the global system of both raw and finished product remain fairly low, healthy, and in synch with current consumer demand. Looking at all the different scenarios, we think it’s more likely than not that demand moves up over the next six months. Inventories are tight around holiday, and then wer’e looking at spring/summer ’10 where we comped against not only a horrible recession, but a weather-impacted period where many consumers simply extended the prior year’s wardrobe. There’s going to be pent up demand at some point.


If we actually start to emerge from this global recession with cotton stockpiles low, production down, and demand picking up on the margin, I’d hate to be on the short side of cotton exposure.


Of course, the theme here will be long pricing power (brands and large retailers), and short commodity exposure (Gildan and to a lesser extent Hanesbrands). It’s too early to see this play out in 2H09, but it will be an increasingly important theme in 2010.


Eye on Cotton - cf cotton 8 09

Ball Underwater: SP500 Levels, Refreshed...

This week has been a perfect week for whoever chose to sun themselves. The SP500 has done absolutely nothing.


We're grinding in a range. As we grind, the Ball Underwater metaphor applies. The next move is going to be at least 2%. Up or down, I have no idea. Monday is month end, and while it’s unlikely on this Monday, come Q4 “Merger Monday” will be back. Things to think about as you stir that drink thinking what are these guys doing in the office as it’s raining in New Haven.


Immediate term TRADE resistance is 1047 (dotted red line). Immediate term TRADE support is now 1017 (dotted green).


Have a great weekend,



Keith R. McCullough
Chief Executive Officer


Ball Underwater: SP500 Levels, Refreshed... - a1

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.