“It would be nice to think that such bad behavior will never happen again.”
Some people are nice in this business. Some people are mean. I tend to be nice to subscribers, children, and dogs. I guess I have a not so nice tweet-streak in me for pundits who aren’t accountable. Hockey players can be mean that way.
The aforementioned quote comes from a non-hockey-non-consensus economics book I have been waiting to review called The Age of Oversupply, by Dan Alpert from Westwood Capital. It’s an outside the box, but reasonable way to consider #deflation.
Dan is one of the nice guys who holds himself accountable to his clients. He is also on a short list of people who were appropriately bearish on things like supply in 2008. The main contention in his book is that oversupply is here to stay. That appears right, for now.
Back to the Global Macro Grind…
Some of the #MoBros on Twitter have been calling me a meany for calling their levered-long-momentum positions in small cap and/or social (non profit publicly listed companies) stocks #Bubbles. But Dan is down with that – he calls them what they are too.
“The Great Credit Bubble may have burst, but the age of oversupply hasn’t ended – and won’t anytime soon. Abundant labor, excess capital, and cheap money are here to stay.” (The Age of Oversupply, pg 18)
By my math, the only way to unwind the excess and stupid-valuation-storytelling associated with these cheap moneys is via lower prices for #bubble stocks. Yesterday’s US stock market volume was revealing on that front:
- Total US Equity Market Volume (total exchange + OTC + OTCBB) was +6.2% vs. its 3 month average
- Total Exchange Volume was +44% vs. its 3 month average
- Total Traded Value (Russell 3000) was +30% vs. its 4 month average
That’s three different ways we try to look at equity market volume in real-time. When it comes to the pick-toggling junk bond #bubble, finding real-time volume read-throughs is more like finding Waldo.
Today’s Chart of The Day (exhibit 51 in our Q4 Macro Themes deck) is a picture of what I am trying to hammer home in terms of the relationship volume has with inflated prices – Total Exchange Volume vs Russell 3000 TTM P/E multiple.
Punch-line: this is the most expensive and illiquid market since the caveman.
“So” how does expensive illiquidity sync with oversupply of labor, capital, etc.? Unfortunately, when Japanese, European, and US growth is slowing (all at the same time), I think what that means is pretty straightforward:
- Deflation of illiquid equity bubbles
- Re-flation of premiums paid for liquidity (JGBs, Bunds, Treasuries)
- And a whole whack of revisionist sell-side economics excuse-making along the way
You see, until this market snapped the backs of the Moving Monkeys (point and click single-factor time/price charts using things like the “50 and 200 day” moving averages), they didn’t have to pay attention to things like books, volume, or volatility.
After a +138% rip in US equity volatility (VIX since the Russell #Bubble topped on July 7th, 2014), they need to start reading!
To be clear on timing, since we’re now probing:
A) Immediate-term TRADE overbought signals in VIX (risk range = 17.78-24.98)
B) Immediate-term TRADE oversold signals in SPX and RUT (SPX risk range = 1)
I don’t want you to be shorting US stocks and buying TLT with the 10yr Yield at its YTD lows (2.21%) today.
I just want you to, objectively, rewind the risk management tapes and learn something from what a baseline 3-factor model (price, volume, and volatility) was signaling for, well, most of 2014.
For OCT to-date, the #Quad4 deflation in US equity sector styles levered to inflation and/or growth expectations looks like this:
- Energy Stocks (XLE) down -10.65%
- Basic Material Stocks (XLB) down -9.03%
- Industrial Stocks (XLI) down -6.79%
That’s precisely what you should see in #Quad4. Mr. Market is telling you that both growth and inflation expectations are slowing, at the same time. Unless you are overweight Cash, Treasury Bonds, and Munis, that is not #nice portfolio behavior.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr yield 2.20-2.39%
Best of luck out there today,
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This note was originally published October 10, 2014 at 13:16 in Gaming
In this exclusive interview Todd Jordan gives his insights from Macau.
Gaming, Lodging and Leisure sector head Todd Jordan and senior analyst David Benz walk through their three-pronged negative thesis on Macau gaming (VIP slowdown as a result of a corruption crackdown, mass deceleration and mass margin contraction) and the threat of further shrinking mass margins.
Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.
1. CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.
The Sugar, Cotton, and Soybeans markets experienced the most BULLISH relative positioning change in the CRB week-over-week
- Soybeans: Despite the bullish change week-over-week, the soybeans market is still -2.0 standard deviations shorter than its Trailing 12-month average and aggregate open interest is +3.1 standard deviations above its trailing 12-month average
The Orange Juice, Heating Oil, and Cocoa markets experienced the most BEARISH relative positioning change in the CRB week-over-week
2. Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.
- The Corn, Natural Gas, and Wheat markets are positioned for HIGHER PRICES near-term
- The Lean Hogs, Cotton, and RBOB Gasoline markets are positioned for LOWER PRICES near-term
3. Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.
- The Corn, Wheat, and Sugar markets are positioned for HIGHER PRICES in 1-year
- The Lean Hogs, Live Cattle, and Cocoa markets are positioned for LOWER PRICES in 1-year
4. Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.
Takeaway: JCP needed a 'rock star' CEO. Ellison is not that (at least in perception). We think this gives more ammo to the bear debate.
Today’s announcement from JCP does not make us more or less inclined to own the stock here, but as much as we walked away more positive from the analyst meeting last week, this announcement probably gives more for the bears to chew on than the bulls. Here’s why…
- At last week’s analyst meeting, Ullman clearly brought greater intensity towards the subject of finding a replacement CEO. So the timing of the announcement is not a surprise. Though there was at least a fleeting chance that JCP hired a high-profile ‘rock star’ CEO like Glen Murphy (remember how close JCP was to hiring Mindy Grossman from QVC/Nike). Marvin Ellison might be good, but he’s not a rock star (at least in perception).
- Ellison has been serving as EVP of Stores at Home Depot where he oversaw a $78bn revenue stream over 2256 stores and 236mm square foot. At JCP, he’ll be overseeing $12bn in sales, 1112 stores, and 111mm square feet. Net/net coming to JCP is hardly an insurmountable task given his background. That’s a positive.
- We actually like the idea of not bringing a dinosaur department store executive to serve as CEO. But on the flip side, Home Improvement is about as far away from selling Clothes and Shoes as you can get. Inventory is far easier to manage at a store like Home Depot, particularly given that the merchandise does not go out of style every 90 days (to the point of obsolescence). Home Depot is the 900lb gorilla in the retailer/vendor relationship in virtually every category. While at JCP, it holds the cards with only a handful of vendor relationships, and those are with the brands that probably don’t matter. We’re not saying that Ellison can’t make this jump from one category to another, but rather that his success at HD does not guarantee his success at JCP.
- The fact that he is overlapping with Ullman in his new role for nine months is a positive. Transitional blowups are not likely. He’ll be there to learn how to execute on the plan that Ullman set out at the analyst meeting next week. We like that a lot. But if there is one thing that’s clear with the 21% sell-off since the analyst meeting, it’s that the market absolutely does not believe in the plan. So, a new CEO brought in to carry on what is viewed to be an unattainable plan can hardly be viewed as a positive.
In the end, after being extremely vocal about getting Ullman out of his seat early on, we’ve actually grown to respect the fact that he repaired a devastated balance sheet, and set the company on a trajectory of earning money by 2017 – something we think is absolutely achievable (in fact, we think break-even by 2016 is achievable). Still tough to find valuation support in that regard. But Ullman has probably done a better job than most others could. If Ullman/Ellison hits that plan, the stock is likely headed higher. We’ll need to hear more about the transition plan before we have any real conviction on the name. For now, we’re on the sidelines.
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