POSITIONS: Long Consumer Discretionary (XLY), Long Consumer Staples (XLP), Long Utilities (XLU)
Being longer works when the market goes up. I know, it’s the stuff of genius.
I thought I was some version of a genius circa 2004-2006 when I was getting paid too much because everything I’d buy would be rumored to be LBO’d. Now some of those companies are bankrupt. Thinking we’re smarter than the market is cyclical.
Today, I’m much more comfortable Embracing Uncertainty and letting the market tell me what to do. My governor in that regard is my TRADE/TREND/TAIL risk management process. I built it to govern my own illusions of intellect.
Across all 3 of our risk management durations, here are the lines that matter most to me right now:
- TRADE resistance = 1291
- TRADE support = 1269
- TAIL support = 1267
In other words, my new immediate-term TRADE range = 1 and that’s bullish because the range is above my long-term TAIL (1267).
What would change my positioning? Price, volume, and volatility signals. But they haven’t changed yet.
Keith R. McCullough
Chief Executive Officer
On track for HK$24-25BN in January
Macau generated average daily table win of HK$782 million in the first 8 days of the month versus HK$706 million in December. The first week definitely received a boost from December 31st being counted in January but we’ve also heard the mid-week performance was strong. Remember that the Chinese New Year celebration will take place in January of this year versus February of last year so the comp is relatively easy. Nevertheless, we expect that the accelerated growth rate from December’s GGR YoY increase of 25% should be received warmly. We’ve seen at least one estimate of 50% YoY growth for January but we think that is too aggressive and not consensus. We are maintaining our expectations of HK$24-25 billion, which would represent +32-40% YoY growth. The higher end of that range looks more likely given the strength of the first 8 days.
While market share is pretty irrelevant after only one week of data, LVS was definitely the standout. We surmise that VIP volumes and hold played a role in the first week. Rather than focus on share, the early January results should be taken as a positive for all the Macau operators. MPEL remains our favorite through earnings season given the magnitude of the earnings beat we are expecting for Q4 and the likely improved sentiment as January continues to come in hot.
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TODAY’S S&P 500 SET-UP – January 9, 2012
As we look at today’s set up for the S&P 500, the range is 21 points or -0.85% downside to 1267 and .80% upside to 1288.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: -200 (656)
- VOLUME: NYSE 710.51 (-14.3%)
- VIX: 20.63 -3.96% YTD PERFORMANCE: -11.81%
- SPX PUT/CALL RATIO: 1.40 from 1.62 (-13.58%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 57.64
- 3-MONTH T-BILL YIELD: 0.0%
- 10-Year: 1.97 from 1.96
- YIELD CURVE: 1.727 from 1.702
MACRO DATA POINTS (Bloomberg Estimates):
- 11:30am: U.S. to sell $29b 3-mo., $27b 6-mo. bills
- 12:40pm: Fed’s Lockhart to speak on economy in Atlanta
- 3:00pm: Consumer Credit, Nov., est. $7b (prior $7.6b)
WHAT TO WATCH:
- German Chancellor Angela Merkel, French President Nicolas Sarkozy meet today in Berlin to discuss euro rescue plan
- Alcoa marks the traditional kick-off of earnings season with report after the market close
- Bristol-Myers Squibb agreed to buy Inhibitex for $2.5b to boost its position in hepatitis C medicines; watch Achillion
- Johnson & Johnson goes to trial today facing demand by Texas for damages of more than $1b on Risperdal marketing
- Nokia’s Lumia 900 Windows phone may be introduced today; watch for other announcements tied to Consumer Electronics Show
- Other conferences this week include J.P. Morgan Health Care, North American International Auto Show in Detroit
- Hungary PM Viktor Orban drops objection to IMF bailout, says his govt is open to “any kind” of credit line
- Netflix starts service in U.K., Ireland, taking on Amazon.com’s Lovefilm
- No IPOs scheduled to price
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
OIL – I thought oil would come down on a Tebow like move like this in the US Dollar Index. I thought wrong. Iran is the #1 story on Bloomberg’s most read this morning as Brent Oil remains > my long-term
TAIL line of $111.89 support (next resist = $115.21).
- Speculators Increase Bullish Wagers Most Since ‘10: Commodities
- Copper Declines on Concern Euro Crisis Is Affecting Economies
- Goldman Sachs Remains “Overweight” Commodities; Favors Gold Commodities Market
- Crude Oil Declines to Five-Day Low Before Merkel, Sarkozy Meet
- Morgan Stanley Says Gold, Grains to Outperform Oil in 2012
- Wheat Rises as Feed Demand May Build on Dry Argentine Weather
- Sugar Rises on Index Weight Changes, MENA Demand; Cocoa Climbs
- Gold May Extend Gains on European Crisis, Reliance Capital Says
- Rice Exports From India May Surge as Ban Ends on Record Crop
- Gold May Gain in London as Europe, Iran Concerns Spur Demand
- Hedge Funds Resume Bullish Bets as Oil Tops $103: Energy Markets
- Iran Able to Block Strait of Hormuz, General Dempsey Says on CBS
- Ethanol Eats More Corn Than Cows as Herds Drop: Chart of the Day
- COMMODITIES DAYBOOK: Hedge Funds Boost Bet on Commodity Gains
- Gold Moving Average Signaling a Bear Market: Technical Analysis
ITALY – starting to diverge from Germany in more ways than just bond yields; this makes sense if Italian banks are at the back of a long line w/ Deutsche Bank and Commerzbank in front of them. Unicredit’s risk is now clear in the rear view mirror, but what does that mean for the broader Italian MIB Index? Looks safe to be short MIB with a 15,160 stop vs DAX long.
CHINA – winning move for Chinese stocks overnight (we’re long), putting on their best 1-day gain in 3 months, closing up +2.9% to 2225 on the Shanghai Comp after a better sequential gain in Money Supply
Growth (M2 moves to +13.6% y/y); M2’s slope of acceleration/deceleration actually tracks Chinese Equities quite well.
The Hedgeye Macro Team
The Macau Metro Monitor, January 9, 2012
EVEN-SPREAD TABLE NUMBERS, ASKS FRANCIS LUI Macau Business
According to Galaxy's vice chairman, Francis Lui Yiu Tung, Galaxy has no concerns that the opening of Sands Cotai Central could hurt performance at Galaxy Macau. He says the government cap on live gaming tables is needed but wants an even spread of tables across the city’s six gaming operators so "they can compete on a more equal ground." Mr Lui also confirms that Galaxy will offer three-star accommodation to attract more middle-class mainland visitors and look to expand into new Asian markets.
VENETIAN UPGRADES HIGH-LIMIT AREA Macau Business
The Venetian Macao this weekend unveiled its upgraded high-limit gaming area which features 66 live table games and 156 slot machines. “Our new spaces will cater to our premium mass gaming guests and will set a new standard for a high limit gaming experience in Macau,” says Andrew Billany, senior vice president of Paiza and Plaza operations at Venetian Macao.
Highlights from this week's Risk Monitor
* The TED spread rose by less than one basis point to 57.6 bps and the Euribor/OIS tightened 4 bps vs last week. These are important gauges of perceived risk among interbank participants, currently showing contradictory signals.
* Bank swaps in the U.S. tightened significantly, while European bank CDS continued to widen out.
* The MCDX measure of municipal default risk fell sharply week over week.
* The ECB Liquidity Recourse to the Deposit Facility continued to climb.
* Slightly More Downside - Our macro quantitative model indicates that on a short term duration (TRADE), there is slightly more downside risk in the XLF (1.5% downside vs. 1.3% upside).
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 9 out of 12 worsened / 2 of 12 unchanged
1. US Financials CDS Monitor – Swaps tightened for 25 of 27 major domestic financial company reference entities last week.
Tightened the most WoW: AGO, MMC, MBI
Widened the most/ tightened the least WoW: MTG, RDN, SLM
Tightened the most MoM: MBI, AGO, MMC
Widened the most MoM: C, SLM, MTG
2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 29 of the 40 reference entities. The average widening was 2.5% and the median widening was 7.2%
3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. Irish sovereign swaps tightened by 4.1% (-30 bps to 696 ) and Spanish sovereign swaps widened by 15.2% (58 bps to 439)
4. High Yield (YTM) Monitor – High Yield rates fell -66 bps last week, ending the week at 8.20 versus 8.86 the prior week.
There appear to be data integrity issues associated with the month of December in this series such that this week's result can't be taken at face value.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 14 points last week, ending at 1597.
6. TED Spread Monitor – The TED spread rose less than 1 basis point last week, ending the week at 57.6 this week versus last week’s print of 57.1.
7. Journal of Commerce Commodity Price Index – The JOC index rose 4 points, ending the week at -20 versus -24 the prior week.
8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 4 bps to 94 bps.
9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding. Over the course of the last few months, this metric has been making higher highs and higher lows, a pattern that continued last week.
10. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads tightened 26 bps, ending the week at 154 bps versus 180 bps the prior week.
11. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. The Baltic Dry Index has fallen 391 points since December 23rd and ended this week at 1347.
12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure. Last week the 2-10 spread widened to 170 bps, 6 bps wider than a week ago.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.3% upside to TRADE resistance and 1.5% downside to TRADE support.
Margin Debt in November
We publish NYSE Margin Debt every month when it’s released.
NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May of this year. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which retraced back to +0.43 standard deviations in September, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in October and November’s print of +0.78 and +0.55 standard deviations. But overall, this setup represents a material headwind for the market.
One limitation of this series is that it is reported on a lag. The chart shows data through November.
Joshua Steiner, CFA
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