“It is the greatest of all advantages to enjoy no advantage at all.”
-Henry David Thoreau
Thoreau had a lot more time to think and write than many of us. He actually went completely off the grid and lived in a little self built hut on Walden Pond for two years to focus his thoughts. Unfortunately, going into the woods for a couple of years is not really practical for those of us who manage global macro risk daily, but as a result of Thoreau’s sojourn we have some very insightful writings from him.
A couple of days ago we made the somewhat controversial call to go to 100% cash. In fact, Keith actually titled the Early Look just that, “100% Cash”. To the Thoreau quote above, being in cash is not really a relative advantage as cash inherently generates no return. We get that. In economic and market environments like the one we are in, though, sometimes the best advantage is, in fact, to have no advantage at all.
Now, obviously, most investors by mandate can’t go to all cash. The point was that regardless of your mandate, our view was that it was time to get out of the way and take the chips off the table.
Simply, and much like what Baupost’s Seth Klarman articulated in his recently quarterly letter, we are happy to be on the sidelines when investing becomes based on speculating what the next round of government intervention will be. Will QE3 be introduced? Will Operation Twist be extended? Will Operation Twist end? It’s all speculation, it’s all a loser’s game and none of us have an advantage.
The original Money Honey Maria Bartiromo was kind enough to have me on for the Closing Bell to discuss our call two days ago. As I highlighted in the interview, this is an environment that requires tactical investing. The gentleman I appeared with, after trying to give me a hard time about us going to cash, also eventually agreed (five minutes after he disagreed) that this environment requires tactical investing versus a long term buy and hope strategy.
As many of our long term subscribers know, we have two key products that provide a clear indication of where we stand in terms of asset classes and specific stock and macro investments, these are: the Virtual Portfolio and the Hedgeye Asset Allocation model. Over the last couple of days as prices have corrected, we’ve adjusted our stance slightly and have added the following positions:
1) Bought a yield curve flattener via the etf FLAT – The thesis here is pretty simple. The Federal Reserve is extending “Operation Twist”, which inherently drives down the long end of the curve. In general we do not mind fighting the Fed, but in this instance we recommend investing with the Fed as its just math that the yield curve should revert to the mean with the Fed’s aggressive buying. This reversion to the mean potential is highlighted below in the Chart of the Day.
2) Bought Target Corporation (TGT) – With oil down dramatically over the past three months, this benefits retailers such as Wal-Mart and Target, who will gain share of wallet from consumers via their reduced spend on energy. Also with the ongoing disaster at J.C. Penney (we are hosting a lunch in New York today to discuss this short idea so email if you’d like to attend), TGT should and will take share.
3) Bought Under Armour (UA) - Growth is hard to come by in this environment and our retail team thinks that UA will print $3 billion in revenue by 2014. This would be a doubling of revenue from 2011. Meanwhile, in the short term UA will be comparing against a high inventory build a year ago in the upcoming quarter, so margins should look relatively good.
In global macro news this morning, the key event over night was the much anticipated downgrade of 15 global banks. Our Financials Sector Head Josh Steiner wrote the following on this last night:
“While there's a small aftermarket "buy the news" rally taking place, we'd caution against getting too excited. First, consider what ratings downgrades mean. At their heart, they're saying that default probabilities of 15 of the largest banks around the world are higher now. In other words, the world has become a riskier place. While this is something the market's known for a while and the ratings agencies, as usual, are just catching up, recall one of the themes from our calls with Peter Atwater regarding Hardwired Ratings Linkages Lead to Hardwired Financial Contagion. At its core is the concept that sovereign and bank ratings are increasingly interwoven with growing mutual dependency/causality while Aaa rated entities are becoming fewer and less willing to do "whatever it takes". Considering how many of these firms' long term issuer ratings are still on negative outlook, and the growing uncertainty facing the sovereign debt of countries like Italy and Spain, we wouldn't uncork the champagne just yet.”
In the short term, as in today, to Josh’s point we may see a relief rally, but over the longer term the implications of ratings downgrade do remain ominous.
In Europe today, Hollande, Merkel, Rajoy and Monti are meeting in Rome ahead of the EU Summit next week. The proposal to allow the EFSF/ESM to buy peripheral sovereign debt will remain in focus with the key question being whether Merkel will continue to resist pressure.
The EU Summit next week will be the focus of market action and speculation around government intervention next week. A major investment bank is out this morning saying that it has heard from participants at the recently ended G-20 meetings in Mexico that there could be a “bazooka” of sorts in the works.
We have no advantage on the next round of government intervention, but we would refer you to Einstein’s definition of insanity:
“Insanity : doing the same thing over and over again and expecting different results.”
Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1, $89.92-95.58, $82.08-82.82, $1.24-1.27, and 1, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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The Macau Metro Monitor, June 22, 2012
VISITOR ARRIVALS FOR MAY 2012 DSEC
Macau visitor arrivals decreased by 6.5% YoY to 2,146,542 in May 2012. The average length of stay of visitors decreased by 0.1 day YoY to 1.0 day.
Analyzed by place of residence, visitors from Mainland China decreased by 4.2% YoY to 1,271,540, coming mostly from Guangdong Province (616,540), Fujian Province (58,585), Hunan Province (48,807) and Zhejiang Province (48,607). Mainland visitors traveling under the Individual Visit Scheme (IVS) fell by 0.9% to 526,279. At the same time, visitors from Hong Kong (540,435); Taiwan (78,834); and the Republic of Korea (31,292) decreased by 11.8%, 23.2% and 2.1% respectively, while Japanese visitors (33,655) increased by 17.6%.
WYNN SCORES ONE VICTORY IN LEGAL SAGA AGAINST OKADA Macau Business, AP
WYNN won a small ruling, sending back to Nevada state court its breach of fiduciary duty lawsuit against Kazuo Okada. Okada had in March moved the case to federal court, arguing that the underlying issue was whether he had violated U.S. law by allegedly paying bribes to foreign officials.
This note was originally published at 8am on June 08, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“We are comfortable missing out on potentially major rallies if they are based purely on money flows or government action; the risks of engaging in this sort of speculative activity are simply too high.”
I’ve always enjoyed reading the quarterly letters and writings of great investors. From my perspective, Baupost’s Seth Klarman fits into the category of a great investor. The quote above is from his Q1 2012 letter to investors. On some level, Klarman has earned the right to underperform in the short run as his long run track record, almost 30 years, is superior to almost any investor in that time frame.
That being said, I think what likely differentiates Klarman and many investors with superior long run track records is their process. My guess is that Klarman may have written the above quote even just a couple of years into his career before his track record was established.
The fact is great investors have a process. Sometimes the process tells them to invest aggressively, sometimes it tells them to stay on the sidelines with large cash balances, but the outcome of the process is a plan to allocate capital. Overtime, if the process is superior, the outcome will be positively differentiated returns.
If I were allocating capital to funds, the first question I would ask any potential manager would be - what is your process? That would be followed by - why will this process produce superior results over time? Undoubtedly after reviewing their historic results, I could determine whether they actually had a process and executed on their investment plan accordingly.
The famed Spanish painter Pablo Picasso said this about having a plan:
“Our goals can only be reached through the vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.”
Quoting a famed European artist about planning is somewhat appropriate given the current debacle in Europe. Now this isn’t a shot at Europeans but rather a shot at the lack of an actual long term plan emerging to solve Europe’s long run debt crisis. Not to mention, the lack of a long term plan when the common currency was established.
I’ve had a number of friends who are traders, either personally or for large institutions, email me over the last couple of days and the general consensus in the trading community seems to be that the market will remain choppy until after the Greek elections, the G20, the FOMC, and the EU Summit. Not to put words in their mouths, but the plan in the trading community seems to be to not do much until the central planners are done planning. I like that plan.
As we wait for the central planners to stop their planning, the economic data out of Europe continues to deteriorate. The key European economic data from the last 24 hours includes:
- German exports declining in April -1.2%, for the first decline this year (worse than expected);
- Bank of France cuts its forecast in Q2 for France to -0.1% (worse than expected);
- Italian industrial output for April comes in weaker at -1.9% month-over-month (worse than expected);
- Netherlands April industrial production comes in at -2.7% month-over-month (weaker than expected); and
- Greek GDP contracted -6.5% in Q1 from a year ago, versus the -6.2% projected decline on May 15th.
The most startling data point is likely the last one. Not because the Greek economy matters all that much anymore, but rather because the Greek government continues to have a difficult time getting a handle on the actual data. Personally, I’ve basically accepted that most governments make up the numbers, so revisions, either up or down, are really of no great surprise.
Speaking of government data, the Chinese government will be releasing a broad swath of data over the next 24 hours, including consumer price index, industrial production, retail sales, and producer price index. For many, the plan is to buy commodities and risk assets if a Chinese rate cutting cycle begins in earnest. In the Chart of the Day, you can see why this may not be such a good plan, at least according to the last cycle.
Specifically, on September 16th, 2008, China cut rates for the first time in the cycle. As might be expected the 19-commodity CRB index ripped +9.5% in six days. By March 2nd, 2009, the CRB index bottomed -46.4% lower. Chinese rate cutting may have been a panacea for some, though not for those investors levered long of commodities. (Thanks to my colleague Darius Dale for putting this analysis together.)
Certainly, risk assets may act differently this time around if China starts to cut interest rates aggressively. My point is simply that front running central planners, to Seth Klarman’s point above, is a dangerous plan, if it is a true investment plan at all.
Yesterday, Chairman Bernanke presented his plan to Congress and as part of that testimony he said:
“The Committee reviews the size and composition of its securities holdings regularly and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”
This came at the end of the paragraph in which Bernanke outlined the Fed’s current actions, namely federal funds rate at zero for an extended period and a number of rounds of quantitative easing. In effect, via error of omission perhaps, Bernanke insinuated yesterday that the Fed is basically out of bullets. This might just be the best plan I’ve heard from the Federal Reserve in years.
Our key levels are: SPX fails at 1332 resistance (no support to 1283 TAIL); VIX holds 21.41 TRADE support, resistance = 24.73; USD holds all lines of support (range = 81.98-82.62); Euro fails, again, at 1.25 resist, support = 1.22; Oil (brent) fails at 101.73 TRADE resistance, no support to 95.26 (bearish formation there); and Gold has a big breakdown through our 1596 TRADE support, now nothing to 1538.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
TODAY’S S&P 500 SET-UP – June 22, 2012
As we look at today’s set up for the S&P 500, the range is 15 points or -0.57% downside to 1318 and 0.57% upside to 1333.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: on 6/21 NYSE -1901
- Down from the prior day’s trading of 10
- VOLUME: on 6/21 NYSE 865.87
- Increase versus prior day’s trading of 15.27%
- VIX: as of 6/21 was at 20.08
- Increase versus most recent day’s trading of 16.47%
- Year-to-date decrease of -14.19%
- SPX PUT/CALL RATIO: as of 6/21 closed at 1.81
- Down from the day prior at 1.90
CREDIT/ECONOMIC MARKET LOOK:
YIELD SPREAD – watch this 10s/2s Spread in the US like a hawk; it’s at 133bps wide this morning and still holding the low end of its recent range – historically, the Yield Spread always mean reverts to dead flat. That’s your bear case for bank earnings from here which, incidentally, we think is a much more relevant next catalyst for the money centers than whatever Moodys figured out after the fact.
- TED SPREAD: as of this morning 38
- 3-MONTH T-BILL YIELD: as of this morning 0.08%
- 10-Year: as of this morning 1.64
- Increase from prior day’s trading at 1.62
- YIELD CURVE: as of this morning 1.34
- Up from prior day’s trading at 1.32
MACRO DATA POINTS (Bloomberg Estimates):
- 11am: Fed to purchase $1.5b-$2.25b notes in 2/15/2036-5/15/2042 range
- 12:30pm: Federal Reserve Bank of Cleveland President Sandra Pianalto speaks in Cleveland
- 1pm: Baker Hughes rig count
- House, Senate not in session
- CFTC holds closed meeting on enforcement matters, 10am
- U.S. Transportation Secretary Ray LaHood makes funding announcement on conference call, 10:15am
WHAT TO WATCH:
- Moody’s downgrades 15 global banks; Morgan Stanley only cut 2 levels, Credit Suisse reduced by 3
- Citigroup, other banks call Moody’s cuts unwarranted
- German business confidence fell more than estimated in June
- KKR said to consider sale of BIS unit ahead of refinance date
- Italian consumer sentiment fell to a record low
- AIG names Koellner as executive chairman of ILFC after CEO’s relationship is probed
- International Game, Bally secure Nevada online casino licenses
- Sony in final stages of talks to invest in Olympus: Nikkei
- U.S. Health Care, EU Summit, Google, RIM: Week Ahead
- Darden Restaurants (DRI) 7am, $1.15
- Carnival (CCL) 9:15am, $0.08
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG
OIL – Bernanke’s Bubbles (Commodities) are in some cases popping; others (oil) crashing. This morning we are finally getting an immediate-term TRADE oversold signal for Brent at $89.92, so cover Energy shorts here and re-short the bounce. Both the Commodity and the stocks that have earnings expectations based on the wrong top-line assumptions.
- Crop Traders Bullish for Ninth Week on Dry Weather: Commodities
- Copper Heads for Seventh Weekly Drop in Eight on Slowdown Signs
- Gold Seen Cutting Weekly Decline as Europe Concern Spurs Demand
- Brent Oil Futures Rise on Speculation Plunge Below $90 Excessive
- Corn Climbs as Dry Midwest Weather Threatens to Hurt U.S. Yields
- Batista Said to Sell 49% AUX Stake to Qatar Fund for $2 Billion
- Sugar Falls as Supplies Seen Ample as Demand Slows; Coffee Drops
- Fortescue Challenges Gillard’s Mining Tax in Australian Court
- Jet Fuel Gets Olympic Spur as Europe Plants Shut: Energy Markets
- Soy Harvest Squandered as Reserves Decline: Argentina Credit
- Normal Monsoon for a Third Year Set to Boost India Harvests
- Food Stamps Vie With Aid to Growers in U.S. Agriculture Overhaul
- Aluminum Set to Extend Decline to 2010 Lows: Technical Analysis
- Nippon Steel Stainless Unit Eyes Mergers as Japan Demand Wanes
- Gazprom Biggest Loser as Shale Gas Upends World Markets: Energy
- Deripaska Comfortable on Rusal Debt as Yields Up: Russia Credit
RUSSIA – while the Johnny come lately shorts in Spain cover all at the same time, Russian stocks continue to crash – get the petro and the Dollar right, and you’ll get the PetroDollar markets like Russia right. RTSI down another -2% here and crashing like oil has, down -27% since March. Context: Russia is the world’s 9th largest economy (Spain is 12th). There is no such thing as “de-coupling.”
The Hedgeye Macro Team
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