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MACAU WEEKLY ANALYSIS (MAY 11-17, 2015)

CALL TO ACTION

Another bad data point – we’d really like to bring good news, a positive pivot, a reason for hope, a catalyst on the horizon, but not today. Following a stronger sequential week due to the May holidays, table revenues are back to bad, and down 40% YoY. Our forecast for the full month of gaming revenues is not quite as bad, owing to easier weekly upcoming comps, but nobody should rejoice over a down 35-38% month. Our concern remains with the base mass where we see the biggest negative delta from Street expectations. Indeed, visitation and floor activity looks weak in May as well.

 

 

Please see our detailed note: 

http://docs.hedgeye.com/HE_Macau_5.18.15.pdf


Lower-For-Longer

Client Talking Points

USD

The U.S. Dollar was smoked on that bad Retail Sales report (last Wednesday) and proceeded to close the week on its lows (-1.8% week-over-week and -5.3% in the last month). We are staying with the counter-TREND call (Down Dollar, Up Commodities) until we get through what should be a dovish June 17th FOMC meeting.

GOLD

Gold had a big move last Wednesday on big volume showing some follow through here this morning (something Gold hasn’t been able to show for 8-10 months); $1228 last after a +3.1% week (+3.4% year-to-date vs SPX +3.0%); Down Dollar, Down Rates is what Gold wants most. 

EUROPE

Europe doesn’t like any of the aforementioned because that implies Up Euro. The EUR/USD is up another +2.3% last week, so the DAX was -2.2% on that, lagging all major equity markets; Euro fades -0.4% this morning, DAX rallies +0.9% - correlations continue to matter.

Asset Allocation

CASH 57% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 6%
FIXED INCOME 26% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
VNQ

One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). The reality is that we are in a #LateCycle slowdown and the jockeying around each incremental data point will continue to get more and more intense as the Fed’s only ammo for suspending the cycle that has unfolded many times over is to push out the dots on a rate hike. #LowerForLonger.

ITB

The ITB turned in modest positive absolute and relative performance in the latest week as the advance in interest rates ebbed and the high frequency mortgage purchase application data continued to reflect improving housing demand trends. Purchase activity was flat week-over-week but held at 23-month highs with demand growing +11.7% on a year-over-year basis.  As it stands, 2Q15 is currently running +14.5 QoQ, +13.7% YoY, and on track for its best quarter in two years. The Mortgage Bankers Association also released its Mortgage Credit Availability Index (MCAI) for April on Tuesday.  The MCAI made a new cycle high, increasing +0.5% month-over-month with the Government and Jumbo indices leading the gains.  

TLT

We are constructively dissatisfied with how last week went for Global Macro markets. Constructive because we think we made the right research pivot on Dollar Down, Commodities Up. Dissatisfied because devaluing the Dollar isn’t the answer for America’s stagnating economy. On Friday, the Down Dollar, Down Rates move looked a lot like 2011 all over again. Remember that? Markets did. Financials (XLF) -0.4% on the day vs. Utilities (XLU) +1.3%. It’s the Fed is going to stay Lower-For-Longer move that Hilsenrath confirmed in the WSJ this morning.

Three for the Road

TWEET OF THE DAY

In today's Early Look "Constructively Dissatisfied", I remind you what 2011 looked like - Down Dollar, Down Rates, Up Gold #Stagflation

@KeithMcCullough

QUOTE OF THE DAY

Compound interest is the greatest mathematical discovery of all time.

-Albert Einstein

STAT OF THE DAY

Over the course of six quarters (to establish its international business), HAIN bought 4 international businesses for a total of $600 million.


General Confusion

This note was originally published at 8am on May 04, 2015 for Hedgeye subscribers.

“To be a good General, you must know mathematics.”

-Napoleon

 

If macro markets haven’t been confusing you as of late, give me a buzz. This 5’9 General needs to know the math that gave you clarity!

 

Napoleon went on to say that mathematics “serve to direct your thinking in a thousand circumstances” (Napoleon, pg 11). And in attempting to risk manage Global Macro markets, it’s tough to disagree with that.

 

The math simply gets tougher when correlations start to break-down. While they are not collapsing across durations (yet), correlations between the US Dollar, Rates, and Equities definitely don’t look like USD vs. Commodities do. That’s new. Welcome to a new week.

 

General Confusion - a.nap

 

Back to the Global Macro Grind

 

I’ll get into the point about correlations in a minute, but first let’s look at the FX move, in context:

 

  1. US Dollar Index dropped another -1.7% on the week, taking its 1mth correction to -2.9%, but still +5.6% YTD
  2. Euros (vs. USD) got squeezed +3.0% wk-over-wk, taking its 1mth rally to +4.1%, but still -7.4% YTD
  3. Canadian Dollar inched up another +0.2% on the week, taking its 1mth bounce to +3.8% (still -4.4% YTD)

 

In other words, whether it was priced in what became the most Consensus Macro FX position (short Burning Euros post the drop to $1.05 vs. USD in March) and/or a Commodity Currency like CAN/USD, that was one heck of a 1-month move.

 

The impact on macro markets, however, was not homogenous from a correlation perspective:

 

  1. CRB Commodities Index +1.7% last wk = +5.5% 1-month, but -0.9% YTD
  2. Oil (WTI) up another +3.5% last wk = +14.3% 1-month = +6.3% YTD

 

Vs.

 

  1. Gold 0.0% last week = down -2.8% in the last month to -0.9% YTD
  2. UST 10yr Yield = +20 basis points last wk to 2.11% = down -6 basis points YTD

 

It’s pretty easy to argue that Gold doesn’t work when Bond Yields rise as market #history suggests that the absolute return of Gold then has to compete with higher yields. It’s harder to argue why USD and Bond Yields moved in the opposite direction.

 

So let’s go there and put the US 10yr Treasury Bond Yield move in the context of Global Yields:

 

  1. Germany’s 10yr Yield was +22 basis points (bps) on the wk to +0.36%
  2. Netherland’s 10yr Yield was +22bps wk-over-wk to +0.52%
  3. Austria’s 10yr Yield = +23bps wk-over-wk to +0.50%
  4. Belgium’s 10yr Yield = +22bps wk-over-wk to +0.65%
  5. Canada’s 10yr Yield = +22bps wk-over-wk to 1.66%
  6. Australia’s 10yr Yield = +15bps wk-over-wk to 2.68%

 

Not only was that a completely correlated move across bonds markets (un-correlated to the USD Down move), it was the biggest week-over-week percentage gain in Global Yields, ever.

 

And while I’m sure the next thing an absolutist will say is “but it’s from a low level”, that doesn’t matter when most of the institutionalized world runs money and chases returns, on a relative basis!

 

Yes, math majors who specialize in mean reversion history will also keenly note that “ever” is a long time. And for that reason alone I think it’s fair to say that US Bond Yields weren’t charging to lower-highs on bullish US economic data.

 

To the contrary, actually, the ISM report for the US that was reported on Friday was still plenty slow at 51.5 APR vs. the same in MAR (and it didn’t snow in April). Moreover, the employment component of the ISM slowed to sub 50 at 48.3.

 

That makes this week’s US jobs report all the more important as almost everyone I talk to thinks that the non-farm payrolls recover month-over-month (even though almost none of the Global Macro data did!).

 

Confused yet?

 

Just to add some Consensus Macro color to where the crowd is positioned coming into this week, here’s the most recent CFTC (non-Commercial) futures and options positioning:

 

  1. Russell 2000 net SHORT position at its lowest level of 2015 at -5,486 contracts (6mth avg -25,989)
  2. 10YR (US) Treasury net SHORT position at its lowest level of 2015 at -115,917 contracts (6mth avg -158,559)
  3. Crude Oil net LONG position tracking around its highest level of 2015 at +371,486 contracts (6mth avg +306,931)

 

This tells me (partly) why the Russell 2000 was the dog of the US major indices last week (many covered shorts high and are now too long small/mid caps lower) and what Bond Bears really think (i.e. they don’t think rates go up a lot from here).

 

As for people who are in the business of being bullish on Oil. There are many. There are also many, many, more Americans whose confidence and real-spending power slows alongside rising gas prices and a general confusion about markets vs. economic reality.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.86-2.12%

SPX 2087-2117
RUT 1217-1250
VIX 11.77-14.84
USD 94.25-96.71
EUR/USD 1.05-1.13
Oil (WTI) 54.62-60.15

 

Best of luck out there this week,

KM

 

General Confusion - 05.04.15 chart


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CHART OF THE DAY: What #Gold Loves

Editor's Note: The chart and brief excerpt below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for information on how you can subscribe.  

 

"...On the heels of an ugly Retail Sales slow-down to 0.9% year-over-year growth (and the worst US Consumer Confidence report of the year via the University of Michigan), this is what the big macro stuff did last week ... US Dollar Index -1.8% on the week (and now -5.3% in the last month) ... Gold +3.1% on the week to $1225

 

That last one (Gold) was the best performing of the Dollar Down inverse-correlation-love lot … primarily because there was this extra-cherry on top that Gold loves more than anything else. It’s called Down Rates..."

 

CHART OF THE DAY: What #Gold Loves - z 05.18.15 chart


Constructively Dissatisfied

“You are, in a word, constructively-dissatisfied.”

-Jim Casey

 

After editing the founder of UPS’s famous business-building quote I am, in two words, constructively dissatisfied this morning. It’s the last citation I wanted to highlight for you from one of the better books I’ve read this year, Learn or Die, by Edward Hess.

 

Per Casey via Hess, here’s the UPS DNA: “Learn, Improve and Adapt” and there are “four primary strands: 1. Mutual Accountability 2. Constructive Dissatisfaction 3. Process Improvement and 4. Employee Centric Culture.” (pg 180)

 

Casey’s people-model isn’t perfect. No one’s is. But it certainly worked for him and his team. For me, it’s transparency, accountability, and trust. And I can’t give lip-service to that. My teammates and I need to live that out loud, every day.

 

Constructively Dissatisfied - ztree

 

Back to the Global Macro Grind

 

Let’s say I was constructively dissatisfied with how last week went for Global Macro markets. Constructive because I think we made the right research pivot on Dollar Down, Commodities Up. Dissatisfied because devaluing the Dollar isn’t the answer for America’s stagnating economy.

 

On the heels of an ugly Retail Sales slow-down to 0.9% year-over-year growth (and the worst US Consumer Confidence report of the year via the University of Michigan), this is what the big macro stuff did last week:

 

  1. US Dollar Index -1.8% on the week (and now -5.3% in the last month)
  2. Euro (vs. USD) +2.3% on the week (and now +7.2% in the last month)
  3. Commodities (CRB Index) +1.0% on the week (+6.9% in the last month)
  4. Oil (WTI) +0.5% on the week to $59.69 (+15% in the last month)
  5. Gold +3.1% on the week to $1225

 

That last one (Gold) was the best performing of the Dollar Down inverse-correlation-love lot … primarily because there was this extra-cherry on top that Gold loves more than anything else. It’s called Down Rates.

 

Down Rates finally did what they usually do and correlated positively with Down Dollar on slowing US economic data, with the 10yr US Treasury Yield dropping from an intra-week-freak-out-high of 2.36% to 2.14% as economic gravity won, again.

 

On Friday, the Down Dollar, Down Rates move looked a lot like 2011 all over again. Remember that? Markets did. Financials (XLF) -0.4% on the day vs. Utilities (XLU) +1.3%. It’s the Fed is going to stay Lower-For-Longer move that Hilsenrath confirmed in the WSJ this morning.

 

Back to the week-over-week moves and how those synched in the land of Global Equities:

 

  1. US Financials (XLF) were down in an up tape, -0.2% on the week, staying in the red for the YTD at -0.1%
  2. US Healthcare (XLV) continued to outperform beta, +1.1% on the week to +8.6% YTD
  3. European Stocks (EuroStoxx600) flashed another bearish divergence vs Global Equities -0.9% wk-over-wk
  4. Germany’s DAX lagged its European continent bogey, falling -2.2% on the week
  5. Emerging Market Stocks (MSCI Index) flagged another bullish divergence vs Global Equities +0.8% on the week

 

Yep, Down Dollar = Up Euro à Emerging Market Equities beat European Equities.

 

If you didn’t pick-up on the year I called out, let me hammer the num-lock pad on that one more time: 2011. That was a big year for both Gold and Emerging Markets. It was also a very bad year for Europe and US Financials.

 

2011 was the year of stagflation being priced into US Federal Reserve Policy. It was the year where the initial Quantitative Easings didn’t provide the centrally planned elixir of a real US growth “recovery” … and The Bernank had to deliver more QE Cowbell.

 

As markets front-ran the next QE, the US Dollar burnt to a crisp (not mentioned once by big Ben in any of his statements, but it was a 40 year low) and Gold hit its all-time highs. US interest rates hit all-time lows and the Financials posted their widest losses vs. Utilities, ever.

 

Constructively dissatisfied with that?

 

If you’re a money manager, maybe not. “Fighting” an easier Fed (read: pushing out the dots, from here, would be an easing, on the margin) has proven to be elusive for most who have expressed their bearishness in 2009-2015 Zero Hedge Bear terms.

 

But if you’re looking for mutual accountability between policy makers and economic outcomes, you can UPS that request in the mail and kiss it goodbye. Until we have real leadership in this country that gets the difference, in real Dollars, it’s The People’s purchasing power that loses.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.95-2.22%

SPX 2100-2131
RUT 1211-1251
USD 92.84-94.44
EUR/USD 1.10-1.14
Oil (WTI) 55.97-61.57

Gold 1198-1231

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Constructively Dissatisfied - z 05.18.15 chart


May 18, 2015

May 18, 2015 - Slide1

 

BULLISH TRENDS

May 18, 2015 - Slide2

May 18, 2015 - Slide3

May 18, 2015 - Slide5

May 18, 2015 - Slide6

May 18, 2015 - Slide7

May 18, 2015 - Slide8 

BEARISH TRENDS

 

May 18, 2015 - Slide9

May 18, 2015 - Slide10

May 18, 2015 - Slide11


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