Challenging Gartman

“The President’s very frontal attack on the bankers is a front attack upon capitalism.”
-Dennis Gartman
In his Friday morning missive, that’s what Dennis Gartman wrote about capitalism. This is a view that got forwarded around this weekend. It’s a fear-mongering and politically partisan view that attempts to hold Americans hostage to the Perceived Wisdoms embedded in a failed financial system.
So, Mr. Gartman, let’s see how hard core a capitalist you really are. I am now challenging you to a debate:
TOPIC: What is American Capitalism in 2010?
WHEN: Any time

Coward or capitalist? Conflicted or compromised? We will have to see. Bring any one of your Fast Money friends from the manic media network (CNBC). I will come alone. No phones. No crack-berries. No notes.
You called President Obama “young and misguided.” Well, Paul Volcker is far from young and my macro views from “The Top, To The Bottom, and Back Again” have been hardly misguided. So now you can be held accountable by some real players in this game. Let’s get it on, real-time. You know where to find me.
Back to my daily risk management call…
On Friday’s market selloff, instead of whining about our politics, we started buying. We dropped our allocation to cash from 52% to 46% and took our invested position in US Equities up to 12% (from 6%) in our Asset Allocation Model. We bought back the 3% position we sold higher in US Healthcare (XLV), and bought a 3% position in the SP500 (SPY) for the first time in 2010.
We remain bullish on the US Dollar’s intermediate term TREND (we are long UUP), and bearish on everything commodities (including gold) for the same duration. Despite Mr. Gartman insisting that those “predisposed to exiting dollar positions to do precisely that”, the buck continued higher last week, closing up +1.3% week-over-week at $78.16. The US Dollar Index has closed up for 5 out of the last 7 weeks.
Zero is our current asset allocation to Commodities because we are bullish on a Buck Breakout and bearish on the demand implications of the Chinese Ox being in a Box. Zero is also the rate of return being issued to the conservative citizens of America who have been keeping cash in their hard earned savings accounts rather than issuing it to asset managers like Gartman who can’t seem to earn anything unless commodities inflate.
If creating a high-low American society of preferred lending terms is your version of “capitalism” Mr. Gartman, please state so plainly. Otherwise, we will find someone else who will call zero percent return for what it is – the sad truth.
This morning, the spread between the short-end (2-year US Treasury yields) and the long end (10-year yields) remains unsustainably wide. Carry traders on prop desks at Investment Banking Inc. don’t call it this, but we do – this is called the Piggy Banker Spread, and it is currently +281 basis points wide. That’s only 0.005% away from its widest spread ever. Yes, Mr. Gartman, ever is a very long time.
Chinese stocks closed down another -1.1% overnight, taking the Shanghai Composite down to -5.6% for 2010 to-date. China doesn’t issue their domestic savers a rate of return of zero, nor do they intend on allocating incremental capital to countries like the US or Japan who intend on issuing that conflicted and compromised rate to foreign investors as their “full service” domestic bankers chow down.
China is moving down her own economic path, at her own pace. China is now the world’s creditor nation. America is the debtor. If the old boy networks of Dennis Gartman think that what the Chinese have been watching ensue in America for the last 3 years is called “capitalism”, I’m thinking that they’d just as soon let us keep it.
My immediate term TRADE lines of support and resistance for the SP500 are now 1080 and 1126, respectively.
Best of luck out there today,

XLV – SPDR Healthcare
— We bought back our bullish intermediate term view on Healthcare on 1/22/10.
SHY – SPDR S&P 500
— On 1/22/10 we bought our first piece of exposure to the broad US stock market index as it tests our intermediate term TREND line of support.
EWC – iShares Canada
— We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF, we bought Canada on 1/15/10 and 1/21/10.
XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.
UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).
EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil
— As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.


IEF – iShares 7-10 Year Treasury
One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.
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 BondsIf 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.


McCarran Airport traffic declined 2.1% in Dec. However, an easy hold % and table drop comparison with last year coupled with recent strength in the high end from Asia may have resulted in Strip revenue growth.



McCarran Airport in Las Vegas released the number of enplaned/deplaned passengers at 3.1 million for the month of December, down 2.1% y-o-y.  On the surface, that would seem to be enough to push gaming revenue growth into negative territory following November’s surprise increase.  However, in December of 2008, table game hold percentage was only 10.1% versus a more normalized hold of 12%.  Moreover, baccarat drop, which can be extremely volatile month to month, was also abnormally low last year.


In addition to the easy comparisons in hold percentage and table drop there are two additional factors leading to a conclusion that Strip gaming revenue growth could be positive again in December.  As we’ve written about, there has been an acceleration in high end Asian play recently due the strong economic conditions, particularly in China.  Macau is experiencing the same trend.  Also, CityCenter opened in mid-December which probably spurred above normal high end visitation.  


Assuming normal hold percentage, we project Strip gaming revenues to once again climb 8% - November also posted +8% - over the same month last year.  Hold percentage is always the wild card, of course, and the assumption of normal hold is the largest y-o-y contributor to our positive revenue projection.  If we assume consistent low hold with last year, our model projects slightly negative Strip revenue growth.


Here our are projections:






The Macau Metro Monitor. January 25th, 2010



MGM Grand Macau is looking to strengthen its brand by appealing more to Chinese tastes. President Grant Bowie said: “We need to make it a China brand…that’s my role.” The company plans to re-launch the Macau brand shortly with a new marketing campaign geared towards upper middle class Chinese. Some of the changes will include a more traditional buffet and improving taxi access to the property.


With a potentially lucrative HK IPO in the works, sources said MGM is taking steps to exit Atlantic City, where it owns 50% of Borgata and a 72-acre parcel near the resort in Renaissance Pointe. It's unclear whether BYD will be interested in acquiring MGM's stake, but they do have the right of first refusal

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US equities were weaker for a third straight day on Friday.  Last week’s three-day, 5.1% losing streak was the first for the S&P since November 20th, while the index posted its biggest weekly decline since the week-ended October 30th.


Stocks were rocked by the heightened regulatory scrutiny on the financial sector out of Washington and concerns about tightening moves in China.  The latter was putting significant pressure on the RECOVERY trade.   Lastly, the uncertainty surrounding Bernanke's confirmation added to the negative sentiment. 


The VIX was up 52.48% last week, the biggest weekly spike since October 2008 and finished at its highest level since November 4th. The Hedgeye Risk Management models have the following levels for VIX – buy Trade (22.51) and Sell Trade (29.59).


The Technology (XLK) was the worst performing sector on Friday.  The semiconductors sold off sharply with the SOX down 5.3% on the day.  AMD traded down 12.4% and was the worst performer in the group despite its better-than-expected Q4 results and relatively upbeat commentary about demand.  On Friday, GOOG declined 5.7% despite earnings and revenues that came in ahead of expectations. 


The Financials (XLF) was the second worst performing sector on Friday declining 3.3%.  The weakness was attributed to concerns surrounding the Obama administration's increased regulatory reforms.  On Friday, regulators shut down banks in Florida, Missouri, New Mexico, Oregon and Washington.  So far in 2010 nine banks have failed, following 140 closures in 2009.


While the Materials (XLB) outperformed on a relative basis on Friday it was the worst performing sector last week declining 6.4%.  The sector is underperforming as China is embarking on a tightening process.


As we look at today’s set up, the range for the S&P 500 is 46 points or 1.0% (1,080) downside and 3.2% (1,126) upside.  At the time of writing the major market futures are trading higher on the day.  


Last week copper prices fell for the second straight week, as concerns about demand from China as the tightening process continues to be played out.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (3.31) and Sell Trade (3.46).


In early trading today Gold is trading higher after declining 3.3% last week.  Like copper, gold has traded down for the past two weeks.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,085) and Sell Trade (1,116).


In early trading, crude oil is trading flat after declining 2.0% on Friday.  Crude has also declined for the past two weeks, on the back of a slowing China and increased supplies.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (74.11) and Sell Trade (76.77).


Howard Penney

Managing Director


US STRATEGY – DC Fallout - sp1


US STRATEGY – DC Fallout - usd2


US STRATEGY – DC Fallout - vix3


US STRATEGY – DC Fallout - oil4


US STRATEGY – DC Fallout - gold5


US STRATEGY – DC Fallout - copper6


McCullough on Outlook for Treasury's Geithner

The Week Ahead

The Economic Data calendar for the week of the 25th of January through the 29th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

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