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Professional Forecasting

“We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.”

-John Kenneth Galbraith


I have that quote scotch taped on the insert of my investment notebook. I keep it there not to remind myself how wrong the consensus groupthinkers tend to be, but to always remember that I don’t know what I don’t know. Mr. Macro Market knows all.


I have never been afraid to shoot the puck or make a call on markets. You can call that brave or arrogant. I call it strapping it on every morning and playing the game to win. For any of you who have done anything at the highest level in your life, you get this. Confidence beats cowardice.


What gives me confidence is my investment team and market prices. Before I make a call on anything out there, I check with what Mr. Macro Market tells me to look at, then I ask my analysts what they think. That’s it – we start each day by admitting that we may not know what market prices are telling us.


Every three months, we change our Top 3 Macro Investment Themes. Why do we change them? Well, that’s easy – because market prices change. We get a lot of questions on where we will wash out on our Q2 Macro Themes. We are waiting until the seconds run out on the game clock for Q1 to do that.


Any professional athlete, entertainer, or investor worth their title wakes up every morning reviewing their performance. Sometimes people don’t like others talking about performance. Sometimes people appreciate accountability. But no matter where you go in the morning, there your performance will be.


By next Thursday, my Macro Team’s performance will be on the scoreboard for Q1 of 2010. While I myself have made plenty of tactical mistakes out there, I think my teammates have performed admirably on nailing down 3 big macro moves. As a reminder, our Q1 macro calls have been:

  1. Buck Breakout (bullish on the US Dollar; bearish on commodities, gold, euro, etc…)
  2. Chinese Ox In A Box (bearish on Chinese stocks; bullish on Chinese yields and currency)
  3. Rate Run-up (bearish on US Treasuries)

My biggest question every morning is where do our macro themes start to go wrong. The score is the score. What matters from here is what to make of it. Am I becoming consensus? Where do I sell the US Dollar? Should I cover my short position in gold? Should I short Chinese stocks again, or should I be long them?


Well, the good news is that my business model allows me to change my views on all of this with a click of a button. The conflicted and compromised ratings models of the Investment Banking Inc. can’t do that for you but I, like the buy-side, can. We call that cool.


Becoming consensus isn’t cool. Neither is not knowing that you don’t know that consensus can remain longer than you can remain solvent. I have learned this lesson plenty enough times in my career to never disrespect it.


So, before I wrap up, let’s quickly look at consensus relative to what Mr. Macro Market is telling me this morning relative to our Q1 Macro Themes:

  1. US Dollar is overbought anywhere north of $81.92 on the USD Index. The big breakout line (support) is the immediate term TRADE line at $80.45.
  2. Chinese stocks got spanked again last night, trading down -1.2% on the SSEC, and breaking my immediate term TRADE line of support of 3034.
  3. US Treasury rates blasted right through every line of resistance I have in my macro models yesterday, across durations.

The least consensus call we have left is that rates are going to continue to Run-up. As a reminder, our call on US interest rates going higher is fairly straightforward and it’s based on 3 forecasts:

  1. The Data – we think inflation (CPI), globally, will accelerate sequentially in March vs. February. We think unemployment rates (including the USA) are setting up to drop, sequentially, for the next 3 months, and that reported global growth will continue to surprise to the upside.
  2. The Decision – Bernanke is preparing to remove the “extended and exceptional” language from consensus policy.
  3. The Debtor – whether USA’s The Creditor be China or the US taxpayer in California, Piling more Debt Upon US debt Upon Debt from here is bearish for government bonds (we are short IEF and MUB).

Here are three fresh quotes that support our forecast for higher interest rates, globally, this morning:

  1. Sovereign Debt - “Our financial support demonstrates our commitment to finding a fair and equitable solution for all stakeholders in the wider interest of the economy.” -UAE Supreme Fiscal Committee chairman, Sheikh Ahmed Bin Saeed Al Maktoum, on bailing out Dubai World at a price.
  2. Sovereign Debt - “in an emergency, such aid would have to be provided as a combination of the International Monetary Fund and joint bilateral measures in the euro zone.” –Germany’s Merkel on pushing the Greeks to higher lending rates at the IMF.
  3. Sovereign Debt - “We have clearly underestimated the impact on the euro from the European sovereign crisis and perhaps also from the broader macro adjustment that it portends.” –Goldman Sachs, capitulating on their bullish view of the Euro.

At least someone at Goldman is admitting that they too don’t always know what they don’t know. Cheers to professional forecasting. If you want to get in this game, be prepared to win and lose - because everyone, whether they like you personally or not, will be keeping score.


My immediate term support and resistance levels for the SP500 are now 1147 and 1177, respectively.


Best of luck out there today,



Professional Forecasting - Professional Forecasting





The Macau Metro Monitor, March 25th, 2010

SJM SLOT PARLOUR TO GO AHEAD macaubusiness.com

SJM's project to transform its Guangzhou Hotel into a slot-machines parlour was been granted approval by the Gaming Inspection and Coordination Bureau (DICJ) as an initiative to promote businesses, hospitality and tourism in the Inner Harbour. This was a surprise since the government "stands firm" on moving slot-machines parlours out of residential areas. According to DICJ’s director, Manuel Joaquim das Neves, no other locations in the Inner Harbour has been approved to open slot machine venues.


COTAI SANDS READY TO SHIFT macaubusiness.com

On Monday, March 29, Sands China will hold a contract signing ceremony with a contractor to restart construction on parcels 5 and 6 on the Cotai Strip. The actual start date of the construction is TBD. Phase I of the project is expected to be ready in 18 months and will cost approximately US$2 billion.


At the end of 4Q 2009, the Gaming Sector had 44,020 employees, up slightly by 0.4% YoY. Analyzed by occupations that are directly related to betting services, 18,274 were dealers, up slightly by 0.4% YoY; 12,040 were hard & soft count clerks, cage cashiers, pit bosses, casino floor persons, betting service operators, etc., up by 1.4%. Meanwhile, 5,283 were casino & slot machine attendants, security guards, surveillance room operators, etc., up by 4.4% from a year earlier.


In December 2009, average earnings (excluding bonuses and allowances) for full-time employees dropped by 3.4% year-on-year to MOP 15,100. The average earnings for dealers fell by 4.9% over December 2008 to MOP 13,270, and that for hard & soft count clerks, cage cashiers, pit bosses, casino floor persons, betting service operators, etc. stood at MOP 18,400, down by 5.7%. The average earnings for casino & slot machine attendants, security guards, surveillance room operators, etc. registered a YoY increase of 4.7% to MOP 10,060.

At the end of December 2009, number of vacancies of the Gaming Sector increased by 48.1% YoY to 382, with 114 for dealers, 57 for hard & soft count clerks, cage cashiers, pit bosses, casino floor persons, betting service operators, etc. and 66 for  casino & slot machine attendants, security guards, surveillance room operators, etc.

With respect to the indicators that measure the inflow and outflow of human resources, as well as staffing needs of the sector, the employee turnover rate and recruitment rate of the Gaming Sector were 4.1% and 4.9% respectively in the fourth quarter of 2009, while the job vacancy rate was 0.9%.


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Inflection Point In Swaps

We are short Municipal Bonds via the etf MUB, short High Yield Bonds via the etf HYG, and short Treasuries via the etf IEF


We have had our Hedgeyes on the action in the swaps markets over the last few days.  Below we’ve attached five year charts for both 10-year swaps and 2-year swaps.  These charts show that that swap markets are at an inflection point and, in fact, are turning negative.  Last night, 10-year swaps were at -2.25 basis points and 2-year swaps were at -17.0 basis points.


According to Josh Steiner, our Financials Sector Head:


“Essentially, what’s going on here is that the cost of swapping floating rate obligations for fixed rate obligations has soared, which has put downward pressure on the fixed payer swap rate – so much so that the rate is now actually below that of comparable duration treasuries creating a negative spread (for the 10YR).”


This of course happens for a couple of reasons.  First, it shows increasing anxiety around the Fed tightening.  In effect, one would only pay a big premium to swap fixed rates for floating rates if you thought floating rates were about to get meaningfully more expensive.  Secondly, and also per Josh:


“To a lesser extent it supports the idea that AA corporate credit is trading tighter and tighter to US sovereign credit, partly because the markets are starting to price in the downgrade of the US and partly because corporate balance sheets, especially for the financials, are much, much stronger now (i.e. they are holding significantly higher capital than at any time in the last several years with much of the credit risk already reflected).


The view that the Fed may raise rates sooner than expected from the swap markets has also been supported today by data points from the Treasury market.  The Treasury Department today sold $45 billion in 5-year notes at 2.605%, which was a higher rate than anticipated.  In addition, the buyers offered to purchase only 2.55x that amount being sold, which was the lowest level of demand in this auction since September 2009.  Moreover, indirect bidders, a group which includes foreign central banks, bought only 39.6%, the lowest level since July.


We continue to be aggressively short this Rate Run Up.


Daryl G. Jones

Managing Director


Five-year chart of 10-yr swaps:

Inflection Point In Swaps - 1


Five-year chart of 2-year swaps:

Inflection Point In Swaps - 2

SBUX – It’s Only Just Begun

SBUX held its annual shareholder meeting this afternoon and although the tone of the meeting focused around the progress SBUX has made over the last year, CEO Howard Schultz began his presentation by saying “there is no finish line and we are not shouting victory.”  He concluded by saying, “It’s only just begun.” 


SBUX’s annual meeting is a big event.  Today’s management presentation ended with a performance by Sheryl Crow, who admitted to being a Starbucks groupie (her babysitter is an ex-barista).  Among all of the razzmatazz, I’d say the two most important takeaways stemmed from management’s comments about its initiation of a quarterly dividend and its current growth strategy. 


Earlier today, SBUX announced that its Board approved its first ever quarterly dividend of $0.10 per share and a resumption of its share repurchase program.  Management stated that this dividend and increased share repurchase authorization reflect the true health of the company and show the strength of the company’s balance sheet.  Management refuted the idea that the initiation of the dividend is a sign that the company is no longer going to grow.  Instead, the company said that this is far from the truth as SBUX still has significant room to grow given that the company currently has less than 4% and less than 1% of market share in the U.S. and International coffee markets, respectively.


Mr. Schultz outlined the company’s significant growth opportunities, but said SBUX will pursue a “radically reframed growth strategy.”  The company will maintain its traditional growth vehicle by resuming growth of its U.S. store base while accelerating the growth of its International stores.  The new growth will come from the company’s pursuit to make its coffee available in multiple platforms in multiple formats, primarily through expanding the CPG business, Seattle’s Best and Starbucks VIA.  Specifically, Mr. Schultz thinks that both Seattle’s Best and VIA are multi-billion dollar global opportunities.  VIA is currently sold in 10,000 outlets and the company thinks the brand can easily achieve 30,000 points of distribution.  Internationally, SBUX sees big opportunity for VIA as 70%-80% of all coffee consumption is in the instant coffee category.  SBUX just launched VIA in the U.K. about three weeks ago.


SBUX thinks it can fill a gap with Seattle’s Best by making premium coffee available to customers in more places.  There are currently 560 Seattle’s Best cafes in the U.S. and the company plans to grow the concept through both new company-owned units and a franchise network.  According to management, there is a deep pipeline of franchisee perspectives.  This retail store growth will complement the brands growth through the CPG channel and through partnerships with other retailers, such as the recent announcement to roll out Seattle’s Best coffee in Burger King’s 7,000 units in the U.S.


Mr. Schultz is convinced these new avenues of growth will complement SBUX’s retail business growth.  And, he predicted that over the next 2 years, “a different kind of Starbucks will emerge.”


Howard Penney

Managing Director

UA: Back Near The Top of Our Queue

UA is starting to look interesting again. Today we saw two sell-side downgrades based on Valuation, and I got pinged with two separate emails about concern that apparel will hit a wall as footwear launches. I’ll never flat-out ignore valuation. But if you want to put on a short based on valuation for a company that is going to beat numbers, print accelerating top line growth at a time when growth for retail is in question, and give further evidence that the company will double in size – again – over three years, then be my guest.


I think the most interesting call out here is that ‘UA will hit a wall like Nike did when it was young.’ Something tells me that the people chirping about that thesis aren’t actually diving into the margin characteristics over the past 30-years for Nike, and comparing UA’s progression. If they did, then this would be a tough argument to make.




Check out the chart below. It shows Nike’s revenue growth over a 20-year period starting in the early 80s, and the margin level realized (or implemented) to achieve such growth. The bottom line is that EVERY time Nike hit a so-called ‘wall’ – such as at the initial volatilitility in building a shoe biz in the US (when a ‘sneaker culture did not exist at the time), the end of its US footwear growth burst in the late-1980s, and growing too fast in US apparel by the late 1990s – it was preceeded by a prolonged period of over-earning on the margin line. There’s no way an early cycle company in this business should be printing 15-18% EBIT margins.


To that end, can ANYONE show me ANY evidence that UA overearned at any point in time? Compare it to early Nike, compare it to ‘fad-ish’ trends where the companies don’t reinvest enough to have a sustainable infrastructure from which to grow, and then compare it best of breed companies in other consumer spaces. Seriously, UA’s behavior as it relates to capital deployment has been textbook as a baseline for success. The Street could care less about this analysis over the near-term. But we care – it usually presents great opportunities to buy great businesses when the market is freaking out for the wrong reasons.


I don’t know if I’d call UA ‘hated’, but the sentiment has definitely deteriorated. Today’s downgrades have the percent of Buy ratings down to 20%. We like that.  UA is quickly making its way back towards the top of our queue.



UA: Back Near The Top of Our Queue - UA NKE EarlyGrwth 3 10


UA: Back Near The Top of Our Queue - UA EarlyGrwth 3 10



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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

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