• run with the bulls

    get your first month

    of hedgeye free


Angry Shorts

“When anger rises, think of the consequences.”



One of the best parts about being a risk manager in global macro is that there is no real information “edge” that my competitors can glean from getting winks and nods from the old boy network. The edge in global macro resides in having a repeatable research process that can quantify the crowd’s behavior.


The vaunted “1 on 1” is one of the most overpriced research products in our business. It being priced at a premium is the output of a self destructing sell-side business model whose “ideas” continue to be discounted as lagging indicators. As a result, there is an analytical void at both the sell-side supermarkets and the media that perpetuates their consensus leanings that you can capitalize on.


Without giving away the secret sauce manufactured here at our risk management boutique, I can tell you that we have learned a lot from neuroscientists like Dr. Richard Peterson in recent years and have found some very effective ways to quantify sentiment. This becomes quite handy, particularly when you can identify what we call the Angry Shorts in a crowded global macro position.


As a practical matter, we look for the appearances of key words and phrases in mainstream media and then overlay it with a multi-factor risk management model to come up with trading ranges in markets. Yesterday, the words “euro” and “parity” had what I considered a statistically significant reading.


That’s why I wrote in yesterday’s strategy note that “our call this morning will not be to pile on to the “parity call” that has quickly become the most deserved and consensus trade in global macro. Both our immediate and intermediate term duration targets for the Euro are converging in the $1.21-1.22 range. Whenever these durations converge, my own mathematical prejudice is to cover my short position.”


In other words, the timing of my calls is directly correlated to the math. I don’t wake-up every morning and lick my finger hoping the wind gives me the signal. I wake up to a new daily set of data - most of it is quantitative; some of it is qualitative; but all of it needs to be quantified and risk managed.


As a practical matter, the next step is putting the outputs of our models on the tape. Unlike the conflicted and compromised sell-side, we do that real-time, every day. In the Virtual Portfolio (we don’t believe in running a prop desk in front of, beside, or behind our clients), you can see all of our positions on a marked-to-market basis. We are either right or wrong and you should be the first to remind us of as much. We are accountable.


Yesterday, as it tested and tried our immediate term oversold level of $1.22, we capitalized on some Angry Shorts in the Euro and made the following two moves: 

  1. 1210PM (EST) – we bought oil as it was immediate term oversold
  2. 1219PM (EST) – we shorted the US Dollar as it was immediate term overbought 

Now the decision to buy oil was immediate term in nature (3 weeks or less), whereas the decision to short the US Dollar was intermediate term in nature (3 months or more). Oil is now broken, across all 3 of our core investment durations (TRADE, TREND, and TAIL), but has immediate term upside to $76.17/barrel. We were already long some oil going into the day, so we didn’t get angry about it; we waited for our price, and bought more with the expectation to keep a trade a TRADE.


On the US Dollar Index position, I laid out our intermediate term thesis on the Duration Mismatch between the Euro and the US Dollar in my strategy note from last Thursday titled Fiat Fools. Without re-hashing that in full, the bottom line is this: US sovereign debt problems are only different than Western European ones in one key factor – timing. The darkest days for professional US politicians who perpetuate a fiat currency policy are coming.


Yes, the Euro-trashing by Trichet has been voted on in a very public (marked-to-market) way. One TRILLION is a lot of French Fiat that has created what Mr. Macro Market sees well ahead of a lying Spanish politician. That’s why the Euro has lost -18% of its value since November. While it may be “new” to the money honey at CNBC, it’s not new to the real-time risk managers of global macro. Neither will it be “new” news to anyone who has studied basic calculus when the USA gets its turn.


If you are looking for the simpleton version of the math on the topic of US debt, deficits, and unfunded liabilities, read “Comeback America” by David Walker. I am in the middle of reading it right now. Since Walker was the comptroller general and head of the GAO (General Accountability Office) of the United States of America, his view of the actual numbers versus the Made-Off ones is quite revealing.


I’ll spend more time on what Walker calls the “Financial Hole” ($56 TRILLION US Dollars) in the coming weeks and months, but for now let me leave you with something that can help you help your friends get really angry about – a TRILLION dollars…


Whether its Euros or US Dollars, as Walker wrote, “think about that word, trillion”… “if you can”…


“The $1.42 trillion deficit translates to about $2.6 million of debt accumulated each minute, $160 million an hour, and $3.8 billion a day.”


Them be some liabilities that Americans are going to be getting really angry about within 6 to 9 months. Make sure you are short the US Dollar before that anger management becomes consensus.


My immediate term support and resistance lines for the SP500 are now 1109 and 1144, respectively. I remain short SPY and we will be hosting our Monthly Macro Call this afternoon (email if you’d like to participate).


Best of luck out there today,



Angry Shorts - DOLLAR


The S&P 500 finished slightly higher on Monday, after spending most of the day in the red.  On the MACRO front the “Sovereign debt Dichotomy theme/concerns” continue to provide downward pressure in Europe.  There were additional concerns over the strength and sustainability of economic activity in China, though these concerns did little to stop China from being up 1.4% last night. 


On the MACRO front, the May Empire Manufacturing came in below expectations; 19.1 vs consensus 30.0 and prior 31.9. New orders index was 14.30; down from prior 29.49. Shipments index was 11.29; down from prior 32.10. Inventories index was 1.3; down from prior 11.39.


March total net TIC flows were $10.5B vs revised prior $9.7B; net long-term inflow (purchases of equities, notes and bonds) totaled was significantly higher $140.5B than consensus $50.0B and $47.1B  billion in February.  Treasury purchases rose by the most since June as China added to its holdings for the first time since September.


On the housing front, May NAHB Housing Market Index was better than expected; 22 vs consensus 20 and prior 19. While still low by historical standards, this was the highest reading since August 2007.  The gauge of buyer traffic increased to 16 from 13 last month and the measure of sales expectations for the next six months climbed to 28 from 25.


Yesterday, Consumer Staples was the best performing sector and is now added to the list of sectors that are positive on TREND.  The others include Consumer Discretionary, Industrials and Utilities. 


Commodities fell to a seven-month low, led by the industrial metals and energy.  The CRB declined 2.1% to 253.20, the lowest level since October 5th. Copper plunged the most in 15 months and crude oil fell to the lowest price since December.  Oil declined sharply yesterday but has pared some of its losses.  Currently it is trading up 2.7% at $71.95. 


Not surprisingly, the REFLATION trade was hit hard yesterday.  Energy (XLE) was the worst performing sector, down 1% (with crude oil down 2.1% to 70.08 after trading below $70 earlier in the day).  Industrials (XLI) and Materials (XLB) round out the bottom three performing sectors.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.80) and Sell Trade (76.17). 


Within the Materials, the S&P Metals & Mining Select Industry Index was down 3.4%.  Chinese export concerns and the EURO are leading the list of concerns for the XLB.  Steel companies were among the worst performers, as were the precious metals.  Even gold stocks were notable as gold companies moved to the downside. 


Yesterday, at 12.10 PM we shorted the UUP.  We've been waiting for immediate term TRADE capitulation in the Euro. We may have seen that yesterday and the USD is approaching our intermediate term TREND upside target at the same time.  Today, the USD is up versus the GBP, JPY, and the AUD, down versus the EURO, CHF, CAD, and HKD.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.99) and Sell Trade (86.97). 


The Euro is holding Hedgeye's $1.21-1.22 level of intermediate term support, popping back up to 1.24 with immediate term resist at 1.26.  The Euro is up versus the USD, JPY, GBP, AUD, and HKD.  The Swiss Franc and Canadian Dollar are trading up versus the EURO, with the CAD showing less sensitivity to oil prices than the Australian currency.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.22) and Sell Trade (1.26). 


Looking at counterparty risk, three month LIBOR has increased again from yesterday to 0.46.  The inverse correlation between the TED spread and the EURO tightened further during yesterday’s trading; it is now -0.95.  The TED spread widened during trading yesterday but has come in slightly this morning (the Euro is up!), currently at 0.297.  Gold has shown some weakness over the past couple of days; at the time of writing it is trading down 1.1% at $1,214 per ounce.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,177) and Sell Trade (1,255).


The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.99) and Sell Trade (3.15). 


At the time of writing, equity futures are trading above fair value, feeding the markets rallied into the close Monday.   Yesterday’s late session rally has translated into higher European and Asian markets, where RISK is slowly returning.  As we look at today’s set up, the range for the S&P 500 is 35 points or 2.5% (1,109) downside and 0.6% (1,144) upside. 


On the MACRO calendar we have:

  • April PPI
  • April Housing Starts, Permits 
  • API Crude Inventories 
  • ABC Consumer Confidence

Howard Penney

Managing Director














Despite a much higher Mass mix, Venetian’s margins are comparable to Wynn. High promotional activity is the culprit.



Wynn reported massive margins in Macau a few weeks ago which we discussed in our April 30th note, “WYNN GROWS INTO ITS MULTIPLE”.  A lot of the margin looks sustainable assuming Wynn continues to grow its direct VIP play and keeps its commissions low.  Unfortunately, we cannot say the same for the LVS Macau casinos.


Bottom line, Sands China is paying total commissions much higher than the “official” cap of 1.25% of rolling chip or 44% of win.  A fat commission structure explains why Venetian’s margins are in-line with Wynn Macau's despite Venetian generating a higher mix of higher margin Mass business and a greater percentage of VIP play than Wynn.  See the chart below for illustration.




Sands China paid out aggregate commission dollars of 1.37% of RC in 1Q2010, 1.27% in 2009, and 1.31% in 2008 or 47%, 45% and 46%, respectively, if we look at commission as a % of win.  We define aggregate commission dollars as the sum of:

  • Rebates offered to direct players and the estimated monies paid to junkets that ultimately get paid back to junket customers as rebates.  This number can be calculated as the difference between calculated gross gaming revenues and reported net casino revenues. Rebates are recorded as a contra-revenue item.
    • For Sands, this amount is usually between 75bps to 100bps of VIP Turnover or 28-35% of VIP hold %.
  • Junket commission expenses are the part of the junket commission that the junket keeps in return for his service of providing credit, working capital, collection services and client promotion activity.  Junket commission expenses are reported in casino operating expenses by Sands China and broken out in the notes section of their releases.
    •  Junket commissions are estimated between 24-30bps for Sands China.
  • In addition to offering players rebates and paying junkets commissions for their services, operators also offer “comps” to their junkets and VIP players in the form of free rooms, free meals, free transportation (including those wonderful jet rides), and other forms of “entertainment.”  When we met with DJIC last year before commission caps were put in place, they told us that the caps were meant to capture the value of “comps” in the all-in rate.  Of course, they also intended to put a cap on revenue share deals, but that also never happened.  Regardless, complementary services have a cost to them and should be included in thinking about the cost of the VIP business.  Like rebates, complimentary non-gaming services are treated as a contra-revenue item.  When Sands China reports, non-gaming revenues are reported as net of “comped” revenues vs. when LVS reports the comps are in the promotional line.  To be fair, we reduce the promotional line by 50% in order to capture the true cost of the promotional instead of just the revenue forgone.
    • Gross comps are not insignificant;  they’ve been running between 19-30bps.

Even excluding the complimentary non-gaming services, commissions are higher than one would expect given the high percent of direct play across the 3 properties and the significant weight towards RC junkets vs. revenue share arrangements. Part of the explanation for higher all in commissions is that Sands pays a higher rebate rate to its direct players – perhaps closer to 1% not including comps.

  • 80% of Venetian’s VIP commissions are paid on a RC basis (i.e. 1.25%).  Venetian’s direct play as a % of total VIP Turnover was 21% in 1Q2010, 17% in 2009 and 15% in 2008.
  • 50% of Sands’s VIP commissions are paid on a RC basis.  Sands’s direct play as a % of total VIP Turnover was 10% in 1Q2010, 11% in 2009 and 2008.
  • 80% of Plaza’s VIP commissions are paid on a RC basis.  Plaza’s direct play as a % of total VIP Turnover was 43% in 1Q2010, 28% in 4Q2009 and 49% in 3Q2009.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Brazilian Breakdown Continues

Brazil’s Bovespa is having another terrible day today, losing another -1.9%, trading down to 62,232 and adding to the concerns that are permeating bearish global equity market conditions.


As you can see in the chart below, Brazil remains broken from both an immediate term TRADE and intermediate term TREND perspective. Underneath the chart we have compiled Moshe Silver’s primarily translated local Press Notes from Brazil as of the last 48 hours. Local consensus is as local consensus does.




Brazilian Breakdown Continues - Bovespa


Brazil Press Notes – Sunday 16 May 2010

O Globo headline: “Lula will leave his successor a gross national debt of 64% of GDP, the largest in the last ten years.”

O Globo reports total public sector debt may rise to 64.4% of Brazil’s GDP by the end of 2010, the highest level in ten years.  The paper reports this is primarily attributable to a special loan program implemented since last year between Brazil’s treasury and the BNDES – the Brazilian Development Bank, and funded by bonds issued by the Brazilian treasury.  It is projected that Brazil’s public sector debt could reach R$2.2 trillion in December, or 64.4% of GDP.

Growth of public sector debt is in sharp contrast to Brazil’s external debt, reported at barely 3.4% of GDP.  This disparity has economists troubled, particularly in light of the current wave of credit miseries afflicting European nations.  There is concern that Brazil’s hard-won fiscal credibility is now at risk.


The 2009 global fiscal crisis opened the way for a radical change of approach by the Lula administration.  The accumulation of surpluses, which had reduced debt as a percentage of GDP, was replaced by a combination of increased expenditures, and an expansion of credit by increasing public indebtedness.


Commentary: Lula may be Brazil’s Jack Welch.  Having overseen impressive economic growth, and having fostered social programs that have improved the lives of millions of his countrymen, Lula may leave behind a nasty twin surprise as he steps down. 


First, the economy may turn out to be an absolute shambles.  This is not completely his fault, as he can not be blamed for the US and European financial crises.  (As the US economy was infecting its neighbors with the fiscal equivalent of AIDS, Lula observed in a global forum that the black and yellow and brown people of the world were now all going to suffer tremendous harm at the hands of white bankers.  “I don’t see any one among them with dark skin,” he said.  “They are all white.”)


The second nasty surprise may be just how intractable the nation’s drug and gang violence is.  While Lula insists that the violence is largely contained to well-known sections of the major cities – and that people will be all right if they stay in the right part of town – his administration doesn’t seem to have made a dent in the staggering level of violence.  The nation also reports 23,000 drug-related homicides a year, and foreign tourists have a nasty habit of turning up dead in the middle of downtown Rio and Sao Paulo.  It doesn’t take many reports of random violence to scare people away.  The nation has already fallen behind on its “ironclad” schedule to prepare stadiums for the World Cup.  The FIFA President made an offhand remark the other day about other countries being able to host the games on short notice – it was not taken as a threat, but things can change.  Two years out, Brazilians may regret not having replaced Lula after his first term.


Government Must Cut Spending

The government will have to cut public sector spending far more than the R$10 bn announced last week if they are to restrain growth in the economy.  Economists are now saying that the accelerated level of economic activity, and its attendant inflationary pressure, can only be contained by severely restraining public spending.  In order to cool off demand and bring down the price level, the government must withdraw liquidity from the economy, say economists.  In order for this program to be effective, economists say the additional budget cut must be at least R$30 bn.  The government has already implemented a budget reduction of R$21.8 bn this year, but this measure was accompanied by a reduction in receipts already foreseen for the period, which means the drop in revenues is preventing the budget cuts from having an effect.  The government just announced a further R$10 bn in possible cuts, but the budget is already set, and it is difficult to see where these cuts will be taken.


Last year, public expenditures were R$571 bn, of which barely R$19 bn were subject to cuts as being nonessential items.

The government is supposed to identify where further cuts will be taken.  The announcement is supposed to come by the end of this month.


The ex-director of the Central Bank observed that the European crisis will force the government to move more slowly in issuing bonds, which means the rate of deceleration in the economy will be less, complicating the situation into the year 2011.  Growth is projected at 7.5% this year, and the economy will likely be overheating going into 2011, with minimum projected growth of 5%, which will require still higher interest rates, requiring additional budget surpluses to service the debt.


Month of May Inflation Surprise 

General price levels rose more than expected for the month of May, due to a strong increase in wholesale prices.  The General Price Indicator (IGP-10) rose 1.11% in May, after a 0.63% rise in April, according to the Getulio Vargas Foundation.  A Reuters poll of economists had foreseen an increase of 0.78%, an average estimate based on a range of 0.7%-1.04%.  The reported figure is above the top end of the range of estimates.

The wholesale price index rose 1.34% in May, after advancing 0.51% in April.  The consumer price index rose 0.64% in May, versus an earlier increase of 0.80%, due to a cooling off in food price increases.  Food prices were up 1.12% in May, versus 2.58% in April.  The national index of construction costs, which was up 1.01% in April, rose 0.77% in May.


Brazil Press Notes – Monday 17 May 2010

Headline from O Globo: “Chinese Competition Reducing Brazil’s Africa Exports”.  The guiding principle of the Lula government’s foreign policy – South-South integration – risks a severe setback due to the interruption of trade and logistical cooperation between Brazil and African nations, particularly in the area of transportation.  The situation is seen as being exacerbated by an aggressive Chinese presence in the region, as Chinese purchase large tracts of land, and engage low-priced manual labor by offering competitive wages, depriving established Brazilian companies of contract laborers.

An alarm was sounded a few days ago when the April trade figures were released.  Brazil’s exports to Africa fell 32% versus April 2009, the only market to record a reduction.  In the first four months of 2010, trade declined 14.8%.  Brazil sold fewer automotive parts, machinery and equipment, cereals, iron ore and airplanes to African customers.

Welber Barral, Brazil’s Secretary of Foreign Trade, says Brazilian companies are losing important contracts in infrastructure projects to the Chinese.  “The data are somber,” he said.  “In 2009, China’s sales to Africa were US$50 Bn , corresponding to a third of Brazil’s total exports.  The Chinese have a very aggressive financing mechanism,” said Barral.


Keith R. McCullough
Chief Executive Officer


Moshe Silver

Chief Compliance Officer


Table gaming revenues tracked through May 16th were a whopping HK$8.6bn. Wynn, MPEL, and SJM gained share at the expense of LVS and MGM.



We just received some preliminary Macau numbers for the first half of May.  Fueled in part by Wynn Encore, table revenues through May 16th were HK$8.6 billion.  The Golden Week celebration took place in early May and needs to be taken into account in predicting the full month revenues.  Adding expected slot revenue of approximately $700 million for May, we think May could end up generating approximately HK$16 billion in revenues, up 85% year over year.  Here are the market shares MTD:


SJM            35.3%
LVS            15.1%
Wynn          18.1%
MPEL          13.2%
Galaxy         11.9%
MGM             6.4%


We already wrote about Wynn’s impressive May so far in our note last week.  Other notable market share shifts concern LVS, MPEL, and MGM.  LVS has been losing share but it took a huge dip thus far in May and if it holds, will be the lowest on record for the company since Venetian opened.  We don’t know how the company held but we’re guessing it was pretty low.  For the last few months, LVS’s share has been in the 19-21% range.  On the other hand, MPEL’s share improved 60bps sequentially, despite the Encore opening.  MPEL could be the big winner this month relative to estimates.  Finally, MGM’s share fell again sequentially to a level not seen since February of 2009.  Not the kind of numbers to be posting into an IPO.



Braveheart: SP500 Risk Management Levels, Refreshed

There was a time in my career where I thought I could pretend I was Braveheart and buy my “best ideas” on valuation – then I got crushed. In a market that’s flashing negative across my core 3-factor model (Price, Volume, Volatility), the risk/reward is skewing to the downside.


After registering price, volume and, volatility studies after the first hour of this morning’s trading, the risk in the SP500 clearly outruns the reward (1108 downside versus 1144 upside). Here are some other real-time risk management factors to consider: 

  1. SP500’s dominant TREND line (1144) is not only broken, but the bulls are keep trying to test it – that should equate to higher VIX if SPX fails again
  2. VIX remains in a Bullish Formation (bullish across all 3 of our core investment durations, TRADE, TREND and TAIL), with no resistance to 39.37
  3. Immediate term TRADE support drops to a lower-low for the first time in a week (was 1110 and is now 1108 which would also be a lower-closing low) 

The brave move from here may simply be not getting sucked into the bid.



Keith R. McCullough
Chief Executive Officer


Braveheart: SP500 Risk Management Levels, Refreshed - S P