The Macau Metro Monitor, June 30th, 2010



Sands CEO, Jacobs, disclosed in a SEC filing that he sold 166,470 shares on 06/25 at $25.78, after exercising options on 250,000 shares at $11.13 and 18,750 at $ 7.73. IM believes this selling was a result of tax planning, not job satisfaction. IM is sure that Jacobs will be beside Adelson in the months to come.


SJM LOSES ITS PR GURU Intelligence Macau

John Catt, head of PR at SJM, has left. He played a critical role in guiding the company through its IPO and building a respected PR department at SJM.


“I believe that misconceptions play a large role in shaping history.”

-George Soros


That was my favorite quote from an important speech that George Soros gave at Humboldt University in Berlin on June 23, 2010, where he warned of many of the misconceptions associated with the credibility of sovereign debt. He is one of the few global macro analysts in this game who got this latest down move right. Well done, Sir Soros. Well done.


Like any great top-down analyst, Soros started his analysis by taking a step back, looking at the timeline of the crisis of confidence in Lehman Brothers. Then he took a step forward, using past market behavior as his guide. This is what we call proactively managing global macro risk with a behavioral bent.


If you wake up every morning accepting that the Officialdoms of Wall Street and Washington are all about storytelling, you put yourself in a much better position to understand that their “misconceptions play a large role in shaping history.”


Soros formally calls this “Reflexivity”…


“Reflexivity asserts that prices do in fact influence the fundamentals and that these newly-influenced set of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern. Because the pattern is self-reinforcing, markets tend towards disequilibrium. Sooner or later they reach a point where the sentiment is reversed and negative expectations become self-reinforcing in the downward direction, thereby explaining the familiar pattern of boom and bust cycles.” (George, Soros (2008). "Reflexivity in Financial Markets". The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means (1st edition ed.). PublicAffairs. p. 66).


Hedgeye calls this Prices Rule Risk Management. We believe that marked-to-market prices are not only leading indicators for future events; they perpetuate those events. Using this framework, our daily risk management plan is to change the plan as prices change.


Now that stock market prices from China to the USA are hitting lower-lows, you can bet your Madoff that the consensus storytelling on Wall Street will become bearish (this week’s II Bullish to Bearish Survey saw the Bears rise from 31% to 33%, which still isn’t Bearish Enough, but we’re getting there).


Eventually, Washington will follow Wall Street’s lead and start fear-mongering the citizenry into a “Third Depression” so that Professional Politicians can up government spending again. In the meantime, everyone who is long and wrong will just revert to blaming the Europeans and high-frequency traders.


After the 6th US market down day in the last 7 and a fresh YTD closing low of 1041, the SP500 is down -6.6% for 2010. While that’s hardly a YTD down move of consequence when you compare it to the leaders of the 2010 toilet bowl (bottom 3 countries YTD = Greece -33.2%, China -26.8% and Spain -22.6%), the SP500 is finally teetering on what our Hedgeyes call a crash relative to expectations (a peak-to-trough drop of 20% or more).


Since its recent bear market cycle closing high of 1217 on April 23rd, the SP500 has lost -14.5% of its value. With our immediate term TRADE target for the SP500 down at 1018, we don’t foresee a crash coming in the immediate term (1018 would imply a -16.4% correction). That said, with the intermediate and long term TREND (1144) and TAIL (1091) levels in the SP500 broken, anything can happen.


In the US, the biggest misconceptions that we have been hammering on are largely concerning expectations for US growth and deficit spending. Combined, lower than expected GDP growth and higher than expected deficit spending, these 2 factors will continue to play a significant role in shaping the history of markets. History, after all, gets marked-to-market as of yesterday’s closing price.


We’ll go through our multi-factor/multi-duration risk management model in tomorrow’s Q3 Hedgeye Macro Theme Conference Call where we’ll introduce a new quarterly theme called “Bear Market Macro” (email if you’d like to participate). The slide deck will provide you with the kind of macro analysis that market practicioners use, fully loaded with probabilities, ranges, and levels.


Yesterday, we took the market’s weakness as an opportunity to cover some shorts: American Express (AXP), New York Bancorp (NYB), and Consumer Staples (XLP).  On weakness, we bought Under Armour (UA) and the Brazilian Real Fund (BZF), taking our allocation to International Currencies up to 21% from 15% (and our cash position down from 70% to 64%). We like currencies where the government that houses them (China and Brazil) respects the cost of capital.


The US market should bounce today, and you should take that as one more opportunity to take advantage of consensus misconceptions about US growth. Remember, short term bear market bounces can often be more forceful than bull market ones. Our macro model is flashing immediate term support and resistance levels of 1018 and 1085, respectively. Manage your risk around that range.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Misconceptions - soros


After setting off yesterday’s meltdown in the S&P500 (down 3.1% yesterday), China closed down another -1.2% overnight to new YTD lows of -26.8%.  China continues to flash a very negative leading indicator for global growth. 


The Conference Board issued a press release stating that due to a calculation error the originally reported April LEI for China was incorrect. The correct April LEI for China was +0.3% vs. originally reported +1.7% and March +1.2% and February +0.4%. This change raised questions about the strength of economic growth in China.


Copper is confirming the slowing growth story, led by China.  Yesterday, copper traded down 5% to close at $2.93 per pound.  Year-to-date, copper is down 12.5% and is broken on TRADE and TREND.   The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade ($2.84) and Sell Trade ($2.98).


This down move was quickly compounded when the Conference Board released the June number in the US.  After rising for the past 3 months, consumer confidence fell to 52.9 in June; much lower than consensus 62.5 and prior 62.7 (revised from 63.3). The decline was driven largely by increasing concerns related to jobs and income.  Present Situation was 25.5 vs. prior 29.8 (revised from 30.2); Expectations was 71.2 vs. prior 84.6 (revised from 85.3).


The Euro moved lower by 0.7%, but is rallying in early trading today.  The EURO was pressured on concerns surrounding the expiration of the ECB’s 12 month liquidity facility and the consumer uprising in Greece.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.24).


Treasuries were stronger yesterday; the yield on the 2-yr is within record territory and the yield on the 10-yr dropped below 3%. The dollar index traded up 0.4% on the day and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.28) and Sell Trade (86.57).  The VIX surged 17.1%, and is now up 26.2% over the past five trading days.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (30.87) and Sell Trade (39.90).


Yesterday, all sectors were down led by Energy (XLE -3.9%) and Materials (XLB -3.7%).  On a relative basis, the best performing sectors were Consumer Staples (XLP - 1.6%) and Healthcare (XLV -1.8%). 


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,226) and Sell Trade (1,258). 


After trading down to $76 yesterday, crude is trading higher for the first time in three days.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (74.83) and Sell Trade (79.36).  


As we look at today’s set up for the S&P 500, the range is 67 points or 2.2% (1,018) downside and 4.2% (1,085) upside.   Equity futures are trading above fair value, on a light day for macro news.    


Howard Penney













Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Personal savings rate: worse than we thought


The headlines in Greece today suggest that social unrest is far from over.


Here are just a few of the headlines in Greece this morning:

“Greek Protesters Warm Up Ahead of New Nationwide 24-hour General Strike”

“Greeks Strike to Protest Pensions, Labor Law Overhaul”

“Youths Clash With Police As Greek Unions Strike Over Proposed Reforms”


Looking at the Greek CDS numbers, the probability of default is well above 60% and the Greek market is the worst performing equity market on the planet (China is next followed by Spain).  The citizens of Greece are speaking out loud and clear yet there is nothing the government can do; they are handcuffed by a leveraged balance sheet. 


The equity market in the USA is only just beginning to reflect the harsh reality of out leveraged balance sheet.  At the time of writing the S&P 500 is trading at 1,047.  If it closed below 1,051 there is no support to 1,018…


As I said in the Early Look today, one of the most poignant Hedgeye sayings is “austerity equals civil unrest” and civil unrest is in full force in Greece.  Spain is not far behind.  When a country is mismanaged, it can only end BADLY.


Howard Penney





Chinese Ox . . . Boxed By Leading Indicators

Conclusion:  Consistent with prior Hedgeye research, Chinese leading indicators indicate a forthcoming slowdown in economic activity in China.


The Conference Board’s Leading Economic Index for China was revised lower today to 0.3% from the prior report of 1.7%.  The key change in the data was the calculation of Total Floor Space Started.   Originally this data was reported to have contributed 1.3 percent, but was revised lower to negative -0.1% in April.


In April three of the six components that make up the LEI increased.  These positive contributors were: PMI supplier delivery index, total loans issued by financial institutions, and the raw materials supply index.  Conversely, the three components that declined in April were: consumer expectations, the PMI new export order index, and the total floor space started (as noted above).


With April’s gain, the six-month annual growth rate of the leading economic indicators continue to moderate, down to 3.3% (a 6.8% annual rate).  This is a marked deceleration from the prior six months period, which grew 4.9%, or 10.0% on an annualized basis.


Clearly, we are starting to see evidence of the Chinese government’s cooling measures, and that the second derivative of Chinese growth has peaked.  The question remains: Is this priced in?


On June 10th, we wrote a note that concluded, “China is starting to look interesting on the long side, as the stock market has priced in slowing economic growth.”  Based on the price action over night in China, the Shanghai Composite was down over -4%, the answer seems to be clear.


The combination of the downwardly revised leading indicators and the fact that the Agriculture Bank of China (the third largest lender in China) capped its IPO at a lower than expected range (signaling lower demand for Chinese equities than expected), suggests that Chinese equities are still better for sale.


Daryl G. Jones
Managing Director


Chinese Ox . . . Boxed By Leading Indicators - 1