"We're Used To Winning"

"We're not used to 14-9 victories, but we're used to winning."

-Drew Brees


Q: For all of the overpaid professional politicians in Washington this morning - what do the mid-month 2010 US stock market rallies of February, July, and September have in common?


A: Winners (Winter Olympics, World Cup, NFL Season).


Investment Conclusion: politicians, stop intervening in this game and go away.


New Orleans Saints quarterback, Drew Brees, reminded the real grinders of this country what makes us wake up every morning expecting to win. Brees doesn’t point fingers. He doesn’t fear monger either. He’s one of the fastest in the world at changing his mind as the game that’s in front of him changes. He makes calls and he holds himself accountable to them. Drew Brees is an American Risk Manager that is used to winning.


What does this have to do with managing risk across global markets this morning? A lot. The behavioral side of analytics and how it applies to decision making in modern day finance is still in its very early days.


Neuroscientists, like my friend Dr. Richard Peterson, are starting to enlighten us about the intersection between investor psychology and financial markets. I’ve mentioned his 2007 book “Inside the Investor’s Brain” before as one of the most important risk management books I’ve ever read. Peterson just published “Market Psych” on September 7th, and it’s on the top of my reading pile this morning.


The intersection between confidence and fear is one of the most important factors in my multi-factor, multi-duration, risk management model. If you have a market that’s dominated by what the government is going to do next, and the core marketing message of that government is fear mongering about great depressions and keeping “risk-free” rates of return at ZERO percent, the impact on confidence becomes very real.


I don’t need a loser who gets paid to politically pander to tell me how to think about market risk or the bottoms up factors in meeting my employee payroll. Nor do I need them to eliminate the rate of return I have on the hard earned savings in my family’s bank account. What I really need is for the government to just stop and leave me and this market alone. You want a solution, Mr. President? Try that.


From the front line manager at a McDonald’s this morning to an offensive lineman protecting Drew Brees’ blind side last night – these are the men and women of this country that inspire our competitive spirits and drive a positive confidence interval in our decision making. Americans are back from Labor Day vacation showing a renewed spirit to persevere – this time, Mr. Big Government, just leave them alone.


I’m certain that I won’t be accused of being bullish since April, but don’t confuse the winning side of this game with a lack of confidence. For me, there is no such thing as the “risk on, risk off” game of finance often bandied about by pundits who have never traded a P&L in their life. Risk is always on. Confidence isn’t about being bullish or bearish. It’s about being right.


Not unlike the NFL on last night, our revolutionary Hedgeye Risk Management Portal shows you everything that we do and when we do it. There is a replay on the competitive fields of real-life folks – we’re early in showing this to the world of finance. We think others will follow.


Since September 3rd, you’ll notice that this cuddly Thunder Bay Bear has done nothing but BUY long positions and COVER short positions. It’s not my job as a risk manager to bypass calling an audible when the game in front of me is changing. In the last week, Americans have become more confident and so has the US stock market’s internal risk management factors on our immediate term TRADE duration.


The top 3 plays of the week that are driving US consumer confidence higher are as follows: 

  1. The ABC/Washington Post Consumer Confidence report improved from minus -45 to -43 this week.
  2. MBA Mortgage Applications rose for the 2nd consecutive week by +6.3% on a week-over-week basis.
  3. Weekly US jobless claims dropped for the 3rd consecutive week to 451,000 this week down from 500,000 in the week of August 23rd. 

You can go back and see how many of our short positions we covered between August 24th and 25th (when confidence and mortgage applications bottomed). The instant replay doesn’t lie; people do.


The bottom line then was that the volatility index (VIX), or one of the clean-cut measures of concurrent fear was peaking in the high-20’s. All the “valuation” models that the Warren Buffett wannabes of this game use don’t work until prices reflect the appropriate Fear-Discount. If you are going to strap on the risk management pads and actually trade this game, keep that in mind.


My greatest fear about NOT being short the SP500 (SPY) here is that after I get fired up watching some of America’s finest on the field on Sunday, some “government is good” loser comes back into my life on Monday with another failed policy game plan that smokes all of the confident players in this country right back into their holes.


My immediate term TRADE lines of support and resistance for the SP500 are now 1085 and 1123, respectively. Go Redskins.


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer


"We're Used To Winning" - 1


The Macau Metro Monitor, September 10th 2010



In a statement released last night, RWS said it was "voluntarily withdrawing its shuttle services in the spirit of collaboration with the Singapore Government".  RWS spokesman Robin Goh said that a total of eight services running through Bukit Merah, Queensway, Bedok, Choa Chu Kang and Bukit Panjang, Tampines, Jurong East, Ang Mo Kio and Bishan, as well as Tiong Bahru will end at 11pm on Sunday.  The remaining shuttles running through the Central Business District, Orchard and Marina areas will continue. 


Several hours before RWS's annoucement, MediaCorp visited the pick-up points in Bishan and Bedok and observed that demand for RWS' shuttle services - which had operated as scheduled - remained strong with many of the buses operating at full capacity, in spite of the authorities' investigation. Many of the passengers used the shuttles to get to Sentosa in general and not just RWS.  However, without the shuttles, business may soften.



The Casino Regulatory Authority has issued directives to the IR's put and end to their free shuttle services, effective immediately.  RWS said that it received the directive at noon on Friday.  Approximately  4-5% of RWS's casino visitors travel to the resort by the free shuttle services and therefore, management doesn't expect that the Authority's move will have great impact on its business.



According to the president of Real Estate Chamber of Commerce in Macau, recent data indicates that Macau has clearly fully recovered from the global financial crisis. Value of real estate properties in Macau is almost back to pre financial crisis levels and if there are no further tightening measures or other negative external shocks in 2H10, the value of real estate property in Macau is estimated to sustain 5-10% annual growth.




According to the National Bureau of Statistics, property prices in 70 major Chinese cities rose 9.3% in August YOY but were unchanged on a MOM basis from July.  August trends are a deceleration from growth rates in the first 7 months of the year. On a YOY basis, China’s home prices increased 7.8% in Dec 2009, 9.8% Jan 2010, 10.7% in Feb 2010, 11.7% in March, 12.8% in April, 12.4% in May, 11.4% in June and 10.3% in July.  New home prices rose 11.7% YOY in August, a 1.2% deceleration from July.  Prices of second hand homes increased 6.2% YOY in August, down 0.5% from July.  Investment in property sector soared 34.1% to RMB $449BN in August.



Long Oil? Keep This Chart Front and Center

Conclusion: Total oil and petroleum stocks are at all time highs in the United States, suggesting underlying demand is slow, which supports our view of decelerating GDP growth.


We can get verbose at times, but sometimes it's simply easier to just show one chart.  The chart below is comprised of distillates, crude oil, and gasoline stocks from Department of Energy data going back to 1990, which is as long as the data is kept.  Currently the aggregate supply on hand of petroleum products is 1.1 billion barrels, which is the highest level we've ever seen in this data set.


According to the BP 2009 Global Energy Abstract, the United States consumed 18.7 million barrels per day in 2009, which was 22.3% of the total world production. Its share of world imports is slightly smaller at 11.4 million barrels per day, or 21.6% of the total.  The point is, the United States consumes and imports more than 20% of the world's oil, so if inventories are at an all time high level in the United States, it is a negative data point for future prices.


Distillate stocks are the real outlier in U.S. petroleum stocks as they are well above the 20-year band of 100 and 150 million barrels of inventory for really the first time ever.  Distillate inventories are currently at 175 million barrels, which suggests anemic demand for distillates.


The last time inventories were close to this high was October 1991.  Despite inventory declining over the next two years, the price of oil fell more than 22% over that time period.


We'll have more thoughts on this topic from Energy Sector Head Lou Gagliardi next Thursday as he launches his energy sector coverage, but to the extent you are long oil . . . keep the chart below front and center.


Daryl G. Jones

Managing Director


Long Oil? Keep This Chart Front and Center - 2

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Based on Upper Upscale RevPAR coming in at 10%, August represented a sequential slowdown in seasonally adjusted absolute RevPAR from July.


As we discussed in our 08/10/10 note “DOLLAR REVPAR MORE RELEVANT THAN %,” to keep pace with July, August need to generate RevPAR of roughly $100.  Actual August YoY RevPAR growth came in at +10% which, on the surface, appears stronger than July’s 7.8% increase.  However, on an absolute basis, adjusted for seasonality, August growth need to be at least 14% to match July’s performance.  In our opinion, RevPAR is actually on a declining pace sequentially which gives credence to our Pent Up Demand thesis espoused in our 08/17/10 note “PENT UP DEMAND THEORY.”


The good news is that September needs only to grow RevPAR 8% to match August’s performance versus 12% to match July.  The bad news is that if this new level of absolute RevPAR continues, 2011 RevPAR could fall below the Street’s estimate.


With IL, IN, and IA already reported, August is looking worse than July on an absolute basis, after adjusting for seasonality.


As we did for lodging – yes, 10% RevPAR growth in August actually represented a slowdown – we’ve taken a look at sequential regional gaming trends on an absolute basis.  Of course, we adjust for seasonality since August is typically a better than average month but slower than July while September is one of the slowest months of the year.  Ignoring YoY changes is prudent in our opinion given the extreme volatility over the last two years. 


Seasonally adjusting the July actual revenues yield August regional gaming revenues of $1.047 billion, up 2% over last year.  However, Illinois, Indiana, and Iowa have already reported August, and they were all disappointing relative to July.  Plugging in those actual numbers, we arrive at a new estimate of $1.029 billion, flat with last year.  But that assumes that Louisiana, Mississippi, and Missouri are also not disappointing.  Since the regional markets tend to be impacted by the same macro factors, those three states could come in lower.  Thus, we believe August gaming revenues may come in at -1% to -3%. 


Based on July, the seasonality model would’ve projected September to be up almost 2% but if we are right on August, that would lower our September estimate to -2% and our October estimate to -4%.  Looking further ahead, November could be the first positive YoY month, but just barely, while December has more cushion and should be a positive growth month.  Nevertheless, these don’t sound like recovery numbers just yet.



Covering our S&P 500 Short

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Position Changes Today: Covered SPY, Bought EWG

I attempted to explain this today in my EL titled “Feeling Strange”, but I think it’s worth repeating. Duration Mismatch crushes performance and the best way to avoid it is having a Duration Agnostic risk management process.
As a reminder, we have 3 core durations that we manage risk around: TRADE, TREND, and TAIL.
Currently, the SP500 is bullish from an immediate term TRADE perspective (support = 1085)
and bearish from an intermediate term TREND perspective (resistance = 1144). That means that we can be mentally malleable enough to admit that the immediate term upside in the SP500 is more probable than the immediate term downside. Be sure not to confuse this with pretending you are going to be the next Buffett – keep a bullish TRADE a trade.
Both the DATA (ABC confidence, MBA mortgage apps and jobless claims) and the SP500’s PRICE support this immediate term bullish view. You might say, heh last week you shorted the SPY and how can you change your mind that quickly? Well, for starters, I didn’t have this week’s DATA or PRICES in my back pocket when I made that move earlier last week. The key to risk management isn’t being wed to a view that was based on prior DATA and PRICES.

If next week’s DATA turns back to bearish and the SP500 breaks 1085 again, I’ll short SPY again. As is customary, all my moves are on the tape – I have done nothing but cover and buy positions in the Hedgeye Portfolio since 11:02AM on September 3rd.
If the SP500 closes above our immediate term resistance line of 1107, I see heightened probability of this pain trade taking us all the way back up to another lower-high of 1123. And from a bearish intermediate term TREND perspective, nothing will have changed other than immediate term DATA and PRICES.



Covering our S&P 500 Short - chart1


Stay transparent my friends,

Keith R. McCullough
Chief Executive Officer

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