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Being a Lady

“Being powerful is like being a lady. If you have to tell people you are, you aren't.”

-Margaret Thatcher


America (she) is a great country and I’m proud to be an American!  When are we going to behave like the powerful nation we are?  


Sadly, of late, we need to keep reminding people how powerful we are.  We do have tremendous power and this is a great nation, but right now we lack the backbone and the political leadership to make the tough decisions to get us on the right track.  (And, no, I do not believe the Tea Party is the answer).   


Case in point #1 - Treasury Secretary Tim Geithner 


Mr. Geithner is in the hot seat today because he is representing the USA on the world stage in Seoul, South Korea at the G20 summit this weekend.  His quotes in the WSJ yesterday are a sign of weakness, not strength.  Just one example: “We would like countries to move toward a set of norms on exchange-rate policy."  Seriously, the Chinese are having a field day with that comment.  As issuers of the world reserve currency, it’s embarrassing that successive administrations have led us down this path.


Another embarrassing quote: "Right now, there is no established sense of what's fair".  What? C’mon, Mr. Geithner, what is not fair?  Given his record of paying taxes, some might find it amusing that Geithner is our guy in Seoul, making the moral case.  Some might say he lacks legitimacy in such a claim.  The same might be said by the international community: why is America pointing fingers when it is plainly obvious that failed economic policies and Washington DC dogma has rendered the U.S. economy and currency in their present states?  The Chinese march to the beat of their own drum and look out for their interests.  What part of that is not fair?


The countries with strong economic and fiscal policies are being forced to embrace capital controls to slow the inflows of speculative cash that is coming from the USA.  It’s not unfair, it’s embarrassing!  Nobody cares about the losing team complaining about the officiating or the lack of sportsmanship from the other team; at the end of the day, all that is remembered is who lifts the trophy.


Case in point #2 - Failed Washington policies - Stress Tests 2 is on the way


I could go in multiple directions with this one (TARP, Healthcare reform, etc….), but despite the Dodd-Frank financial regulatory act, the US financial banking system is still facing a high level of systemic risk.  The foreclosure fiasco is posing systemic risks to a number of financial intuitions, and I don’t believe the first round of bank stress tests contemplated a breach of contract in securitized mortgages.  This is a problem.  Who knows what other omissions the stress tests made from their “analysis”?


While today is the 103rd anniversary of the Panic of 1907, which led to a run on the Knickerbocker Trust Company, we are seeing another crisis emerge at a number of large financial institutions.  The 13% month-to-date decline in Bank of America is not a run on the bank, but it’s frightening nonetheless.  There is no immediate threat of Bank of America being insolvent, but the damage to the bank’s reputation is immeasurable and the financial liability is uncertain. 


If we have learned anything over the past two years, the downside scenario is that the losses are likely greater than the $47 billion that a few institutions want back.  Importantly, the latest round of uncertainty in our financial system is not helping consumer confidence and will make most financial institutions more cautious about extending new credit, further slowing the recovery.


It would seem that it’s just a matter of time before the Stability Oversight Council created by the Financial Regulatory Act orders Stress Tests 2.  


Case in point #3 - No credible plan


While Mr. Geithner can cry this weekend that things are not fair, nobody in Washington (Democrat nor Republican) has put forth a credible plan to fix the nation’s problems except for more QE.    


As my colleague Daryl Jones noted in a post yesterday on Canada, for the second time in the last 30 years, the Canadian Dollar is now worth more than the US Dollar.  In short, Canada cut spending and improved the corporate tax environment, which narrowed the deficit and reduced government borrowings. 


Austerity, not quantitative easing, will provide Mr. Geithner the respect he needs to be powerful on the world stage.  Leaders make brave decisions at difficult times; there is no evidence of strong leadership on either side of the aisle in Washington today.


The S&P 500 is up 3.4% so far this month, on the back of the FED printing more and more money.  The potential headwinds for the market are seemingly being ignored (for now) but won’t go away.  The headline risks from the mortgage mess, slowing GDP momentum, margin pressure from higher commodity costs and lingering worries about the backlash that could emanate from the divergent fundamentals at work in the foreign exchange market can’t be solved by the FED and QE.


Margaret Thatcher was a leader that was unafraid to take a stand.  She was a divisive figure in Britain, and around the world, and remains so today.  I believe that America’s leadership could learn much from her example.  She allowed the gales of creative destruction to blow through the nation’s economy and many fault her for the demise of the mining industry in Britain in the 1980s. 


On that same point, many applaud her confrontation of the unions and credit her with reestablishing Britain as a world power.  My point here is that she made difficult decisions, perhaps made mistakes at times, but showed the leadership that was needed to boost her country. 


Much like President Obama, Thatcher had a record-low approval rating during her tenure as Prime Minister.  On average, it was 40%.  History has been much kinder; a survey conducted by Yougov/Daily Telegraph in the United Kingdom in March 2008 rated Baroness Thatcher as the leader Britons regard as the greatest post-World War II prime minister, receiving 34% of the vote.  Sir Winston Churchill came in second, with less than half of Thatcher’s support, at 15% of the vote.  Politicians that make tough decisions are not always appreciated immediately. 


Doing the right thing is not always easy.  The administration needs to realize that instant gratification and pandering for votes is not going to set this country straight.


Function in distaster; finish in style,

Howard Penney


Being a Lady    - mt

China Sets the World Up for a CRASH

“In Macro, everything that matters happens on the margin.”

-Keith McCullough


Conclusion: China’s 3Q and September economic data tells us a lot of what we already knew about China and even more about what we “apparently” didn’t know about the global economy – growth is slowing; inflation is accelerating. Further, China vs. QE2 = a catch-22 that won’t end well for this current global rally.


Chinese 3Q10 GDP growth came in at +9.6% YoY, 10bps better than consensus expectations. Despite the “beat”, the Shanghai Composite Index fell (-0.7%) – the largest decline since September 16 – on the back of nasty inflation data: 

  • CPI quickened in September to the highest YoY growth rate in 23 months: +3.6% vs. +3.5% in August.
  • Food inflation accelerated +50bps MoM in September to +8% YoY vs. +7.5% in August. As we have shown previously, roughly 36% of China’s citizenry lives on less than $2 per day (PPP), with food being their largest expense. That’s roughly 480 MILLION Chinese citizens who are being starved on the margin by Bernanke’s QE policy (CRB Foodstuff Index has a (-0.86) inverse correlation to the U.S. dollar since the June 7th peak in the dollar).
  • Chinese CPI is still 110bps higher than the benchmark one-year deposit rate of 2.5%, despite Tuesday’s 25bps rate hike. As long as inflation continues erode savings, speculation will continue to be a thorn in China’s side. 

The ugly inflation data combined with a marginal deterioration in Industrial Production growth (+13.3% YoY in Sept. vs. +13.9% in Aug.) to overshadow sequential upticks in retail sales growth, rural wage growth, and business confidence. Simply put, it’s not good when growth is slowing and inflation is accelerating; the absolute levels of growth and inflation are less relevant to astute investors. Think about the last stock you remember working when topline growth was slowing and gross margins were contracting.


As the chart below shows, 3Q10 marks the second straight quarter of China’s marginal stagflation:


China Sets the World Up for a CRASH - 4


What IS currently working in China’s favor is the Fed-sponsored, dollar-debased, yield-chasing rally we’ve seen globally. As such, Chinese equities, using the Shanghai Composite as a proxy, have rallied ~27% off their July lows.


We know China has been the world’s engine of growth for much of the last 18-20 months and, as expected, the data confirms growth is slowing. Now, China (AND THE ENTIRE WORLD) is in a serious catch -22: 

  1. According to the yield chasers of the world, the U.S. (China’s largest customer at ~20% of exports) “needs” QE2 to grow demand for China’s products.
  2. QE2 crushes the U.S. dollar, which puts upward pressure on the prices of things Chinese citizens and businesses have to buy – the U.S. Dollar Index has an inverse correlation of (-0.95) to the CRB Commodities Index over the last 3 months.
  3. China gets smacked with more inflation, which leads to incremental tightening of Chinese monetary policy. On Tuesday, China reminded everyone how serious they are about fighting inflation with an “unexpected” 25bps hike in their benchmark one-year lending and deposit rates. 

China’s rate hike Tuesday reminded everyone across the globe the amount of correlation risk associated with yield chasing fueled by excess liquidity. Therein lies the rub – more QE and China (the world’s growth engine) is forced to tighten incrementally or less QE and the global Fed-sponsored, dollar-debased reflation rally we’ve seen across nearly asset class comes crashing back down to economic reality.


I believe they call this “damned if you do; damned if you don’t.”


Our CEO, Keith McCullough, has been aggressively reminding our clients that at a point, dollar down becomes a very BAD thing. While our Chaos Theory mantra suggest that you never know which incremental granule collapses the sand pyramid, we are going on record saying that Chinese monetary policy will certainly catch a few finger points when it’s all said and done.


Elsewhere in China’s economy, we circle back to Chinese property prices as adding incremental fuel to the fire. China’s Property Prices (70 Cities) rose in September by +0.5% MoM, marking the first sequential uptick on a monthly basis since May. While prices decelerated on a YoY basis in September (+9.1% vs. +9.3% in Aug.), the +56% MoM gain in property sales value and +52% MoM gain in property sales volume exacerbate the slight monthly increase in prices in September and overshadows the  marginal deceleration of YoY growth in September.


China Sets the World Up for a CRASH - 2


This latest reading may serve to speed up China’s implementation of a nationwide property tax trial and may also provide additional incentive for China to raise interest rates, should real estate prices continue to go the wrong way. As long as the spread between inflation (blame QE2) and one-year deposit rates is negative, China will find it difficult to fully oust speculation from its property market, all else being equal. That alone makes a compelling case for further rate hikes, which will crimp China’s growth on the margin (Gross Capital Formation is roughly 45-50% of GDP).


On the positive side of Chinese rate hikes, Todd Jordan, our Managing Director of GLL, has shown rate hikes to be positively correlated with Macau Mass Gaming Revenue (0.75). “Moreover, interest rates were statistically significant in explaining the changes in gaming revenues with the highest t-stat present in the Mass [Revenue] to Interest rate equation”, he remarks.


China Sets the World Up for a CRASH - 3


The takeaway here being that interest rate hikes provide upward pressure on the value of the currency (yuan), which ultimately filters into increased consumer spending and consumer confidence. Raising the value of your currency can actually be good for your citizenry? (shhhh… don’t tell Heli-Ben).


At the end of the day, incremental Chinese monetary policy tightening is bearish for Chinese growth, which itself is bearish for the speculative bid that has buoyed many emerging market equity markets and commodities YTD. This round of Keynesian Rallies is near its end. Don’t be caught holding the bag when China pokes a hole in it – that is to say if we haven’t popped it ourselves by standing up to the Fed’s weak monetary policy.


Darius Dale



CMG reported another quarter of upside surprises on both the top and bottom lines.  Earnings came in at $1.52 per share versus the street at $1.31 per share and comps came in +11.4% relative to the street’s 8% estimate.  On a two-year average basis, this +11.4% comp implies an 185 bp acceleration from the prior quarter and the company said the same-store sales growth was driven primarily by traffic.


Restaurant-level margins improved 220 bps YOY.  Relative to my earnings expectations, the biggest upside was driven by the higher-than-expected comp growth (I was modeling 9% growth).  As a result of this impressive top-line growth, the company got leverage on every line of the P&L, outside of G&A, which was higher YOY due to a manager’s conference during the third quarter and higher YOY stock based compensation expense.  For reference, the company had guided to no leverage on the food, labor and other operating expense lines.


Management slightly raised its full-year comp guidance to high single digit growth from its prior range of mid to high single digit growth.  For FY11, CMG’s initial guidance includes low single digit comp growth and 135 to 150 new units, which implies about 12% to 14% unit growth, in line with FY10 expectations.


Howard Penney

Managing Director

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Scorching The Snake

This note was originally published at 8am this morning, October 21, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We have scorched the snake, no killed it.”

-Shakespeare (Macbeth)


The proverbial snake in the common man’s wallet is inflation. In this day and age of globally interconnected prices, governments can scorch it, but they can’t kill it - not when Western Fiat Fools wake up every morning trying to debauch their currencies for short-term stock market pops.


China scorched the serpent on Tuesday when it raised interest rates. The way that this works is very simple. Use monetary policy as a blow-torch on the way up (rate hikes) like Greenspan and Bernanke have used it as a blunt instrument on the way down (rate cuts). Glenn Stevens at the Reserve Bank of Australia is a modern day king cobra killer in this regard. He doesn’t get paid to be willfully blind. That’s why his citizenry trusts him.


Sadly, one day of snake scorching this week doesn’t a TRADE or TREND make. As soon as bad US economic data rolled through the leg hump machine yesterday, US stock market cheerleaders were right back at it begging Bernanke for more Quantitative Guessing. The Burning Buck went straight back down and commodity and stock prices went straight back up.


For all of you “deflation” fans out there, here’s a New Hedgeye Economics equation to jot down in your notebooks:


QG = i


That’s it. It’s that simple. Quantitative Guessing = global inflation.


Score this like you would scrabble points and mark-your-score-to-market at the end of every day by measuring what asset prices do on an inverse basis to the Burning Buck.

  1. Tuesday: US Dollar UP +1.7% = CRB Commodities Index DOWN -2.0%
  2. Wednesday: US Dollar DOWN -1.4% = CRB Commodities Index UP +2.4%

Cool, eh?


Not so much if you are part of the starving people in this world who the perma-bulls are quick to point out demand a lot of what their favorite companies in their portfolios make. But very cool for Wall Street and Washington types who really could give a damn about anything other than where the US stock market closes at month-end ahead of a mid-term election. It’s all about the short-term bonus baby.


Enough about the Fiat Fools who have mortgaged America, let’s go back to the leader in this global macro game of Monopoly: China.


Last night, the Chinese reported more of what our Hedgeyes have been calling for since Q1 of this year – a Chinese Ox In A Box (economic growth slowing as the Chinese focus on proactively tightening the screws on speculative lending and price inflation).


Here’s a Chinese data check:

  1. GDP growth slowed sequentially (quarter-over-quarter) to 9.6% in Q3 versus 10.3% in Q2 (versus +11,9% in Q1)
  2. Industrial Production growth slowed sequentially (month-over-month) in September to +13.3% from +13.9% in August
  3. Consumer Price Inflation accelerated again sequentially (month-over-month) in September to +3.6% from +3.5% in August

Net, net, what this means is that both economic lines in our model (Revenues = GDP and Cost of Goods Sold = inflation) continue to go the wrong way. Chinese economic growth has slowed to a 1-year low as inflation has accelerated to a 2-year high.


Ok. So what do you do with that?

  1. Realize that it’s not new “news” – Chinese growth has been slowing and inflation accelerating since Q1.
  2. Respect that, despite the slowdown, the Chinese government still has the political backbone to fight inflation and raise interest rates
  3. Stay long the Chinese currency because it, unlike America’s currency, has credibility (we have a 12% long position in Chinese Yuan, CYB)

Can you imagine Ben Bernanke raising interest rates as GDP growth is slowing and inflation accelerating? Can you imagine anyone in Congress understanding that a strong currency and positive rate of return on a citizenry’s savings gives more spending dollars to those conservative savers? Can you imagine anyone in a position of power on Wall Street or in Washington Scorching The Snake?


Here’s a brain Teaser for Timmy Geithner for his plane ride to Seoul, Korea and this weekend’s G-20 meetings:


If China has 1-year interest rates at 2.50% and the US has 1-year interest rates at 0.21%, which country has the higher probability of empowering their citizenry of savers with more money in 1 year?


I’m in Maine at a non-Groupthink Inc. conference for the next few days. This morning’s 9AM session is called “Thinking Wrong” … At a bare minimum, America’s snake oil salesman “economists” can’t accuse me of thinking inside the economic box they’ve put their people in.


My immediate term support and resistance lines for the SP500 are now 1173 and 1186, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Scorching The Snake - snake

Blame Canada! Contemplating Economic Outperformance North of the Border

Conclusion: While we have no position, we have a bullish stance on the Canadian Loonie versus the U.S. Dollar based a number of economic metrics.  The first nation of hockey is good at more than hockey it seems.

In 1995, the Wall Street Journal wrote that Canada was “an honorary member of the Third World in the unmanageability of its debt problem.”  Not surprisingly, Canada’s currency reflected this out of control debt and deficit issue and was commonly known as the Northern Peso, due to its weakness vis-à-vis other first world currencies.  In fact, the Wall Street Journal bottom ticked the Canadian Dollar, which is outlined in the chart below, as Canada slowly but surely got its fiscal house in order and its currency reacted accordingly.


At its zenith, Canadian debt-to-GDP was 120%, of which 70% being federal and 50% being provincial.  As a result, Canada’s credit rating was downgraded to AA, and its currency, the eponymous Loonie, could not catch a bid.   In 1995, enter Finance Minister Paul Martin of the Liberal party and some dramatic reforms and the currency was off the races and a steady climb to parity with the U.S. Dollar. (For the second time in the last 30-years, the Canadian Dollar is now worth more than the U.S. Dollar, and was last trading at 1.027 U.S. Dollars per Canadian Dollar.) 


Blame Canada! Contemplating Economic Outperformance North of the Border - 2


Finance Minister Paul Martin had clearly not been reading his New York Times, as he took a path of austerity instead of implementing additional government stimulus.  The key measures that Martin put in place to right the Canadian financial ship, were as follows:


• Federal government employment was reduced by 14%;

• Federal grants to the provinces were reduced by 14%;

• Spending cuts were 4 ½ times tax hikes.

• Canada’s welfare system was dramatically modified;

• Corporate taxes were cut by almost a third; and

• The General Services Tax (GST) was instituted to pay for the tax cuts described above.


In essence, Canada cut spending and improved the corporate tax environment, which narrowed the deficit and reduced government borrowings.  The result of these measures, much to the chagrin of Keynesians, is that Canadian has dramatically outgrown its industrialized peers from 1995 onwards.


We continue have a positive view Canada’s economy for a number of key reasons, which as are as follows:


1. Commodities – The natural derivative of a declining U.S. dollar is inflation, especially an inflation of those commodities priced in U.S. dollars.  In the case of Canada, this means oil.  Canada’s oil reserves, particular due to its vast Alberta Oil Sands, are virtually incomparable globally.  In fact, when utilizing the reserves in Alberta’s Oil Sands, Canada has almost 180BN barrels of reserves, which is second only to Saudi Arabia.  As the U.S. dollar declines, the asset side of Canada’s balance sheet inflates via its oil reserves.


2. Free marketers in power – Alberta native and current Canadian Prime Minister Stephen Harper is in his second term with a minority government, but his Conservative party won an increased share of parliamentary seats the second time around and has popular momentum.  One of the key economic accomplishments of Harper’s term was to finalize free trade negotiations with European Free Trade Association.  Recently, Harper also appointed my former colleague from Onex Corporation, Nigel Wright, as his Chief of Staff.  Wright is a long time partner at Onex, Canada’s largest private equity firm, and is solidly pro-business and in favor of free markets.  As the Prime Minister’s Chief of Staff is oft called the second most powerful position in Canada, Wright will have influence, which should be positive for the Canadian economy and continue the small government policies of Harper.


3. Unemployment – While the Canadian economy is not yet firing on all cylinders, it is also not going down the Road of Economic Perdition as is currently being followed by the United States.  Canada’s banks did not over leverage themselves in the housing market and are considered some of the healthiest in the world.  As a result, capital has continued to flow naturally, versus artificial infusion via quantitative easing, and therefore Canada has seen a gradual improvement in its unemployment rate, which we have charted below.  For the first time in almost 30-years, Canada’s unemployment is below that ofthe United States’, and by almost a full 2%. 


Blame Canada! Contemplating Economic Outperformance North of the Border - 1


On the negative ledger, the most negative factor facing Canada may well be the fact that its largest trading partner is the United States.  As of 2009, 73% of Canada’s exports were sent to the United States and 63% of Canada’s import came from the U.S.  Canada cannot hide from an economic slowdown in the United States.  Nonetheless, we’ll take Canadian on the relative trade (and in the next Olympic hockey final).


We would also advise U.S. policy makers to set aside their Krugman Krpytonite and take a look at Canada’s fiscal turnaround in the mid 1990s.  She’s a better case study than Japan, to be sure.


Daryl G. Jones

Managing Director


Given the financial and operation leverage, BYD's quarters are wildcards and Q3 is no exception. Underlying fundamentals don't appear to be getting worse but they don't seem better either.



We continue to search for reasons to get positive on BYD considering the almost universal hatred for this stock in the analytical community.  Unfortunately, we are coming up snake eyes for now.  There are reasons not to short it, however: business is stabilizing, bank negotiations look like they are going well, and the free cash flow yield is very high.


The stock had a 10% move on 10/8 when the August Nevada numbers came out showing the LV locals market grew 3% YoY.  Well, that really didn't excite us because gaming volume actually fell 4% which was right in line with what our model was projecting based on the seasonally adjusted performance of the prior 3 months.  In other words, August fundamentals neither accelerated or decelerated from recent trends as can be seen in the following chart.




While everyone seems to be focused on YoY comps, we try and look at historical seasonal patterns and adjust results to view the sequential performance.  Given the volatility over the past two years, even two year comps are not that meaningful.  Overall regional gaming trends seem to be following the same pattern as the locals.  Seasonally adjusted revenues are exhibiting flattish sequential growth.  At least business is stable.  Here are our Q3 estimates. 



BYD 3Q Projections: 

  • Las Vegas locals revenue of $146MM and EBITDA of $30.4MM
  • Downtown Las Vegas revenue of $54Mm and EBITDA of $7MM
  • Midwest & South revenues of $189MM and EBITDA of $41MM
  • Borgata revenue of $211MM and EBITDA of $53MM
  • Other:
    • Corporate expense: $10MM
    • D&A: $37MM
    • Share of Borgata D&A: $18MM
    • Share based comp: $3MM
    • $1.1MM of deferred rent
    • $27MM of interest expense , plus $12.4MM at Borgata
    • $10MM of MI

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