Spirit Of Defiance

This note was originally published at 8am this morning, October 25, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There is no week nor day nor hour when tyranny may not enter upon this country, if the people lose their roughness and spirit of defiance.” 

-Walt Whitman


The world’s short-term US Dollar Debauchery trade is back in motion this morning: dollar DOWN = commodities and stocks UP. As the Buck Burns, Bloomberg’s #1 headline reads “G-20 To Avoid Competitive Devaluation.” Never mind the hypocrisy of it all - America’s currency is the only one being devalued. Provided that we don’t get suckered into buying stocks today, these will be looked back on as fascinating days in the Fiat Republic.


The good news is that, in addition to Americans pushing back against Washington’s economic policies, there is a Spirit of Defiance that’s building globally against Quantitative Guessing. Here’s a taste of what the respectable likes of Germany and Canada are saying:

  1. “It’s the wrong way to prevent or solve problems by adding more liquidity. Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.” –Germany’s Economy Minister, Rainer Bruederle
  2. “I agree that there’s suggestion that aggressive quantitative easing in the United States would create devaluation pressure on the US currency.” – Canada’s Finance Minister, Jim Flaherty

Maybe not so surprisingly, while Canadian and German interest rates remain higher than America’s, both countries have lower structural unemployment levels and both of their respective stock markets are outperforming the SP500 for the YTD (Germany’s DAX +11.7% and Canada’s TSE +7.3%).


As both the Euro and Canadian Dollar strengthen, their citizenry is becoming wealthier. As both the German and Canadian populations age, the rate of return on their hard earned savings accounts isn’t being compromised for the sake of Banker of America’s earnings. As the world turns, both German and Canadian culture isn’t being held hostage by CNBC and US style Congressional commercials. Fancy that.


In the end, this won’t end well for America. Most of us who aren’t creating an economic strategy that conforms to the confirmation-bias in our year-end bonus package get that. “There is no week nor day nor hour” that we can pinpoint when this will all become crystal clear. But that time will come.


Last week was interesting in that the US Dollar Debauchery trade actually paused. However fleeting that moment was, it certainly gave the buy-and-hope crowd something to think about. Like a cold buddy shower, that was a healthy risk management exercise to observe.


The US Dollar closed up +0.55% on the week. That was the 1st week that Burning Buck was up in the last 6 and only the 4th week out of the last 21. All the while, both weekly US Consumer Confidence (ABC/Washington Post poll) and the MBA Mortgage Applications indices fell.


Americans having no confidence to lever themselves up with a “cheap mortgage” or chase the stock market higher (after a +13% rally since Bernanke introduced QE2 at Jackson Hole on August 27th) is not new news. What is news is what happens to asset prices when, God forbid, someone (China) attempts to give the US Dollar and the cost of capital some credibility.


Gold closed down -3.4% last week and was the standout loser in a relatively strong week for the US Dollar. That will, of course, all reverse this morning as the Buck Burns again, but it’s more interesting to note that almost everything else didn’t react as poorly as I would have thought in the face of US Dollar strength. Everything macro was actually quite flat.


On a week-over-week basis, here’s what was flat despite the US Dollar being up:

  1. Small Caps (Russell 2000)
  2. Euro
  3. CRB Commodities Index
  4. Oil
  5. Volatility (VIX)
  6. Yield Spread (10s minus 2s)

Given the extremely high inverse correlations between the US Dollar and everything else, the most obvious question here is why flat? Well, the week didn’t occur in a vacuum. It was very lumpy. The US Dollar picked up all of its strength in a 24 hour move after the Chinese raised interest rates on Tuesday (USD up +1.7% that day and the SP500 was down -1.6%). Otherwise, the US Dollar was flat to down for the remaining trading hours in the week.


The other obvious reason as to why, is the discounting mechanism that I think poses the greatest financial risk to your net wealth - the undeniable market expectation that the US Dollar will be compromised by Quantitative Guessing in t-minus a few weeks. This, Ben Bernanke, is the government sponsored risk that’s got the bulls in heat. God Speed with that by the way. In the Spirit of Defiance I’ll be a short seller of the SP500 from here until then.


My immediate term support and resistance levels for the SP500 are now 1165 and 1188, respectively. In the Hedgeye Virtual Portfolio, I’m currently short both the US Dollar (UUP) and the SP500 (SPY). The Cash position in the Hedgeye Asset Allocation Model is a healthy 61% (down from 67% last Monday). I’ll look forward to raising that Cash position today.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Spirit Of Defiance - ww

Bear/Bull Battle: SP500 Levels, Refreshed...

POSITION: Short the SP500 (SPY)


We shorted the SP500 today at 9:53AM, so our view of the US stock market here is implied. We are very time and price sensitive and all the while respectful of the reality that immediate term tops are processes, not points.


This morning’s early run-up was real. On my immediate term TRADE duration, it was the first one-day 3 standard deviation move I’ve observed since October 13th. While the selloff from October 13th to October 19th wasn’t a big one. It was enough to stop the slope and expediency of the market’s weekly ascent. Looking forward at the next two weeks of market catalysts, I won’t be surprised if we look back at today’s intraday highs the same way.


I’m not bearish for bearish sake. In terms of bearish calendar catalysts, here’s what I see coming down the immediate term pike: 

  1. Tuesday = Case Shiller Home Prices for August (bearish)
  2. Wednesday = New Home Sales for September (bearish)
  3. Thursday = the Bank of Japan’s outlook report (bearish)
  4. Friday = US GDP for Q3 (bearish) 

Most importantly, I now have the immediate and intermediate term TRADE (1191) and TREND (1216) lines of resistance in close proximity to where I shorted SPY this morning.



Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed...  - 1


In preparation for Royal Caribbean’s Q3 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from RCL’s Q2 earnings call. 




  • “Simply put, the year is progressing better than we expected it to and generally, our business is as good or better than projected both in this country and abroad.” 
  • “The best way to describe demand for our cruises today is stable and remarkably consistent. With the exception of currency fluctuation, our revenue projections today are virtually identical to the ones we did 3 months ago.”
  • “Bookings since our last call has been up about 11% over the same time last year and our booked load factors and average per diems are both running ahead for the second half of the year. Despite a high degree of uncertainty about the economy and the volatility we see in the stock market, our domestic bookings have been very consistent over the last several months.”
  • “Since the beginning of the year, we have seen a steady expansion in the booking window and we’re now quite close to pre-recession levels.”
  • “Just under half of our revenue will come from guests outside of the United States. While the majority of these guests pay for their cruise in local currencies, virtually all of our onboard revenue is in U.S. dollars.”
  • “For 2010, we estimate that approximately 30% of our revenues and 20% of our non-fuel Net Cruise Costs will be denominated in currencies other than U.S. dollars. Our revenues are most influenced by changes in the euro, British pound, and Canadian dollar. Our expenses are most influenced by the euro and to a lesser extent, the British pound.”
  • “Our capacity is forecasted to be up approximately 7.1% and we expect to continue to benefit from the exceptional response to our newest vessels.”
  • “As you saw on the booking window chart, the window is expanding so we do have higher load factors in the second half. Pricing is up a bit.”
  • “From a strict statistical point of view, by our analysis, Epic has about a 3% impact on Caribbean capacity for the full year and about a 6% impact on Caribbean capacity for the back half of the year which is not that significant and so our sense is that her arrival, although it has generated a lot of publicity for the industry which is always a good thing, is not having a significant impact on our Caribbean performance.”
  • [Pricing in the 4Q] "It’s proceeding as expected."
  • “As we look at the third quarter, we’re seeing this year an increase in the number of guests that we’re getting out of Europe and a big increase in the number of guests that we’re getting out of the UK because we put Eclipse in the UK market. So we’ve seen our sourcing mix at Celebrity change quite a bit this year. As we get into the fourth quarter and the ships are doing a more traditional Caribbean business for us, we’ll see a shift away from where we were in the third quarter to more of our guests coming out of the North American markets.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Less bad and better are not the same thing...



"We saw both stabilization and improvement in our business, as we reported the smallest declines in revenues and EBITDA since the third quarter of 2009. We are encouraged by our results so far in October, and expect fourth-quarter comparisons will be the best of the year. As conditions improve, we remain focused on deleveraging our balance sheet and controlling costs, ensuring we will be well-positioned to capitalize on the opportunities presented by a recovering economy."

- Keith Smith, President and Chief Executive Officer of Boyd Gaming



  • Las Vegas Locals: "As expected, we saw trends similar to the second quarter, as consumers remained cautious with discretionary spending. However, in actual dollars, the Adjusted EBITDA decline matches the smallest quarterly gap in the last two years. Although spend-per-visit was lower, visitation to our Las Vegas Locals properties remained strong."
    • "Strong" is a relative term... i.e. not getting worse from already terrible levels.
  • Downtown: "Results reflect lower spend-per-visit, combined with lower ticket prices and increased fuel costs associated with our Hawaiian charter business. There is evidence of a strengthening recovery in Hawaii's tourism economy, which bodes well for our Hawaiian visitation."
  • Midwest and South: "The region delivered the best revenue and EBITDA comparisons so far this year, as our Louisiana properties made considerable progress toward closing the gap on their strong 2009 results. In addition, we maintained or increased market share at all six properties in the region."
    • Less bad is good... but they did say that things would actually be better at some point in the second half
  • Borgata: "Slot win was nearly flat during the quarter, compared to a 9% decline overall in the market, and hotel occupancy rose slightly year-over-year. However, these positive trends were offset by unusually lucky play by table game customers during the quarter, which decreased our hold percentage to below historical levels."



  • "Positive trends they have experienced in the third quarter have continued into the 4th"
  • It appears as if Las Vegas is beginning to recover
    • Increased visitation to Vegas
    • Growth in retail sales (July)
    • Gaming win rose 21% in August and slot win grew 13.2% in August and the locals market also grew in the month
    • Convention visitation increased
  • Thinks that there is a perception that the locals Las Vegas market will only improve when job growth and housing prices increase.  But they believe that consumer confidence is more important to increased spend. Total employment have been stable despite increases in the unemployment rate...
    • Per our math, consumer confidence is irrelevant and housing prices and unemployment are all that matters
  • Deleveraging is their highest priority
  • Actively examining opportunities to refinance their debt and extend maturities
  • Will only pursue deals that give an attractive return to shareholders
  • Will continue to look for ways to operate more efficiently
  • Have had positive comparisons in October so far in the Las Vegas locals markets for revenue and EBITDA.
    • Believe that that will have increased spend per visitor going forward
  • Estimate that they increased their market share in the Las Vegas market by 1%
  • Encouraging signals in Downtown
    • gained market share
    • experienced the lowest decline
    • Hawaiian economy is strengthening and will eventually lead to a revenue improvement at their properties
    • Rated spend increased slightly
  • Midwest and south
    • Occupancy increased
    • Market share increased
  • Borgata positives:
    • Slot win was nearly positive
    • Occupancy at Borgata and Waterclub was over 96% - 1% better than last year
    • Table hold impacted them by $9MM
  • Leverage ratio was 6.9x - covenant remains at 7.25x in the next quarter and expect to remain in compliance
  • Pre-opening expense relates to Echelon
  • Increase in interest expense is due to refinancing at Borgata and a $2MM debt write-off retirement of old facility.
    • Expect interest expense there to be $22MM in 4Q
  • Expect tax rate to be approx. the same next quarter
  • Borgata made a $240MM to its owners - they received $145MM in total distributions (included: $10MM consent fee and $40MM reimbursement of expenses)
    • Property reduced debt by $28MM since financing was completed


  • Positive comps in October so far in the Las Vegas locals markets for revenue and EBITDA
  • Why did they pass on Borgata?
    • have other opportunities and are focused on deleveraging their balance. Not interested at that price.
  • Capitalized interest at Borgata? Capex was $4.5mm of maintenance and there was no capitalized interest
  • What was the EBITDA impact of the low hold at Borgata? $8MM (All flows through ex. taxes)
  • Still interested in making an acquisition in the Las Vegas locals market?
    • Yes - at the right price
  • How long will Borgata remain consolidated for?
    • Only if there are changes in the JV agreement - so expect it to remain consolidated for some time.
    • Once a deal is reached between a potential buyer and MGM - as long as there is no change in the JV agreement they will continue to consolidate Borgata. They are unlikely to approve any changes in the JV.
  • Capex in the quarter:
    • Maintenance capital of $7MM
    • Given the current environment, the numbers for 2010 are good for 2011. Going through their 2011 budgeting process now.
    • Don't feel the need to spend any more right now
  • Perspective on Revel opening in AC?
    • Thinks there is plenty of capacity and any new capacity would just add competition
  • Any interest in selling their stake in Borgata?
    • The only current decision point they have right now is the right of first refusal
  • Borgata table play: No material change in mix of play. Haven't changed their credit policy. The market in AC has gotten more promotional but they haven't participated.
    • Table drop decline 10% YoY
  • Will likely start the Borgata room remodel sometime in 2011.
  • Refinancing will occur between now and next year when it goes current.  Are having ongoing discussions with the banks.
  • Do they think that STN's re-emergence from BK and change of hands in M Resorts will impact the promotional environment?
    • they don't compete with M
    • STN's has been more promotional since re-emerging
  • 3Q in Nevada is the weakest quarter. When you combine low volumes with fixed costs, you get margin compressions.  Aren't going to ignore STN's renewed efforts, will be as competitive as they need to be.
  • Doesn't see the impact of the election impacting their results
  • Why has the hold at Borgata been low all year?  Just bad luck
  • Boyd's corporate tax rate is 35% and Borgata's is 9%
  • Plans for Florida updates? none

UA: Thoughts Into and Out of the Quarter

The quarter looks really good – we’re at $0.68 vs. $0.60E driven by the top-line with upside in gross margin. We’ve been a big fan of the story as evidenced by our $1.70 estimate for next year when the Street was at $1.10 and the stock was trading around $35 – since then, consensus has come up to $1.40. In addition, while product in the marketplace has strong momentum, the reality is that UA’s top-line comparisons get materially harder over the next 4-quarters and our estimate is ~20% below the Street next quarter.


Nit-picking the growth on a company that’s putting up such stellar numbers could be the equivalent of complaining about the trunk space in a new Ferrari, but  the reality is that we’re going to be seeing a decelerating rate of growth in sales – given that shares are trading at a ~35x 2011 EPS, this flat out matters. This is not a short into the quarter – repeat, this is not a short into the quarter, but as any bears out there get squeezed, we’re more inclined to get involved on the short-side post the event.


UA: Thoughts Into and Out of the Quarter - UA Q3 Walk1 10 25 10

UA: Thoughts Into and Out of the Quarter - UA Q3 Walk2 10 25 10



Greece CDS spread Inflects

Below we show charts of 5YR Sovereign CDS spreads (in bps), Greece’s equity market (ASE), and the Greece 10YR bond yield.  Interestingly, last week the Greek CDS spread and 10YR bond yield showed an upward inflection. Of the many risks being priced into Greece’s credit markets, we think it’s worth note that the country’s budget deficit is likely to be revised upward for both 2009 and 2010, as rumors spread that the country’s accounting (in conjunction with Eurostat) was wrong. 


We are currently not invested in Europe after selling our position in Germany (via the etf EWG) this morning in the Hedgeye Portfolio. Keith sold EWG to take a gain with its immediate term TRADE overbought; however its intermediate term TREND is bullish. The DAX is up +11.4% YTD versus the UK FTSE at +6.4% or SPX at +6.7% YTD).


Matthew Hedrick



Greece CDS spread Inflects - mh1


Greece CDS spread Inflects - mh2

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.