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TODAY’S S&P 500 SET-UP - November 18, 2010

As we look at today’s set up for the S&P 500, the range is 20 points or -0.64% downside to 1171 and 1.05% upside to 1191.  Equity futures are trading higher tracking strength in European and Asian equities. Concern over the Irish debt situation eased, while the Spanish bond auction did not go as bad as feared. In important economic data today: Initial Jobless Claims, October Leading Indicators, November Philadelphia Fed Index.

  • Dendreon (DNDN) won backing of FDA advisory panel for Provenge
  • DryShips (DRYS) reported 3Q adj. EPS 38c vs est. 25c
  • Limited Brands (LTD) raised FY adj. EPS forecast to $1.82-$1.97, vs est. $1.94; also declared special $3-shr dividend
  • PetSmart (PETM) reported 3Q EPS 38c vs est. 38c


  • One day: Dow (0.14%), S&P +0.02%, Nasdaq +0.25%, Russell 2000 +0.34%
  • Month-to-date: Dow (0.99%), S&P (0.39%)%, Nasdaq (1.25%), Russell +0.63%
  • Quarter-to-date: Dow +2.18%, S&P +3.28%, Nasdaq +4.53%, Russell +4.68%
  • Year-to-date: Dow +5.56%, S&P +5.69%, Nasdaq +9.12%, Russell +13.17%
  • Sector Performance: Disc +0.7%, Energy +0.4%, Healthcare +0.1%, Consumer Spls (0.01%), Tech (0.05%), Utilities (0.1%), Industrials (0.1%), Materials (0.1%), Telecom (0.2%), Financials (0.6%).


  • ADVANCE/DECLINE LINE: 611 (+2860)  
  • VOLUME: NYSE - 943.05 (-30.23%)
  • VIX: 21.76 -3.63% - YTD PERFORMANCE - (+0.37%)
  • SPX PUT/CALL RATIO: 1.60 from 1.80 -11.24%  


  • TED SPREAD: 15.15 -0.101 (-0.665%)
  • 3-MONTH T-BILL YIELD: 0.14% -0.01%
  • YIELD CURVE: 2.39 from 2.34


  • CRB: 295.43 -0.27%
  • Oil: 80.42 -2.31% - BULLISH
  • COPPER: 373.40 +0.08% - BULLISH
  • GOLD: 1,337.32 flat - BULLISH


  • EURO: 1.3531 +0.33% - BEARISH
  • DOLLAR: 79.084 -0.16%  - BULLISH



European markets:

  • FTSE 100: +1.41%; DAX: +1.42%; CAC 40: +1.64%
  • European markets are posting solid gains as investor appetite for risky assets returns amid rising hopes a solution to Ireland's banking crisis is near at hand.
  • The rally is being led by gains across most sectors with Basic resources, Construction Banks and Auto names prominent.
  • A number of strong earnings reports have also lifted sentiment with SABMiller posting consensus beating interims.
  • UK Oct Retail Sales (0.1%) y/y vs cons (0.1%)  

Asian markets:

  • Nikkei +2.06%; Hang Seng +1.8%; Shanghai Composite +0.94%
  • Asian markets were mostly up today, on speculation that concern over China’s anti-inflation policies may have been a bit too much.
  • Resource stocks powered much of the region's rises.
  • Financials led gains in Japan up 4-9%, as all 33 sectors rose.
  • Resource shares led a rise in Hong Kong.
  • Bargain-hunting lifted South Korea as worries about Ireland’s debt crisis eased.  Technology shares gained.
  • On a softer dollar, resource stocks outperformed after recent falls in China.
  • Australia was lifted by resource stocks, as banks declined slightly. 

Howard Penney
Manging Director

THE DAILY OUTLOOK - levels and trends














Investors may be better off creating their own CZR at only 10x EBITDA.



Over 14x 2011 EV/EBITDA seems exorbitant to us, bordering on highway robbery.  We decided to try and recreate CZR through public securities.  While not perfect, we think a combination of BYD, MGM, PENN, and short a little Wynn Macau reasonably replicates the CZR portfolio.  By our math, we can do this at a 10x EV/EBITDA multiple, a 30% discount to the 14x implied by the midpoint of the CZR $15-17 offering range.


The CZR bulls will say that you can’t recreate the Harrah’s Total Rewards system and there is brand equity with World Series of Poker.  However, PENN has huge growth in Ohio which isn’t reflected in its 2011 valuation. Moreover, BYD has significant land holdings on the Strip which do not currently contribute to EBITDA. Finally, MGM has international brand development and management opportunities, again not included in its EV/EBITDA valuation.


Let’s not forget CZR’s industry leading leverage of 11.5x.  While MGM is in the ballpark, BYD is “only” at 6x leverage and PENN maintains just 3.5x leverage.  Is Gary Loveman, Total Rewards, and the hope of near-term internet gaming enough to justify a 4x EBITDA turn valuation differential?  We would argue definitively no.

On the Rebound

With Foot Locker reporting 3Q results tomorrow, it bears repeating that we remain bullish on the name both into the print as well as over the intermediate term. None of this is new if you’ve been reading our posts since the beginning of 2010 focused on FL’s turnaround prospects. What it is new, however, is the latest monthly athletic footwear data point depicting category performance. If one thing stands out more than than anything, it’s that basketball is on the “rebound.”


While the trend below is clear, it’s even more pronounced on a year-over-year basis with sales improving: +19%, +20% and +53% in August, September, and October respectively (this differs from the chart below which is based on a trailing 3-month data set). No other retailer is more levered to the category than FL.


Expect to hear enthusiasm on Friday’s call regarding the resurgence of hoops, especially as it relates to all four key brands (NKE, UA, Adi, and Reebok) pumping new products supported by major marketing efforts. Beyond the commentary, continued strength in hoops will be a key contributor to same store sales throughout the remainder of the year and into the Spring, or about the same time Nike drops its re-launched “Free” platform.


On the Rebound - FW Mo by Cat 2 11 10

For reference the current category market share at retail in the specialty athletic channel based on NPD is:


Running = 31%

Basketball = 21%

XTraining = 3%

Classics (originally designed for performance at launch e.g. Shoxx now in this category) = 18%



Eric Levine


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%

The Courage to Listen

This note was originally published at 8am this morning, November 17, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen.”

-Winston Churchill


For those of you unfamiliar with the story of Aung San Suu Kyi, she is a widely admired opposition politician in Burma and a former General Secretary of the National League for Democracy in her country.  The ruling military junta has oppressed Suu Kyi and her allies in order to maintain political control of the country. 


I am not a student of South East Asian politics but in the past few days I have found Suu Kyi’s story fascinating to delve in to.  What is most striking is her unwavering courage and commitment to serve her country; she refused to leave Burma for fear of being denied reentry by her political opponents.   After spending fifteen of twenty-one years in captivity, that courage and commitment is still as strong as ever. 


Upon her release from nearly 15 years of house arrest, Suu Kyi was quick to focus on making progress, saying of junta leader Senior Gen. Than Shew, “We have got to be able to talk to each other…real genuine talks, not just have some more tea or this or that”. 


Needless to say, Suu Kyi could offer a lesson in leadership to many politicians in the rest of the world.  Coincident with events in Burma, politicians throughout the West have been hastily passing blame, prematurely accepting plaudits, and wantonly pleading ignorance in accordance with the direction of the political winds.  From the Irish and Greeks to the Americans, it has been a tough time for political leadership in the Western Hemisphere. 


We have now witnessed a “compressed crash” of 3.87% in the S&P 500 since 11/05 and the carnage is even worse in some of the commodity markets: 


(1)    Gold -4.22%

(2)    Corn -10.26%

(3)    Oil -5.19%

(4)     Wheat -13.56%


The three worst performing sectors have been:


(1)    Financials -5.30%

(2)    Materials -5.09%

(3)    Technology -5.06%


The “compressed crash” is partly a function of the “blow off QE2″ euphoria that has been building since Bernanke’s speech in Jackson Hole, the David Tepper CNBC interview and the embarrassing Bernanke op-ed in the Washington Post which was nothing more than the FED admitting their intention to manipulate the stock market --no matter what the consequences.   


Following an open letter from a group of stock market practitioners and economists that was published in the WSJ demanding the FED to end QE2, the FED deployed two of its most senior officials to defend its policies on TV.  Both Janet Yellen and William Dudley (Federal Reserve Vice Chairwoman and President of the New York Fed, respectively) dismissed concerns that quantitative easing was aimed at Burning the Buck or that it could ignite inflation. 


It’s truly embarrassing what we are witnessing from some of the leaders of this country.  The perfunctory denial of what has been shown in real-time market prices for weeks now is a disgrace and an affront to our intelligence. 


The QE2 debate has been divisive in this country but its implications are global.  If it were solely another example of partisan politics why would Germany, China and Brazil all oppose the move too?  What is even more embarrassing is Representative Barney Frank having accused Republicans of “lining up with China and Germany in opposing the Fed’s credit easing!”  You couldn’t make this stuff up even if you wanted to! 


Overnight China declined 1.92% (now down -7.51% from 11/05) as Premier Wen Jiabao is now drafting measures to curb inflation, which means higher interest rate and slower economic growth in China.  I don’t think Wen picked up the phone to call the republican leadership to seek counsel on his inflation problems.  This becomes a problem for the USA because our “sick” economy cannot survive a slowdown in the economic engine of emerging markets.


We shouldn’t feel special, though; our friends across the pond are receiving the same treatment.  European Unity, the dream of Jean Monet, lies in shambles as “fellow Europeans” are turning out to be fair-weather friends with fingers pointing en masse across the once-again obvious borders that divide the 27 nations.  Whether it’s Greece “reclassifying” statistics or Ireland clinging to hope of retaining some vestige of autonomy throughout this episode, tensions are fraying.  Unelected politicians in Brussels are most distressed; Herman Van Rompuy, President of the European Council, struck a tone of desperation yesterday when he said “we’re in a survival crisis”. 


From a U.S. perspective though, the spotlight will be back on America’s problems soon enough.  Obama, by the sheer volume of the message the American people sent him from the polls earlier this month, has been forced to become somewhat more conciliatory in tone.  The Republicans, for their part, have been emboldened by their recent success, which is likely to be detrimental to getting anything accomplished in Washington.


Sadly, America’s ills are grave and should take precedence over the perpetual campaign for fame that politicians are now engaged in. 


These are important days for the United States and the ability of the country’s leaders to inspire confidence for a sustained period of time will be imperative for any real recovery to stand the test of time.  While the history of American Leadership is not without its blemishes, it is true to say that this country has been fortunate to find, more often than not, great leaders at the helm of political and social movements in times of national strife.  Abraham Lincoln, Franklin Roosevelt, John F. Kennedy, and Ronald Reagan are just a few of the Presidents that come to mind when one thinks of courage in a time of difficulty.


Sadly, our political system is broken and it seems gridlock is what we are faced with.  Gridlock is not good for equity prices.  Since November 2006, voting in Congress has become more and more tied to party lines.  There is no political leader with the courage and the backbone to bring together the needed cooperation to enact the change that can right size the listing ship. 


I will end with a thought from Jean Jacques Rousseau, a man who lived through times of crises: “The inflexibility of laws, which keeps them from bending to events can in some cases render them pernicious, and through them cause the ruin of a State in crisis”. 


From the FED, to Congress, to the White House, “politicking” is making a difficult situation very grave indeed.  Sadly, none lack the courage to speak.


Function in disaster; finish in style,


Howard Penney


The Courage to Listen  - HP EL


Conclusion: We just shorted PNRA in the Hedgeye Virtual Portfolio.


PNRA has posted strong results year-to-date, but the stock is now flashing as immediate-term overbought in Keith’s model with TRADE support down at $92.35.


The timing of the overbought level being triggered lines up with my fundamental view as the company will be lapping its most difficult same-store sales growth comparison in Q4.  As I have said before, I think the company’s guidance for 4-6% comp growth in Q4 is somewhat aggressive as it relies on a significant acceleration in transaction growth that I think will be difficult to achieve.  Year-to-date, average check growth has driven about 6.5% of PNRA’s 8.4% comp growth. 


Management’s Q4 comp guidance assumes 1-3% transaction growth and 3% average check growth.  Although the company’s transaction growth trends did improve during the third quarter on a two-year average basis after slowing in 2Q10, this 1-3% growth target implies a 110 to 210 bp uptick in two-year average trends from 3Q10 levels. 


Panera is relying on the success of its recently launched MyPanera Loyalty Program (nationwide rollout was completed in mid November) to boost comp growth during the fourth quarter.  Specifically, the company is expecting an approximate 1.5% lift to comp growth from the new loyalty program and an additional 1.5% lift from sequentially increased media spending during Q4.  Through the first 27 days of Q4, same-store sales were up 4.4%, which implies a 120 bp acceleration in two-year average trends from the third quarter.  Despite this strong start, comparisons get more difficult throughout the quarter, and management’s expectation for such a sharp sequential increase in transaction growth seems like a stretch, even in light of the company’s new loyalty program.  I do not doubt that over time, this program will drive frequency, but a +1.5% lift in the first quarter it is rolled out still seems aggressive.




Howard Penney

Managing Director

Trouble Brewing In Korea?

Conclusion: With growth slowing and inflation accelerating in the Korean economy, Korean equities will present a nice opportunity on the short side over the intermediate-term TREND.


Position: Bearish on Korean equities.


By now, it should be clear that we don’t subscribe to Bernanke’s promise that equities will appreciate in perpetuity; nor do we buy the tired consensus argument that equities will continue to rise globally due to the “excess liquidity” created by QE2 (see: 2007). Cutting to the chase then, we have two very important questions regarding South Korea: 

  1. Can the world’s 13th largest economy “comp the comps” with regard to YoY Real GDP growth?
  2. With inflation accelerating, will the Bank of Korea take the necessary steps to cool quickening price increases? 

Notwithstanding that the former plays into the latter, as it stands currently, we don’t think Korea has enough mustard in the old engine to prevent growth from slowing domestically. Taken in the context of a) growth slowing globally; b) inflation accelerating globally; and c) interconnected risk compounding, it’s relatively easy to arrive at that conclusion considering that exports account for roughly ~50% of Korea’s GDP. China (21.5%), U.S. (10.9%), and Japan (6.6%) are its top three export markets and growth is slowing and/or setup to slow meaningfully in all three economies (growth in Japan could go negative over the next 2 quarters).


Looking at the table below, we see that Korea has some tough comps to surmount for the next three quarters starting in 4Q10:


Trouble Brewing In Korea? - 1


On the inflation front, Korea has been reluctant to deal with its inflation woes, finally raising rates yesterday for only the second time this year. Unfortunately for Korea’s savers, the 25bps hike leaves the benchmark 7-Day Repo rate at 2.5% - a full 1.56% below the latest rate of consumer price inflation as measured by the October CPI report. In fact, real interest rates in Korea have been negative for nearly a full year, with the decline accelerating of late:


Trouble Brewing In Korea? - 2


Clearly the negative real interest rates are helping stoke inflation as savers turn to consumers on the margin. With CPI accelerating to a 20-month high of +4.1% YoY and PPI accelerating to a 22-month high of +5% YoY, we see further rate hikes on the horizon as Korea is forced to combat rising prices. In fact, in concordance with yesterday’s rate hike, the Bank of Korea dropped its pledge to keep monetary policy “accommodative” for the first time since the financial crisis began.  Instead, it shifted its tone towards “maintaining price stability while sustaining growth”.


Trouble Brewing In Korea? - 3


While the CRB Commodities Index has backed off its recent highs, prices remain elevated enough on a YoY basis (+6.9%) to continue to quell inflationary pressures globally (thanks to Quantitative Guessing) and Korea is no exception, in spite of its reoccurring threats for capital controls. When it’s all said and done, Korea will likely have to institute a series of rate hikes that will further compound the problem alluded to in question #1 from above. When growth slows and inflation is accelerating, it’s not good for equities. Korean equity investors will find this out soon enough.


Trouble Brewing In Korea? - 4


With the KOSPI up +12.9% YTD and up +9.7% since Bernanke started “shaking the ketchup bottle” at Jackson Hole, Korean equities have plenty of mean reversion to be had to the downside over the coming months.


Darius Dale



Trouble Brewing In Korea? - 5

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