• run with the bulls

    get your first month

    of hedgeye free



By no means am I trying to imply that Beijing controls the government machinations of the Macau SAR. I’m actually stating it definitively. That is why I take note when Beijing summons the local Macau powers that be to the capital. I suspect there will be some more definitive action taken with regard to the visa situation. Leisure visits were recently pushed from once every month to once every two months. Effective September 1st, visa restrictions were tightened so that the circuitous route through Hong Kong to escape restrictions has effectively been closed. September gaming revenue looks like it could come in flat with last year vs. a 44% gain in August, so the visa situation is clearly making an impact.
  • What could happen at this meeting? I believe one of two scenarios. First, Beijing could maintain the visa status quo until the end of current Macau Chief Executive’s term next year. It’s no secret that Beijing is not happy with some of Edmund Ho’s public statements, especially regarding Beijing’s influence. A second plausible outcome could be a reversion to the previous visa environment; that is, back to the once a month visitation restriction and access for mainland Chinese arriving directly from Hong Kong.
  • Either of these scenarios takes a 6 month visa restriction off the table, which is big plus. You may recall, seemingly credible rumors of an even longer restriction contributed to a sharp sell-off in the Macau stocks. Investors now seem to anticipate either the current 2 month restriction continues in perpetuity or worse, so either scenario could be positive relative to expectations. On the margin, the probabilities are favorable for a near term spike in the Macau stocks. Las Vegas Sands, with 20% of the stock short, could have the most leveraged move higher.
Macau revenue growth is in Beijing's hands
Reversal of 9/1 visa restrictions would be a big positive

Debunking the Short Selling Ban, Part I

The SEC’s short sale ban created a rally by removing free market checks and balances. The long term impact on the markets will be less positive.

The SEC short selling ban covers 779 financial stocks until Oct. 2 and imposes new penalties for clearing brokers that fail to deliver on shares sold short after t+3. The FSA ban covers only 39 UK financial stocks but the window extends to January 16 of next year.

Overall the impact on market liquidity is expected to be significant. According to a report released last week by my friend Joe Gawronski at Rosenblatt Securities:

“Bans on shorting financial stocks, combined with the new disclosure and fail-to-deliver penalties, should exert considerable downward pressure on volumes. Short selling by hedge funds and other investment managers, as well as by many smaller and medium-sized high-frequency trading firms (but not their larger brethren), is likely to drop off significantly during the terms of the emergency orders.”

The options markets could be hit especially hard by this move. Options market makers have enjoyed an exemption from borrowing stocks before shorting intended to allow them flexibility as they offset their exposures. If they can’t borrow shares to deliver short then they can’t sell protection to the markets. On Friday it was reported that an SEC staff recommendation had been put forward to amend the order to allow options market makers to keep their exemption. The SEC’s waffling on this point is understandable since, with traders at bank desks sitting on their hands for want of capital, the locals are suddenly the only game in town. Without them, buyers and sellers will only be able to transact if they happen to meet in the same strike and maturity.

Decreased liquidity is obviously not the biggest negative aspect of this order. The natural checks and balances that legal short selling provide allows greater efficiency in the marketplace as short sellers are incentivized to police the market for poor performing management teams, corporate malfeasance and unrealistic valuations. By removing this force from the market we are sending a message to the world that our financial firms are too weak to stand on their own and that we will protect them despite by changing the rules of the game if need be. To some investors, this will look like the first step down a slippery slope of market manipulations that have chased foreign capital out of other markets in the past. Even if more banks failed without the short sale ban, there would remain faith in the integrity of the US market system. With this solution, we demonstrate that our market has no more integrity than our bad banks.

Andrew Barber

Nike: Putting ROIC Before Ego

Nike but ego aside and made the right ROIC decision by getting out of the competitive swim business – but not without inflicting as much bodily harm as possible on its opponent.
I was initially shocked to see this one… After taking a blow during the summer Olympics by having to allow Nike swim athletes to wear Speedo suits, Nike s getting out of the competitive swim business.

Nike is finally seeing the light… After sustaining such a loss (in PR or in $$), the old Nike would have plowed capital into this business just for the sake of winning. That’s what they’ve always done. But an important point here is that Nike is getting out of ‘competitive’ swim – not ‘casual’ swim. For what it’s worth, 98% of swim-related sales come from the casual market. This is business that Nike licenses out to Perry Ellis. NKE brass asked themselves whether investing capital in this business would result in any boost in its casual business – and the answer is No. All in all, a wise move in my opinion. I’d rather see the capital go toward getting sport culture apparel right, or combating Under Armour in performance footwear. Apparently Nike Agrees.

One factor that really surprised me was that Nike was gunning for Michael Phelps. But something between the Olympics and now squashed chances of bringing him on. Could it be the sheer price, as nearly every endorser in the US has gunned for a piece of the MP enterprise?

To quote a sports agent representing most Nike swimmers (and most of his paycheck) "Nike getting out of the championship swimming market is the death of American elite swimming as we know it."

My view here is that Nike bid up Phelps just enough for Speedo (Warnaco) to keep him, but at a borderline painful price. In instances where Nike does not win, it inflicts as much bodily harm as possible.

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.

Know When To Fold Em

“You got to know when to hold em, know when to fold em, Know when to walk away and know when to run.
You never count your money when you’re sittin’ at the table. There’ll be time enough for countin’ when the dealins done.”
-Kenny Rogers’, The Gambler

Feet on the floor and flush with cash - that’s where you need to be early this morning. This card game is over. Despite their fibbing to you for the past 9 months that “Investment Banking Inc.” is AOK, Goldman Sachs and Morgan Stanley faced the river card this weekend, and were finally forced to fold em’, turning over the keys to their leverage cycle castles.

You’ll read about yesterday’s Wall Street going away just about everywhere today, so I’ll save you the air time of the specifics. We hope we have been proactively preparing you for the inevitable. We now have more important things to do here this morning, like putting the client first. The bottom line is that the compromised, constrained, and conflicted “Investment Banking Inc” of 2007 is out of aces. Goldman Sachs and Morgan Stanley are now going to be regulated bank holding companies. They need commercial deposits to bail them out of this mess, so look forward to seeing Goldman ATM machines at a 7-Eleven near you.

Now to the markets and your money. Yes, that’s your money that tomorrow’s Wall Street will be managing, not the wealth associated with them levering up on it. Never mind the partisan bailout haggling of this weekend. Tomorrow is when both sides of the aisle are going to get at each other. Tomorrow is the Senate Banking session where Ben Bernanke, Hank Paulson, and Chris Cox will be on the hot seat, answering to the populist, conservative, and democrat cries of this fine nation. I am betting on black that Paulson doesn’t get his plan through the political process in the timeline he was pleading for yesterday on “Meet the Press” (see my note yesterday detailing Tom Brokaw’s intense interview).

During the short squeeze melt up on Friday, I moved to 96% cash, and that’s where I will likely stay until the dust clears on this mess on October 2nd, when free market capitalism’s rules come back to this game. That, of course, is the last day of the ban on short selling. While we can no longer rule out Paulson and Cox moving the goal posts on the fly, we can have confidence that this reckless government sponsored market volatility will continue into and out of that date.

Consider last week’s move in the Russell 2000 small cap index vs. the larger cap Dow Jones. The Russell was +4.6% on the week, and the Dow was down -0.30%. Why? Well, post the sandlot SEC rule change, all of the shorts had to cover, and the volumetric impact associated with small caps is much more powerful than in their big cap brethren. This is going to be a major problem on October 3rd, because illiquidity (no shorts) drives volatility – ask Dick Fuld what happens to a “Level 3” asset that doesn’t trade when it is forced to find a marked to market price. The US Government bailout team doesn’t get this.

Worse yet, John McCain is ranting and raving about replacing the SEC’s Chris Cox with the guy who suggested we ban short selling in the first place, Andrew Cuomo! People generally do not accuse McCain of being an economically intelligent man – this certainly is not going to get him any points from the free market capitalists today.

The “Trade” that you should be focused on this morning is the one that has been born out of the Paulson plan in the last 2 sessions of global trading – the devaluation of the US Dollar. The US$ is down a full percentage point so far this morning, taking its cumulative decline since John Mack’s “evil doer” short seller speech to -3%. If you follow the bouncing ball of interconnected global markets, you’ll notice that this has lit the fire underneath inflation related assets. Oil and Gold were +6% and 13% respectively last week. Food oriented commodity inflation remains sticky, and Dr Copper is hitting a 2 week high this morning as well.

Hank Paulson is a good and hard working man, but he himself noted on “Meet The Press” that he doesn’t know what the cost of bailing out his Wall Street investment banking cronies is going to be. He is also a smart enough man to not have answered Tom Brokaw as to whether he will be around at the US Treasury in 2009 to see his hurried decisions through.

Confusion in markets breeds contempt; crisis’ of confidence do not support recoveries; and governments do not mark bottoms in stock markets.

We’re rolling up our sleeves here. There is some heavy lifting to be done in re-building a Wall Street that we can all be proud of again. “There’ll be time enough for countin’, when the dealins done.”

Best of luck this week,


I thought this was an interesting turn of events. On Friday, MSD Capital (Michael Dell’s group) converted their friendly “G” filing into a not so friendly 13D filing. They own 14% of the common stock and a chunk of the preferred… As you read Item 4 of the filing, keeping mind that DIN is over 7x levered.

Item 4. Purpose of the Transaction.

"The Reporting Persons now intend to have further discussions and other communications with the Company’s management and members of its Board of Directors regarding debt repayment, changes in the Company’s capitalization and dividend policy, disposition of Company owned restaurants, composition of senior management including the hiring of a new Chief Financial Officer and the composition of its Board of Directors."

It goes on……

"The Reporting Persons may also have conversations with other stockholders. In the course of such conversations with members of management, the Board of Directors and other stockholders, the Reporting Persons may suggest actions that could result in, among other things: (a) the acquisition by the Reporting Persons of additional securities of the Company, or the disposition of securities of the Company; (b) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any of its subsidiaries; (c) a sale or transfer of a material amount of assets of the Company or any of its subsidiaries; (d) changes in the present board of directors or management of the Company; (e) a material change in the present capitalization or dividend policy of the Company; (f) any other material change in the Company’s business or corporate structure; (g) changes in the Company’s certificate of incorporation or bylaws or other actions which may impede the acquisition of control of the Company by any person;"

I have never met the people managing MSD Capital, but I’m sure their future plans will not include the current CEO of DIN.

Ukrainian Bear Hug

Ukraine leaders fight over how to handle economic and political pressure from Russia while their market tumbles, the fallout from this could spread…

The unilateral withdrawal of President Viktor Yushcenko’s Our Ukraine party from the ruling democratic coalition on Tuesday placed the already battered Ukrainian Stock market under further pressure as the hard line pro democracy leader (whose face is still scarred from a poisoning that he believes was the work of Russian agents) continues to accuse Putin’s cadre of attempting to destabilize his country and his former coalition partner Prime Minister Yulia Tymoshenko of pursuing a course of appeasement.

With political crises exacerbating the effects of global financial meltdown, the Kinto cap weighted Ukrainian index (KINDEX) reached levels this week more than 55% below where it started the year –prompting PFTS exchange President Iryna Zoria to call on Kiev to pursue stimulus measures similar to those adopted in Moscow. Zoria also decried the National Bank of Ukraine's policy of fighting inflation by withdrawing funds saying that it “impedes the fight against the liquidity crisis and is not in line with the measures of international financial regulators.”

Relations between Russia and Ukraine (never good) have been in steady decline since Kiev first stated its desire to join NATO, but the pace has accelerated sharply since the events of August. Yushcenko’s party issued a manifesto on Ukrayinska Pravda’s website yesterday which will do nothing to ease tension:

“…..Our Ukraine demands that possible coalition partners condemn the act of military aggression by the Russian Federation against Georgia, strive for the immediate restoration of Georgia's territorial integrity and the withdrawal of Russian troops from sovereign Georgia; condemn the use of Ukraine's territory for waging a military attack by the Black Sea Fleet of the Russian Federation against Georgia…………….
……………The Our Ukraine People's Union insists on the need to diversify energy sources and to ensure the pumping of oil via the Odessa-Brody oil pipeline from Odessa to Brody.”

Until now the Russian response has been limited to threats ranging from potential tariffs on Ukrainian exports to Russia (the Russian market currently accounts for 25% of the Ukraine’s total sales abroad) to the expulsion of diplomats but, as rhetoric heats up so does the possibility of sanctions from Moscow.

It is very important to note that roughly 75% of all of Ukraine’s natural gas supply either originates from, or passes through Russia. Additionally, Ukraine is also the conduit for an estimated 85% of the natural gas that Russia supplies to EU markets. Any move by Putin to use Russian energy supply as a means of punitive action against Kiev could help local instability spill into the broader European energy market rapidly.

Andrew Barber

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 80.37%
  • SHORT SIGNALS 78.32%