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GENTLEMEN PREFER BONDS BUT….

The hedge fund strategy du jour in the gaming space is to go long bonds and short equities. Even the sell side has jumped on board, in typical fashion. A little chirping in the ear of the naive sell side community is all it takes.

Today alone, this strategy could’ve KO’d an aggressive hedge fund. Gaming operator stocks increased in the 20-30% range today with a few outliers like LVS up 80% and PNK up 60%. I’d like to think it my note this morning, “A SHORT SQUEEZE COMMETH”, had something to do with it. In fact, I will think that. I need the ego boost.

We also had that inconsequential (sarcasm) MGM earnings release today. Business is pretty bad in Las Vegas but MGM was able to show the market a bit more liquidity than expected. That was also my call this morning on PNK ahead of next week’s earnings. Moreover, PNK’s fundamentals are a bit stronger than for MGM.

So we got our short squeeze, a bit quicker than I expected. Where do we go now? Yes the moves were huge but they were off such a low base. The short interest may be lower after today but most of the other catalysts I pointed to this morning are still intact. The trade is still higher, potentially much higher.

Buy bonds/short the equity? Not a good strategy in my opinion. Not that gaming bonds aren’t attractively priced. They are. But gaming equity has a long way to go until it’s shortable again.

Aside from potential 50% moves in the stocks daily, the other problem with this strategy is interest rates. Yes, higher interest rates are bad for stocks too but they are a direct input into bond pricing. At the current low level, interest rates are likely to go up. Inflation is a big risk with the current Greenspan Fed Fund rate in place. Inflation is very bad for bonds.

Besides, even gaming companies are buying bonds, their own and each other’s, and not buying stock. Given their track record on investing: share repurchases at the top (MGM, IGT), other stock purchases (PNK buying ASCA stock), and the horrible ROI on recent new casinos and expansions, the actions of these guys look like a solid contrarian indicator to me.
I personally own shares of PNK

Today's Trivia ...

Q: Was it volatile at the lows?

A: Over the past 10 trading sessions the average change between the intraday high and low in the VIX has been 22%.

Uh, yeah...

Don't be short that.
KM

Confidence: How Wrong Could The Bears Be, From here?

It’s always easier to see a market bottom in the rear view mirror…

A subscriber responded to our post on consumer confidence with a few follow up questions regarding which data series tended to have the strongest correlation. I sent him a quick note along with consumer confidence charted vs. unemployment and told him that it seems that the strongest correlation was to employment, and that a bottom in confidence tends to lead the unemployment spike slightly –something of a tautology (most see the writing on the wall, know that layoffs are coming and stops spending before the pink slips actually arrive). In his follow up note he said that he expected “the stock market should in theory be acting similarly to prior periods entering recessions although w/more voracity this time b/c of housing”.

The part that I stumbled on was “acting similarly to prior periods entering recessions”. I charted confidence vs. unemployment since the Consumer Confidence Index was created in 1967 to arrive at a channel to gauge points of maximum pessimism. In the year following each of the five inflection points the S&P had positive returns. What’s more, four out of five realized double digit gains greater than 15%.

This is pretty intuitive stuff. From a market psychology standpoint, looking at the convergence of consumer pessimism and unemployment as an indicator may provide a valid rear view mirror indicator. In each of these historical periods an investor that took long positions in the quarter subsequent to improving confidence numbers was rewarded.

Andrew Barber
Director

Early Look

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"Heli-Ben" Flies Again!

Bernanke just cut the funds rate to the level that the crowds were crying for. He is polarized and politicized – sad, but true.

Now that we have an effective Greenspan free money 1% Fed Funds rate, I think we’ll see enough cash deployed in November to keep this short term "Trade" rally alive. Consensus is on the other side of that idea. The bulls have guns, and the bear shorts are on the run. This is all good for stocks.

Bernanke has acknowledged that the economy has slowed "markedly" and that "risks to growth remain"… gee, thanks. Since he has been looking for inflation to slow for well over 2 years, I don’t think what he thinks on inflation matters.

At 1% interest rates, I don't get paid to be in cash. Every asset class has time and a price. Look for us to continue to decrease our position in US Cash, and increase our exposure elsewhere. The US Dollar is getting whacked again today. We remain short it via the UUP etf.

Our immediate "Trade" target for the S&P500 remains 1016.
KM

EYE ON CHINESE GROWTH

The Bank of China cut rates today for the third time in two months. With five consecutive quarters of slowing growth and a downturn in industrial exports sparked by the deteriorating global markets, central bankers in China are taking their cues from the US and lowering rates to soften the landing.

If you have been reading our work you know our thesis: despite the leveling trajectory a maturing economy, China’s private sector will increasingly focus on growing internal demand, and that in turn will feed a growth pattern that will continue to greatly outpace the US and EU on a relative basis. This rate cut should bolster internal domestic consumption in China help prove us right.

Andrew Barber
Director

REFRESHING OUR S&P LEVELS

Our models refresh every 90 minutes of trading. Here are our new S&P Levels 10:45 AM


Buy aggressively = 842
Buy =921
Sell the "Trade" = 1016

Andrew Barber for KM

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

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