Short Covering Opportunity: SP500 Levels, Refreshed

POSITION: Long Healthcare (XLV)


After covering our US Housing short (ITB) this morning, that makes me long-only on US Equity Index and Sector ETFs. To be clear however, I’m seeing this as another immediate-term Short Covering opportunity – nothing more.


Here are the lines that matter most right now across the 3 durations on our risk management model: 

  1. Immediate-term TRADE oversold = 1187
  2. Intermediate-term TREND = 1203
  3. Long-term TAIL = 1270 

If this market fails to recapture its TREND level (1203) this week, I’ll be giving you lower-lows of immediate-term TRADE support. But, for now, 1187 is the line and we want to be managing our net exposure accordingly. On the bounce we re-hedge.


The highs for both 2011 and Q4 look likely to be in. Bad Santa.



Keith R. McCullough
Chief Executive Officer


Short Covering Opportunity: SP500 Levels, Refreshed - SPX


No change to November forecast of HK$21-22 billion



As expected, average daily table revenues slowed considerably this past week to HK$664 million from HK$715 million the first 2 weeks of November.  Again, the motorcycle Grand Prix race is usually a VIP business killer and last week was no exception.  We didn’t see a big migration over to Cotai as we expected due to the congestion on the peninsula, however, although it could’ve been masked by low hold on Cotai.  Since the slowdown was anticipated, there is no change to our HK$21-22 billion (+25-31% YoY) GGR projection for the full month of November.


In terms of market share, both Wynn and MPEL improved from low hold in the first two weeks but still below recent trend.  SJM remains well above trend due to high hold.  LVS share actually fell slightly sequentially from last week but remains above trend.  Given the enhanced junket commission and credit structure especially with Neptune in place as of November 1st, we would expect continued share increases for LVS.




Keith shorted PENN in the Hedgeye Virtual Portfolio at $35.29.  According to his model, there is TRADE and TREND resistance at $35.91 and $37.44 respectively.  



A long-time regional gaming darling by Wall Street, PENN has lost some of its luster and is facing some formidable challenges—cannibalization, a large capex budget, new competition, and slowing growth.  Contrary to what management said on its 3Q conference call, PENN seems to be feeling the heat from the new Rivers casino that opened in mid-July.  As the chart below shows, PENN’s market share in Illinois has tumbled to its lowest level since June 2009 (Joliet fire) and its total gaming revenues in the state fell 10% YoY in October.




In addition, PENN’s two largest properties by revenue generation—Hollywood Casino at Charles Town Races and Hollywood Lawrenceburg—have seen growth stagnate recently.  Since the table anniversary, Charles Town and the West Virginia market have only grown in the low-single digits.  The same can be said about table games revenue at Hollywood Casino at Penn National Race Course, which after a fast start, has stabilized at $3MM/month.  Performance may decline at that property in the coming months as more competition comes online in the Delaware River Valley e.g. Revel, Arundel Mills, Valley Forge.  


It doesn’t help PENN that overall regional gaming performance has gotten off to a miserable start in 4Q.  While the bulls will point out that an unfavorable calendar in October (one less Friday vs a year ago) accounted for the underperformance, we believe even if state revenue numbers improve, PENN will likely be a laggard rather than a leader.



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Notes below from CEO Keith McCullough


Get the US Dollar right, you’ll get most other things right. That’s been our call since May.

  1. SINGAPORE – these guys are now being as explicit as we have seen them since 2008 about Global Growth Slowing (the Monetary Authority of Singapore: “The world economy and financial system are at their most fragile state since the 2008-2009 global financial crisis”); both HK and India continued to crash overnight (down -25.3% and -22.2% respectively from YTD tops)
  2. SPAIN – center right government = austerity = European Stagflation; if Singapore thinks they only to +1-3% GDP growth in 2012, the Europeans could be down -2-4% GDP in no time. European stocks getting rocked and now all major European tapes back in Bearish Formations (bearish across all 3 of my risk management durations); Greece -60% since FEB
  3. SANTA – really red for November to date equity returns and I’ll look forward to hearing what the Tom Lee camp thinks about that into month end. The bull markets I see are in the US Dollar (UUP), Long-term Treasuries (TLT), and Growth Slowing (FLAT)

The only line of big support left for the SP500 = 1203. A close below that puts the YTD low back in play.





THE HBM: MCD, PNRA, JACK, PFCB - subsector fbr





MCD: McDonald’s and Target have dropped egg supplier Sparboe Farms due to an undercover video by the animal rights group Mercy for Animals which, according to media reports, showed “mindless animal cruelty”. 


PNRA: Panera Bread has entered into an MOU on proposed settlement of class action law suit.  $5M has been set aside

for payment of claims and, according to the company, this figure was not included in the 4Q guidance.


JACK: Jack in the Box raised to “Buy” at DA Davidson.





PFCB: At its analyst meeting in Arizona on Friday, P.F. Chang’s said that the company is expecting 4-6% inflation in 2012.  According to the CEO, Richard Federico, 2012 revenue is a “wild card”.


THE HBM: MCD, PNRA, JACK, PFCB - stocks 1121



Howard Penney

Managing Director


Rory Green



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