Squirrel Hunters

"You cannot help men permanently by doing for them what they could and should do for themselves."
-Abraham Lincoln

On the score of a one factor model (leadership), using 1-day as my duration, I thought President Obama did a solid job last night. Using that same duration, I thought Timmy Geithner was awful yesterday. These aren't partisan points - they are simply my judgment calls on two men and their respective character.

Lincoln taught us that sound judgment and awareness are invaluable leadership attributes. We need more people in the seats that matter in this country to start calling things out that plain Americans with a YouTube are already concluding for themselves at their kitchen tables. When Geithner speaks, anyone with main street smarts cringes... he's what the boys back in my hometown of Thunder Bay, Ontario would call a Squirrel Hunter...

Some people who read this and consider themselves of the haute couture class won't get that, and that's fine - they're squirrel hunters too, and we don't want them leading America into The New Reality. Where this country is going requires a broader sense of societal responsibility than just how much money we make. Some people have learned nothing from the US Financial System crashing, and we cannot help these people "by doing for them what they should do for themselves."

Whether it was Pete Najarian on Fast Money chanting that the real growth in this market lies in "levering up toxic assets" or Jimmy Cramer shamelessly dancing around the CNBC set to Beyonce's "Halo" applauding the Treasury Secretary's performance - this is all one and the same folks - a circus... and at some point it just needs to stop.

Squirrel Hunters have no memory, no shame, and no pride. Najarian can get all amped up about the immediate term TRADE breakouts in Goldman Sachs, Morgan Stanley, and Blackstone all he wants, but if this country's future lies in the hands of those executives who brought this great American financial system to its knees, America will not be "helped permanently" - and this will not end well.

The Client gets this. The Client's name is China. While Goldman talks about selling their handshake with their Chinese investment in ICBC (Chinese bank), so that they can TRADE into bidding on Barclays I-Shares (which is a UK asset selling at another government sponsored fire-sale, where Goldman uses our government's TARP moneys to bid??), the Chinese are moving forward shaking hands with new business partners around the world.

Overnight, the Australian stock market continued its impressive run (up +14% since March 6th) after Chinalco was cleared by Aussi regulators to buy their $19.5B stake in mining giant, Rio. After securing $25B in oil and natural gas partnerships with the Chinese, the Russian stock market has been charging forward alongside The Client as well. The Russian Trading System Index is up another +2% so far this morning, and now +16.6% for 2009 to-date. Yes, Squirrel Hunters, fire up your engines - I am going to proactively predict that you begin to trumpet the Russian ETF that we have been long, RSX, in the very near future...

You see, despite it's fantastic +21.6% trough-to-peak short squeeze from the SP500's 676 low, the USA's score is still -10.7% for 2009 to-date. This is not a bull market. This is a bear market that ripped the snouts off of the "hedgie" Squirrels who shorted the lows. No, I did not buy into the book selling narrative fallacy that the US economy is in a Great Depression; but I will sign off on the call that the said leadership in this country, from the aforementioned cable network to US Congress is indeed depressing.

American Idol had to push its show forward by a day in order to make room for Obama's prime time appearance last night. I'm a huge fan of success, and I absolutely love the democratization of success associated with that show. American Idol stands for a lot of principles that are transcending in The New Reality. America wants to participate - she wants the voice of her people to be heard. If there's a Squirrel Hunter on the screens, she wants to vote them off - if there's a winner, they want to champion that just as readily.

This is America. These challenges we face from a leadership perspective are real. We need to unlearn a lot of the received "wisdom" of those puppeteering our financial system. We need to re-learn what made this country great. We need to evolve.

The Chinese are providing not only the financial discipline associated with having savings embedded in their society's culture, but leadership in their ability to permanently help the global economy evolve.  

The US Bond market started to break down again yesterday. Yes, we all know that Bernanke's US Treasury Bond buyback program goes live today... but will that bid be enough? Are we doing the right things to permanently fix what has been revealed as a structurally impaired financial system? Do we have credible leaders in place that the Chinese can trust?

Don't forget - China is The Client. China has the cash. China owns our debts. And China knows exactly what a Squirrel Hunter looks like when YouTubed...

The risk/reward in the SP500 this morning is evenly balanced at +/- 3%. My intermediate TREND line resistance in the SP500 remains 829. For now, TRADE the range.

Best of luck out there today,


EWC - iShares Canada-We bought Canada on Friday 3/20 into the selloff. We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's socialist past, and believe next year's Olympics in gold-rich Vancouver should provide a positive catalyst for investors to get long the country.   

DJP - iPath Dow Jones-AIG Commodity -With the USD breaking down we want to be long commodity re-flation. DJP broadens our asset class allocation beyond oil and gold.  

XLK - SPDR Technology-Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last several weeks.  Semiconductor stocks, which are early cycle, have provided numerous positive data points on the back of destocking in the channel and overall end demand appears to be stabilizing.  Software earnings from ADBE and ORCL were less than toxic this week and point to a "less bad" environment.  As the world stabilizes, M&A should pick up given cash rich balance sheets in this sector and an IBM/JAVA transaction may well prove the catalyst to get things going.

EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.25% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.

GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish TREND.

DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.


LQD  - iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

EWJ - iShares Japan - Into the strength associated with the recent market squeeze, we re-shorted the Japanese equity market rally via EWJ. This is a tactical short; we expect the market there to pull back when reality sinks in over the coming weeks. Japan has experienced major GDP contraction-it dropped 3.2% in Q4 '08 on a quarterly basis, and we see no catalyst for growth to return this year. We believe the BOJ's recent program to provide $10 Billion in loans to repair banks' capital ratios and a plan to combat rising yields by buying treasuries are at best a "band aid".

EWU - iShares UK -The UK economy is in its deepest recession since WWII. We're bearish on the country because of a number of macro factors. From a monetary standpoint we believe the Central Bank has done "too little too late" to manage the interest rate and now it is running out of room to cut. The benchmark currently stands at 0.50% after a 50bps reduction on 3/5. While the Central Bank is printing money and buying government Treasuries to help capitalize its increasingly nationalized banks, the country has a considerable ways to go to attain its 2% inflation target. Unemployment  is on the rise, housing prices continue to fall, and the trade deficit continues to steepen month-over-month.

DIA -Diamonds Trust-We shorted the DJIA on Friday (3/13) and Tuesday (3/24) and believe on a TRADE basis, the risk / reward for the market favors the downside.

EWW - iShares Mexico- We're short Mexico due in part to the country's dependence on export revenues from one monopolistic oil company, PEMEX. Mexican oil exports contribute significantly to the country's total export revenue and PEMEX pays a sizable percentage of taxes and royalties to the federal government's budget. This relationship is unstable due to the volatility of oil prices, the inability of PEMEX to pay down its debt, and the fact that PEMEX's crude oil production has been in decline since 2004 and is down 10% YTD.  Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.

\IFN -The India Fund- We have had a consistently negative bias on Indian equities since we launched the firm early last year. We believe the growth story of "Chindia" is dead. We contest that the Indian population, grappling with rampant poverty, a class divide, and poor health and education services, will not be able to sustain internal consumption levels sufficient to meet targeted growth level. Other negative trends we've followed include: the reversal of foreign investment, the decrease in equity issuance, and a massive national deficit. Trade data for February paints a grim picture with exports declining by 15.87% Y/Y and imports sliding by 18.22%.

XLP - SPDR Consumer Staples-Consumer Staples was the second best sector yesterday. XLP has a positive TRADE and negative TREND duration.

SHY - iShares 1-3 Year Treasury Bonds- On 2/26 we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries


LVS filed an 8-K announcing the company was seeking an amendment to its credit agreement. The proposed amendment would permit the company to buy back outstanding term loans up to a maximum $800 million in face value. An amendment to tender for the notes requires majority lender approval and will likely involve an amendment fee. LVS indicated that they may or may not pursue the tender. Presumably, they would not pursue it only if other options were available, a positive outcome in either scenario.

The debt is currently trading at between 45 and 50 cents on the dollar. Even if LVS tenders at 55, this would be a significant deleveraging event. We calculate at that price with cash on hand, LVS would reduce leverage by 0.75x, effectively putting them in the clear in terms of the leverage covenant in its credit facility for 2009.

While LVS still faces a potential 2010 breach as the maximum leverage ratio steps down, the current move potentially buys them a lot of time.

Potential breach in Q2/Q3 of 2009 without any debt buyback
Debt buyback would allow LVS to escape covenant breach in 2009


Not surprisingly, LVS announced that EVP Brad Stone recently resigned from the company. Interestingly, the effective date and the terms and conditions of Stone’s resignation have not yet been determined. So is he really gone forever?

Brad Stone was a respected member of the LVS executive management team that has had a well known falling out with Chairman Sheldon Adelson. There has been a lot of speculation recently that Mr. Stone was on his way out due to the Adelson relationship and also personal reasons. The release did indicate that Stone was leaving for “personal reasons” which is at least partly true. Mr. Stone has been going through a divorce.

I’m not sure the Brad Stone and LVS marriage is over, however. I think Mr. Adelson might be interested in retaining Mr. Stone and negotiations could be going on currently. While the departure announcement should not be a surprise, any reconciliation would be, and should be considered a positive. Stay tuned.

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.

TBL: It Doesn’t Smell That Bad

Smartwool continues to prove itself as Timberland’s diamond in the rough. While only about 6% of sales at $80-90mm, it is closer to 10% of cash flow. This is a solid brand all around, and I dare you to find a retailer that will tell you otherwise. At the time of the Smartwool deal, it seemed like a ridiculously expensive acquisition at around 13x EBITDA, but interestingly enough it has turned out to be TBL’s most accretive. Based on realized numbers, TBL is looking at a ‘hindsight valuation’ of 5-6x EBITDA.

Well…the company is extending the brand into a new category – slippers. That might not seem like a big deal, but this is a natural extension for Smartwool. Can it add $20mm in slipper sales? Yes. They will have men’s and women’s styles featuring double-merino wool uppers that are naturally antimicrobial and odor-resistant. (Author’s note: I will deny having tried this, but if you wear one pair of Smartwool socks over the course of a 5-day business trip, they still won’t smell – so I’m told). The brand’s positioning on this is “The shoes are great after skiing or snowboarding. You can slip them on and drive home.” The collection, which will retail from $70 to $125, includes three women’s and two men’s styles.

My concern with TBL near-term is still that numbers look too high for ’09. Though we can’t ignore that there’s $2.50 in cash on the balance sheet, and I can get to a value for Smartwool between $1-$1.50 per share based on range of multiple assumptions. That suggests that the base business is selling for $680mm at its current $11.75. Admittedly, this would have been a heck of a lot more attractive when the stock bottomed at $8.50. But if it trades off on a miss, or a market retracement, keep this one on your screen.
I'm not saying it's pretty...but the comfort supposedly rivals UGGs.

March Madness Branding Just Got Boring

We started off with 64 teams and some with non-traditional brand representation such as Robert Morris University (CRONS), Boston College (Reebok), Maryland (Under Armour), and Western Kentucky (Russell). Well, through process of elimination, it is now back to the Nike and Adidas show. Of the Sweet Sixteen, Nike Inc has 13 slots, with Adidas occupying the remaining 3. Nike's 82% share of the teams remaining in the tourney just about matches Nike’s share in the relevant basketball shoe market. The problem is that Nike does not score points with consumers for endorsing these teams at this point. Consumers have grown to expect it. The big deal would be if a non-Nike team won the championship. Adidas would be able to create marketing buzz if this were to happen, but the real hype would have come from some of the smaller brands. Maybe next year…


If there is a better market in the country, I’d like to know. Revenue growth has been positive for five straight months. A strong local economy and the presence of hurricane relief workers are certainly big contributors. The market standout is clearly PNK’s L’Auberge and that is where we spent our time.

The major issues facing L’Auberge are the following:

• Reliance on the local energy economy
• Can the market support Sugarcane Bay?
• Cost synergies between L’Auberge and Sugarcane Bay
• Potential for slots in Texas

Despite the sequential dip in February, market trends remain strong as the extra day and an extra Saturday in February 2008 impeded the growth a bit. March trends appear very strong. Surprisingly, the price of oil has had little impact on volumes, good or bad. Any negative economic impact has been offset by customers staying closer to home (“staycations”).

L’Auberge is also performing well in March, which should be another record month. The property continues to drive more business from Houston and even San Antonio, and is now targeting more group business which is already up double digit over the last few years. The growth has occurred without any acceleration in promotional allowances. If anything, L’Auberge has been less aggressive with the lower tier customer.

L’Auberge is currently running at 65% capacity on the slots which brings into question whether the market can support Sugarcane Bay. The answer is probably not right now but considering the growth, the market should be bigger in 2-3 years, if and when the new property opens. Construction has not begun. The good news is that there appears to be some meaningful cost synergies for PNK in opening a L’Auberge sister property. In addition to the obvious marketing synergies, the properties can share the executive management team, laundry facilities, marketing databases, etc.

Finally, on the Texas situation, we’re not sure the market participants added much value on that issue. However, we continue to believe Texas remains a long shot. Remember, 50% of the counties in Texas are still “dry”. More on the prospects for Texas slots in a later note.


Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.