• run with the bulls

    get your first month

    of hedgeye free



The Las Vegas locals market is in rough shape and the aggregate numbers will continue to look ugly. The only positive for the market is that housing and employment began deteriorating earlier than the rest of the country and could pull out of it earlier. Unfortunately, we are not there yet.
  • So what does a company do in this environment? I say capitalize. Crush the competition. Boyd Gaming has this opportunity. BYD’s primary (and larger) competitor is Station Casino. With their bonds trading at between 8 and 30 cents on the dollar, Station is facing a high probability bankruptcy. BYD, on the other hand, is one of the few gamers with significant liquidity. I think BYD should aggressively utilize this huge competitive advantage. An effective strategy would be to advertise and market heavily, treat employees well, and most importantly, keep the slot product fresh.
  • There is a lot of market share to take (see the 1st chart). Station generated over $1.2bn in net gaming revenues over the past 4 quarters versus only $800 million for BYD. Assuming just a 2% increase in share (see 2nd chart), BYD could generate an incremental $33m in EBITDA, translating into $0.23 in EPS or 33% of the 2009 consensus estimate of $0.70.
  • BYD still faces uncertainty in the locals Las Vegas market and numbers are likely to go lower. However, the company seems to have a tremendous opportunity to capitalize on its liquidity and build market share. The results may not be immediately evident, but long-term gains could be substantial.

Devaluating A Currency: Free Money Has A Price

This morning both the ECB and Bank Of England put on their reactive management caps and cut rates as aggressively as they ever have. Now that we are looking at pending negative real interest rates in Europe, the revisionist historians can remind you that this is generally bad for one’s home currency (see the chart below, the British Pound has been pounded).

Interestingly, European stock markets sold off hard on these reactive management decisions. Bounces in free falling equity markets (like the UK) are actually higher than those you’ll see in bull markets. Don’t confuse short term hope with reality.

Gordon Brown has forced his socialist hand onto the table of the British elite. Tax rates on those earning over 150,000 pounds are being hiked to 45%. There is no question that this is not a good thing for consumer spending in the UK. However, the open question remains as to what those British pounds are actually worth.

We remain short the UK via the EWU etf.

Is He Flattening A Big Fat Bubble?

We talked about this credit market relationship being a major risk back in April/May. Notwithstanding that we are coming in from a higher nominal level of rates, the fact remains that a flattening of the US yield curve is negative within the parameters of our multi factor risk management model.

It didn’t pay to ignore this relationship 9 months ago, and I don’t think it does today. Effectively, the yield curve is flattening because the US Federal Reserve is going to cut rates to zero (on a real basis to negative). Additionally, we have a Treasurry Secretary who apparently sees no problem floating trial balloons out to the marketplace that the US Government “could” cut or cap US mortgage rates to/at 4-5%. Not only does that rhetoric crush the long end of the curve, it leads the almighty US Consumer to a scarier place – saving!

Dear Hank,

He/She who saveth, spendeth less…

The US Economy has a 70% weight in Consumer Spending.

If you think you can create an expectation for ultra low long term mortgage rates, and the Amerian consumer isnt going to bake that into the cake of their decision making process (ie wait for lower rates), you are smoking something that we didn’t this morning here at Research Edge.

Flattening curves crush returns for the only American Capitalist who remains relevant. He or she who wants to borrow short and lend long, needs to see a spread and rate of return.

The head of the US Treasury should also consider what his #1 customer (China) might do with their bonds – if the Chinese realize that no rate of return on their bonds is not a risk worth taking, their selling will create the loudest bubble popping that we have heard in some time – the popping of the long term bond market bubble.

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.

Manage Responsibly

“International cooperation and coordination have been robust, and we appreciate the responsible role China has played during the turmoil”
-Hank Paulson

Hank “The Market Tank” rolled into China last night and gave the aforementioned and overdue praise to the Chinese government for proactively preparing for this global economic tsunami. China acted “responsibly” while Hank behaved reactively. For a compromised Bush Administration, this is both an about-face and a confirmation that the end of American dominance as the world’s economic superpower is here.

When I took an oversized long position in US Equities in mid November, one of my main macro catalysts was Hank Paulson being replaced. That, not bailing out the Pandit “Bandit” at Citigroup, was the biggest contributor to the five day +19% short squeeze rally in the SP500. It was a vote of confidence in team Obama, Summers, Volcker. Now, unfortunately, that catalyst is in the rear view mirror, and all squeeze rallies have less oomph, as a result.

After dropping -8.9% on the first day of December trading, the US market has rallied 6.6% in two days, lifting the hearts and minds of the perpetually bullish. Currently, I have been getting a lot of questions as to why I have a zero position in US equities. One of the obvious answers lied in the math. We booked our gain on the long side of the SPY before Monday’s swan dive, and actually shorted it, making money on both sides. If you simply owned the SP500 for the last 3 days, you lost money. Math, like Paulson’s idea of leadership, does have its inconvenient truths.

We live in an increasingly interconnected global marketplace, where multi-factor asset allocation and risk management models are winning. There was a day, not so long ago, when your average underage and underperforming “hedgie” would tell you, “I don’t do macro… I’m a stock picker.” That was all good and fine, until stocks stopped going up every day. While it’s easier now for everyone to differentiate winners from losers in this game of global risk management, I still think it’s very difficult for investors to find a sell side process that they can use, daily, to augment their own investment process. That’s why I started Research Edge.

Research Edge is a proactive global research and risk management process. We work as a team rather than in silos. We have our feet on the floor earlier than most, and we have our “Eyes On” most things, real time, that we can quantify for you. This isn’t a sales pitch. This is all part of a critical investment theme for 2009 – we call it “The New Reality.”

The New Reality means that you can have a zero position in US Equities, and have an 18% allocation to International Equities. The New Reality means that you can be in cash and that you don’t “have to buy” anything. The New Reality is that country level exchange traded funds provide you the opportunity to be long a dynamic economy like China, AFTER you’ve waited for the “70% OFF” sale. The New Reality is that the self directed investor who has the cash now has the leverage, not the master of the ‘Investment Banking Inc.’ “prop desk” who was having fun being overpaid to lever up your money.

The New Reality is that I am waking up to China closing up another +1.8% this morning. Why be long anything in the USA since the 1st week of November with the SP500 down -14% and the Shanghai Stock Exchange up +17%? Why not think about shorting stocks and markets, like the US, high… and covering them low? I, for one, am a Canadian who has had the lifetime opportunity to live, work, and to be a part of this wonderful melting pot of cultures that the world has come to admire as the United States of America.

While the “Fast Money” CNBC crew tells you what to do, after the market closes. Allow me to submit a proactive process rather than that reactive one. If you don’t want to wake up at 4AM (you shouldn’t), let my family and team do it for you. We may not be right all of the time, but we are more right, more frequently, across global markets and asset classes than most.

This morning, if you asked our soon to be ex-Treasury Secretary what he would do after a 2-day stock market move of +6.6%, what do you think he’d say? I have no idea. If they have anyone left over there, he might call up the Goldman “prop” desk and “get a look.” You can decide for yourself whether that “look” is a proactively prepared one or not. Thankfully, we wake up every day in The New Reality to new rules of Transparency and Accountability. These levered up investment vehicles now have to show you what they own and mark it to market. The score won’t lie to you; people will.

My “Early Look” this morning is this: Globally, overnight rate cutting is as broad based and reactive as any morning I have woken up to in 2008. On top of the expected panic button 100 basis point rate cut in London by the BOE, we have other former European proactive central bankers freaking out. Sweden’s Riksbank cut by 175 basis points! In Asia, countries who haven’t cut in well over a year did so in unison (Indonesia, Thailand), and central bankers in New Zealand smoked those who aspire to earn a return on cash savings by cutting rates by another 150 basis points.

The market reaction, globally, is not what these central bankers are hoping for. Hope is not a process, neither is reactive management. Despite the two day run in the US market, most of this is based on hope. I see 2% upside and -13% downside from here. I have a zero allocation position (net short actually) to US Equities. I have a 6% position allocated to China. I am part of “The New Reality.”

Pretend you are Chinese this morning, smile, and say goodbye to Hank, and all those who failed to manage your money “responsibly”. Upward and onward into 2009 we go.

Manage responsibly out there today,

Long ETFs

GLD -SPDR Gold Shares –LME Gold spot prices declined by as much as 0.8% in trading today, reaching $778.07 per ounce.

OIL iPath ETN Crude Oil –Light Sweet Crude futures fell as low as $45.30 this morning, testing the lowest level since early 2005, with EIA crude stock levels showing a declining of almost 500k barrels last week.

EWG – iShares Germany  -- The DAX Index rose 1.6 % to 4,638.43 in trading today.  Verband der Chemischen Industrie, a trade association that includes BASF (EWG: 4.6%) and Bayer (EWG: 6.0%) guided down for production and sales by the chemical sector as a whole for 2009.

EWH – iShares Hong Kong – The Hang Seng dropped 0.6 % to close at 13,509.78.

FXI –iShares China – Baosteel -China’s largest steelmaker, commented on “drastic shrinkage” of sales to Automotive sector in H2.

 Short ETFs

IFN iShares India –
Yields on India’s benchmark 10-year government bonds have dropped 30 basis points to 6.79% after India’s inflation rate unexpectedly fell to a seven-month low. The benchmark Sensitive Index rose 2.7% to 8987.47. Wholesale prices rose 8.40% in the week to Nov. 22 from a year earlier.

EWU – iShares United Kingdom – The pound fell versus the dollar to an all-time 6-year low. Home value declined 2.6% from October. Prices fell 16.1% from a year earlier.

UUP – U.S. Dollar Index –The Euro declined to $1.26 USD and 117.05 yen on speculation the ECB will cut interest rates by half a percentage point today from 3.25%.

EWJ – iShares Japan –The Nikkei 225 closed down 1% to 7,924 today. Japanese stocks fell partially because of speculation that US carmakers will enter bankruptcy.

FXY – CurrencyShares Japanese Yen Trust – The yen declined to 92.73 USD in trading this morning.


PNK has doubled since bottoming at $2.82 on November 20th, yet the stock is still down 76% on the year. There have been rumors circulating regarding a PENN takeout of PNK. I don’t have insider information so I can’t speak to the immediate validity of that hearsay. However, I think I made a pretty compelling argument that such a combination should and could happen. See my 11/11/08 post, “LIKE PEANUT BUTTER AND CHOCOLATE”. That view hasn’t changed.

After such a big move in the stock, I consulted our technical and quant expert Keith McCullough for his thoughts. The stock still appears undervalued and there would be significant upside in a takeout scenario. For those of you who need a little more here are Keith’s thoughts:

Looks better and better every week, usually flashing positive performance divergences, correcting on lower volume days … the patient is out of emergency.

Immediate term “Trade” is to 6.57. “Trend” line support is starting to build, but really takes off on a close above 7.26.

Short interest is your friend (21% of float) and so are the insiders who are net buyers all of a sudden. Shareholder list was a big negative factor (too concentrated), and deleveraging by the weaker hands in October simply took it to $3 with more sellers than buyers. Combining the latest quarter’s positive surprise (liquidity) getting mutual fund yr end out of the way are calendar catalysts that play to the bull side.

Political Brouhaha in Canada

Although we haven’t bought the Canadian stock market yet, from a purely capitalistic perspective, we have had a more positive view on Canada recently based on the political shift to the right of center driven by current Prime Minister Stephen Harper. As we have previously noted, Harper solidified his minority government just seven weeks ago. We took this as a sign that Canadians, on the margin, were more predisposed to the conservative economic policies espoused by Harper and his Conservative Party.

Unfortunately, in the last couple of days, the political outlook in Canada has clouded over dramatically. Late yesterday, Reuters called recent events “one of the worst political crises in the country’s (Canada) 141-year history.” As a Canadian, it is an assessment I have a hard time denying.

A coalition has formed between the Liberal Party, the National Democratic Party (the NDPs), and the Parti Quebecois. In combination, the coalition has 163 seats (Liberals 77, NDP 37, and Bloc Quebecois 49) versus 143 seats for the Conservatives. On December 1st, the three opposition leaders signed an accord in which they agreed to form a coalition to pursue a non-confidence vote in Parliament. Under the accord, the Liberal leader will become Prime Minister and the cabinet will be split between the Liberals (75%) and the NDP (25%). Collectively, the three parties have agreed to vote together for the next 18 months on all matters of confidence.

As a result, Prime Minister Harper faces a non-confidence vote on December 8th. Given that the coalition has 163 seats, he will almost certainly lose the confidence vote and have to resign and/or call a new election. In order for the new election to proceed, the Governor General has to approve the plan for a new election. Harper’s only option to circumvent the non-confidence vote, and either a new election or handing the government over to this Liberal led coalition, is to get the Governor General Michaelle Jean, a Liberal appointee, to end the current session of parliament, which would then reconvene in January.

The coalition is taking advantage of the current economic turmoil to gain power under the guise that the Conservatives do not have an economic plan. Ironically, the coalition has not put together a new economic plan of substance, nor do they have a history of working effectively together. In fact, in the most recent election the Liberals and NDP were much at odds over economic policy. The largest disagreement was over $50 billion in corporate tax reductions that the Liberals supported and that the NDP wanted to invest into social programs.

As David Frum wrote on December 1st in the National Post, Canada’s major newspaper:
“Imagine Canada 6 months on. There’s a Liberal prime minister. He will head an unstable coalition of Liberals and socialists aligned with separatists. To appease the socialists, he will have to raise taxes. To appease the separatists, he will have to direct disproportionate money and attention to the province of Quebec.”

Frum’s point is adroit. A Canada in six months from now, under this leadership team, could well be an unmitigated economic disaster. We can debate whether Prime Minister Harper has the qualifications and wherewithal to develop an economic plan that will soften the current economic crisis, but undoubtedly a coalition led by the Liberals and backed by a self proclaimed socialist and a leader of a party whose primary goal is the separation of Quebec, leaves much to be desired.

Keith and I, reluctantly, may have to short the homeland in the coming weeks.

Daryl Jones
Managing Director

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.