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SP500 Levels Into The Close: BUY > 870

When trading action finds itself in a place like it is right here and now, our quant models flash a critical level that we call the Shark Line. This is the breakout/breakdown line where short sellers either get eaten or paid. I am on the bull side of this “Trade” right now. The pain trade is the higher one from here.

See the chart below. I have a major support line that is developing underwater at 836. If confirmed, the SP500 will have successfully made another higher low for this market’s recent trading cycle – that, on the margin, would also be bullish.

Don’t forget that “Heli-Ben” will be dropping free moneys from the skies at next week’s FOMC meeting. FREE money remains a bullish catalyst for any asset class that has the potential to “Re-Flate” – that includes your shorts.

Has American Confidence Bottomed?

On a morning where I woke up to a Wall Street billionaire calling his business a “giant ponzi scheme”, Bank of American cutting 35,000 jobs, and General Motors setting up to go away… other than making them stare at futures traders selling another panic bottom, what else can this brave New Reality throw at the American consumer’s confidence?

This morning’s University of Michigan Consumer confidence number popped out of its darkened hole, coming in at 59 (see charts), after bottoming in early November at 55. My bet here is that confidence continues to make higher lows alongside higher lows in the SP500. We spent the earlier part of this week buying stocks as American consumer confidence in Obama improved (over 70% of adults are either “hopeful, optimistic, or proud” of his becoming President per the Bloomberg/LA Times poll).

Stock markets are leading indicators. They build strength when confidence in them, on the margin, is improving. They break down when that confidence erodes. While there are plenty of reasons to be bearish (read the last year of my investment notes), most of these reasons are no longer a surprise. When the SP500 futures were down 4% pre-open, the stock market had already swan dived for a peak to trough 48% move. Sometimes it’s just priced into the market folks.

Today’s rally has to have the bears dizzied.


Subway is making an aggressive move in the coffee segment……

Adding more heat to the coffee wars, Subway confirmed yesterday it would begin testing Starbucks-owned Seattle’s Best Coffee at 1,900 locations starting in January.

As the largest publically traded restaurant company, MCD appears to be the 800lb gorilla in the space. Don’t take Subway lightly, with 21,000 stores in the US and $8.0 billion in revenues, the company can have a significant impact on industry trends.

As you can see from the picture below, MCD is turning up the heat on SBUX with a very aggressive
marketing campaign on the West Coast….

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 80.46%
  • SHORT SIGNALS 78.35%

Eye on Transparency: $17.1BN+...Missing?

As we noted in The Early Look, it was disappointing to wake up to the Bernie Madoff fraud this morning. At a time when this country desperately needs leadership from the financial services industry, the news seems to get worse every day.

Madoff started his firm in 1960 and according to various biographical sources, “the firm was one of the five broker/dealers most closely involved in developing the Nasdaq market.” In addition, he has at various times served as the Vice Chairman of the NASD, a member of its Board of Governors, President of the Security Traders Association of New York, and Board member of the Depository Trust and Clearing Group.

While Bernie Madoff likely wasn’t a household name outside of Manhattan’s moneyed circles, he was clearly a substantial player in the finance industry and a major player in the asset management world. In total his firm is reputed to have managed north of $50BN dollars, with the hedge fund business managing north of $17BN.

It is unclear exactly how much money is missing, yet the SEC press release states:
“According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.”

In addition, in the same press release, the SEC referenced a conversation that Madoff had with an employee and in this conversation “he admitted that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.”

While it will take months to determine the extent of the losses, the number appears to be between $17BN and $50BN in client assets. If these losses are anywhere near accurate, this is one of the biggest frauds in business history and certainly the largest in money management history.

The implications for this are twofold. First, increased regulatory and transparency rules will have to come into play, a trend that will already be in place under the Obama administration and a Democratic Congress. Second, withdrawals from money managers of all strategies will likely accelerate in the short term. Investors should, and will, have serious doubts in regards to whether their money managers are doing what they say they are doing from both an accounting and strategy perspective.

We are wary that the Madoff fraud is a canary in the coal mine. While we know many, many money managers who have high ethical standards and take their fiduciary responsibilities very seriously, these types of events are rarely isolated. The potential for more Madoffs, and the broader implication of increased asset redemptions, is a tail risk that should be proactively prepared for and managed around.

Daryl Jones
Managing Director
Research Edge LLC


The following charts detail the decline in slot handle versus table drop on the Las Vegas Strip and Atlantic City, the two largest gaming markets in the US. Slot play peaked in 2003 in both markets. Possible explanations for the declining percentage of slot volume are:

• Younger generations don’t play slots as much, the older generation is dying off
• Higher international visitation to Las Vegas
• The popularity of poker extended to other table games
• The opening of Borgata attracted a younger customer profile

Revenue share from slots is down as well but not as much. As we wrote about in our 7/21/08 post, “I’LL HAVE A SLOT MACHINE, HOLD THE WINNINGS” slot hold percentage has climbed steadily over the past 15 years. In other words, consumers are getting less and less paid back to them in winnings for every dollar wagered.

So pricing to the consumer is up, slot pricing to the operator is up, yet demand does not appear to be keeping up. It will be interesting to see how both levels of pricing hold up in this environment.


I’m all for cutting costs. Higher margins are generally a good thing, but not always. I believe BYD’s decision to cut half of its matching 401k contributions is short sighted. Hopefully, it doesn’t speak to a larger strategy of sacrificing long-term opportunities to gain market share only to boost near-term EPS and cash flow. Let the guys without liquidity worry about that.

We’ve been vocal about the market share opportunities available to casino operators on the right side of the liquidity trade: BYD, PENN, and WYNN. Of the three, BYD seems to be in the best spot. As we wrote about in our 12/4/08 post, “IT’S THERE FOR THE TAKING”, BYD’s main competitor, Station Casinos, completely eliminated 401k matching contributions recently to ALL employees. Unhappy employees provide bad service. Since Station is close to bankruptcy, BYD also has other opportunities to offer a better product and steal market share, including a fresher slot floor.

BYD’s actions may seem inconsequential. After all, they are leaving the union alone and only cutting non-union matching 401k contributions by half. My argument is that it seems so unnecessary. Yes business is bad but BYD doesn’t need the EPS or the cash right now like ¾ of the industry and virtually all of its competition. I just hope BYD still capitalizes on the other opportunities to steal share including offering better maintained facilities and service, newer slots, and more marketing and promotions. That would put the focus on the long-term, where it belongs.

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