Is the Republican Party A Distressed Asset?


"Is Michael Steele here? Michael, I don't care how many times you ask, the Republican Party does not qualify for bailout.  Rush Limbaugh is not a troubled asset."

                                                                -President Obama, White House Correspondents' Dinner, May 9th 2009


President Obama hosted his first White House Correspondents' Dinner this past weekend to much fanfare.  While much of the dialogue seemed to be fairly predictable, the line above actually garnered a great deal of applause and is a very insightful point. 


In fact, the Republican party is currently in trouble and does have a bit of a Rush Limbaugh problem.  While Rush may not be a troubled asset, the Republican Party does need a bailout, or at least a massive makeover.  We recently heard from a contact of ours who is a major conservative fundraiser and he wrote us the following:


"I was on the Hill this past Thursday. Very discouraging. Republicans seem exhausted. The party will take years to recover."


Installing Michael Steele as the Head of the RNC and the recently completed listening tour by Jeb Bush, Mitt Romney, and various other Republican leaders are certainly steps in the right direction in reinventing the face and energy of the Republican party, yet this process is in its early days.  In the meantime, the Democrats are consolidating power and President Obama's polling numbers continue to improve, while the Republican Party is trading at cents on the dollar.


In the past, we have quoted the Rasmussen presidential approval rating as a proxy for how President Obama is doing in terms of popularity.  We use this poll for consistency purposes and also because Rasmussen has been rated as one of the most accurate pollsters over the last decade. For the last five days, Obama's approval index has been in the +7 to +9 range (this is the difference between Strongly Approve and Strongly Disapprove), this range is at its highest since the first week in April.


While that poll is interesting and indicates a shift up in approval for President Obama, an even more interesting poll is the right direction / wrong direction poll.  Currently, 38% of likely voters believe the country is headed in the right direction.  While this does not seem like a large number, it is a five year high and is the highest number of the Obama Presidency.  In fact, it is up 11 points from his inauguration and 17 points from when he was elected.  President Obama has inspired a view among likely voters that he is getting this country back on track and with this popular support will come even more political capital.


On April 28th we wrote the following in a note about Senator Specter's decision to change parties:


"Make no mistake about it, the balance of power in the United States has officially swung to the left and as a result we should analyze both risk and reward accordingly with this new geo-political input."


In that note we made the call out that one way in which we could see this power shift manifest itself was on unionization and the potential that Senator Specter would reverse his view on Employee Free Choice, which relates to voting on union representation.  This shift in national political influence with the consolidation of Democratic power in the Senate and increasing popularity of President Obama, combined with the view that he is leading the country in the right direction, will also manifest itself in more subtle ways.


Specifically, the recent capitulation of bondholders in the Chrysler bankruptcy has the appearance of a situation whereby the bondholders are deferring to the strengthening power of President Obama and the Democratic Party.  According to the Boston Globe, "The group eventually came to the conclusion that there wasn't enough of them to withstand the enormous pressure and machinery of the US government." 


Obviously the bondholders are likely attempting to promote their own interest to the media, so the quote must be taken in context.  Nonetheless, the context is concerning.  Bondholders have rights and fiduciaries responsibilities, and in this situation chose to acquiesce to the government rather than aggressively pursue those rights.  Clearly, part of the decision making process on the side of the bondholders was that they were not only facing off with the U.S. government, but one that has a popular executive branch combined with a consolidated legislative branch - so would be difficult to beat.  


While this was a loss for the bondholders of Chrysler, it was also likely a leading indicator of future events.  These capitalists had clearly weighed the risk / reward and decided that based on the potential for future interactions with the government, according to simple game theory analysis, the best outcome was to acquiesce on their position quickly and quietly.  That said, not all  investment managers have walked away from this situation quietly.  In fact, Cliff Asness wrote the following in an open letter:


"Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It's not always a pretty process . . .the above is how it works in America, or how it's supposed to work."




Daryl G. Jones
Managing Director



When gas prices at the pump hit $4 a gallon last summer, the pain felt by restaurant operators was severe.  While we are miles away from that level, the surge in oil prices and subsequent move in gas prices should not be overlooked. 


Last week pump prices increased to a new national average of $2.17 a gallon and are up $0.12 over the past month.  The good news is that prices are still $1.47 a gallon cheaper than last year.




There is a view that oil could have a meaningful upside as the re-flation trade continues to play out, especially with a weakening dollar.  In early trading today, Oil prices traded above $59 a barrel to set a new six-month high, mainly in response to the positive tone to equities and a weaker dollar.


At some point, the sequential rate of change (week to week and month to month) will begin to impact the consumer somewhat more than the absolute year-over-year decline. 

Currently, the psychological behavior associated with the rate of change has not been evident is sales trends at Wal Mart, which is a proxy for consumer behavior as its sales trends have a high R-squared to changes in gas prices.  Although, it should be noted that the Consumer Discretionary (XLY) has now begun to underperform and appears to be in a correction phase; over the past week the XLY is up 0.3% versus 2.4% for the S&P 500.


With Full Service valuations surging over the past two months, sales trends that remains under pressure, and higher gas prices, it’s not the right time to be a Full Service BULL!



Wow!  We knew management was making progress on the cost side but this exceeded our expectations by a wide margin.  Should the stock go up on this?  Absolutely.  Will it?  Yes, but probably not enough.  Even with a big move up today, the stock will likely still trade around 6-6.5x 2010 EV/EBITDA versus the US regional comp group at 7-7.5x.  An argument can be made that GC's business model is more attractive than the US guys (see our 4/5/09 note for the thesis, "GC:  GOOD CANADIAN GAMING").  GC is definitely a "show me" stock, but Q1 is definitely a start.


Revenues were a little below expectations but EBITDA bested our projection by 19% and the Street by 27%.  EBITDA margin increased 370bps YoY to 30.5% despite an 4% revenue decline.  The good news?  Most of these cost cuts appear sustainable.  Numbers are going higher, despite the revenue decline.  Here are the property details.





For those of you who like details, the following are the conference call and property highlights:



  • Gaming revenues in line with our expectation, normal hold
  • Hospitality & other revenues came in a little light, caused by the construction disruption which led to the temporary relocation of several food & beverage outlets and reduction in room capacity to 195 room from 202
  • Costs came in 1.9MM lower than our estimate, and were down 13% Y-O-Y due to reduced staffing levels and reduced variable costs



  • Gaming revenues were 1% better than our estimate
    • Table drop was better than we expected, up 7% y-o-y, but hold was weak at 18.3% vs our 19.15% estimate, costing GC 300k of revenues
    • Slot handle was weaker than we expected though, down 11% y-o-y, but had slightly better win %
  • F&B and other was 26% better than our estimate
  • Costs were 8% lower than 1Q08 and 1.1MM below our estimate
  • EBITDA was up 11% and margins increased 460bps to 46%


Vancouver Island:

  • Gaming revenues came in 1.4% better than our estimate
    • Table drop was very weak, coming in 15% below our estimate, hold was 1% above our estimate. However, table revenues are only 1.3MM at these 2 properties so the hold differential was de minimis
    • Slot handle was a little better than our estimate down 4%, win % was normal
  • Hospitality and Other was materially lower than our estimate down 27% y-o-y (again very small number to begin with)
    • There was some construction disruption
  • Costs were down 20% y-o-y, much better than our estimate
  • EBITDA was up 2% and margins were up 6.2% to 57.6%


Nova Scotia:

  • Gaming revenues came in 5% below our estimate
    • Table drop a little better than we expected, hold was normal
    • Slot handle 2% below our expectation, win % was normal
  • Hospitality & other came in 200k above our estimate and 21% better y-o-y
  • Costs were in line with our estimate (remember that cost reductions at this property began in 2Q08)
  • EBITDA was up 133% and margins were 20.2% vs 8.4% last year - this is the last quarter of easy comps



  • Table drop increased 17% y-o-y, although hold was 2.2% below normal levels, impacting revenues by 600k
  • Hospitality and other came in 150k better than our expectations
  • EBITDA came in 22% better and margins came in 330bps better
  • In CAD dollars revenues increased 29% and EBITDA increased 44%
  • CAD dollar decline 20% in value vs USD at the end of 1Q09, if spot rates stay constant the decline should be closer to 13% for 2Q

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Credibility Crisis

"All credibility, "All credibility, all good conscience, all evidence of truth come only from the senses."  -Friedrich Nietzsche

The credibility of the US Financial System and those who think they are leading it continue to weigh on my mind. This is not a Geithner Saturday Night Live skit or an Obama Washington DC media cocktail party we are watching folks. We are playing with live ammo here.

In a perverse way, the Breaking of The Buck will continue to auger bullishly for our intermediate-term investment in REFLATION. In the long run however, America's long standing stature as the world's currency reserve will be dead.

Bad habits die hard for a reason. If a part of the whole that is trying to exist in a dynamic ecosystem (like, say, the global economy) doesn't have the flexibility or objectivity to evolve, it's likely to go away. Take Darwin's thesis on that - God knows you shouldn't take a hockey player from Thunder Bay, Ontario's word for it.

But what is a man's word worth in the world of finance these days? Does America's handshake with The Client (China) matter anymore? What are the repercussions for the people we have leading this US Financial system down the road to hell in a hand-basket?  Do you really think these people have what Nietzsche referred to as credible "senses"?

These questions are best served to be considered within the framework of a book - heck, maybe I'll take some time off and write one - then CNBC will have to quote me. Maybe I won't! Someone has to wake up every morning calling these cats onto the carpet, or my son Jack is going to be living in a country that's as compromised and conflicted as we allow it to get.

This morning, the Banker of America, Kenny Lewis, is compromising whatever inch of respect that his handshake had left with The Client. Remember, The Client, is what we at Research Edge call China (yes, you little trickster of a strategist who likes to call our coined phrases your own, have at it!). The cost of Kenny's handshake was $7.3 billion in liquidity via his sale of China Construction Bank.

While I am sure that BAC's conflicted US centric Board is completely ignorant of The New Reality, at least we can remind someone over there who is allowed to be objective (when no one is looking ) that selling stock in The Client's face isn't cool.

On this score of compromising America's credibility with the Chinese, what is very interesting this morning is the contrasting headlines between the Top 2 stories being read on Bloomberg:

1.      "Most Stocks, Index Futures, Copper Rise on China's Spending"

2.      "Bank of America Said to Raise $7.3B From China Construction Sale"

Who really "gets" this? President Obama? Do you get it?

By the self-enhancing nature of his perceived to be self deprecating speech this weekend, Obama certainly fancies himself as a smart man. I actually think he is smart, but I also think his economic team wears world class blinders when it comes to understanding the interconnectedness of global markets.  Rather than reading his latest fiction novel, why doesn't someone pass the Oracle of Obama some of the required reading that's being issued real-time and being reflected in marked-to-market prices?

Larry Summers' lap dog, Christina Romer, gets YouTubed daily with her professorial take on macro economic factors. One of her favorite lines in supporting her economic views is "we're in line with blue chip private market forecasters." Unfortunately, I am not kidding you on that either. It's embarrassing and sad all at the same time. Professors teach impractical theories about markets for a reason.

What in God's good name is a "Blue Chip" Wall Street forecast anyway? Are these the forecast of Kenny Lewis' compromised and conflicted "economists" at Investment Banking Inc.? Or are these the "forecasters" from the not so much Government State Enterprise banks, like say Goldman Sachs? Wait - are the Goldman guys private forecasters to Geithner?

So many questions. So little time...

The credibility issue here remains folks. As bullish as I am on a continued generational short squeeze, let me be clear in stating that this remains an immediate to intermediate term view. Dollar down = REFLATION. That's pretty much it, but in the long run... unless we take a good hard long look in the mirror and understand that the only way that our markets will recover from here is if Chinese demand continues to recover... it will not end well.

On weakness, I bought back our long position in China (via the CAF closed end fund) yesterday. The Chinese are reporting that the growth they are seeing in urban fixed investment is now running up +31% on a year-over-year basis. On the heels of fantastic auto sales for April yesterday, the Chinese macro data continues to impress. All the while the lack of American credibility continues to depress. The US Dollar is down again here in early morning trading. US Futures like that. As they should, for now...

Enjoy the REFLATION trade while it lasts. I have the reward outrunning the risk here in the US market for the first time in a week. I have upside reward of +3% to the SP500 line of 938.

Best of luck out there today,



CAF - Morgan Stanley China Fund- A close end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

EWD - iShares Sweden-We bought Sweden on 5/11 with the etf down on the day and as a hedge against our Swiss short position. Sweden is up a healthy 18.7% YTD and has bullish fundamentals. The country issued a large stimulus package to combat its economic downturn and the central bank has effectively used interest rate cuts to manage its economy. Sweden's sovereign debt holds a strong AAA rating despite Swedish banks being primary lenders to the Baltic states. We expect Sweden to benefit from export demand as global economies heat up.

XLK - SPDR Technology - Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last eight weeks.   As the world demand environment becomes more predictable, M&A should pick up given cash rich balance sheets in this sector (and the game changing ORCL-JAVA deal). The other big potential catalyst is that Technology benefits from various stimulus packages throughout the globe - from China to USA. Technology will benefit from direct and indirect investments.

XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We've been on the sidelines for the last few months, but bought XLV on a down day on 5/11 to get long the safety trade.

VXX - iPath VIX- The VIX is inversely correlated to the performance of US stock markets. For a TRADE we bought some of the Street's emotion on 5/4, getting long their fear of being squeezed.

TIP - iShares TIPS- The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD - SPDR Gold-We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.

EWJ - iShares Japan -We re-shorted the Japanese equity market via EWJ on 5/6. 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-the government cut its forecast for the fiscal year to decline 3.3%, and we see no catalyst for growth to return this year. We believe the BOJ's 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".
EWW - iShares Mexico- We're short Mexico due in part to the media's manic Swine flu fear. The etf was up 7% on 5/4, giving us a great entry point.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. 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.

DIA  - Diamonds Trust- We shorted the Dow on 5/4 for a TRADE. Everything has a time and price.

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.

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%.

EWL - iShares Switzerland - We believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials.  Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.


April in Atlantic City was cold.  Gaming revenues declined 14% YoY, better than the 19% decline in each of the last two months.  Who cares though?  Business is bad and the 6 month moving average continues to trend downward.  Let's move on.




I wouldn't exactly call Borgata's performance hot, but on a relative basis it was blistering.  Revenues were flat YoY in April, following an 8% decline in March.  The property almost posted its first revenue gain since August 2008.  Both slots and tables were roughly flat, slots up a titch, tables down slightly.  The six month moving average turned up in April marking the first positive discussion point coming out of AC in a long time.  We'll see if that's sustainable, but what is sustainable is the advantage of having the best asset in the market.



Calm Waters? SP500 Levels Refreshed...


So here I am, buying and covering today, wondering if what I am doing here contains a unique strategy - getting longer?


As the proverbial trading waters calm themselves, I'll tell you what isn't a unique thought - being short without a catalyst. Not with this macro setup. No Sir - not here, not yet...


Squeezy is hanging out in the shark tank below (see chart's green range of 817-865 SPX) and just waiting for some bait to jump at on the 900 SP500 line. They tried to crack that line of support this morning, but to no avail.  All you're seeing today is another higher low.


The 934 line is the January 6th closing high for the YTD. A close above that gets Squeezy chomping on the shorts right up to my new resistance line of 940.


Tech is leading gainers today. I am long Tech again, and liking my cost basis.


Sharks eat sheep.



Keith R. McCullough
Chief Executive Officer


Calm Waters? SP500 Levels Refreshed...  - shark

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