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Short of Garty?

"Thinking well is wise; planning well, wiser; doing well wisest and best of all."- Persian Proverb

Of course I am not "short of" the man. As all Early Look titles go, we have to have some fun at these un-Godly hours of the macro morning. Dennis Gartman is one of the great grinders of the early morning gridiron. The investment community is a better place with him in it.

This does not mean, however, that I need to subscribe to the panting dog nodding that CNBC's Fast Money's producer must force his "Traders" to look into the eye of the camera with when listening to the Gartman gospel. Someone has to hold the members of this circus act accountable. The American Financial system is being You Tubed by the world, daily, and it's just too embarrassing to know that The Client (China) thinks that this is what US investors do.

So Garty, lets slap the ole red, white and blue accountability pants on and take a walk down the path of a few positions that you are currently "short of", The Dow and Gold:

1.      I have also been "bearish of" the Dow via the DIA etf, but covered my position on Wednesday's weakness

2.      I am long Gold via the GLD etf, and remain "bullish of" it

Not to be mistaken for that one Fast Money Trader who pronounces the world's most relevant growth economy with an "R" at the end of it ("China-r"), we must give the proper attribution to the "bearish of" or "bullish of" lingo - this is Garty's  - and he remains, The Man, for beating his own path with it.

Let's get back to "doing well" as it's the "wisest and best of all" positions. Being the capitalist that he is, we want to make sure Garty has every opportunity to get these positions right.

1.      The Dow Jones Industrial Index

-         Garty is right, the Dow is trading below the 200 day - but that's far from a unique short thesis; this is not a "truly ominous" chart to be "short of"

-         Immediate term TRADE support = 8153

-         Intermediate term TREND support = 7782

2.      Gold

-         Garty must know that he is getting this one wrong (after all, that almighty 200 day moving average that he is "short of" with the Dow = gold $856/oz)...

-         Immediate term TRADE support = $897/oz

-         Gold is about to lock in its second consecutive week of positive price momentum, and it's threatening to breakout again to the upside.

Now don't get me wrong here, I don't think Gold busts out to higher highs, yet... nor do I want to be "long of" the Dow. As prices change, my view on all things do. I am not wed to any position other than my marriage to Laura. I was "short of" Fast Money's "long gold, short America" call in early March, remember. Garty, for accountability purposes, have someone forward you my Early Look of 2/19 titled "Long America, Short Gold"  (www.researchedgllc.com <http://www.researchedgllc.com> ) - I get the short case, but only at a price.

One way to really perform in markets is to understand how the other players on the ice play. If you can proactively predict their patterns of behavior (200 day moving averages for instance), you can always put yourself in a position to trade ahead of them. This isn't a complicated strategy. Remember, "Thinking well is wise; planning well, wiser..."

Garty, like you, I'm in it to win it here and I want to see you keep winning man. If the Dow is down today, at a bare minimum, just cover your short. As for being "short of" gold, well, I know that you know that I'm right on this, so... cheers to changing as the facts do.

I have downside support for the SP500 at 881 and upside resistance at 931. Buy low, sell high, capitalize on consensus, and trade the range.

Have a great weekend.



EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.00% (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.

EWZ - iShares Brazil- Brazil continues to look positive on a TREND basis. President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme: as the USD breaks down global equities and commodity prices will inflate.

XLE - SPDR Energy- We bought Energy on 5/13 with the dollar up. We think it works higher if the Buck breaks down.  Bullish TRADE and TREND remain.

XLY - SPDR Consumer Discretionary-The TREND remains bullish for XLY.  The US economy is showing faint signs the steep plunge in economic activity that began last fall is starting to level off and things are better that toxic.  We've been saying since early January that housing will bottom in 2Q09 and that "free money" for the financial system will marginally improve the US economy in 2H09, allowing early cycle stocks to outperform.  The XLY is a great way to play the early cycle thesis.

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. From a fundamental setup, we're bullish on Sweden. 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 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.

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.

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.

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


MGM gets it done.  Good for MGM management, MGM's bondholders, and those investors who played the deal.  And good for IGT.  IGT you say?  MGM will probably be IGT's number one customer over the next year.  Anyone who has walked through MGM's Strip properties lately will notice a little bit of rust on the slot machines.  Bellagio still has a lot of the original slots from the Bellagio opening in 1998.


MGM is probably the most important cog in the wheel, but it is not the only one.  The recent opening of the credit markets has allowed companies to short up balance sheets, improve liquidity, and avoid covenant breaches.  The following casino companies could be more aggressive in the replacement market:


  • BYD: The company has dramatically cut back on maintenance capex the past year, including replacement slots. With the big Q1 and ability to buy back discounted bonds BYD is unlikely to breach its leverage covenant. Remember, BYD maintains $2 billion in liquidity on its credit facility and is already free cash flow positive.
  • ASCA: Raised $500 million in debt in May which effectively cures any potential senior leverage covenant breach. Company will be free cash flow positive this year.
  • PNK: Will likely issue bonds soon given the credit environment. There will be no limitations on PNK's ability to replace machines.
  • Harrah's Entertainment - A leading bankruptcy candidate a few months ago, the world's largest slot machine operator has restructured its balance sheet and cut costs. The regional markets are performing better than expected and the fire at PENN's Joliet Empress has given the company an EBITDA boost. If Harrah's starts buying machines again, look out.
  • Station Casinos - Once this company goes into bankruptcy, pre-packaged or not, it will have more liquidity to buy much needed replacement machines. Station is the third largest slot machine operator in the US.
  • LVS - Not a huge operator but cost cutting and asset sales could put LVS in a much better situation vis-à-vis its covenants.


We predict a V-shaped recovery, not for gaming revenues, but for slot replacement demand.  The timing is still uncertain but could it come as soon as 2010?  Maybe.  The good news is that a recovery is not in the estimates, at least not for IGT.  While all the suppliers would benefit from re-accelerating replacement demand, IGT could capture the lion's share due to the mix of the "old" machines.  More on that in our next slot post.


Yes IGT has had a great run since it announced its Q2 last month.  So what?  So has every other gaming stock.  That was simply a "the world is not ending" move.  The next move will be fundamentally driven.  On that front, there has been a lot of good news lately.  The simple fact is that IGT's customers are improving their balance sheets, liquidity, and taking covenant issues out of play.  Bottom line:  Casinos will start buying slots again.  As we discussed in our 4/21 note, "IGT: PLENTY OF EARNINGS POWER FOR PATIENT INVESTORS", IGT could earn $1.40 in a normal replacement market and potentially even more for a few years assuming a V-shaped recovery.



NKE: Don't Read Into Headcount Announcement

Don't read too much in to Nike's announcement last night of another 1% headcount reduction (from 4% to 5%). It is not due to another downturn in biz nor is it a response to Adi being on the ropes.


It is simply the end of their fat-tailed process to evaluate and drill down who is being let go as part of the broader restructuring.  In actuality, it looks like any stress internally regarding who will be let go will finally come to an end, and there will be more of an SG&A pad.


I still would not touch the stock here, but I also want to get the unbiased facts to you before Mr. Market makes up its own narrative and takes on a mind of its own.

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Chinese Retail Sales data for April was great, while Industrial Production was merely good

Research Edge Position: Long Chinese Equities via CAF

At 7.1%, year-over-year Industrial output data released by the National Bureau of Statistics On Tuesday evening came in lower than anticipated by most observers. While in light of collapsed external demand the lessened output growth is not surprising, it was still disappointing for bulls like ourselves to see lagging components like electricity which declined 3.5% Y/Y, and Telecommunications/Computers which grew by just 1.1% Y/Y.  We were hoping to see a broadening of production increases beyond just components directly tied to stimulus infrastructure investments like transportation equipment and cement up 9.6% and 12.9% Y/Y respectively.


Retail sales data for April also released by the NBS on the 13th provided better support for the bullish long term domestic demand thesis. At 934 billion Yuan, total retail sales grew at a 14.8% Y/Y -a massively bullish number even if the figures have not yet had the impact on the manufacturing sector we were looking for. While stimulus rebates have helped sales of big ticket items (as expected after last week's CAAM sales data, automotive figures crushed it with Motor Vehicle production up 17.9% y/y and sales up 18.5%) , retail shoppers have not appeared to abandon their taste for small luxuries either, with discretionary components like cosmetics and furniture showing healthy double digit y/y growth.


Put in contrast with yesterday's disappointing US retail data, the growth rate of China's consumer spending underscores the changing nature of global consumption. If the individual consumer in China continues to spend money with confidence, ultimately it will translate to imports beyond just cotton and iron ore and production growth beyond just rebar and concrete.


Andrew Barber


More confident in MAY


Tomorrow the University of Michigan will report that consumer confidence is much better than expected.


Despite general employment concerns, declining home prices, retail sales, the H1N1 virus and the general feeling that things are still bad, the Oracle of Obama and the Dow at 8,300 appear to be bolstering consumer sentiment in May.  Tomorrow we will learn that consumers are becoming more confident that there is a chance for a strong economy over the next six months. 


The preliminary May reading of the University Michigan will suggest that confidence has risen to the highest level in six months.


Going into University of Michigan report we are long the XLY and have been buying some select consumer discretionary names (see www.researchedgellc.com) for our entire long and short positions.  On the flip side, yesterday we noted a significant increase in PUT activity in the XLY.  Clearly, somebody smells the fear that we don't!


With consumer confidence on the rise it's likely that consumers could also ease back on prioritizing needs over wants.  While the trend in April retail sales suggests that the majority of consumers maintain a needs-based bent when buying, an increase in confidence measures could suggest that consumers may wade back into the "want" spending pool.


Howard Penney

Managing Director


More confident in MAY - consumer

Russia’s Monetary Bandwidth


Russia's central bank cut its refinancing rate 50bps to 12% yesterday, the second cut in the last month. 


We've had our EYE on Russia this year and have been in and out of the Russian etf RSX on the long side. (We currently do not have a position). The Russian stock market (RTS) has now moved to +50% YTD, overtaking China as the best performing stock market YTD across the globe.  


This year we've been cautious in pointing out the risk premium associated with owning Russia, yet assertive that Russia's commodity based economy stands to benefit greatly from commodity reflation and its ability to supply China with the resources it needs for domestic growth. Further we believe that Brazil, Australia, and Canada share in this thesis. Yesterday we bought Brazil via the etf EWZ and Australia via EWA. Last week Andrew Barber noted in his post "Meet The New Boss: China" that Brazil's total exports to China exceeded those to the US for the first time in March, with iron ore leading the charge. Clearly getting long countries that can feed China's appetite has worked this year. Brazil is up 30% YTD and Russia (especially mining companies) will push higher from increased Chinese demand, which is now being confirmed by copper shipments. 


And there's continued confirmation that Russia understands who the client is.  Yesterday President Medvedev met with Wu Bangguo, chairman of the National People's Congress, to discuss their "strategic partnership" and a number of meetings are scheduled for the two nations this year.


Yesterday's interest rate cut will help to arrest the deflationary environment Russia is experiencing and in theory decrease the cost of borrowing.  In the case of Russia, it is worth noting that the central bank has room to cut, unlike major economies such as the US, UK, Japan, Switzerland, Sweden, and ECB-countries, all of whom are hovering at or around zero percent.  For the commodity levered Russia, inflation is a double edged sword. On the one hand it increases the price of its commodity exports that drive growth, yet on the other puts extreme pressure on domestic prices. By some estimates, inflation could slow to 9% this year, down from the central bank's target of 13%. In any event, Russia enjoys the ability to cut rates due to the stability of the Ruble versus the USD and Euro in the last months.


Look for use to get in on the long side of Russia via RSX at the right price.


Matthew Hedrick


Russia’s Monetary Bandwidth  - russia

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

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  • SHORT SIGNALS 78.35%