• run with the bulls

    get your first month

    of hedgeye free


Right Said Ted


When I mentioned that I wanted to write a note on the Ted Spread to my Macro colleagues this morning, Andrew Barber rightly questioned whether it was a unique thought given that it was a top story on Bloomberg this morning.  I'm not necessarily sure it is a unique thought, but I do think it is important for all equity investors to be well aware where this key measure of risk is trading. 


As of today, the Ted Spread had narrowed to 69 basis points, which is a level not last seen since August 9th, 2007 (and we've outlined in the chart below).  We cannot say enough times, while the patient (being global equity markets) may still be in the hospital, the world is a dramatically different place than November of 2008 when the Ted Spread was over 400 basis points.


The Ted Spread and the steepening yield curve chart we showed earlier this week are most relevant for one sector, financials.   As was noted in our Sector View this morning, financials are in a positive TREND.  As Keith pointedly said, "I won't short them."  We might not be long, but not being short is a signal in and of itself. 


The rate at which commercial banks can borrow money is at a multi-year low and the yield curve is at a multi-year high in terms of steepness, which enables banks to borrow long and lend short for a reasonable profit.  While I'm certainly no financials analyst, both the Ted Spread and shape of the yield curve are fundamental positives that anyone trying to short the financials should have front and center.


We borrowed the title from English pop band, Right Said Fred, who were best known for their hit, "I'm Too Sexy."  The Ted Spread is speaking loud and clear and while looking at credit spreads may not be sexy or unique, when they speak, we listen.


Daryl G. Jones

Managing Director


Right Said Ted - ted1


Right Said Ted - ted2


Press reports indicate that LVS is pursuing a Macau IPO on Hong Kong exchange through Goldman Sachs.  As we pointed out in our 5/7 LVS note, "LVS: DON'T EXPECT A NEAR TERM ASSET SALE", we've been hearing that asset sales are not imminent, so an IPO announcement would confirm that to some extent.  We've had discussions with LVS management regarding this very topic over the last two months.  It was always an option but valuations were too low.  That may no longer be the case.  However, our sources indicate that the IPO timing may not be imminent either.  There are still quite a few legal hurdles to cross.


Here is our quick analysis.



  • Pro-rata allocation of corporate overhead
  • 9x EBITDA multiple on 2010
  • No value for undeveloped parcels (Sites 5, 6, 7, 8, 3)


We have $724MM of EBITDAR, net of corporate expense, equating to $6.5BN of enterprise value. Subtracting $3.2 BN of debt, less $525MM of estimated cash at the Macau entity, gets us to $3.8BN of equity value or $5.84 per share or $5/share on a present value basis. 


To avoid a covenant breach in 2010, when the leverage covenant steps down to 3.0x, LVS needs at least $250MM of cash (even if they used all their cash on hand to reduce debt).  However, they cannot really leave themselves without liquidity, so realistically they need about $500MM.  If they want to resume construction on Sites 5 and 6, they need about $750MM.   We also have them breaching in 3Q09 and 4Q09 - however, they have enough cash on hand to cure the breach - despite leaving themselves with low liquidity.


If you assume they need to raise about $750MM, that equates to a 20% IPO of the Macau entity (using our numbers).  We assume this will simply show up as minority interest although they can do a variety of different structures, including spinning off the entire entity and issuing shares back to current holders...  In any event, if they create a separate trading vehicle for LVS Macau, then it may "unlock some value" at that entity.  However, this was obviously a more relevant catalyst for the stock when it was trading at $2 vs its current price.  There are other examples of stub equities that haven't done anything for a company's valuation (like MPEL/242 HK) as well as a host of other examples where it doesn't matter.  We think that this is just another way for LVS to avoid a covenant breach/incremental interest in Macau, but more importantly it will provide them with enough liquidity to resume construction and perhaps salvage some of their sunk costs.

When Does Gasoline Matter Politically?


As we saw last year when crude oil reached meteoric highs and gasoline at the pump was selling at $4+ per gallon, the price of gasoline does have political implications.  The default position seems to be to blame the government when gasoline is going higher.  So, in all likelihood, if the price of gasoline continues to climb it will be negative for the Democrats and their approval rating. 


Based on the most recent data from the Department of Energy ("DOE"), gasoline is selling at $2.24 per gallon at the retail level on average across the United States.  Gasoline closed out 2008 at $1.61 per gallon by the same measure from the DOE, so is up 39.3% on the year.  Roughly a year ago gasoline was selling at $3.72 per gallon, so on a year-over-year basis, the consumer is still faring much better, but this year-to-date increase is a sequential shock to be sure.


It seems likely that the political rhetoric will heat up with gasoline up so much year-to-date.  Especially as we enter the summer driving season, which should lead to higher prices on a relative basis as summer driving creates incremental demand.  As a future client asked us yesterday, at what price does gasoline / oil become a political issue?


Obviously, there is no science to the answer.  We follow opinion polls very closely and have been looking for something on the margin that would indicate that the Democrats are losing steam.  In the Presidential realm, the Democratic President seems to be retaining his Teflon status and popularity as ever before (according to Rasmussen, Obama's total approval rating is 57% and his approval rating is +7).  Interestingly, congressional polls seem to be telling a different story.


As outlined in the chart below, which was put together by Christian Drake from our Healthcare Team, for the first time in almost five years Republicans are leading congressional polls.   According to pollster Rasmussen:


"This is the third week in a row - and just the fourth time in more than five years of Rasmussen polling - that the GOP has held such a lead."


This shift in congressional support is at least coincident with the dramatic rise we have seen in gasoline prices, if not correlated.  Regardless, we would expect that political rhetoric to only heat up if gasoline continues its rise in price, which will only hurt the popularity of the incumbent party.  We would also submit that we are getting close to the price where gasoline will matter politically.


Daryl G. Jones
Managing Director


When Does Gasoline Matter Politically? - ras

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.

GIL: Whack-a-Mole Alert

There's nothing out yet on the wire this morning regarding the prospect of a Broder Bros. bankruptcy filing. However, we just spoke with the Deputy in Charge at the Eastern PA District Court. Broder Bros. was not in their system that reflects filings real-time suggesting there no filing in that court last night.


Fot the record, we've stated all along that we do not need a piece of paper telling us that a company is in dire straits -- and just because debt is refinanced it hardly means that it makes the company healthy.  All it means is that life support will be prolonged. 


If I made apparel and Broder was my customer, I'd rather just get the pain overwith.

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.



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.