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Ahead of BYI’s earnings tonight, BYI filed an interesting 8K. Historically, adding change of control provisions to management employment contracts has been a signal.



Bally filed an 8k last night involving an amendment to CEO Dick Haddrill’s employment contract.  Among other things, the amendment provides for a cash payment of $2.5 million to Mr. Haddrill upon the company meeting certain financial objectives OR upon a change of control. 


Michelle Leder of Footnoted, our SEC filings expert and partner, will be following up with some important detail and historical implications of these types of filings.  The main takeaway, however, is that adding change of control language to management employment contracts has been a somewhat reliable signal of a company being acquired.


Mr. Haddrill successfully sold another gaming equipment supplier, Powerhouse Technologies, among other companies, so he is no stranger to getting deals done at a premium.


BYI will report earnings tonight after the close.  As we wrote about in our preview note, we think earnings will be fine but we are not making a call on the quarter.  We do like the company and fundamentals long-term and obviously, realization of the company’s true value could be expedited with a sale.


Status quo from Beijing or Macau governments until 2010 at the earliest but visa and tax changes are looking likely in 2010. 



Our sources are telling us that Beijing wants to be perceived as impartial when it comes to Macau politics.  The visa situation is unlikely to change until well into 2010.  The new Macau government is also likely to remain idle but the good news is that they are becoming increasingly open to reducing the gaming tax rate to remain competitive with Singapore.  We are hearing that LVS will not open in Singapore until April and the Macau government would wait on the tax reduction until then.


We’ve got some pretty good color on government intentions:

  • Investors expecting an immediate visa relaxation by Beijing may be disappointed. We are hearing that the Chinese government wants to sit tight for 4 to 6 months after the new CE takes over later this year so not to show favoritism.  We remain convinced that Beijing wants to control growth in the 5% range and will only tweak the visas to reach that goal.
  • We are now more optimistic about the Macau government lowering the gaming tax rate.  Our government sources indicate that officials are very worried about the Singapore impact.  Macau wouldn’t move until the spring, just a bit ahead of the LVS opening in Singapore.  This would be good news, just maybe not as soon as some were hoping.
  • The new Macau government will be deliberate on implementing any changes.
  • The bad news on the status quo is that Macau hotel casinos are still being forced to reduce the number of foreign employees.  The entertainment divisions are taking the biggest hit which is affecting service issues and potentially could weigh on visitation.  We’ll be following this closely.


Macau is hopping in August but it doesn’t seem to be visa related.



Our guys on the ground are telling us that it’s pretty difficult to get a cab these days in Macau.  The Mass floors are packed.  “It’s like the old Macau again”, we’ve been told.  By “old” Macau, they are referring to last year.  We’re pretty sure there hasn’t been any visa tweaking by Beijing.  Rather, the drivers are:

  • Venetian arena – The Venetian is holding more events at the arena including concerts and other shows.  Some of the acts have been big draws.
  • “Holiday Season” – July tends to be a month where many kids are in summer school.  Families visit in August.
  • Stock market/economy – The Hong Kong stock market has bounced back and the economy has stabilized.  The Chinese stock market is booming. 
  • City of Dreams growing the Mass market


Even though we are only half way through the month the August number are looking pretty good.  Anecdotally, the Wynn Macau floor has been particularly busy.

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%

Game Time

"In life, as in a football game, the principle is to hit the line hard.”
-Theodore Roosevelt
If you want to make it in this business, have your own process and patiently prepare. When you see a high probability opportunity to win - hit the line hard. Otherwise, just buy an index fund and/or ask you friends for their “best ideas.”
If you want to approach this game hitting the line hard on every market move (trust me, in the last decade of my making mistakes trading markets with live ammo I’ve tried it), you’re going to have a short shelf life. The investment season is long and hard. Pick your spots. Timing and sizing is everything when it comes to winning.
With the SP500 trading lower in 4 out of the last 5 sessions, and the media carting out everyone from David Tice (on Bloomberg), Nouriel Roubini (on CNBC), to some head and shoulders double top technician, I see a big opportunity.
Two days ago I posted an intraday note titled “Buying Red”, and yesterday I posted another one titled “Game Time.” When your investment process leads you to high probabilities of economic reward, it’s not time to take a show of hands – it’s time to do up your chinstrap and make the call.
My call is this – take advantage of the generational level of groupthink that you are seeing out there and buy low. Until the US market’s intermediate term TREND of Dollar down = everything priced in Dollars up breaks down, don’t fight it – capitalize on it.
A lot of levered long investors called themselves “event driven” funds at the manic highs of 2007. In many cases, unlike tangible merger arb events, these “events” were soft catalyst in nature (like say buying shares of something wild Bill Ackman was about to file an Ackmanist position in). That greater lemming strategy obviously doesn’t work when the market is going down. But what about macro “events” that you can have Research Edge on in a market that’s going up?
You see, the problem a lot of these levered long super duper stock picking dudes have with macro is that a company’s CFO can’t get them comfortable with macro catalysts. There is no super special “one on one” that a portfolio manager can sign up for to get that Global Macro memo. Macro matters, and so do the macro events.
My global macro “event” is Ben Bernanke’s FOMC statement.
Game Time: today - 2:15PM EST.
If Bernanke panders to the political pressures of maintaining this ridiculous rhetoric of “Depressions” and “emergency level” interest rates, the US Dollar will put in another lower-high, and start to retrace it’s year-to-date lows. If he doesn’t pander, he still might confuse the currency market and I win that way too. I think he panders.
On our 1PM EST Macro Monthly Strategy call today, I’ll go over one of my Q3 Macro Themes, “Burning The Buck”. Since March, if you’ve only bought stocks/commodities/currencies, etc. on US Dollar up moves, you have been absolutely crushing it in your 2009 season.
Again, the US stock market has been down 4 out of the last 5 trading days. Over that time period, the US Dollar has rallied +2.5%. The US Dollar remains broken across all 3 of my key investment durations (TRADE, TREND, and TAIL). Stocks, commodities, and currencies remain bullish across all 3 durations.
That’s why I am choosing to hit this line hard. In the Virtual Portfolio, I have 28 longs and 6 shorts. In the Asset Allocation Model, I have taken my position in US Cash down to 32%. Until I don’t see these buying opportunities for what they are, I will keep taking these shots.
That’s all I have for you this morning. It’s Game Time.
Best of luck to you out there on the field today,


XLK – SPDR Technology Tech and Healthcare remain the two sectors most primed for accelerating M&A activity in Q4. Both look great from an intermediate term TREND perspective, but at a price.

EWC – iShares Canada We bought Canada on 8/11 ahead of Bernanke’s pandering. Canada has what THE client (China) needs, namely commodities, which we believe will reflate as the buck burns.   

USO – Oil FundWe bought USO on 8/10. With Bernanke as the catalyst for the USD breaking down we want to be long oil.

QQQQ – PowerShares NASDAQ 100 We bought Qs on 8/10 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.

COW – iPath Livestock This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action.  

EWG – iShares Germany Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy.

XLV– SPDR Healthcare Healthcare has lagged the market as investors chase beta.  With consumer confidence down and the reform dialogue turning negative we like the re-entry point here.

CAF – Morgan Stanley China Fund A closed-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.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global 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 - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.

UUP – U.S. Dollar IndexShorting the USD on a strong 3-day rally to another lower high. Your catalyst is Bernanke pandering to political consensus on Wednesday. We believe that the US Dollar is a leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the US dollar.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10 and 8/3.

EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds – If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

Chart of The Day: Game Time

Bernanke’s Bucks are on the line. We are t-minus 6 trading hours here until game time. To pander, or not to pander, remains the question…


I made the call on The Maintenance Man (Bernanke) in my Early Look today… and to be clear, I want to make it again:


  1. I am short the US Dollar into/out of the next 3-6 trading days of this FOMC statement
  2. I am long most things that anchor on the price of the US Dollar declining
  3. I am expecting group-thinkers to short low and cover high all the while


The US Dollar remains broken across all 3 of our key investment durations (TRADE, TREND, and TAIL). See the chart below for our resistance levels. This is one of my key macro roadmaps:


  1. 1.       TRADE = $79.96
  2. 2.       TREND = $81.03
  3. 3.       TAIL     =  $82.82


Buying red,



Keith R. McCullough
Chief Executive Officer


Chart of The Day: Game Time - km811



Taking Cues from Europe's Larger Economies

Research Edge Position: Long Germany (EWG)


Over the last week there were many critical European data points released. Below we’ve revisited the fundamental landscapes of Germany and the UK within the larger direction of the Eurozone in light of these newly reported facts.  We have a bullish stance on Germany (currently in our portfolio) and believe that despite improved fundamentals in the UK, the market will continue to underperform its Western European peers.  


Managed Deflation?


Eurostat reported that June Eurozone industrial producer prices fell 6.6% annually and increased by 0.3% from the previous month, confirming the present deflationary environment that we’re seeing. The large drop on an annual basis is better understood in the context of last year’s manic energy prices, and while producer prices rose 0.3% on a monthly basis, excluding the energy sector, prices fell 0.1%.  We’ve held that both PPI and CPI (which Eurostat recently estimated at -0.6% annually in July) are in aggregate at a relatively comfortable level given the region’s downturn and helped encourage the ECB and BOE to keep rates unchanged at 1% and 0.5% when they met late last week. That said, we are seeing a divergence in the inflationary outlook in Germany and the UK.


Germany was one of the few countries in the Eurozone to report a decline in PPI on a monthly basis at -0.1% in June, (or -4.3% annually) and today released that CPI fell 0.5% in July Y/Y, with consumer prices remaining unchanged at 0.0% from the previous month. In contrast, the UK PPI recorded a 1.0% gain in June over the previous month, and was down 8.5% from the previous year. On the margin June’s inflationary number is just one data point among many macro factors we follow, yet it points to a larger theme we’ve been making:  if producers can’t pass on savings to the consumer it’s one less cog to get consumers to spend to ignite growth.


As we measure changes on the margin, for the UK, the sequential uptick in PPI (with an inflationary CPI reading of +1.8% in June) signals that inflation may be getting ahead of growth, whereas Germany is benefitting from imported deflation.



Critical Metrics Improve Across Germany and the UK


Leadership: For the balance of the last year we’ve been vocally long German Chancellor Angela Merkel’s leadership and short UK PM Gordon Brown’s, and it hasn’t disappointed. Not only did Brown and Co. not demonstrate leadership throughout the country’s downturn, they haven’t pretended to proactively manage the economy. Last week furthered this thread, with the BOE increasing its purchasing program by 50 Billion Pounds ($84 Bill.), with the BOE saying that “the recession appears to have been deeper than previously thought”.  We believe Mr. Market will continue to choke on this… 


Germany, on the other hand, has maintained a sober fiscal policy, prizing low government debt and low (future) taxes. Merkel has combined the early issuance of its cash for clunkers program with support for the all important auto industry vis-à-vis a bridge loan to GM’s Opel division (before seeking a private buyer), all of which has helped to offset significant declines in export levels and order demand.


Industrial Production and Factory Orders: while German industrial output eased 0.1% in June on the month (after surging 4.3% in May), forward-looking Factory orders rose 4.5% in June M/M, according to last week’s release from the German Economics Ministry. Not only did the Factory number far outpaced a forecast of +0.6%, but added to May’s +4.4% upward charge. As we’re still looking for signs of life from an export picture, positive momentum from factory orders and increased demand from China will be critical to move the scales.


Confidence: sentiment continues to improve across the Eurozone, jumping to 76 in July from 73.2 in the previous month. Germany has now recorded months of sequential improvement in both consumer and business confidence, while the UK’s July consumer confidence number shot up to 60, the highest reading in over 14 months. We hold that that sentiment is an important metric to drive market performance and engage consumer spending, yet believe that for the UK there is a disconnect with reality: the country’s compromised financial system pared with rising unemployment should sting sentiment and continue the FTSE’s measly performance, which currently stands at 6.5% YTD.


Retail Sales and Housing Landscape: UK retail sales far outpaced expectations and rose 1.4% in June M/M or +1.8% Y/Y, according to the British Retail Consortium.  This is a clear divergence from Eurozone retail sales, which were down 0.2%, and Germany where despite sequential improvement, sales registered -1.8%. For the UK, we believe that growth in retail sales will not be sustainable unless inflation backs off. In the intermediate term we could see it dip down around the 1% level Y/Y. 


While there are incremental signs that the housing market may be improving in the UK, with mortgage approvals, (though a third lower than at the start of 2008) reported as reaching a 14 month high in June and Halifax saying that home prices increased 1.1% in July, we see the overall housing bubble and property devaluation in the UK as a serious fundament risk to growth. On the flip side, debt averse Germans largely avoided the housing mess.


Unemployment: interestingly July unemployment in Germany remained stagnant at 8.3%. While we expect this number to push out in the back half of the year and into 2010, the stability of the number (though lagging) for now is bullish. UK unemployment has now reached historic highs. As this number pushes out we expect sentiment to erode.


Purchasing Managers’ Index: bullishly improving across the Eurozone, Germany, and the UK.


Trade Gap: The UK trade gap was released today at 6.5 Billion Pounds ($10.7 Billion) compared with 6.2 Billion pounds in May. This isn’t a huge surprise as the UK is import heavy, however an increasing trade deficit will only further burgeoning government debt levels. The Euro trading around $1.42 continues to be a headwind for German exports, yet the region’s largest exporter continues to register a monthly surplus.





The data points released last week help confirm an improving trend in Europe’s economy. We continue to see a divergence in market performance across economies, based on unique underlying fundamentals, including uncorrelated trends . Eastern Europe has been a great example of extreme positive market performance with glaring negative fundamentals and admittedly we lost money with Italy on the short side for a TRADE, a country we believe has a very bearish fundamental outlook as its balance sheet blows out with increased governmental debt.


We have conviction that a measureable recovery in Europe will not come without the improvement from the region’s big three: Germany, France, and the UK.  Already we’re seeing the slack in the demand picture tighten for the larger economies, which will greatly aid the peripheral countries that rely so heavily on the EU for trade. 


For the intermediate term TREND, we believe that Germany’s powerful manufacturing capacity remains a primary structural advantage that may propel growth in the final half of the year as the country benefits domestically from imported deflation. We see the UK constrained by its financial leverage and believe that inflation may be getting ahead a growth, a cocktail we don’t want to be long. 


As we’re subject to the data, we’ll change as the data does; however at the right price we want to be long Germany and short the UK.  


Matthew Hedrick



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.