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Pressure Players

“Pressure is something you feel when you don't know what the hell you're doing.”
-Peyton Manning

The #1 headline on Bloomberg this morning is “Stocks Climb as Dollar Declines on Economy; Oil, Copper Gain”…
If you pressed your shorts yesterday and/or didn’t buy anything on US Dollar inspired stock market weakness (the USD was UP all day), you’ll be feeling some macro pressure in your portfolio today. US Dollar bearishness is definitely consensus now, but that doesn’t mean it can’t persist. We’ve seen the game tapes. We know how to manage this dominant risk.
In early morning trading, the US Dollar is getting smoked again, trading down almost a full percentage point right back down to its year-to-date lows. Lower-lows in the Burning Buck will likely equate to higher-highs in the US stock market. The Nasdaq already registered a new YTD high last night. The SP500 needs to close above 1068 today in order to register another win.
Winning is what accountable professionals who have a repeatable process do. Losers point fingers, and we are seeing plenty of those on Wall Street these days. In The New Reality of American Finance, losers can’t hide from the You Tube anymore. This is good. No more Wizard of Oz. The industry is evolving. This is long overdue.
Within 12 seconds of last night’s Monday Night Football game against Miami, Peyton Manning put a ball in the end zone and was up 7-0. Manning isn’t everyone’s favorite player in the league. Some of his quotes (like the aforementioned one) don’t make him everyone’s best friend either but, come Game Time, who really cares ? The man is prepared to play, at the highest professional level, every game of his life.
Only on Wall Street are you not necessarily allowed to behave like the professional athlete that you’d like to be. Particularly if you are on the “sell side”, you are supposed to be subservient, always reminding the “buy side” how “smart” they are. To some extent, this behavior is predictable. After all, the buy side pays the bills.
Having been on the buy side for almost a decade, and now spending some time selling my wares, I’d have to say that the long standing sell siders who haven’t evolved in this business should stick with that loser strategy. Hang on to the old dreams and commission streams boys. It’s all you can do.
What this industry needs is change, and a lot more of it. We want Pressure Players who aren’t sell side or buy side. We want Pressure Players who are delivering on the Right Side. If you wake-up every morning in this business under pressure to point fingers, as Manning would say, “you don’t know what the hell you are doing.”
Aggressive start to the morning Mr. Mucker? Yeah, that’s me. And I’m not ashamed of it. We wake up early here at Research Edge, expecting to win.
Back to our pre-game preparation. Most Portfolio Managers who continue to crush it in this New Reality of Risk Management know that preparing for this morning starts with all of the moves you made in your portfolio on the game day prior. Yesterday, in our Virtual Portfolio, I only bought and covered positions. I covered 3 shorts (CCL, AMZN and AAPL), I bought 1 country (EWG, Germany), I bought one Sector (SMH, Semiconductors), and I bought 1 stock (SONC).
Why buy/cover on red?
1.       The US Dollar was UP. Until buying/covering on USD UP days stops working, I’ll keep running the same play right up the middle.

2.       Volume was DOWN. Decelerating volume on market down days, and accelerating volume on market up days is bullish.

3.       Volatility (as measured by the VIX) remained broken across all 3 of my investment durations. PM’s still aren’t bullish enough.

Like a simple 3-hut count, and putting the ball down field for another 6 yard gain, that simple 3-factor model works. Until it stops working, why wouldn’t we just keep running the play?
We can get upset about the US Government Burning our currency. We can point fingers. We can even make excuses as to why all this can’t be a “fundamental” rally in the US stock market…
But that’s not going to change the score folks. It’s real-time, and it’s up on the scoreboard. Don’t complain about the weather or injuries. Just understand the game that you are in and deal with it.
This morning’s risk in the US stock market no longer supersedes the reward (it did yesterday). Today is a new Game Day. Today, the reward of going long outruns the risk. I have immediate term upside in the SP500 at 1078 (a higher-high) and immediate term TRADE downside support at 1054 (a higher-low). There is still 2.5 hours to Game Time. Let’s come out of the box with the confidence that all proactively prepared professionals should be playing with. Pressure Players expect to win.
Best of luck out there today,




SMH – Semiconductor HOLDRs We bought the semiconductor index on 9/21. We see demand creeping back with the book-to-bill ratio breaking 1 over the last two months.

EWG – iShares Germany Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and balanced budget to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy. Merkel looks to be in the driver’s seat for re-election on September 27th, while her coalition partners are less certain.

CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. 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. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

EWH – iShares Hong Kong
The current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.  

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

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 that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.

EWU – iShares UK We’re bearish on the UK’s leadership and monetary policy to weather its economic downturn. Although we’re seeing improved fundamentals within the country and across Europe we continue to see the country’s financial leverage as a headwind and increasingly the data suggests that inflation is getting ahead of growth. We shorted EWU on 9/9.

DIA  – Diamonds Trust We shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.



The L’Arc casino, owned by Stanley Ho’s Sociedade de Jogos de Macau (SJM) was inaugurated Monday in Macau.  The cost of the project is estimated to be US$352 million.  The new casino opened with over 100 mass tables, 50 VIP tables, and 400 slot machines.  The casino is situated within the L’Arc New World Hotel, a five-star unit with 301 rooms and 39 suites that covers 7,128 square meters.  SJM now operates 20 of Macau’s 33 casinos.


L’Arc represents a 3% and 4% increase to the Mass and VIP table count, respectively, in Macau.




Macau is to limit the commissions paid to junket operators to 1.25% of the VIP chips.  The policy will be implemented with current and future commissions, according to Francis Tam, Macau’s secretary for economics and finance in the government gazette yesterday.  Macau’s six gaming concessionaires lobbied the government for the change. The commission cap will cut casino operators’ costs.

Wage Inflation, not Deflation...

We have recently received several questions about the economic impact of wage increases.


In the charts below we show how the Average Hourly Earnings estimated by the Department of Labor has increased significantly on both a dollar and year-over-year basis. This reflects the significant increase in minimum wage among other things, and it is our view that as AHE continues to trend upwards it can only be additive to our call on Q4 accelerating inflation.


Wage Inflation, not Deflation...  - a1


Wage Inflation, not Deflation...  - a2


Although, on the margin, this is an inflationary factor, it would be wrong to interpret the data too broadly.  The total number of individuals who received a raise directly as a result of the increased minimum is estimated by some think tanks at as few as  4.5 Million, and that population will likely be heavily weighted in labor intensive portions of the service and manufacturing industries rather than spread across the economy as a whole.


Conference Board Manufacturing data for instance suggests that per-unit labor peaked at year end 08 and then fell off during the first half as layoffs continued and capacity remained slack–meaning that as wages have increased, total employment has declined and that the aggregate labor costs for industrials has been flat to negative.


Andrew Barber


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Risk Management: SP500 Levels, Refreshed...

So far, today’s intraday low for the SP500 flashed at 1057. With the US Dollar UP since early this morning, the reason for pressure on anything priced in Dollars is the same as it has been since March. This afternoon, the US Dollar is up less than it was this morning, so stocks are down less than they were this morning. Simple is as simple does.


The weakest of the 9 SP500 Sectors in our Sector Views Risk Management product are the 3 that anchor most on whether the Buck is Burning or not: XLB (Basic Materials), XLE (Energy), and XLF (Financials). With the SP500 at 1063 (at the time of my writing this), all 3 of those sectors are down -1% or more on the day.


Can the Federal Reserve stop the Buck from Burning on Wednesday? Of course they can. Signaling reality gets rates something north of ZERO. Something north of ZERO = US Dollars up, and everything REFLATION toned down…


XLV (Healthcare) is the only sector we are currently long in US Equities. It’s also the only sector of 9 that is up on the day. It’s defensive. After the SP500 makes a YTD high (Friday), we like defensive. We also like buying sectors that are offensive when they are down.


Where do we go next? Our Risk Management matrix has the immediate term TRADE lines of resistance and support at 1078 and 1054, respectively.


Prior to this morning’s open I said that the risk was outweighing the reward. However, as prices and other factors in my models change, I do. If 1054 on the SP500 holds, the reward will once again outrun tomorrow’s risk.



Keith R. McCullough
Chief Executive Officer


Risk Management: SP500 Levels, Refreshed...  - a1



Here are the MGM notes from our meetings in Las Vegas last week



CityCenter slots:

  • They are opening with baby steps on SBG. The service window, a portal for the customer at the slot machine, allows them to communicate players club info (points/free play), to educate the guest and advertise the hotel amenities, and to use it to market promotions. Over time, they will figure out how to better yield the floor/change demons/change min wagers
  • There are certainly challenges with interoperability. IGT/WMS imbedded the window into the games. BYI/ALL/Konami separate the window from the games. So the iViewDM will facilitate the server based window software on all BYI/ALL/Konami devices. Takeaway ability to change the number of min lines that you can bet on
  • Slot market shares:  WMS - 22.5%, IGT - 50%, BYI - 20%, ALL - 5%, Konami - 2.5%
  • Participation levels are at 8% - all the big players
  • 800 slots on the floor now were ordered in May.  1,940 slots currently will be on the floor. Pricing is the first thing they look at.  $17k is the average price - BYI - $10k for basic 3 reel standard. Barcrest - $30k bonus top products
  • The company uses IGT for accounting and marketing. IGT had invested the most capital into SBG




  • In 3Q/4Q09, tons of meetings were cancelled so the company thinks that 2010 will be better
  • Vegas is stealing a lot of business from other markets because it’s a lot cheaper there
  • Excalibur is sold out the last four weekends at $79 per night. All of it is last minute or walk in business
  • Harrah’s is sold out through October on weekends because they priced too low
  • The mood is better but there is still a way to go
  • It is difficult to push up rates, especially for leisure.  They would be happy to get a few percentage points of increase in 2010 ADR
  • MGM thinks 2010 will be better than 2009 for sure




  • Mandarin will price the highest. But their other rooms will likely price below or at Wynn’s level
  • Harmon will be finished out at the end of 2010
  • They will open the retail 50% full. The rest of the tenants will be in by April/May 2010. 90% of the space is contracted but the Tier I’s aren't complete. LVHM, Hermes, Tom Ford - anchors




  • They are doing $20mm of FCF
  • A new team recently put in place down there that found a lot of issues - control related (Side betting)
  • Property should be doing $250-300mm in EBITDA



Stock price:


  • An equity/convert deal now would make sense but Kerkorian may not want to be diluted
  • Shocked that their stock is getting bid up


Asset sales:

  • Bid/ask has narrowed a lot now
  • MGM thinks they can sell the Mirage for 10x
  • They wouldn't sell any Vegas assets now


Here are the LVS notes from our meetings last week in Las Vegas




  • LVS thinks that the mass business will grow in correlation with the GDP/infrastructure
  • VIP will be volatile
  • They are most bullish on Mass business
  • LVS won't be involved with Hengqin island development
  • Beijing wants to see the IPOs get done - pumping the numbers beforehand. The government also wants to see the Cotai strip get developed
  • LVS doesn't think they will loosen visitation restrictions. So basically the government is massaging the numbers to get IPOs and to get Cotai developed.  Guangdong was upset over the visa restrictions and people were getting killed over credit issues. It’s easy enough to come to Macau through a tour group
  • They don’t think that there is a correlation between visitation and gaming revenues for mass/VIP revenues.   90/10 rule - especially for Mass
  • Mass is more correlated to Chinese GDP growth.
  • Sands only has 20k visitors per day and they drop $600mm vs Venetian which does $700-800mm in Mass and has 50-60k visitors per day
  • Slots revenue is more correlated to visitation
  • Beijing just cares about job growth - that's why they want them to open Lots 5+6. They also know that in order for them to open they need to make some money.  Hence the motivation for allowing the selling of condos/selling of retail: LVS can reinvest in the strip
  • IPO will happen by year end - HK listing




  • MGM is trying to get the mass business moving
  • CoD doesn't have the mass play
  • Oceanus - location will be an advantage



Las Vegas:

  • It’s all about room rates for them
  • MGM is still being very aggressive – they don't want to have a lot of inventory for 2010 - so they can markup City Center rooms
  • Wynn sets the rate. LVS prices right below Wynn, and everyone else falls in line
  • If they can raise rates they will make a ton of money
  • LVS would rather go into 2010 with a lot of inventory
  • It took a while to get the Palazzo "running"
  • If City Center prices above Wynn/Encore - and fill - then it’s great for everyone
  • Room rates are firming but it’s just seasonal
  • They think that, following the Encore addition, Wynn had to go deep to sell their rooms



Balance Sheet

  • LVS will send back $1.4bn back to the states following IPO – they had $2.2bn of cash at 6/30 at the US subsidiary. 5.2bn, including 3.6bn of cash.
  • Without the Macau IPO there is no equity in the USA




  • $50mm of maintenance capex in Las Vegas
  • Venetian looks a little tired – they will need to invest some capital




  • LVS is trying to have a large credit operation in Singapore in order to operate a direct marketing business
  • Expecting Jakarta, Singapore, Bangkok, Kuala Lumpur - not so much China (less than 5%)
  • LVS can enforce a gambling debt in Singapore
  • They will have some junkets there but it is hard to qualify under Singapore law
  • We believe the lack of junkets will slow the ramp in Singapore
  • They would be surprised if they didn't have the same visitation as Sands although they are not sure that most of them will gamble because of the admissions tax
  • Focused on a February opening - but won't know until November. They will open with 1,000 hotel rooms when they open (February 28) - out of 2,850 rooms.  The remainder of them will open within 90 days of opening.  LVS will open with 50% of the retail, then up to 90% in 90 days and last 10% will slowly roll out
  • LVS thinks that just hotel and retail can do $250MM in EBITDA for a full year (down from 330MM because of a drop in RevPAR).  With respect to retail, they are happy to rent at $300 per foot.  $400 was the peak
  • They thought they could do ADR of $270 with 90% occupancy.  Currently it seems like the performance will be closer to ADR of $200 with 90% occupancy
  • To come into the casino one needs to pay 100 Singapore Dollars ($60) if you are Singaporean. It costs 2,000 Singapore Dollars for the year
  • They are not sure how long gaming will take to ramp.  For Sands Macau they have been building the business for two years
  • They think it will open very strong and keep growing as all the other attractions there open.
  • The cost will be $5.5bn US dollars
  • Genting will open first - will give them something – 2,000 will incentivize them to do only one