The Truth

Look at the means which a man employs, consider his motives, observe his pleasures. A man simply cannot conceal himself!

Its global this time, indeed. It’s ‘Macro Time’ out there too, so let’s get at it and take some proactive measures of leadership this morning. AIG collapsing last night reminds us all that you are only as safe as the quality of your management. Leadership and cash remain kings.

Not all cash is king. Asian or Eastern European cash is actually frightening right here and now. Alongside a terrorist attack overnight on the US Embassy in Yemen, we have an attack on King Dollar too. The unthinkable has been revealed – the oldest money market fund in America, the “Reserve Primary Fund” was levered long Lehman Debt! Welcome to the new rules of ‘You Tubing’ the US Financial system. After revealing the truth, the “Reserve” fund saw 60% of its assets liquidated. Who is managing your cash? JP Morgan and my mattress have mine.

Transparency, Accountability, and Trust – simple concepts, yet so difficult for the greed mongers out there to uphold. The aforementioned Confucius quote is classic and it’s ringing in the ears of American living rooms all of a sudden. I have looked into the whites of the eyes of plenty of Wall Street’s said leaders. Some are the highest integrity people I have ever met, but then there are the others – give a person a lot of money, and their true character is revealed.

Back to the global economy, Japan and Russia are giving out dump truck loads of cash in trying to stabilize their markets right now. I’m ok with the Nikkei rallying +1.2% overnight, primarily because we covered our Japan (EWJ ) short yesterday, and now I can re-short it higher. The facts remain the same in Japan – they run a government sponsored bailout program at every hint of economic duress, and continue to suffer a generational malaise of economic stagnation as a result. The Bank of Japan kept rates at a free money rate last night of 0.50% - that’s no surprise. What is a surprise is the expediency by which they are injecting Yen into their economy. After plowing another 1 Trillion Yen into its domestic money market last night, my scorecard has it at 4 massive cash injections in the last 2 days!

Russia is doing the same, and to zero avail. They are in the midst of halting the Russian stock market’s trading right here and now as the Russian Trading System Index is down another -6.4% this morning at 1058. Since our “Fading Fast Money” call on 5/19, the former KGB leadership has lost -57% of their country's stock market value. Since the beginning of September alone the RTSI is down -36%!! Between China trading down another -2.9% last night, taking its cumulative losses close to -70% since October, and the implosion in Brazilian and Indian equity markets, you don’t need Larry Kudlow to define whether or not these are called “crashes”. Remember, the bullish narrative of the acronym “BRIC”? I do. This global economic crisis looks more like a brick to the forehead.

Lehman, AIG and Linen’s & Things going under is all about the same thing, a complex system of interconnect global market factors that are colliding with one another. While CNBC is focused on AIG this morning, the governing coalition in the Ukraine is collapsing. The Ukrainian stock market was down -14% yesterday! It’s down -71% since January, and no one is talking about it! We hockey players have never been accused of being an overly intelligent bunch, but I for one can read a map. The economic contagion associated with the Russian fallout in Georgia is real.

I know, I know. Wall Street billionaire’s are the “smart” money. Who am I to call these said “leaders” onto the mat? Well, the good news is that more people are behind my proactive plan with each passing day. Confucius was intelligent, so take it from him rather than me - the lack of foresight, judgment, and leadership in our financial system can no longer be “concealed”.

I bought and covered 8 positions in the ‘Hedgeye Portfolio’ yesterday at the level that I issued in yesterday’s note (1172-1196 in the S&P500). I moved to 82% cash, down from 84%. I have a proactive risk management plan that I am happy to share with 100% transparency, and I execute against it. That’s it.

Keep it simple stupid is what you can say to me, and I am cool with that. Don’t forget to keep a “Trade” a trade however, all the while. Name calling is cool too – this is a full contact sport, and I can take a punch. Two hours until US market open game time. Let’s get at it.



My favorite response came from Ben Leong, Director, Business Development to my question regarding the Macau impact of the declining Chinese stock market: “Chinese invest in the stock market for the long term. Best way for Chinese to make money near term is to go to casino”. A different mindset from what I’m used to, but very instructive. Needless to say, they don’t believe the stock market decline has had any impact.

Nick Niglio, Neptune COO, provided most of the conference call commentary and it should not be taken lightly. Neptune is the number 2 junket operator in Macau and could soon be #1. The company operates 102 tables which will increase to 142 on October 5th through the addition of 40 tables at Galaxy’s Starworld. Neptune is currently in 6 properties in Macau with its best performing room at Wynn Macau.

  • I’ve had a negative outlook on Macau stocks for quite some time, with one exception: the visa situation. My contacts in Macau believe that a new 6 month visa restriction is NOT forthcoming. Mr. Niglio agrees. Beijing remains a bit of a black box but as I speculated in my 8/25 post “MACAU: QUID PRO QUO ON VISA RESTRICTIONS”, the timing of the announcement of aid to the earthquake stricken Sichuan province by the Macanese government was very interesting.
  • More positive commentary from Mr. Niglio. Neptune generated a 9% sequential increase in gaming volume from July to August, and he has seen no effect in September from the enacted 2 month visa restriction. Certainly, the impact on the operators’ mass market clientele will be greater than Neptune’s VIP business. However, the level of VIP volume is still encouraging.
  • As should be expected, government intervention was a key topic of the conference call. Mr. Niglio believes the 1.25% junket commission cap may be enacted in January. I’m still somewhat skeptical that anything formal will come out of the government but wouldn’t rule out “informal” pressure to conform.
  • It wasn’t all roses and chocolates. Mr. Niglio spoke about the potential negative Singapore impact on Macau. Neptune will likely benefit from the opening of that market and, in fact, the junket operator is already in discussions with Las Vegas Sands and Genting regarding a Neptune VIP room in both casinos. Other Macau junket operators are interested in Singapore as well. If you were a junket operator where would you bring your top players; Singapore with a VIP gaming tax rate of 5% or Macau at 35%?
Demand has kept up with supply recently but 9/1 visa restrictions will slow mass market growth

Marty’s Competitive Overlap

Here’s an overview of which footwear retailers have the most geographic overlap with Marty’s, which filed Chapter 11 yesterday.

The verdict? Largest overlap (5-mile radius) goes to Foot Locker (6.6%), Payless (4.6%) and DSW (3.9%). Finish Line and Famous Footwear are around 2.5%. Skechers brings up the rear at 0.6% -- though we can’t ignore the $172k receivable on SKX’s books that is at risk.

I can debate whether overlapping a bankrupt competitor is positive or negative – i.e. will it lead to more promotional behavior if the retailer stays alive, or will it rationalize industry capacity?

The answer depends on duration, which is unknown for now.

More important than any direct impact on any of these peers, my view on all this is that it simply shows how high-cost retailers in a low margin business with structurally weak asset turns simply cannot cut it when the supply chain starts to stress out like we’re seeing today. There will be more Marty’s, Steve and Barry’s and Shoe Pavilion’s. I think that this particularly highlights the risk to DSW’s business model, as well as all components of Brown Shoe.

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Unemployment Matters

Spurred by the casual dining traffic chart I posted yesterday, someone asked me a question earlier today about casual dining traffic trends and whether the more severe fall off in trends in July and August was a function of year-ago comparisons and could trends have actually bottomed. I charted the year-over-year traffic declines on a 2-year average and 3-year average basis, which shows that the declines have not stabilized, but in fact, have accelerated their move downward. Not surprisingly, these declines have coincided with the rise in unemployment rates.

As my partner Keith McCullough said on his portal on September 5th regarding August’s 6.1% unemployment rate, we are still in the early innings of an accelerating unemployment cycle. Unfortunately, as this number climbs, we should expect to see increased deterioration of traffic trends at casual dining restaurants because as this chart clearly shows, easy comparisons have not meant anything for some time now.


Pinnacle Entertainment pulled its application to build a $650 million casino resort in Wyandotte County, Kansas. The company beat the deadline to retrieve its $25 million deposit back from the state, a wise move in our opinion. While its pipeline of potential new projects is deep, PNK is actually committed to two: South St. Louis County (fully financed) and Sugarcane Bay (almost financed).

The risk factors of committing to Kansas were numerous: a dismal consumer outlook, potential smoking ban, high construction costs, and the likely removal of the $500 loss limit in nearby Missouri, to name a few. Most importantly, cost and access to capital make this (and most) projects untenable from an IRR perspective. This is consistent with one of our major themes: cost of capital is going much higher. I shutter to think what type of interest rate PNK would have to pay lenders to compensate for a 3rd definitive development in the pipeline.

Goldman (GS): Staying Short

To me, this has been, and continues to be, the most straightforward secular short thesis in the Hedgeye Portfolio. Wall Street’s operating structure is in the process of changing, and those captive to its current structure will have perpetual headaches to deal with, including competing with Research Edge.

There was nothing that Goldman's CFO, David Viniar, said on the GS conference call today that convinces me that they are not operating under the same compromised, constrained, and conflicted structure that the industry is struggling with. Conversely, Viniar reminded us all that they are very much hostage to the investment banking cycle, and as captive as they have ever been to the volatility implied in their Principal and Prop P&L's. It would have been interesting to get one of their prop traders on the conference call – but these guys aren’t into the transparency thing.

Goldman Sachs is a compensation structure that is proving to make a lot of money in bull markets, and losing an undeterminable amount in down markets. They have not been public across cycles of economic crisis, so the jury is still out on how much money they can lose peak to trough. Today, they printed a down -40% number in their investment banking division and a nasty -67% one in their Trading & Principal division. While Viniar admitted on the call that they may take down risk in a "tactical" way, he refused to imply that they will change their strategies. They don’t consider risk in the same way that I proactively manage it, so this is confusing to me altogether.

There are levered long bull market strategies, and then there are those that can protect and preserve capital in times like this. Great investors evolve. Goldman's prop businesses sound like they don't think they need to. That's plain scary, and I am excited to wakeup competing them every day. They have nothing but market share to give us.

The stock has rallied from $118/share on the open. You should sell it here. On Sunday, my downside target was $147.43. As the facts change, I do, and after listening to their conference call today, I'm going to move that immediate target price to $117.72.


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