• run with the bulls

    get your first month

    of hedgeye free


US Strategy – Churning

The Financials (XLF) went from the worst performing sector on Wednesday to the best performing sector yesterday.  As a result, the XLF moved back to bullish TRADE and TREND.  Yesterday, the S&P 500 closed at 1,093, up 1.1%.  So much for the big "correction," CRASH CALLERS got run over again!   


On the MACRO front, the markets support came from a key batch of economic data out of China that helped put the global RECOVERY trade on the front burner. Also, the trend of better-than-expected Q3 earnings continued yesterday, especially in Technology and Healthcare. A bounce in the dollar early in the day, weighed on The Energy sector. 


Yesterday, initial jobless claims rose 11,000 to 531,000 for the week-ended October 17th.  Although the four-week moving average continued to trend lower.  Lastly on the MACRO front, leading indicators rose a better-than-expected 1% month to month in September, marking a sixth consecutive monthly increase.


The portfolio activity included buying the Taiwan Index fund (EWT) and shorting the Consumer Discretionary (XLY).  We bought more SONC and shorted Nokia (NOK).  From a Research perspective, Rebecca Runkle remains bearish on both NOK and RIMM; she likes AAPL and MOT.  Nokia is up here on the day, so we'll take that as our entry point.


Yesterday, only three sectors outperformed the S&P 500 and every sector was up on the day.   The three best performing sectors were Financials (XLF), Consumer Discretionary (XLY) and Materials (XLB), while Energy (XLE), Consumer Staples (XLP) and Utilities (XLU) were the bottom three. 


The NAR is due to report at 10am existing homes sales.  A Bloomberg survey suggests that sales improved in September to the highest level in two years.  The survey suggests that sales rose 4.9% to a 5.35 million annual rate; the improvement would be the fifth in six months. 


Today, the set up for the S&P 500 is: TRADE (1,071) and TREND is positive (1,009).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 9 of 9 sectors are positive from the TRADE duration.  Yesterday, the Financials moved back to positive on both durations.           


The Research Edge Quant models have 1.0% upside and 2.0% downside in the S&P 500.  At the time of writing the major market futures were up. 


The Research Edge MACRO team.



US Strategy – Churning	 - charthp1


US Strategy – Churning	 - s pperf

US Strategy – Churning	 - s plevels




The Macau Metro Monitor.  October 23rd, 2009


VENETIAN CLOSE TO FINANCING LOT 5&6 destination-macau.com


LVS is close to obtaining US$2 billion in financing that would allow it to finish Lots 5&6.  Sands is willing to contribute additional equity to its hotel and casino project on Macau’s Cotai Strip, on top of the US$1.6 billion it’s already spent.  Leven estimates that the total cost of finishing Lots 5&6 would be about US$3.6 billion and the project should be finished by June 2011.  Commentators have said that junket operators’ ability to lend is strengthening amidst higher real estate prices, which is driving revenue growth in Macau.   


DM agrees with LVS president Mike Leven’s assertion that Lot 5&6 will be a “game-changer” for the company and for Cotai.  Leven said, of the 21,000-room hotel and casino complex on Macau’s Cotai Strip, “We believe it’s the game changer and that’s why we want to finish it… It’s key to our growth in Macau, and it’s key for Macau’s differentiation, to make Cotai a destination” for meetings and conventions.


DM does not believe the Venetian’s line that the additional rooms will cause the MICE (Meetings, Incentive travel, Conferences, and Exhibitions) business to take off; although Lots 5&6 significantly shift the center of gravity from the peninsula out to Cotai, regional neighbors will still maintain the upper hand in the MICE industry.


While the Cotai Strip will certainly gain traction with the opening of Lots 5&6, “downtown” could well hold its own.  First of all, L’Arc has shown the advantage of proximity.  Steve Wynn has apparently mentioned the possibility of hosting street parties in conjunction with his neighbors, drawing on his experience with the downtown area of Las Vegas.  DM also suggests that if Wynn, StarWorld, L’Arc and MGM were joined by a fifth in the now-empty lot (owned by SJM) facing MGM Grand, we would have a real “Macau Strip”.




SLOWDOWN IN SINGAPORE destination-macau.com

Marina Bay Sands is going to open way behind schedule, leaving ResortsWorld Sentosa a significant headstart in the Singapore integrated resort race.  Recently in Hong Kong, the Genting-owned group stuck to its prediction of a 1Q09 soft-opening.   Some commentators believe that this gives RWS a market share benefit because local Singaporeans will be obligated to pay entry fees and will be tempted to buy annual passes that lock them in to RWS’ loyalty program.  DM believes that this theory is overblown and that loyalties will take more than a few months for loyalties to be ingrained.  Besides, despite RWS having an advantage, in the end most people will probably go to both. 


DM is skeptical about the earning potential of these resorts.  MBS will not, as many have claimed, earn as much gaming revenue as the Venetian Macao within a year of opening.  Singapore does not have the market Macau has to draw upon.




ONE CENTRAL OPENING UP SOON destination-macau.com

One Central has begun moving people into its apartments.  The retail mall will open in December, and the Mandarin Oriental is still months behind but will, according to sources, be “worth the wait” and the hotel and serviced apartments will exceed the highest of expectations.  While the combination of corporate cultures that was necessary to make this project happen was no doubt difficult, there is a keen sense of anticipation around the opening. 




GALAXY: THE FAVORED ONE? destination-macau.com

While Galaxy Entertainment Group has enjoyed some good fortune over the last 7 years, DM suggests that the treatment it has received from the government has also worked in the company’s favor.  One example is the direction of the traffic flow around the StarWorld Hotel and Casino, which, according to DM is “as favorable as one can get”.  MGM Grand, by contrast, is not so fortunate; visitors to their property have to Take a long detour to arrive at the property’s front entrance.


Galaxy being allowed by the government to transfer its tenancy rights of its land in Macau to a third party while the land is under development has frustrated some of its competitors.  Ambrose Ho, as SJM, and Pansy Ho, partner of MGM have both suggested that this may not be fair. 





The commission cap will start in December and will cover both turnover and revenue-share agreements.  It’s 1.25% on turnover or 44% of revenues that can be paid to a third-party promoter.  No more than 40% can be discounted on the registered rack rate for rooms and F&B.


Interestingly, the Big Six will be required to “report” their credit arrangements with the junkets. No cap will be put on credit lines – yet.




SJM SUCCESSION PLAN: A THEORY destination-macau.com

Uncertainty around the future of SJM, the future of the relationships between the satellite casinos and the company, the future of its majority shareholder, STDM, has been rife in light of Stanley Ho’s recent illness.  DM has faith in the current CEO of SJM Holdings, Ambrose So, to continue to hold it all together.  He has also raised HK$2 billion from capital markets along the way.  While So runs the daily operations, it is unclear who will take over as chairman.  The three oft-mentioned candidates are Pansy Ho, Lawrence Ho and Angela Leong.  Lawrence Ho has expressed his openness to taking over the reins as long as he can take care of his shareholders at the same time, which leads DM to speculate on some sort of merger deal between MPEL and SJM. 











A Passionate Amateur

“I can fairly be called an amateur because I do what I do, in the original sense of the word - for love, because I love it.”
-David McCullough

Yesterday, I was listening to American novelist, Kurt Andersen (author of Reset), speak at a thinkers event up here in Maine. He spoke about a lot of things that resonated with me about this country. One was that old trees of perceived wisdom continue to fall. Another was that reinventing America might best be accomplished by empowering what he calls our “Passionate Amateurs”
Per Wikipedia, an amateur “is generally considered a person attached to a particular pursuit, study, or science, without formal training or pay. Translated from its French origin to the English "lover", the term "amateur" reflects a voluntary motivation to work as a result of personal interest in the activity.”
In terms of pay, most people know that I really don’t pay myself. In terms of pursuit, most people know that I have a passion to win. In terms of perception, well… most people are going to think what they think. Call me a lover. Call me a fighter. Call me an amateur. I’m cool with whatever.
When it comes to writing, I am definitely an amateur – and I’m cool with that too. Amateurs like me are allowed to break rules. We’re allowed to call people out. We’re allowed to instigate the fights and conversations that no one on Wall Street’s compensation committee is allowed to have. We don’t have a boss.
In 1996, Kurt Andersen got fired as editor-in-chief at the New York Magazine for refusing to back down on a story about the investment banking club of Henry Kravis (KKR controlled the parent company of the magazine). The rest is history. Now Andersen doesn’t have a boss either.
Behavioral Economist, Dan Ariely (author of Predictably Irrational) was also at yesterday’s event. Dan is an amateur too. He has a passion for explaining the obvious in terms that people with common sense can absorb. Recently, he’s taken his conclusions on the incentive/performance issue to Wall Street executives. They liked his book, but they didn’t like the idea of applying the solutions from his book to their compensation structures.
Ariely’s basic conclusion is that Wall Street banking executives genuinely believe that they aren’t amateurs at all. In fact, some deem themselves to be so “professional” that they are “really special” and “different” from the rest of us. They have an innate ability to be incentivized under stress.
Anyone who is allowed to think clearly finds this rather funny of course. It’s like one giant global magnetic force has sucked all of these super special human minds into the one place where these “professional” performers can be paid. To prove his basic point, Ariely tested NBA “clutch” players to see if this God-given ability to perform under stress was more of a belief versus a reality. I’ll save you the required reading - these are simply beliefs.
Never mind the behavioral MIT guy, or me, or the other Passionate Amateurs out there who are calling this out. This morning, turning back to the almighty Groupthink Channel, this is what Ken Langone’s belief is on the topic of executive pay: “The taxpayers have an enormous financial risk in these companies, and very simply stated, I want the best person. If I needed neurosurgery, I would want the finest doctor I could get, no matter what I had to pay for it.”
That’s cool Ken, but guess what? There aren’t many neurosurgeons running Wall Street’s investment banks anymore.

I think that the topic of executive pay has explosive ramifications for this country. An “Us versus Them” society won’t end well. After the Gong Show you’ve witnessed in Wall Street’s ability to miss both the crash and the recovery in the last 18 months, America is not going to reinvent herself by relying on the perceived wisdoms of the “professionals” that chased this market to its October 2008 lows or this morning’s highs.
It’s time for The Passionate Amateur in all of us to take some cold water, slap it on our face, and look in the mirror. If you still think you are super human, do that again. It’s time to wake up and see this US Financial System for what we made it - broken.
I don’t agree with every part of Kurt Andersen’s utopia, but I agree with him on this: It’s time to fall in love again. It’s time to fall in love with the American principles of Franklin and Jefferson who, when it came to finance at least, were some of the greatest amateurs Wall Street or Washington has ever empowered.

My amateur call yesterday was to stay short the US Dollar and buy weakness in anything priced in dollars. Provided that the Buck’s Credibility continues to Burn, in a perverse way, we will keep getting paid. I don’t feel passionate about that part. But on Wall Street, I guess it’s better than being wrong.
My immediate term support and resistance lines for the SP500 are now 1071 and 1104, respectively.

Best of luck out there today and enjoy your time this weekend with your families,



EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

XLU – SPDR Utilities We bought low beta Utilities on discount (down 1%) on 10/20. Bullish formation for XLU across durations.

FXC – CurrencyShares Canadian Dollar We bought the Canadian Dollar on a big pullback on 10/20. The currency ETF traded down -2%, but the TRADE and TREND lines are holding up next to Daryl Jones’ recent note on the Canadian economy.

EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. 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.

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. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

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.

XLY – SPDR Consumer Discretionary Consumer Discretionary has rallied from the freak-out “short everything consumer” lows, prompting a short on 10/22 as a hedge for a TRADE.

UUP – PowerShares US Dollar
We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.

FXB – CurrencyShares British Pound Sterling The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

XLP – SPDR Consumer Staples Strong day for Consumer Staples on 10/16, prompting a short versus our low beta long position in Utilities (XLU).

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.

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%

CMG – As Good As it gets

CMG reported 3Q09 earnings of $1.08, easily beating the street’s $0.86 per share estimate.  The company’s same-store sales growth of 2.7% came in better than analysts’ estimates as well.  Both restaurant-level and EBIT margins grew in excess of 400 bps YOY.  It was a strong quarter.  Unfortunately, I just don’t see any upside from here. 


Margins should continue to grow in the fourth quarter, though to a lesser degree than what we saw in 3Q09, and will likely turn negative in 2010 as early as the first quarter.  CMG’s same-store sales growth has held up this year relative to its peers, posting positive numbers on top of the 6% growth in the prior year, but results have been buoyed by the 6% menu price increase the company implemented in 4Q08. 


In 3Q09, the 2.7% comp was driven by the 6% price increase, -1% mix and a 2.5% decline in traffic.  So although CMG’s comps have remained stronger than some of its peers, the 6% menu increase has helped to cushion the traffic declines.  CMG is losing guests and market share.  That being said, it is impressive that traffic has not fallen off more in light of the huge menu price increase in this environment.


In the fourth quarter, more than half of this 6.0% price increase is rolling off (leaving 2.5% of price in 4Q and flat pricing come Q1).  Management is not currently planning to implement any additional pricing in 2010 so overall comparable sales growth will begin to move more with traffic growth.  And, as management stated on the earnings call, there is no evidence yet that consumer discretionary spending has returned.  Management guided to flat transactions and sales comp trends in 2010. 

This lack of pricing combined with management’s expectation for low single digit food cost inflation and 2%-3% wage inflation next year does not bode well for margins.  Like I said before, I just don’t see how things get better from here unless, of course, we see a real improvement in consumer spending.


In 2010, CMG currently plans to open 120-130 new restaurants, even with the expected level of openings in 2009.  However, due to the “recent pressure on developers and the corresponding reduction in number of new developments currently available for [CMG] to buy or lease” (as cited by the company), CMG is now pursuing a new real estate strategy.  In the past, the company only opened restaurants in what it deemed “tier 1” trade areas.  Going forward, management plans to still open about two-thirds of its new units in these “tier 1” areas, but due to the limited number of opportunities, it will also pursue what it is calling “A model sites,” which it says are “tier two trade areas which still have attractive demographics typically characterized by lower occupancy costs and develop for a substantially lower investment cost.”


Tier 2 sites are still expected to achieve cash on cash returns in the mid 30% range because the lower development, occupancy and operating costs will offset the lower expected sales volumes.  These new “A model sites” will not pose a problem should they generate the expected returns, but it always concerns me when a restaurant operator appears to be compromising its real estate decisions in order to maintain growth.  The fact that the company said it will pursue as many tier 1 locations as it can implies that they are still the preferred sites so these tier 2 locations signal less discipline on the part of the company for the sake of maintaining growth.  These types of compromised real estate decisions often lead to declining returns.  And, it is typically a bad sign when management teams start getting asked questions about possible sales cannibalization…


We have seen how that plays out and it is not good.


CMG – As Good As it gets - cmgebit


Scary Footwear/Apparel Bifurcation Continues

Its spooky how much athletic footwear sales are lagging behind apparel sales and total retail sales.



Another week down and footwear remains in a steady state of decline while apparel and total retail sales surge. Part of the relative strength in apparel is licensed apparel, as we noted earlier. We’re also seeing strength in cold weather apparel across the board.  Think about it… when it gets cold earlier in the season like we have see recently, you buy apparel, not a $200 pair of snow boots. But even after all the puts and takes, the weak athletic footwear trends are notable in light of strength we’re seeing in other footwear channels (like Payless, DSW, and Department Stores).


Zach Brown

Darius Dale


Scary Footwear/Apparel Bifurcation Continues - 1


Scary Footwear/Apparel Bifurcation Continues - 2


Scary Footwear/Apparel Bifurcation Continues - 3

COLM: Key Callouts into the Print

This 4Q number is not a slam-dunk. But its outlook should be less conservative than we usually hear from COLM. There are still issues here…but things might be aligning to start 'going their way.’



COLM is a tough one heading into this quarter. We all know their shtick…blow away the quarter, but guide down.  I’m not sure we’ll get that this time. In fact, we could get a bit of the opposite.  Why? There’s not as much wiggle room to smoke this quarter. On one hand, the company is keeping order trends very tight, and is not producing enough to beef up its ‘at once’ business. So revenue should track backlog fairly well. That means top line down close to double digits, but it also means less volatility on the gross margin line. But on the flip side, last quarter COLM ended with +8% growth in inventories, and -15.5% revenue/backlog growth.  That’s not exactly a bullish 3Q GM setup either. 


The saving grace this quarter? Outerwear has started off on a very positive note, as has winter-related sportswear. Blame it on the weather, but either way, it’s a fact. The maps below are tough to argue with. When we layer a little cold snap on top of lean inventories at retail (COLM will have cleared out its inventory by qtr end), the brand’s performance at retail inflecting to the upside, and FX finally reversing – we’re setting the stage here for backlog to begin to creep higher with bullish Gross Margin implications for FY10.


The stock is still largely hated, with 1 Buy, 3 Sells, 7 Holds, and 23% of the float short. Fundamentally, I think that this company has problems with how it approaches branding as it perennially has too many ‘huge opportunities’ for its content (i.e. never realized due to poor execution or lack of capital commitment). In other words, it is at the mercy of the market, instead of the other way around.  But the reality is that COLM will go through 1-2-year stretches where things just ‘go its way.’  This might be the beginning of one of them.


COLM: Key Callouts into the Print - COLM REV SPORTSCAN




COLM: Key Callouts into the Print - 10 22 2009 11 37 29 AM