“I’d rather be hated for who I am, than loved for who I am not.”
-Kurt Cobain
Kurt Cobain was the lead singer and songwriter of Nirvana. He left this world early in life. He was 27 years old. His Nirvana lives on however, having sold over 50 million albums worldwide.
Other than living vicariously through the aforementioned quote, the only thing I have in common with Cobain was my college hair-do. I am not sure if he used a blow dryer, but I definitely did. I think that’s when I first thought about risk management. Of the hockey mullet that is…
Per our friends at Wikipedia, Nirvana is a “Pali word that means blowing out – that is, blowing out the fires of greed, hatred, and delusion.” When I think about the US stock market rally of 2009, I think of the opposite of that. This may be the most hated rally ever.
Hate? Yes, newsflash: people hate this rally. They hate that they missed it. They hate who gets paid by it. They hate everything about it.
I think he was quoting Neil Young, but another Cobain line that I have taped in my notebooks is that “it’s better to burn out than fade away.” That’s definitely the way that some of the short sellers of everything Depressionista better feel right here and now. If they genuinely believed in their shorts that is. As my Resident Bear, Howard Penney, reminded us all yesterday – timing your shorts was everything.
The YTD closing high for the SP500 is barely a week old. If you hate everything about this rally, you probably hate that you didn’t short the top too. Tops are processes, not points. So far, the SP500 has corrected -3.1% from its YTD high, and is +57.2% from its low.
In the intermediate term, I think that a strengthened US currency will be bullish. In the immediate term, it’s going to get your REFLATION longs more hammered than Cobain might be after a big show. Some of the ideologues like Larry Kudlow hate considering duration versus market price. Why? Because they want “King Dollar” back, but they perpetually want the stock market going up too. Sorry guys – that’s not the way the math works.
For the week to date, the US Dollar is up +1.1%. For the week to date, the SP500 is down -1.5%. Dollar up = stocks down, Larry. That’s the immediate term TRADE. Don’t hate me for it. Don’t love me for who I, or this dominant macro inverse correlation, are not.
I can give you as long a list as anyone as to why the Buck will continue to Burn from an intermediate term TREND and long term TAIL perspective. Those resistance levels for the US Dollar Index are now $77.79 (TREND) and $82.16 (TAIL), respectively. On those two durations, the Dollar remains broken.
However, in the immediate term, I can add to some of Penney’s thoughts on why we might have a Bombed Out Buck – this is, incidentally, one of our team’s three Q4 Macro Themes – what could put a short term bottom in the Burning Buck?
1.      Insider Trading – whether we cart these guys out in green sweater sets or orange jump suits, it is credibility bullish for the Dollar

2.      Too Big to Fail Legislation – the proposal to spread the hate to all banks with more than $10B in assets is less bad for the Fed’s Balance Sheet

3.      Rate Rotation – another one of our Q4 Macro Themes remains that the Fed has to move to where marked-to-market prices have, and raise rates

The biggest problem with these 3 points is the one some of the perma-bulls hate - duration. Remember, a lot of these people who have never seen a bull market that they didn’t like will tell you that they “can’t time markets” and that they “invest for the long run.” People whose money they lost hate that narrative fallacy too.
Hate is not cool, but the American public hates everything about this rally too. “Can’t time markets” means people don’t have a real-time process to manage risk. “Invest for the long run” gets the asset manager paid, not the client.
For most of this year, I’ve been annoying the hedgie girls with my hair blowing line of ‘Burning Buck means that the Debtors, Bankers, and Politicians get paid, and the Creditors/Consumers pay the bills.’ Don’t hate me for it – look at the recent data – America has voted:
1.       Last night’s NBC/Wall Street Journal poll has 64% of Americans saying that Dow 10,000 “doesn’t mean much”

2.       This morning’s ABC/Washington Post consumer confidence reading is at -51, down for the 3rd consecutive week

3.       Yesterday’s monthly consumer confidence reading for October came in at another lower-high, and down month to month

The New Reality isn’t that people hate the truth. It’s that Washington and Wall Street have to finally face it. Hating the US Financial System that we built is something that we have to all take a long hard look in the mirror at and think about.
For now, all I can do is tell you what I see in the US stock market. The SP500 has broken its immediate term TRADE line (1067) and the US Dollar is up again this morning, testing a breakout above its immediate term TRADE line ($76.20). For now, that’s bearish for mostly anything priced in US Dollars. For now, we need to stop hating the idea that the immediate term fix to this compromised US Financial System is going to cost us something.
This country’s Nirvana needs to find its love of American principles again. And that isn’t going to be found by empowering those who put us in this environment that we all hate to begin with.
My immediate term support/resistance lines for the SP500 now move to 1049 and 1084, respectively.
Best of luck out there today,


EWZ – iShares Brazil
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 reflation call.

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.

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.

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.

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.

NKE: A Look At Insider Selling

A lot of people have asked me recently about insider selling at Nike. Here’s some history as to the one-two punch of insider selling vs. company stock repo. There are some key considerations this time around.



Phil Knight is such an icon in the footwear industry – not to mention the holder with majority voting interest. Mr. Knight has not been a ‘serial seller’ of his stock, and in fact hardly sold any in the open market in the first 30-years of his company’s existence. But since he began, he’s sold stock equating proceeds of about $2.5bn (yes – BILLION). Kind of mind-numbing, really, for a guy that started to sell shoes out of a van.  Here’s the part where I bring up that these sales are under a 10b5-1 plan, meaning that it is not Mr. Knight that pulls the trigger, but rather a financial advisor that handles Mr. Knight’s estate planning. Like it or not, the guy is good. His timing has been far better than plans we’ve seen for other executives in retail as well as other industries. But what does that mean? Regardless of who is pulling the trigger, these sales have been timed well in the past.


NKE: A Look At Insider Selling - Phil Knight solo


What’s interesting is that it’s been 17 months since he’s sold a single share. It has been a rarity to see a plan like this executed over time just before a meaningful near-term run up in the stock.


It’s interesting to stack this up against Nike’s own repurchase activity. The facts and numbers don’t lie on this one. In all but one traunch of Mr. Knight’s arms-length selling, Nike was in the market buying shares. Perhaps this is as simple as the company offensively using its bullet-proof balance sheet to mitigate volatility among investor concern about its Chairman selling stock. What we also know is that NKE has not repo’d any shares of substance since Oct 2008. We don’t know the current quarter’s numbers yet. But I’ll be concerned if we see the company not buying any stock, while insiders are selling, AND cash is sitting on its books collecting less than 1% interest.


NKE: A Look At Insider Selling - Phil Knight   NKE Repo Activity


Definitely something to consider.


Darius Dale

The Chinese Consumer – What is wrong with MCD and YUM?

I found it somewhat interesting that the CEOs of YUM and MCD both blamed poor same-store sales trends on the Chinese economy that grew 9% in 3Q09. 


Anecdotal evidence of the behavior of the Chinese consumer is very difficult to come by.  Today, I read an interesting survey on the Chinese consumer and it completely contradicts what the management teams of both YUM and MCD are saying about what is impacting their business.


First, YUM Brands CEO David Novak said on the company’s 3Q09 conference call that “I don't know when the China economy will improve, my guess is that it will strengthen before the rest of the world.”


More to the point, I specifically asked MCD’s management during its 3Q09 earnings call why it felt the need to pull back on China unit growth when GDP grew nearly 9% last quarter.  The answer was so flip I felt like I was dismissed as being uninformed about the Chinese economy. 


Here is MCD’s response to my question...  “GDP in China is very much driven by infrastructure investment.  So you've got to separate GDP from consumer spending.  Two different animals and then, worry is growing around the country.  So the Chinese consumer is a big saver when they're worried about what's going on, and so we've seen that.  We're not going to chase the traffic there from a significant price point of view.  And so, we see the consumer coming back there, so it's not any kind of long-term concern but the GDP numbers that you hear are the level of infrastructure investment that's being put in along with incentives for things like car buying, et cetera, which do not affect the consumer every day on the retail side.  And so, we modeled on the retail data and plan ourselves accordingly.”


MCD went so far as to cut back unit development in China and YUM did not.  I have thought that YUM should do this for six months now, but management suggests that I should not think like a typical US-centric restaurant analyst and I need to view China differently.  Time will tell.


Over the years I have found BIGresearch very helpful in detecting consumer trends here in the US.  BIGresearch just recently published a poll on the Chinese consumer that makes me question what both YUM and MCD are saying about the Chinese consumer.  Although both companies stated that they are seeing signs of improvement in China, both companies are expecting some softness to remain in the near-term as a result of the relatively weak consumer. 


According to the BIGresearch poll “The effects of a global recession continue to be felt around the world, except maybe China, where credit is flowing, and consumer confidence is rising and young Chinese consumers are planning to spend money.”


According to BIGresearch’s 17th China Quarterly, of which there were 12,641 18-34 year olds and 15,168 total respondents, 64.7% of Chinese Consumers 18-34 are confident/very confident in the chances for a strong economy versus 61.3% in Q2 2009, and up almost 40% from Q4 2008.  It would make sense that this sequential improvement in consumer sentiment would be reflected in MCD’s and YUM’s China results, but YUM’s same-store sales growth in China continued to decline in 3Q09 on a 2-year average basis and MCD’s comps are still running negative. 


According to the survey, “The improving trend likely reflects the success of the large stimulus package introduced by the government in early 2009.”  But there is no love for KFC or McDonald’s! 


The survey goes on to say “the young Chinese consumers have a higher propensity to buy a new vehicle or make a big dollar purchase than Americans the same age, which could be due to growing credit markets in China. For example, 24% of Chinese Consumers say they are planning to buy/lease a vehicle in the next six months, up 22.0% quarter-over-quarter, and a whopping 64.7% year-over-year. This compares to 13.4% of 18-34 year old Americans who say the same.  It appears that the young Chinese consumer economic outlook has started to improve.”


As compared to the US consumer, the Chinese confidence in the economy is increasing and their outlook regarding employment is better.  If we saw the same trends in the US, nobody would be making excuses for poor trends.  Instead, we all would be asking what is wrong with the concept.  Right now, both companies are getting a free pass on trends in China.

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US Consumer: Lower-Highs...

On US Consumer spending slowing sequentially, Howard Penney has been as right as the rain feels today in New Haven. If some people don’t understand that the Dollar Down doesn’t get everyone paid at this point, some of those people probably wouldn’t know they are getting wet when rained on either.


The better balance of the rally in stocks since the summer’s highs had everything to do with a US Dollar debasement. We called this Burning the Buck. As the Buck Burns, Debtors and Bankers get paid – the Consumers and Creditors pay the bill.


While I have covered our short positions in both US Consumer ETFs in the last 2 days (XLP and XLY), that was simply because they were down. I will re-short them, at a price. This is not a V-shaped or squiggly shaped Cinderella US Economic recovery. It’s the same kind of recovery we have had in 11 out of the last 11 recessions – 1 to 2 quarters in length, then the US Consumer will call it from there. Stay tuned.


For now, Consumer Confidence continues to make a series of lower-highs (see charts below). Americans are not as stupid as Washington thinks they are.



Keith R. McCullough
Chief Executive Officer


US Consumer: Lower-Highs...  - a1


BYD Gaming Q3 Conf Call



Soft quarter for BYD, particularly in the Las Vegas locals market, in both revenues and EBITDA.  The table below presents our view of the Adjusted EBITDA comparisons.  BYD missed our EBITDA estimate by almost $2 million driven by lower revenues. The Borgata EBITDA was surprising high.  YoY EBITDA actually increased 13% driven by lower operating expenses.


The company reported their own Adjusted EBITDA number $96.6 million which was below the Street at $104.3 million.  Revenues of $398 million fell below the Street at $413 million.


Two other takeaways from the release: 

  1. Echelon construction likely won’t be resumed for 3-5 years.  This is probably a positive.
  2. Spend per visit continues to decline – we’ve highlighted this in past posts and is consistent with our thesis on consumer spending.

We still don’t like the regionals (gas prices will be a huge headwind) and this release provided some corroboration of our thesis.  However, BYD at lower levels will start to look interesting given the attractive free cash flow profile. 






  • Reengineered business model
    • Cost efficiency – y-o-y improvement in operating margin and EBITDA at 3 out of 4 business units
    • LV locals market was the only negative standout
    • Las Vegas market is very challenging, won’t be bad forever. Confidence in long-term.  More cost efficiency will improve bottom line on rebound
  • Echelon halted for 3-5 years.  Reasons:
    • Long, deep recession
    • Consumer spending patterns changed for the worst
    • New supply (10k + new rooms) with depressed demand
    • Financing unavailable
    • Long term LV strategy remains intact
  • STN
    • Bankruptcy process costly and drags out
    • STN trying to restructure for nearly a year, no agreement yet
    • Ready to begin due diligence as soon as permitted
    • The bid is serious and BYD has capability to execute a transaction in the best interest of customers, employees, and Las Vegas.
    • Strategically fits BYD’s plan, makes sense for BYD shareholders 


  • High unemployment – 14%
  • Depressed house prices – 50% from peak
  • Lower spend per visit
  • Traditional summer seasonality
    • Very soft August (over half of $14 million EBITDA decline was from August)
  • Declines in ADR decreased EBITDA significantly
  • September saw a moderation in performance 



  • EBITDA rose yoy for third quarter in a row
  • Hawaiians coming
  • Hawaiian charter had little yoy effect, growth was due to operating growth


  • Market share growing
  • Delta downs tough comps in 4Q and going forward so recent growth rate will slow
  • LA lacks incremental demand needed to absorb more supply
  • Blue Chip EBITDA up 20% in Q3


  • EBITDA grew from focus on margin improvement and pursuing more profitable revenues
  • 18.9% marketshare in Sept., up 1.1%
  • Stabilization trend continued in 3Q.
  • Maximized EBITDA in reduced consumer spending environment


Balance sheet

  • Leverage was below 6.0x vs. 6.5x covenant. 
  • No capitalized interest ($10m last year)
  • Borgata leverage 2.6x. Covenant calc benefited from gain on insurance settlement due to water club fire.
  • Will remain in compliance with financial covenants
  • Reduced debt by $50 from Q2 to end of Q3



  • Tax rate will be the same in Q4 as Q3
  • Expect Borgata to pay larger distribution to its partners in Q4 as a result of insurance settlement
  • Borgata paid out dividend of $3.2 million in Q3



  • Any Echelon costs lingering in quarters going forward?
    • Only costs now are normal recurring of ~$15m this year and less in the following years. Very limited capex for Echelon going forward- $20MM in 2010
  • AC smoking ban               
    • Awaiting city council decision
    • Hoping for 25% of casino floor to be allowed to smoke
  • Sept moderated…was October better also?
    • We’ll see where it plays out. Gets slower past Thanksgiving. Withholding comment on 4Q for now
  • 3.6m gain from debt repurchases? Which notes were bought?
    • 30 m worth of bonds in 3Q – equally split between each of the three issues
  • Echelon. 3-5 years, will there be a skin put on it? Will anything be done to protect structure?
    • It’s in Vegas, good climate so little needs to be done. We’ll monitor it, though.
  • Weighing the prospective STN acquisition with other opportunities in new gaming jurisdictions? Distressed markets? Walk us through analytical approach to those? How does STN weigh out better?
    • We look at many opportunities each week. We see if they fit our strategy…if the market is growing…if it’s a good prospective market…our focus on STN does not preclude us from looking at other assets. We’ve looked at distressed assets and either we don’t like the asset, the market, or the price. We’re looking though.
    • Valuations can be appealing in this economy, but we are in an environment where acquisitions are more appealing than developments but that doesn’t mean we don’t look out for development opportunities
  • Interested in other locals properties aside from STN?
    • Sure ... if there was anything available that made sense
  • Blue Chip performance?
    • Summer is the peak season
    • Was up 20% of EBITDA, despite new Indian casino opening in August (Firekeepers)
    • Should continue to show growth in winter months
  • Plans for Dania?
    • Continue to monitor the market, and the state of the compact with the Seminoles
    • Waiting for the right time to make an investment there


Today’s Case-Shiller report showed that the composite index of home prices in 20 metropolitan areas rose 1.2% month-to month in August, above the consensus estimate of a 0.7% increase.  The magnitude of the increase, however, declined on a sequential basis for the first time in four months.  In July, the index improved 1.6% month-to-month.  Nonetheless, the rate of annual decline in home price values continues to improve. 


The question about whether these trends will continue to show sequential improvement rests on the upcoming November 30 expiration of the government's $8,000 tax credit for first-time home buyers.  Also impacting these housing numbers are the anticipated higher unemployment rates through year-end and the apparent trend toward lower consumer confidence numbers, which was more evident today following the disappointing conference board reading. 


These issues, coupled with a new wave of foreclosures hitting the housing market in early 2010, suggest that the improvement in pricing trends are sure to slow down and may even begin to deteriorate further.


As always, any discussion about Case-Shiller needs the disclaimer that the data we are looking at is for August 2009.  The more recent data that we have seen from the homebuilders and the housing market in general suggests that the trend is slowing.    Two weeks ago, it was reported that the National Association of Homebuilders housing market index dipped to 18 in October from 19 in September, falling below market expectations for a reading of 20.  While the index has improved significantly from the January 2009 reading of 8, it is only up from 14 in October 2008. 


In short, our current view on housing has not changed - Given the pace of new homes being built, the current inventory of unsold homes and the potential number of homes that are in distress is likely to increase.  Put simply: the housing overhang is here to stay. 


Howard Penney

Managing Director




EYE ON HOUSING PRICES - caseshiller1

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