Perceived Knowledge

"A little knowledge is dangerous. So is a lot.”
-Albert Einstein

We have learned a little about a lot in the last few weeks. If the Bombed Out Buck stops burning, most things priced in bucks stop going up.
A little knowledge about this dominant global macro inverse correlation can be dangerous. If you get the timing wrong, you can really get whipped around. Does market timing matter? After the last 18 months, you tell me…
The reality is that most people have a lot of knowledge that they cannot time markets. They have tried. So take their word for it. However, some people can time markets, and they should continue to outperform this year as a result of their risk management discipline.
A little knowledge about the US Dollar’s impact has had the Gold bears pile on with their “gold bugs will get crushed if the Dollar rallies” call. Combine that view with a little perceived knowledge that the “IMF is selling gold” and you have some short sellers of yellow rocks that believed that their “information” was going to get them paid. Perceived knowledge can be dangerous.
With the US Dollar breaking out again above my critical immediate term TRADE line of $76.20, most things priced in US Dollars are set to open down this morning. Crude oil is down at $77.28/barrel. Copper is down at $2.91/lb. Gold is up.
Gold is up. Yes. Market prices don’t lie; people do. The IMF was indeed selling gold, but it wasn’t to the Chinese! It was to India. For the first time in 9 years, the IMF sold the equivalent of 8% of the annual global production of gold to a country. That’s a lot!
India just bought 200 tons of gold. That’s a 56% addition to India’s current gold reserves of 358 tons, and that puts India in the top 10 holders of gold globally. More important than the size of this purchase is the supply side of this equation. If the Chinese want to get anywhere in the area code of what I would consider a reasonable level of gold as a percentage of total Chinese reserves, they’d need to buy 10 times that.
A little knowledge about what China needs can be dangerous. If the US Dollar goes up, a lot of those things that people think China needs will go down. A lot of knowledge about China’s intentions of moving away from the US Dollar as their main currency exposure can also be dangerous. With only 1% of total reserves held in Gold, you can get very dangerous upside price targets in gold if you truly believe in your knowledge of China’s long term intentions.
Since I have a 10% position in it, I get a lot of questions about gold. Is being long gold consensus? What if I continue to be right on the Dollar’s relationship with asset prices? Could an up Dollar mean down gold?
Usually, the best way to answer a macro question is to let Mr. Macro Market give it to us, real time. As surprising as this is, since October 21st when the US Dollar marked its year-to-date lows, it has rallied a full 200 basis points, and the price of Gold has not budged. On the morning of 10/21 Gold was trading $1055/oz, and this morning it’s trading up (despite the US Dollar being up) at $1058/oz.
Is Gold going up because it’s a global currency that countries can trust? Is Gold going up because there is more demand than supply? Is Gold going up because we are witnessing the initial phase of a massive Global Diversification trade away from a world that held 64% of total currency reserves in US Dollars?
I’ll let you dig in on some of the answers to these questions. My only advice helping augment your search for this knowledge is this: don’t call an “expert network” for the answer unless you speak Mandarin and the call you are making is long distance…
Ahead of the Bernanke’s FOMC decision on rates tomorrow, the US Dollar is breaking out from an immediate term TRADE perspective. My immediate term TRADE line for the US Dollar, again, is $76.20 and my intermediate term TREND line is $77.59.
Is Bernanke going to pander to the most politicized policy America has ever seen, or is he going to rightly signal an end of an emergency level of ZERO percent for America’s citizenry of savers? I have no idea. The US Financial System is far too conflicted and compromised for me to hazard a guess. For God, for Country, and for Gold … or something like that… that’s what a little Ivy League knowledge will get you this morning from New Haven about the Fed’s upcoming decision – not a lot.
My immediate term support and resistance levels for the SP500 are now 1023 and 1065, 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. TRADE and TREND bearish.

FXC – CurrencyShares Canadian Dollar We bought the Canadian Dollar on a big pullback on 10/20 and again on 10/28. The TREND and TAIL lines for the Canadian Dollar remain bullish.

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.

XLY – SPDR Consumer Discretionary
We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. The sector is finally broken, from an immediate term TRADE perspective.

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.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. There continues to be 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.

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.


On Monday the UUP, which is the etf for the U.S. dollar index, was down 0.4%, although the dollar is still above the trade line.  As a consequence the S&P 500 closed at 1,042, up 0.6% on the day. 


On the MACRO front, the S&P 500 started the week on a positive note as the RECOVERY theme came back into focus following some better-than-expected economic data on the continued manufacturing expansion in China. Additionally, in the USA the ISM manufacturing index rose to 55.7 in October from 52.6 in September, ahead of consensus expectations of 53. The headline reading was the strongest since April of 2006, as was the employment component, which jumped to 53.1 from 46.2 in September, moving into expansionary territory for the first time since July of 2008.


The earnings and outlook from Ford was another positive, as was an upgrade of MOT by our Technology analyst Rebecca Runkle, one of her favorite names.  While the market finished higher on the day there seemed to be plenty of concerns surrounding last week's selloff and technical deterioration – only one sector is bullish on both the TRADE and TREND. In addition, there is a defensive tone to the market despite some better MACRO data points.  Not to mention some cautiousness surrounding Wednesday's FOMC meeting and Friday's release of the October non-farm payrolls data.


Also on the MACRO front, pending home sales increased 6.1% in September following a 6.4% rise in August, significantly above the consensus of 0.00%. September marked the eighth straight monthly gain and the highest level since December 2006, leaving sales up nearly 40% from the January low. This is probably as good as it gets as I would expect to see October pending home sales may see a sharp pullback with the looming expiration of the homebuyer tax credit. 


On the day the VIX declined 3.0%, taking a breather from last week’s massive move up. 


The three best performing sectors were Industrials (XLI), Consumer Staples (XLP) and Consumer Discretionary (XLY), while Technology (XLK), Healthcare (XLV) and Utilities (XLU) were the bottom three.  The only sector down on the day was Utilities. 


Today, the set up for the S&P 500 is: TRADE (1,026) and TREND is positive (1,023).   The Research Edge quantitative models have 7 of 9 sectors in the S&P 500 positive on TREND and 1 of 9 sectors are positive from the TRADE duration.  Consumer Staples is the only sector positive on both durations. 


The Research Edge Quant models have 2% upside and 2% downside in the S&P 500.  At the time of writing the major market futures are poised to open up small to the down side. 


The Research Edge MACRO Team.






November 3rd, 2009



Las Vegas Sands has released detailed information on its Macau operations ahead of its initial public offering from which it hopes to raise some $2.5billion.  Yesterday the company said it had completed its listing committee hearing with the exchange and was awaiting the formal approval for the listing of its subsidiary Sands China Ltd.  As part of the approval process with the Hong Kong stock exchange, Sands posted a lengthy “Web Proof Information Pack” on the exchange’s website.  The information pack forecasts 2009 adjusted EBITDAR of $803 million from LVS’ Macau operations, up from $686 million in 2008.

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We expect the expected:  uninspiring 4Q09 results when IGT reports this Thursday. How the stock reacts will be largely predicated on the tone and outlook given on the call.



The BYI and WMS calls confirmed what we already suspected:  North American shipments were paltry.  We expect IGT's replacement units to be down sequentially to about 1,850 units and new units to be approximately 1,650.  While CityCenter had just over 800 units on it's floor in mid September, we're pretty sure that IGT won't be recognizing much revenue on those units.  Our understanding is that since IGT implemented the systems business at CityCenter and because there is a recurring component to each game sale since all the units will have a download feature, IGT will have to defer some of the revenue.  Therefore, we don't expect much upside from CityCenter in this quarter, or even the next, since it's unclear over what period IGT will need to amortize this revenue.


International shipments are always trickier to predict since they are largely all replacement driven.  FQ4 should be better than last for IGT due to a shipment of 1,472 units to Casino Rosario in Argentina.  As an aside, IGT helped finance this facility and in return received a 72% share, plus the systems business.  From the 10Q:  "Through June 30, 2009, IGT funded $93.0 million of financing extended to a consortium of Argentina gaming operators comprised of $100.0 million for development and $40.0 million for gaming equipment financing."


For gaming operations we expect a small sequential increase in the installed base in 4Q09.  We've also heard that IGT has been dealing hard with operators to maintain their floor print.


For the quarter we are projecting in-line EPS of $0.17.  Looking forward, our estimates continue to trail the Street; EPS of $0.81 versus consensus at $0.91.  The primary driver of the lower estimate is fewer unit sales to new and expanded casinos.  We do project replacement units to pick up modestly in 2010, however, in line with the Street.  Even though we are below consensu, we are not overly concerned with a product sale shortfall.  The long-term dynamics of the slot sector are very favorable due to the potential for domestic and international new markets.






General Business environment/ Trends

  • Our business had reached a trough in the midst of very difficult markets


Gaming Operations

  • While the lower sequential unit count is disappointing, we expect that as the environment continues to stabilize, our install base should resume growth
  • The sequential reduction in units is really just more of a timing issue
  • I think you are apt to see a relatively stable install base at around 61,000, 62,000 units, in that range
  • In an environment of interest rate stability we would expect to see margins in the 57% to 59% range. Approximately 85% of our install base is comprised of variable fee games that earn a percentage of the machines play level rather than a fixed daily fee
  • We have recently reached agreements with two of the largest casino operators for the placement of over 450 MegaJackpot and Wheel of Fortune machines, over and above the existing units on their floors today

Game Sales

  • We anticipate new unit shipments will decrease for the next several quarters [from the 4,700 shipped in 3Q09] until some of the more recently approved jurisdictions, such as Maryland, Kansas, Illinois, and Ohio begin operations
  • While we continue to expect near-term improvement from trough levels, we will remain cautious until we see sustained incremental replacement demand, both domestically and internationally
  • Our international markets continue to feel the effects of the economic slowdown, most notably in Europe
  • Going forward, we expect product sales margins to be close to 50%, assisted by our cost efficiency efforts

Cost Cutting

  • Thus far, we have completed approximately $135.0 million in annualized cost savings, compared to the fourth quarter of 2008, which was the quarter right before we began these initiatives.
  • On the top of the cost reductions, we are currently working through our second $100.0 million of savings that we've made great progress
  • Portions of these savings have been, and will continue to be, offset by costs associated with the acquisition of PGIC and inflation
  • Our current low-manufacturing volumes, it is difficult to identify the full impact of manufacturing-related reductions in our reported gross margins. We would expect to see the impact of these adjustments as volumes return.
  • In the near term we would expect our SG&A, exclusive of bad debt provisions, to be approximately $100.0 million per quarter and R&D to remain in the low $50.0 million area
  • You should expect to see the R&D numbers stay relatively flat


  • Going forward, we expect our quarterly tax run rate to trend at approximately 39% to 40%, excluding discrete items
  • Capex is expected to trend in the quarterly range of $50.0 million to $75.0 million, although we continue to come in near the lower end of the ranges


Steiner makes a strategic acquisition of Bliss from HOT



Here are the points from the just ended STNR conference call discussing the Bliss acquisition:

  • WIll help STNR growth their land-based spa and retail presence
  • Will allow them to cross market Bliss & Elemis brands
  • 7 licensed locations; 3 operated locations
  • 175 distribution outlets in the US and 110 distribution outlets internationally
  • Hope to close by year end
  • Bliss is more of an urban brand, so it's complementary to their "resort" presence
  • They cannot take the brand to non-Starwood hotels, but can take Bliss into their cruise ship channel and to stand-alone spas
  • Bliss South Beach and Hollywood, completed by year end
  • They can manage the spas at Starwood hotels, or Starwood can lease the spa's from them going forward
  • Think it will be $0.05 to $0.10 accretive in 2010, hope that they can use their NOL's that they have in the US
  • Not a competitive bid process
  • They will keep most of the Bliss team in house
  • Easy plug in brand for them
  • Cost/Revenue synergies baked into the accretion guidance?
    • Fairly minimal
    • Already started the IT and HR integration
  • Bliss: $85MM of TTM revenues and $5.3MM of TTM EBITDA (net of charges)
    • Distribution 28%, spa revenue 50%, direct retail 22%
    • Bliss margins (within 4 walls) are a little better then STNR's - especially in the way in which they manage their bookings
  • What about normalized EBITDA?
    • No comment, but normalized margins are more like low teens than 6% TTM
  • Will all the W hotels in Starwood's pipeline have a BLISS spa?
    • No
  • Aloft hotels also have Bliss products
  • Bliss customers are a little younger then the Elemis customers
  • Price positioning that allows them to take the product to cruise ships

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 80.52%
  • SHORT SIGNALS 78.67%