Spanish Bears...

Despite Torres locking down the Euro Cup yesterday, the poor Spanish centric investor had to wake up to more selling this morning. Spain's IBEX Index is down another -1% today, taking the stock market to -25% from its October 07' highs.

If there was such a thing as "CNBC Spain", the commentators wouldn't be debating whether or not their stock market is a "Bear". This is just plain ugly.

As a consolation prize for losing yesterday, German's DAX index is also down close to -1% on the day, taking the decline in German stocks to -21% since their 2007 highs.

It is global this time, indeed.

India' Sensex Index down another -2.5% overnight...

India woke up to an alarm clock of more selling this morning, and ended the trading day down another -2.5%, taking the Sensex Index down -36% from the its global this time" peak.

I highly doubt the government will intervene here and impose downside market limits like they did in Pakistan last week. Even if you are a country pretending to be a capitalist, that kind of government intervention is over the top.

Look for another interest rate hike in India in the coming weeks. Chinese central bank head, Zhou, made comments overnight that he certainly is not ruling out further rate hikes either.

Global Cost of Capital is going higher. Global Access to Capital is tightening. This is another reason why everything "Ch-India" is crashing.


(chart courtesy of

Asia's Slowdown Continues to Broaden...

Stocks in Thailand lost another -1% overnight, as the reaching effects of Asian Stagflation continue to get more appropriately priced into Asian equities.

There was an interesting article this morning in the Bangkok Post citing the slowdown in Phuket tourism industry. "The hotel occupancy rate in May and June, the trough of the low season, was only 10-15% compared with 50% in the same period last year. The low rate was attributed mainly to high oil prices and the resulting surge in airfares."

The US Dollar's pervasive weakness, and Wall Street's downturn altogether, have misunderstood and broadening effects on consumer discretionary spending, globally.

It is global this time, indeed.

(chart courtesy of


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Parabolic Chart, Explaining "Ch-India's" crash...

I'll let you run the overlay of Chinese and Indian Stock Market Indices since the October 2007 low when India's weekly inflation reading was at 3%.

Global Stagflation is here.

Gas Prices and the Economy Do Matter

On a valuation basis, regional gaming stocks appear to be in the sweet spot for investors. Buying these stocks at a free cash flow yield of over 15% has historically been profitable. However, now more than ever one must take a macro view when assessing the fundamentals. I'd like to finally put to bed the argument that casino revenues are immune to macro factors such as the economy and changes in gas prices. Through my rigorous statistical process, I've found that regional gaming revenues are indeed tied to changes in gas prices and retail sales. Moreover, that correlation has grown as the industry has matured.

Changes in gas prices and retail sales are both statistically significant variables in explaining the change in regional gaming revenues over the last 7 years and over the last 14 years. I identify regional gaming markets as those that derive the dominant majority of customers from drive-in traffic. These markets include all of the riverboat gaming markets plus New Jersey and Michigan.

T stats for each variable for each period was over 4 (T stat over 2 is generally considered significant). As the following chart shows, changes in gas and retail explained 19% and 34%, respectively, of the change in regional gaming revenues over the two periods. Clearly, the relationship has been stronger in recent years.

So what does all this mean? Since the industry is not as defensive as we once thought, any investment decisions must be accompanied by a macro view. I don't think it means you cannot own any of the regionals. Free cash flow yields are very high and probably discount a lot of the macro issues. While gas is universally high, some economies are better than others. Pinnacle Entertainment (PNK) maintains significant exposure to the oil dependent states of Texas and Louisiana which are performing well, all things considered.


State budgets are in crisis yet again. In addition to the usual suspects (NJ and IL) add Nevada to the list. As one of the prime beneficiaries of the housing bubble it's not surprising to see Nevada's economy implode with the housing bust. What New Jersey and Illinois have done with their tax windfalls last go around is a topic for another posting. Regardless of how they got here, the sad truth is these states need to close the gap. Spending cuts are unlikely as usual so look for tax hikes on the politically palatable such as casinos.
  • New Jersey, Illinois, and Nevada lead the way in total dollar deficits projected for 2009. In terms of per capita deficit though, Nevada looks to be in the worst shape, followed closely by New Jersey, then Illinois and surprisingly, Iowa. Considering the recent floods Iowa (and Missouri) might be in even worse shape. Indiana and Louisiana are actually projecting surpluses.
  • Throughout the history of legalized casinos, the states have raised gaming taxes nine times including three times by Illinois. No other state raised taxes more than once. A closer look at the timing of these tax hikes reveals that 7 out of the 9 increases occurred during the last state budgetary crises of 2002-2003. That piece of history doesn't bode well for the industry currently. Whether legislators wish to tackle this issue during an election year or wait until next year will be an interesting follow. In any event, we've got our eyes on this developing trend.

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%