Shares At Risk

“If I had lived through the Depression, I would have been in a better position to understand events.”
-John Meriwether
In 1994, John Meriwether founded a company called Long Term Capital Management. It’s a good thing that the Salomon guys didn’t focus much on Long Term Financial History back in the 90’s. Heck, who would have ever made a Billion Dollars if they actually had some historical context?
Without Goldman’s very own Fisher Black (Black Scholes Options Pricing Model) selling academia, Washington, and Wall Street on “Value At Risk” as a risk management concept, where would this fine nation of Perceived Financial Wizardry be?
Not that I (or history) has kept track, but Meriwether went to business school with a guy named John Corzine. The man formerly known as the Governor of New Jersey (Corzine) became CEO of Goldman Sachs in 1994 (the year LTCM launched) and his successor as GS Chief, Hank Paulson, was co-head of Investment Banking, then, COO of GS from 1994 to 1998.
Only to be outdone by Paulson’s leverage ratios at GS in 2006, Meriwether eventually levered up $7 Billion by a factor of 19:1 in 1997. Then, tick-ah-teee-booom! All of that Perceived Value was at risk. LTCM blew up and the Corzine/Paulson show moved on to careers in the arms races of nuclear national and state leverage.
This morning we are waking up to another Goldman concept. This one is more populist than capitalist in nature. The bankers are calling it “Shares At Risk.” As opposed to a “10-sigma event” that the Salomon, Goldman, and LTCM guys said couldn’t happen 1998, I actually understand this one. Having built my own financial company in the shadow of their creative destruction, I definitely get the partner capital at risk thing. Unfortunately, that’s not what this is.
Getting paid is cool. But having to make up stories to justify why Government Sachs has a Geithner Put, and calling that next gen-American Capitalism is a bit much. I appreciate your bravery and all that, but I would have just taken the cash comp as opposed to the political compromise.
“Shares At Risk” are what Goldman’s top 30 employees on the management committee get for the next 5 years. Bonus compensation in stock, not cash. This what they get for taking state capital. This is the real price. Goldman is now officially, The System.
Re-Regulation of The System is next. Alongside a +2% US Dollar rally breaking the back of REFLATION trades in both Energy and Financial stocks, this is one of the main reasons why GS has broken its intermediate term TREND line of $174/share.

Per Goldman’s definition, “Shares at Risk” now include “an enhanced recapture provision” that will let the committee take away an employee’s shares if that GS employee is engaged in “materially improper risk analysis or failed sufficiently to raise concerns about risks.”

Ok. So what does that mean?


To me, that means that Goldman will never be able to take on the risk and/or government sponsored leverage ratios required to drive themselves back to past peak profit margins. The peak returns for this company are now going to be etched in stone. This is evolution. Private Partnerships are now finally going to be allowed to beat Goldman in their own back yard. Sorry guys – this is the price for taking state capital.


That’s all I have to say about that. Let’s get going this morning with giving The New Reality some risk management levels “to raise concerns about”:


1.      Alongside intermediate term TREND line breakdowns in the price of GS, BAC, and C, the XLF (US Financials Sector) continues to break down

2.      The intermediate term TREND line for XLF = $14.67, and the long term TAIL line of support for the XLF is all the way down at $12.09 (-15% lower)

3.      The inverse correlation between US Dollar Index and the XLF remains very high. The USD has made a bullish move above its TRADE line of $75.32.

The math argues that Mr. Macro Market has been pricing in a Lloyd Blankfein capitulation for the last few months. In the last 3 months, the SP500 is up +5.6% and the XLF (US Financials) is down -2.3%. Yes, in risk management speak, that’s called -790 basis points of negative performance. GS peaked for the YTD on October 14th (it’s down -14% since). Both the stock market in Greece and the United Arab Emirates peaked on that same day, and have since crashed. Irony?


Away from the American Citizenry getting some visibility that we may be seeing an end to the US Government financing banker bonuses on the short end of the yield curve (i.e. financing those bonuses with American Savings), there are other important bullish signals appearing for the Bombed Out Buck:


1.      The Fed’s Balance Sheet actually contracted by $18B this week. That’s one of the largest week-over-week contractions in months.

2.      Next week’s Consumer Price Inflation data (for November) is going to show another sequential rise in inflationary pressures (hawkish Fed data point)

3.      US Treasury yields on the long end of the curve are starting to breakout. I have the intermediate term TREND breakout line for 10-year yields at 3.4%.

I suppose it’s only fitting that on the day after Goldman moving to illiquid compensation that the steepness of the Piggy Banker Spread (the Yield Spread, which is 10-year yields minus 2-years) is setting up to make a lower-high. This morning, with 2-year rates at 0.78% (right at its immediate term TRADE line) and 10-year rates at 3.50%, the Piggy Banker’s have a +272 basis point spread to chow down on. That’s only 4 basis points from the widest spread EVER.
Ever, of course, is a long time. I guess this is the most politicized decision Goldman has ever had to make too. That’s why their share price is at risk of breaking down.


Our new Sector Head for Financials, Josh Steiner, and I are going to be hosting an 11AM EST conference call to go through many of the topics I grazed over this morning. If you’d like to listen in, email


My immediate term support and resistance lines for the SP500 are now 1093 and 1112, respectively.


Enjoy your weekend and best of luck out there today,



EWZ – iShares BrazilAs Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil’s commodity complex and believe the country’s management of its interest rate policy has promoted stimulus.


XLK – SPDR Technology We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).

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.   

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.

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.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30 and 12/2.

– 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


The Macau Metro Monitor.  December 11th, 2009.



The Hong Kong-Zhuhai-Macau Bridge, a mega bridge linking Hong Kong and Macau with mainland cuty Zhuhai, will start construction on December 15th.  It is estimated that the bridge will be completed as early as 2015 and that it will bring economic benefits totaling HK$40 billion in 20 years. 




DM understands that TPG/Apollo/Harrahs people are in town.  They have been reported to be meeting with SJM, although that has not been confirmed.  DM suggests that they are likely meeting with Melco Crown and Galaxy also and also that they eSun could be looking for a new partner while Macau Studio City is embroiled in a legal battle.  DM believes that Melco-Crown needs cash, Harrahs would go to considerable lengths to get a Macau license, and eSun’s Peter Lam is in a great position to broker a deal.  The key question is whether or not the authorities want another American group owning a casino asset in Macau.




Direct flights from Macau to Melbourne were launched this week by Viva Macau.  Flights are twice weekly and are fully booked through December. Reg MacDonald, acting CEO of Viva Macau, is seeking to increase the frequency of the flights.

US STRATEGY – Media Names Bounce

The S&P 500 finished higher by 0.6% on light volume and we saw another outside reversal.  All the major indices were higher except for the Russell 2000, which was down 0.4%.  The dollar index was basically flat on the day and the VIX was down 1.5%.


On the Macro calendar, Initial jobless claims rose to 474,000, an increase of 17,000 from last week figure of 457,000.  The 4-week moving average was 473,750, a decrease of 7,750 from the previous week's revised average of 481,250. This is the lowest level since October 2008.


The good news is that the number for seasonally adjusted insured unemployment during the week ending Nov. 28 was 5,157,000, a decrease of 303,000 from the preceding week's revised level of 5,460,000.  While the trend may be friendly, the level of the 4-week average is suggesting continued job losses.  This is consistent with the EMPLOYMENT post of 12/08/09 - the numbers reported by the labor department just don’t add up. 


For the USA to see a sustainable drop in the unemployment rate, we need Initial jobless claims to drop below 390,000.  This week’s Initial claims number shoots back above the 4-wk moving average, and puts everything NASTY (to be confirmed by a NASTY confidence reading on Friday and declining presidential ratings) in play. 


The best performing sector yesterday was the Consumer Discretionary, led by the media names.  GCI was up +7.0%, followed by SBUX up 4.7% and TWX up 4.2%.  GT and IPG rounded out the top five performing stocks. 


Financials (XLF) and Materials (XLB) were the two worst performing sectors.  Dragging down the Financials were MBI, MI and ZION.  Also underperforming were WFC (2.4%) and BAC (1.2%) on the back of increased expectations for TARP driven capital raises.  Bucking the downward trend in the XLFs were TROW +3.0% and AMG +2.5%. 


Healthcare also outperformed led higher by HMOs, which were up for a fifth straight day, in reaction to news concerning the public option.  A Research Edge favorite, UNH, was up +6.4%. 


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 19 points or 1.0% upside and 1.0% downside.  At the time of writing the major market futures are trading slightly higher.


In early trading today, crude oil is higher for the first time in eight days after China’s refineries processed a record amount of crude last month.  The Research Edge Quant models have the following levels for OIL – buy Trade (69.15) and Sell Trade (74.30).


In London Gold is higher on the day and looking like it will be down two weeks in a row.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,102) and Sell Trade (1,167). 


Copper is higher for the first time in seven days as China’s industrial production grew more than forecast.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.10) and Sell Trade (3.26). 


Howard Penney

Managing Director


US STRATEGY – Media Names Bounce - sp1


US STRATEGY – Media Names Bounce - usdx2


US STRATEGY – Media Names Bounce - vix3


US STRATEGY – Media Names Bounce - oil4


US STRATEGY – Media Names Bounce - gold5


US STRATEGY – Media Names Bounce - copper6


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Adibok Getting Toned?

Adibok Getting Toned?


Reebok is Looking Hot in the Toning Category. Does it Matter?

Adibok is shipping every pair it can get its hands on to take advantage of this trend – which will make ‘Easy Tones’ tough to comp against next year. If the company sees any acceleration in backlog or sales in the US near-term, we’ll question the sustainability big time.



Reebok is staking its claim on the growth we’re seeing in the toning footwear category (MBTs, Shape-Ups by Skechers, Avon’ s Curves, etc…) with its Easy Tones product.  How meaningful, you might ask?  After comping down 50% for the better part of 2 years, recent weeks have spiked to +125%. No kidding. As much as we continue to believe that Adibok is a sinking ship, we won’t ignore the facts. Could the recent performance help right buouy the boat? After going the math, the answer is ‘probably not’. 


Here’s the math: 1) Reebok is 20% of total Adidas Group, 2) 45% of Reebok is footwear, 3) 45% of Reebok revenues are in the US (the focus of the toning trend), and Easy Tones are 35% YTD of NPD’s Reebok footwear (60% over that last 6 weeks).  The math says that the Easy Tones could be between 6-9% of Reebok, and 1%-2% of total Adidas group. Reebok is getting a boost on both the top and bottom line as these toning shoes, like Skechers Shape Ups, sell north of the $100 mark which is driving total ASPs through the roof (ie 50%+).



The bottom line here is that this is a positive near term. There’s no doubt about that. But Adibok is shipping every pair it can get its hands on to take advantage of this trend – before either a) it goes away, or b) it gets so crowded that prices come down and margins take a hit. Either way, the ‘Easy Tones’ will be tough to comp against next year. If the company sees any acceleration in backlog or sales in the US near-term, question the sustainability.


Zach Brown



Adibok Getting Toned? - 1


Adibok Getting Toned? - 2


Adibok Getting Toned? - 3


Adibok Getting Toned? - 4


Just about a month ago at its investor meeting, MCD downplayed the media noise around going national in the U.S. with the Dollar Menu at breakfast, saying that it has been used at breakfast in some markets for some time and is, therefore, nothing new.  Specifically, management stated that in the markets where a Dollar Menu was already offered that the results were directionally consistent with Dollar Menu performance during other dayparts.


Today, it is being reported that MCD will launch a national dollar menu in January, supported by advertising across the U.S. I think this national launch was anticipated by investors, which is why there was so much “noise” around the topic prior to MCD’s November meeting.  If management knew in November that it was going to launch the Dollar Menu at breakfast in January, I find it interesting that management tried so hard to downplay the news, saying it was not new.  It may not be new to some markets, but it is new to the balance of the system in the U.S. 


Don Thompson, president of McDonald’s USA, did say during his presentation at the November meeting that we will learn more about core breakfast initiatives in 2010.  Is this national launch of the Dollar Menu part of the breakfast initiatives?  If so, it is new news.  I think MCD would only introduce the Dollar Menu at breakfast if there was a definite need to do so.  Breakfast is MCD’s most profitable daypart and management would only risk decreasing its margins at breakfast if traffic was under real pressure. 


I think management knew such an introduction would be viewed as a sign of increased weakness in same-store sales trends and would possibly dominate much of the Q&A and coverage of the meeting with investors harping on the issue as to why such an introduction is necessary.


The announcement today, however, is less alarming because the investor community has already had the last couple of months to mull over the possibility of a Dollar Menu at breakfast.  And, we already know that comparable sales trends are weak in the U.S. following two months of reported declines.


If management had not come to a decision over whether to nationally launch the Dollar Menu prior to its investor meeting, then traffic trends at breakfast must have deteriorated rather significantly in the past month, making such a move necessary.  Either way, we know comparable sales trends in the U.S. are under pressure and the Dollar Menu at breakfast will put increased pressure on margins.  I would also think that today’s announcement was not a welcomed one by the entire franchisee community because not all incremental traffic counts are created equal from a margin standpoint.  I view this national launch as a desperate move by MCD and a clear indication of the slowdown in business trends.



She should be a decent new market for the slot manufacturers.  VLT shipments to Italy could commence as early as 2H2010 and could be a nice boost for BYI, IGT, and WMS.



In an effort to raise earthquake relief funds, the Italian government recently passed legislation allowing for the conversion of 14% of the existing AWP machines in the country to be converted to Comma 6B machines, otherwise known as Video Lottery Terminals (VLTs).  Like the AWP games, VLTs will also be operated through a central server.  This presents a market opportunity of roughly 57,000 new machines if all the licenses are purchased.  The cost of each VLT license is 15,000 Euros, equivalent to an aggregate of 850MM Euros of tax proceeds to the Italian government. 


There are ten concessionaires that have the right to bid on the Comma 6B licenses and each concessionaire can only bid 14% of their existing AWP install base.  In their initial indication, all the licenses were spoken for and all 10 concessionaires made the initial 50% deposit in Oct 2009.  They have until March 2010 to confirm the final number of licenses that they want, with the remaining 50% payment due by June 14, 2010.  It’s likely that the final amount of the licenses purchased will end up between the 28,500 that has already been paid for and the full 57,000 amount that is approved. 


The two main issues that will determine the final scope of the market are:

  • Quality of the locations that each concessionaire has
  • Regulation of the secondary market; meaning what happens to the licenses that aren’t bid for, which won’t be decided until March 2010


Once the suppliers are compliant with Italian regulations for VLT operations and the final payment is made, then the concessionaires can start operating the machines.  We see the time line as follows:  1) the testing and approval process with be completed in March, 2) shipping will likely start in 2H2010 and 3) most of the units will be operational by 1Q2011. 


Lottomatica will use its own Speilo machines for its licenses and has an agreement to sell up to 2,000 machines to Gamenet.  Other market players will include:  IGT, WMS, BYI, and Novamatica. 


IGT has a relationship with Atlantis; they will likely announce some sort of agreement over the next few weeks but we suspect IGT will form other distribution partnerships.  BYI has a relationship with many of the players and has provided machines to Cogetch, HBG, and Atlantic, to name only few.  WMS is in discussion with half of the concession holders. VLTs will likely be priced in the $12-13,000 range.


Listed below are the details on the 10 Concessionaires:

  • Atlantis World is the largest with rights to 12,000 VLTs
  • Lottomatica has rights to 10,800 licenses (Spielo)
  • Gamenet has rights to 8,000 licenses
  • Cogetech 
  • SNAI
  • Cisal
  • HBG
  • Cirsa
  • Codere
  • Gmatica


So what are the economics to the equipment suppliers?  Assuming that 75% of the potential 57,000 licenses get purchased in the primary market (meaning that not all the licenses get bought in round one) leaves a market of 43k units.  Taking out Lottomatica’s share, since they will use Spielo, that leaves 33k for the four likely players:  IGT, BYI, WMS and Novamatica.  Assuming equal share – not likely but is the best guess – then that’s 8,250 units per supplier, likely recognized in 4Q2010 or 1Q2011.  Assuming $12.5k pricing and a 40% margin (since the games are Italy-specific and lower priced) = $5k of gross profit per unit or $5MM per 1,000 units.  Here is the impact by company:


  • BYI:  $0.06 in EPS for every 1,000 units sold; 8,250 units = $0.46
  • WMS:  $0.05 for every 1,000; 8,250 units = $0.43
  • IGT:  $0.01 for every 1,000; 8,250 units = $0.08


THE ITALIAN BIRD - suppliers italy 1

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