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The S&P 500 finished slightly higher yesterday, +0.46% - on very light volume.  The government sponsored volatility that weighed heavily on the market last week remained largely on the front-burner.  The risk aversion trade showed some signs of relief with the VIX trading down 6.96% on the day.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (22.51) and Sell Trade (29.54). 


Some optimism did return as the prospects for Fed Chairman Bernanke's confirmation looked a little more like he would remain as the Chairman of the Federal Reserve. 


On the MACRO front, December existing home sales disappointed, dropping 17%.  I agree that the December existing home number is a statistical aberration, but that is not the point.  The issue remains that the current trend in joblessness is still a big drag on the economy and the government can’t prop up the housing market forever. 


The Materials (XLB) was the best performing sector yesterday after being the worst performing sector last week with some unwinding of the RECOVERY trade on concerns about an accelerated tightening schedule in China to combat bubble fears. Within the XLB, steel stocks recovered a bit of last week's 10% decline following the better-than-expected Q4 results out of AKS.


The second best performing sector was Technology (XLK), rising 0.8%.  The outperformance was driven by the semi space with the SOX rising 1.4%; TXN was one of the notable gainers ahead of its Q4 results after the close. Memory names were another bright spot with SNDK and MU outperforming on the day.  Lastly, AAPL was up 2.7% and a standout in the hardware space ahead of its December quarter results, which blew away expectations.


The Financials (XLF) was up in line with market yesterday.  The banking group was also higher on the day, though underperformed the S&P 500 by 30bps. The XLF is bearing the brunt of the government sponsored volatility following last week's proposal by the Obama administration to disallow proprietary trading and hedge fund and private-equity investing on the part of any financial institution that owns a bank.  The more defensive leaning trust names were mostly higher on the day, while the large-cap and regional banks were mixed.


As we look at today’s set up the range for the S&P 500 is 45 points or 1.5% (1,080) downside and 2.6% (1,125) upside.  At the time of writing the major market futures are trading lower on the day.  


Copper is trading lower in London trading on speculation that China will curb lending.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (3.32) and Sell Trade (3.45).


In early trading today Gold is trading lower, as the whole commodity complex is trading lower on the day.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,081) and Sell Trade (1,104).


Crude oil is trading down on speculation that oil stockpiles are very high worldwide, while concerns persisted that China will tighten credit and slow growth.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (73.68) and Sell Trade (76.87).


Howard Penney

Managing Director














Firm Offers Investors A Virtual Hedge Fund...


This morning Fantini’s Gaming Report wrote about WMS’s foray into online gaming.  For those of you that missed it here’s what was written:


“WMS has set up shop in the United Kingdom to launch Internet gaming late next fiscal year, eGamingReview reported.  The company is hiring 25 employees in London in preparation for the launch of a UK-facing site, then will follow with sites aimed at France, Italy and Spain as those countries open their markets to competition beyond their state-granted monopolies. WMS will be the first major US slot machine company to go beyond licensing games to online operators. It also would give WMS experience to offer its games directly to Americans already familiar with them in slot machine form if I-gaming is legalized in the US. As such, it could start a trend of suppliers to brick-and-mortar casinos competing against them on the Internet, and opening whole new revenue streams.”


We spoke to the company and got some clarification on what’s really going on.  The online gaming effort in the UK is has been an ongoing part of WMS’s R&D efforts and is already reflected in the R&D budget – so the employees are not new hires.  The online strategy in the UK is an extension of what WMS showed in it vault at G2E this year, namely increasing customer loyalty to the casinos and WMS games by allowing them to continue their experience online on operator’s websites.  In the UK, regulation allows WMS to have a more direct strategy. The launch of their online gaming efforts in the UK will be a FY2011 event, and should not have any material impact on R&D or SG&A in the interim.  As far as the US is concerned, online gaming is not likely to get legalized in the foreseeable future, at least not until the federal government can figure out a way to tax online gaming.



Unfortunately, this party of acronyms may not be so happy.



With Delaware and now Maryland considering table games, the positive Atlantic City inflection point continues to move farther out on the horizon.  MGM may not have the patience to wait it out.  As reported in the Las Vegas Review-Journal yesterday, MGM may be looking at exiting the AC market through selling its 50% stake in Borgata.  It’s no secret that New Jersey gaming regulators have not been happy with MGM’s involvement with Pansy Ho given the alleged ties of her father Stanley Ho with the Chinese triads.


We cannot think of a worse time to sell an Atlantic City asset.  BYD, MGM’s 50% partner in Borgata, is sitting pretty in at least one respect.  Certainly, Borgata represents over 20% of the company’s property EBITDA so that’s not good.  However, BYD does hold the right of first refusal on any MGM agreement to sell.  So while it's a bad time to sell for MGM, it’s probably a good time to buy for a long-term investor such as BYD.


In the meantime, Borgata cash flow expectations probably need to be ratcheted down.  Pennsylvania slots have had a huge impact on AC and with table games just legalized, the market share shift will continue.  Maryland is not even built out yet but slots, and maybe table, are coming.  The Delaware House just passed table game legislation and the Senate is supposed to follow suit.  The Governor has indicated he will sign the legislation. 


The following chart shows that table games have outperformed slots in Atlantic City most of the last two years during which slots in Pennsylvania proliferated.  That is, up until recently as table game play fallen off the cliff, and that’s before the addition of tables in PA, DE, and MD.  The problem for Borgata is that it generates almost 40% of its gaming revenue from the tables, the second highest in the market.  Borgata's table dominance has partly attributed to its ability to outperform the market until recently.  Given the supply outlook, table revenue is probably more at risk over the next few years.


AC, PA, MD, DE, MGM, BYD - ac tables vs slots


I agree that the December existing home number is a statistical aberration, but that is not the point.  The issue remains that the current trend in joblessness is still a big drag on the economy and the government can’t prop up the housing market forever. 


Earlier today the NAR reported that sales of existing U.S. homes plunged almost 17% in December.  The decline was more than a Bloomberg survey and the biggest decline since records began in 1968.  The decline comes one month after a government tax credit was originally due to expire.  Congress extended the first-time buyer credit to cover deals signed by April 30, 2010 and closed by June 30 2010, and expanded it to include current homeowners.


What is clear from the December existing home number is that the original tax credit measure pulled sales forward.  The current program will have the same effect in 1H10, and sales will begin to fall off again in June 2010.


With Washington propping up the housing market it is nearly impossible to say with any certainty that the housing market is recovering.  As we said last week when the housing “starts” was reported, the government has put a floor under the housing market.  The “bottoming process” for housing will take time and future growth is dependent on job creation, not government stimulus measures. 


Howard Penney

Managing Director


HOUSING GONE WILD - ushomesales


Chinese Bubbles? Some Context...

Understanding that it’s now fashionable for consensus pundits to fancy themselves as professional Crash Callers is what it is. After missing making the call on the 2008 crash, it’s called career risk to miss the next one.


In an environment where Professional Bubble Watchers are in increasing supply, beware of calling something a bubble that’s already popped. Even though we are currently bearish on China for the intermediate term TREND (see our Macro Theme titled Chinese Ox In a Box), we are not superimposing this view across all longer term durations, yet…


Duration mismatch is a classic mistake that I (and plenty other short sellers) sometimes run into. In an industry where most bosses ask the same investment question (“what’s your best idea?”), there is a structural pressure locked into investors brains to be early with “new ideas.” However, the repeatable edge in this business resides in neither being too early, or staying too late.


Let’s assume for a minute that the Chinese make up all the numbers. But let’s also agree that, if they have been making them up the entire time, that everything is relative. The chart below shows real estate prices in 70 Chinese cities going back to 2006. This price data comprises of both residential and commercial real estate, allegedly…


What are some takeaways and questions from this chart?

  1. If there was a bubble in 2007, it already popped once
  2. If the current pace of y/y price growth is another bubble forming, its potentially locking in a lower-high (see the red line)
  3. The latest reading is a December number, and the Chinese have started to tighten much more aggressively here in January

Altogether, this morning’s December report was for real estate price growth of +7.8% year-over-year.


Is less than double digit price growth a bubble? Or are we still so scarred by having missed living through our own real estate bubble, that everyone else must be in a bubble? And that we are the only ones who can see theirs?


Too many questions without answers for a Monday.



Keith R. McCullough
Chief Executive Officer


Chinese Bubbles? Some Context...  - chihaus



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