In the last 24 hours the latest reading on confidence and sentiment are headed in two different directions - confidence up, sentiment down.


Yesterday, the Conference Board’s January confidence index increased to 55.9 (higher than the Bloomberg survey) from a revised 53.6 in December.  The January figure is up 111% from the record low of 25.3 in February 2009, but 65% below the 92.3 average over the past 10 years.  This is the highest reading since September 2009, when the index stood at 61.4.


Like we have seen with the “bottoming” in housing statistics (both starts and prices), confidence is bottoming too.  While the popular press will make a big deal about yesterday’s move, any print below 60 on the Conference Board Index is just not that meaningful. 


The bottoming feeling in confidence was also seen in the ABC number reported last night.  The index improved to -48 from -49 last week.  Personal finances improved to -6 from -10, while the state of the economy deteriorated to -84 from -82 last week.   


The difference between the bulls and bears contracted dramatically to +15.7%; it was +33.3% last week and +37.5% two weeks ago.  According to Investors Intelligence, readings above +30% are very bearish.  The levels over the last two weeks were the highest since the spread was +42% at the October 2007 market peak.


The markets are fighting to maintain upward momentum as the S&P 500, the CRB and China are all broken on TREND and TRADE.  What is not working currently is the buy-the-dip mentality that has been in place since the March 2009 low.  The latest surge in pessimism, however, is a net positive for equities.


Howard Penney

Managing Director







MPEL should miss badly but that isn’t exactly new news. What will matter is the balance sheet issues and whether share can improve after a tough Q4 to capitalize on the strong market trends here in Jan.



We see a big miss for MPEL this quarter, largely driven by poor hold (and poor sell-side modeling of hold) at both Altira and City of Dreams.  Our $406MM revenue estimate and $23MM EBITDA estimate are respectively 42% and 20% below consensus estimates.  This miss probably won’t be a surprise since MPEL is down 25% since early December.


One major focus will be the balance sheet where MPEL needs to communicate its refinancing plans.  Also, investors will want to know whether MPEL’s dreadful Q4 market share has improved in January and whether City of Dreams has figured out how to drive the Mass business.  Macau gaming revenues are up 67% through January 20th which could be a positive for MPEL assuming its market share didn’t deteriorate further.  The negative will be if the VIP segment cannot withstand the slowing China economy, down stock market, and tightening liquidity.  These macro variables are hugely significant in driving VIP play.





City of Dreams

  • Net revenue of $243MM 
  • EBITDA of $22MM 
  • RC volume of $8.6BN and 2.5% hold 
  • Mass drop of $450MM and 17% hold  
  • Slot handle of $315MM and 6% win percentage 
  • Net casino revenues of $236MM, $23MM of non-gaming revenues and $16MM of promotional expenses
  • Variable expenses (primarily taxes & junket commissions that aren’t recorded in net revenues) of $156MM, $7MM of non-gaming related costs, and $57.5MM of fixed costs (remember that Hyatt should be fully open so there should be a step up in fixed costs from last quarter)



  • Net revenue of $138MM 
  • EBITDA loss of $6MM 
  • RC volume of $8.8BN and 2.3% hold 
  • Mass drop of $62MM and 15% hold  
  • Net casino revenues of $136MM, $7.6MM of non-gaming revenues and $6MM of promotional expenses
  • Variable expenses (primarily taxes & junket commissions that aren’t recorded in net revenues) of $120MM, $2.5MM of non-gaming related costs, and $22MM of fixed costs


Mocha Slots

  • Net revenue of $25.4MM 
  • EBITDA loss of $6.7MM




  • Net interest expense of $19.6MM, up materially from last quarter due to MPEL no longer being able to capitalize costs for CoD
  • D&A of $74MM
  • Pre-opening expenses of $5MM





Mass Market / COD ramp/ Present business

  • “The area where we have some heavy lifting to do to drive growth and improvement is in the grind mass-market business at City of Dreams. Although our growth trend in this segment continues to improve, we have not gotten close to our full potential yet. We are not going to provide our detailed marketing play-book in this area, but we have a clear plan of attack to boost awareness of the mass gaming experience at City of Dreams, which will drive visitation, length of stay, and, of course, profitability.”
  •  “We believe we'll end up with 2009 being 5% to 10% ahead of 2008 in GGR terms and we expect next year to deliver a top line growth of around 20% with limited additions in new supply.”
  • Our direct -- premium direct VIP businesses at City of Dreams is….17%, life to date.
    • Our math suggests that it was just north of 11% through 3Q09, and we assume 12% for 4Q09


Guidance/ Outlook

  • Response to lower market share in Oct 2009
    • “ We had lower hold on the rolling chip side across both properties in the month of October, as compared with the previous quarter…. also, October, remember, is a month that is distorted, particularly in the first week, the holiday week, towards the mass segment, so any month that is strong because of holiday periods, you're going to see that distortion downwards.
  • “We're probably looking like we're seeing better volume in November against October and that's against the background of a market that looks like it's grown north of 50% over the course of the first two weeks of November.”
    • November Junket RC volumes were up around 58% y-o-y for the market as a whole.   However, RC in Nov was lower for MPEL than the volumes they saw in Oct.  Mass win does look like it increased nicely month over month in November
  • “We're not going to provide any forecast in terms of the volumes that we expect to see in any segment of the business, not least of which because do one segment and it's not really a complete picture. But we've seen an improvement in the volume of drop that we have at City of Dreams of more than 35%, nearly 40%, if you look across the five months that we've been open as a property.”
  • “We would certainly expect to see our hold move from 16% up towards 18%, and the properties that are performing at the most efficient level in Macau are indicating that you can hold up to 20%, 21% on the mass side. So that's obviously a future target for us.”


Other (Cash flow/ Balance sheet/ Costs)

  • “We've got about $1.7 billion drawn on our facilities; we won't be drawing any more of the capacity that is there.  And we've already banked about $300 million in our balance sheet off the back of a couple of equity placements that we did earlier this year that will be used at some point during the earlier part of next year to effect an accelerated repayment of those facilities.”
  • “Construction of City of Dreams is essentially complete with the recent opening of Grand Hyatt Macau. We expect to outflow approximately $115 million in closing out final accounts on the site during the course of the fourth quarter of this year…  the remaining $40 million are really retention payments that apply to the warranty periods on the various construction contracts and they won't get settled until the early part of the second half of next year in the main. As we then look forward into 2010, there's about another $40 million of CapEx that is primarily associated with the final fit-out of the Dragone Theater. That equipment will arrive in Macau in early 2010 and so we'll pick up and be settling that cost during the course of the first half…. We've then put in place a program of additional CapEx expenditure that runs through 2010….roughly in the order of $40 million to $50 million, which is basically an application of what you would normally expect in the first full year of maintenance CapEx. But because we're under warranty periods, we'll push it into new developments, new amenity development.”
  • “MPEL-wide cost structure of approximately $1.3 million a day, and that obviously includes City of Dreams, Altira, Mocha, and our centralized and corporate costs. With the addition of the Hyatt property and its staff during the course of the last few weeks, that amount has increased by approximately $75,000 a day, so we're up to a little bit shy of $1.4 million per day.

R3: Back on (the) Course in 2010?


January 27, 2009


With the golf season still a ways off here in most of the U.S, there appears to be more optimism ahead for the industry than we have seen in a while. Last night, Calloway management offered some insights into their outlook for the coming year and thoughts on the recent and severe recession. While it’s hard to envision a major rebound in the industry at this point in 2010, there are some positive signs setting up for the intermediate term.





With the golf season still a ways off here in most of the U.S, there appears to be more optimism ahead for the industry than we have seen in a while. Last night, Calloway management offered some insights into their outlook for the coming year and thoughts on the recent and severe recession. While it’s hard to envision a major rebound in the industry at this point in 2010, there are some positive signs setting up for the intermediate term.


  • Consolidation at retail should lead to a better pricing environment and less discounting. ELY management suggests 250 golf doors were shuttered in ’09 or 12% of supply. Golfsmith management believes 22% of golf retail has disappeared over the past 5 years. No matter what metric you use, distribution capacity has been reduced and heavy discounting is likely to subside along the way. At the very least, “going out of business” and liquidation sales have likely peaked. This trend clearly favors the well-capitalized survivors, like DKS/Golf Galaxy and ultimately manufacturers who can better align inventory with demand.
  • Discounting is likely to subside but pricing pressure should persist as mix favors lower priced products. The $299 driver is expected to be the dominant price point in the category, with the $399 product remaining under pressure in the coming year. Lean inventories at retail are not expected to lead to inventory build, but should also be a key factor in a more benign promotional environment.
  • While it is the offseason and likely not a great time to make a judgment, ELY management indicated the impact of the Tiger Woods saga has little to no impact on Calloway or the industry. Trends before and after the recent Tiger media frenzy are consistent.
  • Interestingly, rounds played in 2009 were essentially flat despite the challenging economic environment. Perhaps early retirements and layoffs have given golfers more reason to get out and play?
  • Golf was officially added to the 2016 Olympic Games in Brazil and will become a major industry focus and opportunity in the next few years. By then, we’d bet that Tiger will be back and the Olympic stage will be a key driver for the apparel and equipment brands. For now however, the Olympics is merely “hope”, and not something to even consider as relevant in the near term.
  • With inventories cleaned up as reflected in the 4Q sales/inventory spread (Revs +9%, Inventories -15%), it finally appears that the ELY SIGMA chart is turning the corner. See below:


R3: Back on (the) Course in 2010? - 1




  • Delta Apparel executives offered some insights into the company’s most recent acquisition, Art Gun Technologies. Through its innovative software and technology, Art Gun allows consumers to customize styles, graphics, and colors on an individual garment. Additionally, the software allows the customized design and order to be fulfilled and integrated with production with virtually no human intervention. Sounds like NikeID meets T-shirts…
  • When asked by an investor to share the company’s macro assumptions embedded in guidance, Sherwin Williams CEO replied, “we're not great economic forecasters and so we rely on kind of the consensus of economists and there's a pretty broad range of assumptions out there right now, especially in the new construction markets but we think -- what makes sense to us would be, you know, total residential starts and completions to be up in the mid-teens for full-year 2010, and probably with growing momentum over the course of the year.” At least they admit they don’t have their own macro process…
  • An internal memo revealed that Whole Foods is rewarding it’s team members with higher employee discounts if such employees participate in the company’s Healthy Discount Incentive Program. Team members are measured on four key categories including nicotine use, blood pressure, cholesterol, and BMI (Body Mass Index). By meeting certain “healthy” thresholds, an employee can earn up to an additional 10% discount on store purchases (base discount is 20%). Talk about creative ways to lower health care costs and foster “healthy” competition amongst employees…




Shoe Carnival Secures New Bank Agreement - Shoe Carnival, Inc. announced the successful completion of a new revolving credit facility. The new credit agreement provides for up to $50 million in loans and commercial and standby letters of credit through April 30, 2013. The new agreement revises and updates certain terms and covenants contained in the prior credit agreement. At January 30, 2010, the end of its current fiscal year, the Company expects to have approximately $40 million in cash and cash equivalents. The Company believes that its existing cash and cash flow from operations will be sufficient to fund its working capital and anticipated capital expenditures for its expansion plans in 2010. "We are very pleased to announce the successful completion of the agreement with Wachovia Bank and believe this facility, in conjunction with our existing cash and cash flow from operations, will adequately meet our capital requirements for anticipated growth over the next several years," said Kerry Jackson, Shoe Carnival's Chief Financial Officer and Treasurer. "We appreciate our lenders' confidence in Shoe Carnival as we continue to execute our long-term growth strategy." <>


Rue La La expands its men’s line, hires a Backcountry exec to lead the way - Members-only web retailer is adding a slew of new men’s apparel, footwear, sportswear and accessories brands as it aims to boost its men’s category. To oversee the effort, Rue La La hired Jeffrey Snyder as senior vice president and general merchandise manager. Snyder will oversee all aspects of the company’s men’s division, as well as the company’s active lifestyle product categories. He will report to Shari Shakum, chief merchandising officer. “We’re not just looking to add menswear, but rather, items that appeal to men,” says Snyder. Those items can include wines, vacations and accessories, he says. Snyder most recently was vice president of merchandising and planning at outdoor gear merchant Prior to Backcountry, he was vice president of the outdoor division of the Sports Authority. “Rue La La is the future of online retailing,” Snyder says. “It’s changing the way we shop as consumers.” Rue La La was launched in 2008 and has attracted more than 1.2 million members. GSI Commerce Inc. acquired Retail Convergence Inc., the parent company that operates, in November.  <>


It’s only been a year, but Borders looks for a new permanent CEO - CEO Ron Marshall is leaving Borders Group only a year after taking on the task of revitalizing the bookselling chain and establishing it as a full-fledged e-commerce player. Borders announced this morning that Marshall, who took over as CEO last January, is leaving the company, effectively immediately, to become CEO of another publicly traded retail company. Borders didn’t name Marshall’s new company. To replace Marshall on a temporary basis, Borders has named chief merchandising officer and executive vice president Michael Edwards as interim CEO. Edwards will report directly to Borders chairman Mick McGuire. Edwards joined Borders in September after having been president and CEO of Ellington Leather, a wholesaler of leather handbags and accessories. Marshall, who joined Borders after serving as a principal at private equity firm Wildridge Capital Management, was hired to help the company improve its financial position and establish the multichannel books retailer’s fledgling e-commerce program. <>


Woolrich Fills New Apparel and Accessories Post - Woolrich has named Brian Mangione to the newly created position of executive vice president. Mangione will be responsible for overseeing all aspects of Woolrich branded apparel and accessories and will report directly to Woolrich President Jim Griggs. "Brian compliments the team we've been assembling over the past several months," said Griggs. "Woolrich is experiencing a resurgence and Brian will be integral in keeping Woolrich relevant in the market as we enter into our 180th year of operation." Mangione will be responsible for overseeing merchandising, design, wholesale apparel, corporate marketing, direct retail, licensing, product development, and sourcing. Reporting to Mangione will be Rick Insley, SVP merchandising, licensing & retail stores, Jerry Rinder VP wholesale apparel & corporate marketing, Gary Gifford, director product development and sourcing, and the catalog and Internet team. Mangione comes to Woolrich with a diverse background and experience as a leader in wholesale, direct retail, marketing, sales, product development and sourcing. He most recently was the VP sales, marketing and product development of 180's. Mangione's additional experience includes executive leadership roles at Broder Brothers, New Balance and as the President of Lilian Vernon's business-to-business division. He has held executive positions at Fila USA and Adidas. <>


Pets at Home sold to KKR for £955m - Pets at Home has been sold to private equity house Kohlberg Kravis Roberts (KKR) for £955m, including the debt. The pets specialist, which has flourished in the recession, had been mulling a sale or a possible stock market flotation for some months.

Matt Davies will stay on as chief executive at the pets specialist. Previous owners Bridgepoint bought Pets at Home for about £230m in 2004. Davies said: “We are thrilled to embark on this new chapter in our history with the strong support of KKR. “KKR’s investment represents a resounding endorsement of our success to date and a validation of our colleagues’ commitment and enthusiasm towards pets and pet owners across the UK.” KKR executive John Pfeffer said: “We are delighted to have the opportunity to back the outstanding Pets at Home management team led by Matt Davies and to invest in this exceptional company. <>



Chinese Retailer JNBY to Land in U.S. - JNBY will unveil in March a 2,250-square-foot flagship in SoHo here, its first U.S. store. Founded in 1994 by a group of Shanghai Institute of Design students, JNBY operates as a collective with a staff of 13, led by a senior designer. The group creates 150- to-200-piece collections each season, priced from $80 to $600. China is poised to become the world’s second-largest economy this year and the government has been nurturing domestic companies in an effort to become less dependent on exports. JNBY operates more than 500 stores in Asia, Europe and North America, with new stores planned for Barcelona and Tbilisi, Georgia. Sales were strong enough at a temporary store at 93 Mercer Street in SoHo, that JNBY was encouraged to open a permanent boutique at 75 Greene Street. “I’m hoping [to open] one more store in Manhattan by the end of the year,” said Michelle Wohlers, U.S. brand manager of JNBY and a former executive of Juicy Couture. “Our next target will be Northern California.”  <>


Coin Lays Out Plan for Upim - Gruppo Coin SpA said Tuesday it expects to become the country’s largest clothing retailer following the acquisition of the Upim clothing chain in December, and to reach consolidated revenues of 2 billion euros, or $2.8 billion at current exchange, in the next three years. “This is an extraordinarily important operation for Gruppo Coin,” said chief executive officer Stefano Beraldo, pointing to Upim’s 149 directly operated stores, more than 2.2 million square feet of selling space, most often centrally located in top Italian cities, and 2009 revenues of 430 million euros, or $597.7 million at average exchange rates. Beraldo said between 10 and 20 Upim stores will be converted into Coin units by 2011. By August, around 60 Upim stores will morph into points of sale dedicated to Coin’s brand OVS Industry. Upim also counts more than 200 franchised stores, which will maintain their original banners. The group will reach a total of 900 stores.  <>


Kohl’s Department Stores Achieves 100 Percent Green Power - Kohl’s Department Stores (NYSE: KSS) announced today that the company has purchased enough green power to meet 100 percent of its purchased electricity use with an annual green power purchase of nearly 1.4 billion kilowatt-hours (kWh). With this latest purchase of renewable energy, Kohl’s increased its ranking to no. 2 overall and among Fortune 500 companies on the U.S. Environmental Protection Agency’s (EPA’s) listings of top green power purchasers. Kohl’s retains its top ranking among retailers.  <>


American Apparel Pulls New Line of Nail Polish Off Shelves - American Apparel didn't nail its new nail polish line. The store had just launched its first collection of eighteen lacquers in December for $6 a pop, but according to a leaked internal company e-mail, there were "quality issues with the glassware," and all products had to be taken off the floor immediately. It is also no longer available online. A new polish is expected to hit stores within the next two weeks. <>


H&M, NY & Co. Settle Lead Complaint - H&M and New York & Co. agreed to abide by new restrictions on lead in purses last week when the retailers settled a lawsuit brought by a California consumer watchdog group. The Oakland-based Center for Environmental Health sued the companies, along with dozens of other co-defendants, last June. The advocacy group alleged the retailers violated California’s Safe Drinking Water and Toxic Enforcement Act of 1986 by selling handbags, wallets and other accessories containing unsafe levels of the lead. Hennes & Mauritz AB, New York & Co. parent Lerner NY and two vendors settled with the nonprofit organization in consent judgments approved Jan. 21 in Alameda County Superior Court. The Center for Environmental Health said that, according to the independent testing that prompted its lawsuit, the four companies offered accessories that contained lead levels between 13 times and more than 115 times a 300 parts per million standard reached in the settlement. In its complaint, the nonprofit said consumers, including pregnant women and children, risked lead exposure through average use of the products. It called the settlements a landmark because, in the absence of legislation on the matter, they create the first legally binding rules on lead levels in purses in the country.  <>


From Twitter to Youtube, Brands Get Creative - Get ready for marketing via social media — the sequel. The next hot TV show, music or fashion video is coming soon from a brand near you. Content is not only king, it’s multiplying rapidly and is in the hands of growing numbers of people — much to the joy, the chagrin and even fear of brand marketers who are learning from and leveraging these networks, executives said. By engaging in social media marketing, brands are putting their images and reputations on the line, associating their names with potential controversy, in hopes of entertaining, informing and provoking their followers. Whether it’s a tweet from Tommy Hilfiger, a new program on A|X TV, or a consumer’s thoughts on a Burberry trenchcoat posted at Burberry’s, content is engaging enthusiasts, spreading the day’s news, creating spur-of-the-moment parties, sports events and volunteer efforts — even sparking some purchases. “The people who win will be thinking more like a content publisher than an advertiser,” said Brian Halligan, a former venture capitalist who is now chief executive officer of HubSpot, a marketing software company. <>


Consumers `clipped` 92% more coupons from the web last year, study says - The recession prompted consumers to turn to coupons more in 2009 than they did the year before, the first increase in 17 years, according to a new study. Online coupon access increased 92% and redemption shot up 360%, although the Internet still accounts for only 1.5% of coupons redeemed, says the report from Inmar, a coupon transaction processor. Despite the rapid rise of online coupons, newspaper inserts still account for 89% of coupons distributed to consumers and more than half of coupon redemption, says Matthew Tilley, director of marketing for Inmar. Web sites accounted for 0.3% of coupons distributed to consumers and 1.5% of redemptions, Tilley says. 19.6% of online coupons are redeemed. The primary method of measuring online distribution of coupons is by tracking the printing of web pages with coupons, although other metrics, such as page views, can also be used to estimate web coupon distribution, Tilley says.  <>


Consumer Confidence Lifts Retail Shares Tuesday - Retail stocks shot ahead Tuesday morning, rising as much as 1.4 percent on an increase in consumer confidence and a modestly upbeat 2010 sales forecast, but the sector couldn’t hold on and ultimately kept less than half of its earlier gains. The S&P Retail Index ended with a 0.6 percent, or 2.24 point, rise to 398 while the Dow Jones Industrial Average slid 2.57 points to 10,194.29. Retailers joining in on the rally included Limited Brands Inc., up 4.3 percent to $19.40; Target Corp., 2.5 percent to $52.02; Nordstrom Inc., 2.1 percent to $35.03; Macy’s Inc., 1.9 percent to $15.82, and Abercrombie & Fitch Co., 2 percent to $31.05. (For more on stocks see page 14.) Investors now turn their attention to commentary on interest rates from the Federal Reserve today. The National Retail Federation predicted retail sales, excepting automobile sales, gas stations and restaurants, would rise 2.5 percent this year after falling 2.5 percent in 2009. And The Conference Board’s Consumer Confidence Index rose for the third straight month, advancing to 55.9 for January from 53.6 in December.  <>

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The Bubble In U.S. Politics

“The most important quality in a leader is that of being acknowledged as such.”

~ Andre Maurois


Now that the immediate term bubble in gold has popped and, to some extent, the intermediate term bubble in government debt has started popping, we are left with the mother of all long term bubbles – The Bubble in US Politics.


In Q4 of 2009, I called this a Banker Bonanza (a long term bubble in banker bonuses). However, to be balanced, one’s investment thesis must evolve. Since US politicians were the underwriters of Investment Banking Inc.’s compensation structure, I need to make room for them.


This global market’s supply of revisionist Crash Callers and Bubble Watchers continues to expand, so I want to be careful here. Hanging out with the consensus monkeys isn’t cool. The best way I know to make an actual call on a bubble is to A) quantify it and B) put a time stamp on it.


From here on in, we are going to be marking The Bubble in US Politics to market. We already have a name for the accountability metric: the Piggy Banker Spread. This, of course, is more commonly referred to by some as the ‘yield spread’ (the spread between the yield on 10-year US Treasuries and 2-year Treasuries – ask your local Congressman how it works).


Naturally, bubbles may be observed at their most inflated levels when looking backwards. That’s probably why so many Wall Street perma-bulls have turned into Bubble Watchers. Once someone like me has the audacity to call one of these a “bubble”, all they have to do is be on a distribution list  who forwards them our work, and tah-dah! Slap some Crayola looking charts together for effect, and they make it their own view.


In the rear view, the peak of the 2009 Piggy Banker Spread was +286 basis points wide. Again, this is as wide a spread as the politicians and bankers have ever had to chow down on. And, “AGAIN!” (Herb Brooks), EVER, is a very long time!


This morning, as we prepare for Super Bowl game day of The Bubble in US Politics, the Piggy Banker Spread is trading at +277 basis points wide. Yields on 2-year bonds are trading up at 0.85% (I know, we mice of the citizenry can take that for a rate of return on our savings accounts and cry someone a river about it – no one in Washington cares), and 10-year Treasuries are yielding 3.62%.


Why is Wednesday January the 27th, 2010 the “Super Bowl” in US Politics? Here’s my macro calendar:


1.       First, Timmy ‘The Squirrel Hunter’ Geithner and Hank ‘The Market Tank’ Paulson will be YouTubed by America testifying in front of the House.

2.       Then, Ben ‘He Who Sees No Bubbles, Inflation, or Real-Time Data’ Bernanke will pander to his politicized seat at his 215PM EST FOMC meeting.

3.       Finally, President Obama will issue his first State of the Union Address this evening.


Hooo-wah! What a great day for politics. Or maybe not…


This may very well mark the top of the Perceived Wisdoms embedded in American finance. Or wait a minute, has that horse long left the barn?


Political power can be scary. Political power backstopping the compensation structures and employment of a chosen few is downright frightening. And I don’t think the American, Chinese, or Canadian people buy into any of it anymore. Mr. Bubble Boy in US Politics, if you didn’t know that – now you know.


While this Super Bowl of politics will have the American media’s attention today, that doesn’t mean that what’s occurring on the rest of the global macro scene ceases to exist. Here’s my top 6 list of real-time risk factors to consider within your daily risk management process:


1.       Chinese equities continued to get pounded overnight, trading down another -1.1% to -8.9% YTD

2.       Weakness in Asian currency and equity markets broadened (Australian and Indian stocks lost another -1.5% and -2.9%, respectively)

3.       Rusal (the world’s largest aluminum producer) came public in Hong Kong and closed down -11% (worst HK IPO since early December)

4.       The PIGS (Portugal, Ireland, Greece, and Spain) continue to see country level CDS blow out as equity markets weaken

5.       Global CDS (credit default swaps) for 54 countries in the macro model have now seen volumes ramp up almost +15% since October

6.       Hungary issued $2B in sovereign disaster debt; they denominated the debt in US Dollars and it was their largest debt raise in 5 years


I know, that’s a lot to be concerned about - and on Super Bowl Wednesday, who in Washington needs to be bothered by any of it. Plenty of these said leaders have been elected and paid to be willfully blind. That’s a critical skill-set required for job retention when living in The Bubble of US Politics.


The SP500 has broken my intermediate term TREND line of 1096. I have immediate term TRADE support at 1077. I have a zero percent allocation to anything Asia Equities and/or anything Commodities. I remain bullish on the US Dollar and have a +52% position in our Asset Allocation Model to cash.


Best of luck out there today,





XLV – SPDR Healthcare — We bought back our bullish intermediate term view on Healthcare on 1/22/10.


EWC – iShares Canada — We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF, we bought Canada on 1/15/10 and 1/21/10.


XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).


EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 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.

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



GLD – SPDR Gold Shares We re-shorted Gold on a bounce on 1/25/10. We remain bullish on the US Dollar and bearish on the intermediate term TREND for the gold price as a result.


IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.
RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.


EWJ - iShares JapanWhile 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.


A head of “the super bowl of politics” today, all of the major indexes closed in the red yesterday.  The “super bowls of politics” is our term for today’s testimony of Tim Geithner, the Federal Reserve meeting and capping the day with President Obama’s State of the Union address. 


The Washington madness is keeping “government sponsored volatility” at elevated levels.  More importantly, the RECOVERY trade continues to feel the pressure on continued concerns about tighter credit conditions in China, as well as renewed sovereign concerns stemming from the S&P's move to cut its outlook on Japan's long-term sovereign debt rating. 


This dynamic helped fuel a bounce in the dollar, which was up 0.31% yesterday and 0.73% year-to-date.  The Hedgeye Risk Management models have the following levels for DXY – buy Trade (77.70) and Sell Trade (79.09). 


After a 52% move last week the VIX has seen a two day correction, declining 3.38% yesterday, following a nearly 6.96% decline on Monday.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (22.51) and Sell Trade (29.54). 


On the positive side of the ledger, there continues to be a favorable reaction to the better-than-expected earnings out of the Technology, Chemicals, Packaging, and Insurance and selected Energy names.  The MACRO calendar provided some support as consumer confidence continues to show some improvement and the Case/Shiller home-price index increased for a sixth consecutive month in November.


The worst performing sector yesterday was the Financials (XLF).  The banks were a standout underperformer with the BKX down 2.2% yesterday.  Financial regulatory reform is forcing the street to re-value the franchises of the nation’s largest financial institutions.  The regional names outperformed for the better part of the day before decline into the close.


While Technology closed down 0.3% it slightly outperformed the S&P 500.  The outperformance can be attributed to better-than-expected earnings from some high profile names like AAPL.  The Semis also outperformed on a relative basis with the SOX down 0.2% on the day. 


The RECOVERY trade got hammered yesterday, as Energy (XLE) and Materials (XLB) rounded out the three worst performing sectors after Financials (XLF).  The weakness in Asia and the bounce in the dollar are putting significant pressure on the RECOVERY trade.  However, parts of the Energy sector held up a bit better on the back of some early strength in the coal and oil services, underpinned by the strong earnings trends.  Steel stocks weighed on the materials sector in the wake of a wider-than-expected Q4 loss and disappointing Q1 guidance out of X. 


As we look at today’s set up the range for the S&P 500 narrowed significantly from 45 points to 19 points or 1.3% (1,077) downside and0.36% (1,096) upside.  At the time of writing the major market futures are trading flattish on the day.  


Copper is trading lower in London trading for the second day on speculation that China will curb lending.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (3.28) and Sell Trade (3.32).


In early trading today Gold is little changed but is headed lower on the outlook for a stronger dollar.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,076) and Sell Trade (1,105).


Crude oil is trading little changed ahead of the latest numbers on U.S. inventories.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (73.13) and Sell Trade (76.97).


Howard Penney

Managing Director















The Macau Metro Monitor. January 27th, 2010



The Statistics and Consensus Service reported that Macau's jobless rate was 3.1% for 3-month trailing period ended Dec 2009, down from the 3.3% rate reported for the 3-month period ended in Nov 2009. The underemployment rate was 1.9%. The labor participation rate stood at 71%. In the 4Q09 the unemployment rate of local residents was 3.7% with a labor participation rate of 66%. In 2009 overall unemployment rose 60 basis y-o-y to 3.6%.


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