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Similar to the rest of the Regionals, PENN could miss Q4 projections.  2010 commentary will likely drive the stock.



PENN will report Q4 EPS on Thursday morning.  We expect a miss.  Street is at $0.19 and we are projecting $0.16.  There is always the potential for a lower tax rate, lower corporate expense, etc., but we believe the underlying property metrics will disappoint.  Looking ahead, PENN should provide its first look at 2010 and again we think the guidance will come in below consensus estimates.  We are projecting $1.27 and $598 million in EPS and EBITDA, respectively versus the Street at $1.40 and $639 million. 






  • “We obviously continue to feel challenged with the softening of the consumer on a macro basis. As you see economic data coming out regarding the de-leveraging of the consumer and increased savings levels from them, it's certainly is reflective in what we are seeing in our demand and our businesses.”
  • “Visitation continues to be flat, in some cases actually like Lawrenceburg showing growth, but clearly spend-per-visit and time-on-device is expecting many of our businesses, even though we showed slight revenue growth year-over-year.”
  • “There is no question we are seeing the migration down in terms of customer where they are still coming, but they are playing at lower periodical levels than they had in prior year, any even in prior quarter, so that’s obviously is affecting the top line of business, we continue to be appropriately aggressive in adjusting our cost structures, our labor levels , our marketing spend.”
  • “It’s more of the same as we saw in the second quarter and as we highlighted in our results the month of August is really the softest we saw in the third quarter.”
  • “I think we haven’t seen any change in any of the trends in October that we’ve seen in the third quarter.”
  • “We saw in the third quarter that the trends continued to decline as we look at year-over-year numbers. So we are not seeing any recovery yet from the consumer in terms of those metrics that I outlined.”
  • “Our business are not declining as much as our spend-per-visit. And I don’t think that is kind of at least it’s not a situation where the customers don’t like our products they just don’t have the money that they used to have to spend on.”  



  • Lawrenceberg: “We are not getting growth in our VIP segments that we had hoped for and we recognized that we are working right now and improving the non-gaming amenities in Lawrenceburg. We are going have a new meeting space complete late this year, early next year. So that we can conduct more VIP special events in a high quality environment on the casino floor. And we are improving the tiered restaurants that are on that third level in that space, which will be finished in the late second quarter, early third quarter of next year.”
  • “Looking into the fourth quarter, we’ve got maintenance CapEx of roughly 36, project CapEx of 49 and that includes Maryland, Joliet and again some expenses in Lawrenceburg to come up with this whole.”
  • What % of cost cuts are sustainable? “I think when you look at what’s been done if volumes come back and we start showing growth, yeah there will be some of that, but I would think two-thirds of it is sustainable.”

Political Groupthink

“Wide acceptance of an idea is not proof of its validity.”
-Dan Brown (The Lost Symbol)

This weekend’s political and economic commentary was fascinating to observe. If you didn’t know that there is a Bubble in US Politics, now you definitely know. American politicians are more concerned with their jobs and partisan grand-standing than with addressing what is painfully missing in this country – re-establishing some accountability and trust in our leadership.
Domestically, we had plenty a Wall Street/Washington “economist” carted out to explain the strength of Friday’s +5.7% GDP report. Since most of them completely missed calling the US economic crash, then missed calling for the recovery, I guess it’s only fitting to have them explain why they know these numbers so well. It’s actually quite pathetic to watch.
Internationally, we had the soothsayers of the free money Levered Long Cycle at the World Economic Forum in Davos, Switzerland enlightening us with their latest predictions on where we are headed next. Again, I doubt many of these folks use YouTube like the new generation of Millennials, but we simpleton researchers here in New Haven, CT do. Whatever happened to the Great Depression part deux that they were all calling for in Davos last year?
All the while, ex-Goldman CEO, and former head of Political Groupthink at the US Treasury was on a book selling road-show titled, “On The Brink: Inside the Race to Stop the Collapse of the Global Financial System.” Apparently the man who signed off on levering up Goldman during the speculation bubble is now writing books about how he saved us from it all. Nice. Get that man another $100M, and a break on his taxes!
The mantra of the Bubble in US Politics has been to perpetuate a crisis so that these unaccountable fear-mongering politicians can look like they are solving it. This is not a surprise. It’s just plain sad.
Hank Paulson and the old boy club are feverishly trying to write their version of US history before we do. Here’s what he wrote in his book about the following architects of this financial disaster:
1.      Ben Bernanke – “Easily one of the most brilliant people I’ve known.”

2.      Timmy Geithner – “keen analytical mind and a great sense of calm.”

3.      Barney Frank – “scary smart, ready with a quip and usually a pleasure to work with.”

Unfortunately, I couldn’t make up these quotes if I tried, and they really summarize my point. This is what scares me the most about the America that my wife and I are about to welcome another child into - that Hank Paulson and Barney Frank consider themselves “scary smart.”
It’s scary alright. There is nothing that scares me more than Perceived Wisdom combined with political power. This country is on the brink now. We are on the brink of losing all that has made this country one of the greatest in the world. We are becoming hostage to a Bubble in US Politics.
Into Friday’s strong US market open, I shorted the SP500 (SPY) for the first time in a long time. Yes, the SP500’s intermediate term TREND line (1098) in my macro model is broken, but so is my appetite to carry these mounting political risks.

In an interconnected marketplace of colliding global macro factors, it’s very difficult to quantify political risk. So I just keep it simple. Mr. Macro Market votes on the impact that politicians have on market prices every day. During the week we labeled the Super Bowl of Politics, the SP500 closed down -1.6%.
I really couldn’t care less who Hank Paulson considers “brilliant, calm, or smart.” What I care about is managing the risk that these people are imposing on the hard earned savings of American families who need someone to stand up for them.
Call me a maverick or a mouthpiece. Call me Forrest Gump or Mucker. Call me Canadian or American. I really don’t care. Just don’t call me part of this colossal failure of Political Groupthink.
My immediate term lines of support and resistance for the SP500 are now 1056 and 1098, respectively. On Friday morning’s market strength, I raised my position in cash to 64% in our Asset Allocation Model.
Best of luck out there this week,


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


XLE – SPDR Energy
The Energy ETF was up +1.7% on 1/29/10 and we remain bearish on both oil and commodity prices for the intermediate term. Shorting green.

SPY – SPDR S&P 500
The SP500 broke our intermediate term TREND line earlier this week and remains broken. The 4Q09 GDP report confirms that Bernanke has to raise interest rates. ZERO is not a perpetual policy unless the USA wants to become Japan. We shorted SPY on 1/29/10.

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 Treasury
One 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. Russia’s GDP fell 7.9% in 2009.
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.

US STRATEGY – Objects are closer than they appear

In the business world, the rearview mirror is always clearer than the windshield.

-Warren Buffett


As I said on Thursday, the initial estimate of GDP is the most heavily rigged and politicized data point put out by the government.   Friday’s headline GDP number of 5.7% was a very strong number, but the advanced number is more about politics than reality about the strength of the US economy.  More importantly it’s looking in the rear-view.   


The markets were lower on Friday after rising initially from the strong GDP number.  The REFLATION trade continues to unwind with the strength in the US economy, which is dollar bullish.  The Dollar index was up 0.71% on Friday and is now up 2.06% year-to-date.  The Hedgeye Risk Management models have the following levels for DXY – buy Trade (77.87) and Sell Trade (79.51).  With our “Break-out Buck” theme we are dollar bullish in 1Q10. 


Also on the MACRO front there were other bullish economic data points out on Friday.  The January Chicago Purchasing Managers Index was 61.5 vs. consensus at 57.2 and the final January University Michigan Confidence reading was 74.4 vs. consensus at 73.0.


The Greece debacle continues to live on.  The reports of EU willingness to consider providing relief to Greece met “Europeans Pointing Fingers” (see or 1/29 post) with sharp denials.  The issue has demonstrated that European countries are quick to dismiss their own problems in favor of calling out their neighbors.


The VIX was up 3.75% on Friday and is up 13.56% year-to-date.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (22.37) and Sell Trade (28.94).


Regardless of how fast they are growing or innovating, Technology (XLK) was the second worst performing sector on Friday and year-to-date.  The semiconductor index is under considerable pressure declining 3.42% on Friday.  Year-to-date the SOX is down 12.18%.  Friday’s standout to the downside was SNDK, declining 11.67%, on a decent quarter, but underwhelming guidance.  Mr. Softie (MSFT) also reported a good quarter but declined 3.36% on Friday.


On the back of the stronger confidence numbers, two of the three best performing sectors on Friday were consumer - XLY and XLP.  While the GDP number was strong, the personal consumption expenditures declined sequentially down to 2.0% annualized from 2.8% in 3Q09 and the personal savings rate increased slightly to 4.6% from 4.5%.


As we look at today’s set up the range for the S&P 500 is 32 points or 1.5% (1,056) downside and 2.3% (1,098) upside.  At the time of writing the major market futures are trading up on the day.  


In early trading today Copper is trading lower to an 11-weeks low; a stronger dollar and concern about China’s demand.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (3.03) and Sell Trade (3.12).


In early trading today Gold is little changes but could trade higher today on a weaker dollar.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,066) and Sell Trade (1,111).


Crude oil is little changed over concerns over the pace of demand growth.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (71.38) and Sell Trade (77.08).


Howard Penney

Managing Director


US STRATEGY – Objects are closer than they appear - sp1


US STRATEGY – Objects are closer than they appear - usd2


US STRATEGY – Objects are closer than they appear - vix3


US STRATEGY – Objects are closer than they appear - oil4


US STRATEGY – Objects are closer than they appear - gold5


US STRATEGY – Objects are closer than they appear - copper6


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The Week Ahead

The Economic Data calendar for the week of the 1st of February through the 5th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - wa1

The Week Ahead - wa2


Shorting Oil

Earlier this morning, Keith shorted the XLE in our virtual portfolio.  We’ve outlined the chart of this etf below, but suffice it to say oil, the commodity, and oil producers, as represented in the XLE, are broken.  The key drivers behind this breakdown are the inverse correlations with the U.S. dollar, an ongoing slowdown in China, and burgeoning inventories globally.


Two days ago we wrote a note titled, “Oil is Broken”, and we noted:


“As we discussed ad nausea last year, the direction of the price of the U.S. dollar is critical for determining the price of those commodities priced in dollars.  In the year to date, the U.S. Dollar Index is up ~0.74% and, not surprisingly, Oil is down ~-6.61%.  While last year the inverse correlation was more like 4.5:1, early on this year it seems like that factor is accelerating.  One driver of this is likely the slowdown occurring sequentially in China.”


As the Chinese proactively slow their economy in the first half of this year via lending restrictions and higher interest rates, it will continue to have a negative impact on the demand side of the equation for commodities and primarily oil and copper.  China is the world’s GDP market share taker and as its growth slows, even on the margin, it has an amplified impact on the demand for commodities, which is negative for price in the intermediate term.


On January 27th the DOE reported inventory numbers for oil and oil products.  While oil actually showed a draw of 3.9 million barrels, which is bullish on face value, this was quickly attributed to weather issues in the Gulf of Mexico.  Most disturbing for those bullish of oil were the build in inventories of both gasoline and distillates, which suggest a soft demand situation in the United States, the world’s largest user of petroleum.


The chart of the XLE and its key levels is outlined below.


Daryl G. Jones

Managing Director


Shorting Oil - xle29


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