Revisionist Research

“If we knew what we were doing, it wouldn’t be called research, would it?”

-Albert Einstein


After listening to Larry Kudlow cajole Hank Paulson last night, I thanked my lucky stars that men of this intellect and foresight were watching over my family between 2003 and 2007. On behalf of all Americans, I suppose they want me to thank them for saving our lives from the crisis they perpetuated.


I guess Kudlow is so caught up in running for the Republican party that he forgets demanding Bernanke provide what he called “shock and awe” liquidity to the system on all stock market down days. At the same time the ex- Goldman CEO reminds us that he “never second guessed my partners at the Fed.”


Kudlow called Paulson’s self serving Revisionist Research a “brilliant account” of saving us from their own compensation depression. They reminisced about Paulson’s Christian Scientist leanings and Kudlow’s prior addictions being saved by prayers to God. The whole thing was just scary, as Perceived Wisdom, combined with abused political and media power, usually is.


Turning the page back to reality this morning, the Chinese obviously watched that interview and had to wonder what in God’s good name they are doing betting the ranch of their currency reserves on a politically and religiously loaded American fraternity of conflicted interests.


Chinese stocks sold off again overnight, leading most of Asia to close lower, despite the CNBC oriented market cheering that’s always met with an American market up day. The Chinese don’t get paid to be willfully blind. Nor do they see any long term risk management in “never second guessing” the thought processes of two highly politicized men like Bernanke and Greenspan.


China, India, and Australia have an explicitly different view on monetary policy than America, Britain, and Japan. This is new. While 74% of “economists” thought the Reserve Bank of Australia’s Glenn Stevens was going to raise rates again overnight, he didn’t. That’s the point. He doesn’t have a Wall Street or a Washington consensus to pander to.


Countries that are leaning toward the once stated independent Federal Reserve policy (1980s, under Paul Volcker) of fighting inflation and asset price speculation continue to do just that, irrespective of being concerned with what their stock markets might do on any given minute, week, or month.


Australia has already raised rates 3-times in the last 3 months. China and India have both tightened bank reserve requirements, and raised short term lending rates. In the US, rather than manage risk like this proactively, we subscribe to reactive management, setting rate policy based on the blowings of the political wind. That’s what I have been referring to as the Bubble in US Politics.


Can you imagine Michael Bloomberg stepping up this morning and suggesting that New York City’s property prices are speculative? Could you ever imagine any American politician saying anything of the like, ever?


On Monday morning, the Mayor of Shanghai called property prices “too high.” This is AFTER property stocks in China have been getting hammered for the last 6 months. This isn’t about propping up a CNBC market quote folks. This is about learning from research associated with American asset price bubbles.


The China Banking Regulatory Commission warned lenders last night, again, about “hot money” in the property market. These guys are being both consistent in their message and vigilant in their execution of it. This isn’t leftist political rhetoric. This is called meaning what you say.


Now our call for Q1 has been that the Chinese Ox will be in a Box, so this is fine relative to the positioning of our intermediate term investment call. But please, please, do not mistake this for our grandstanding and making this a crash call. That’s what the fire engine chasers are doing AFTER the property bubble in China has already popped.


The Chinese property component of the Shanghai Composite Index closed down another 1% overnight, taking the overall Shanghai stock market index to down -10.5% for the YTD. After the fact, former Morgan Stanley research analyst, Andy Xie, is making headlines saying that the “property bubble is set to burst.”


Now don’t get me wrong, Xie does some great research. He’s by no means a consensus monkey. But calling for something to crash, after it has been crashing is probably a little bit more about selling research than making a long term call from here that you can make money on.


On January 10th, China’s State Council guided to explicit guidelines on property lending. Chinese lenders have to abide by a minimum 40% down-payment for 2nd mortgages, and price home loans 10% above the benchmark lending rate of 5.3%. Sound like an “easy money” bubble economy to you?


If you missed seeing this coming, that’s fine. But please don’t let a man purporting to be a researcher tell you that it’s either new this morning or that it wasn’t foreseeable. That’s what Larry Kudlow and Hank Paulson are telling you about 2008, rather than reminding you of all that they said and did between 2003 and 2007. History doesn’t start on the date they decide.


My immediate term support and resistance levels for the SP500 are now 1062 and 1098, respectively.


Best of luck out there today,





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.



UNG – United States Natural Gas Fund Macro DJ (Daryl Jones) and I remain bearish on Commodities. Natural Gas had a healthy price pop on 2/1/10, prompting us to short it. 


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 SharesWe 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. Russia’s GDP fell 7.9% in 2009.


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.


The Macau Metro Monitor.  February 2nd, 2010.





Macau’s trade deficit widened to MOP 2.94 billion in December from MOP 2.78 billion in November, according to the Statistics and Census Service.  One year ago, the trade deficit was MOP 2.36 billion.  Exports from Macau dropped 25.5% year-over-year to MOP 680 million in December.  Imports’ value increased 10.6% year-over-year to MOP 3.62 billion in December. 



Casino gross receipts in January exceeded MOP 13.3 billion (US$ 1.67 billion), according to The Macau Post Daily.  The revenues beat the previous monthly record of MOP 12.6 billion (US$ 1.58 billion)  in October last year.  Compared with the casino sector's gross receipts of MOP 8.6 billion in January 2009, last month receipts were up around 55 percent.  SJM took market share of 30%, with Sands China taking 22% of revenues in January.

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Monday’s political undertone was that the Volcker rules could be significantly watered down in the Senate if not just DOA.  Today, Paul Volcker is scheduled to appear before a Senate hearing, with little expectations of presenting anything new.  Today’s set up in the Senate is for party-line grandstanding, with the possibility of a few fireworks from some of the more vocal members of the Senate. 


Yesterday, the S&P 500 finished higher by 1.43% on a 34% day-over-day decline is volume.  The upward move was helped by the weakening RISK AVERSION trade, as both the Dollar index and the VIX declined.  The VIX declined 7.9%, to 22.59 and is very close to the TRADE line of 22.51.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (20.56) and Sell Trade (28.12).


On the MACRO front, upbeat manufacturing data out of the US and China helped to underpin the RECOVERY trade.  Yesterday, the ISM manufacturing jumped to 58.4 in January from 54.9 in December, marking the highest level since mid-2004. The production component was a big contributor to the January increase, rising to 66.2 from 59.7. While the orders component only saw a slight improvement to 65.9 from 64.9, it remained firmly in expansionary territory.  Importantly Employment continued to improve, moving up to 53.3 from 50.2 in December.  


Nearly every up move in the S&P 500 in 2010 has been associated with very light volume and as I said earlier yesterday, was no exception.  The best performing sectors yesterday were the sectors that have decline the most year-to-date - XLB, XLE and XLF. 


Rebounding from an oversold condition, the Materials (XLB) was the best performing sector, rising 4%.  The XLB benefited from its leverage to the ISM manufacturing data and the support provided by the RECOVERY trade. 


The second best performing sector was Energy (XLE), up 3.3%.  While all the major commodities were strong yesterday, natural gas prices led the way with t 5.9% increase.  The integrated group snapped a four-day losing streak with help from the better-than-expected Q4 results out of XOM +2.7%. The coal stocks were also very strong following last week’s selloff.


The one sector that continues to underperform is Technology (XLK).  While there was some upside leadership coming from the semi space, with the SOX +3.1%, the balance of the group can’t get out of its own way despite the continued trend of better-than-expected December quarter earnings. 


As we look at today’s set up, the range for the S&P 500 is 36 points or 2.4% (1,062) downside and 0.8% (1,098) upside.  Equity futures are trading mixed to fair value following yesterday's strong gains with concerns over potential tightening in China, the US housing numbers due out today offset by recent economic data and the fact that most 4Q10 earnings continue to beat estimates.  


The Dollar Index decline 0.1% yesterday and the Hedgeye Risk Management models have the following levels for DXY – buy Trade (78.66) and Sell Trade (79.51). 


Copper rose for a second day in London on speculation that a weaker dollar will spur demand.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (2.99) and Sell Trade (3.13).


Gold remained almost unchanged over the past week, though a strong dollar is a negative for gold.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,077) and Sell Trade (1,113).


Crude oil climbed for a second day on speculation that recovering demand in the U.S. is causing fuel supplies to drop.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (72.03) and Sell Trade (77.13).


Howard Penney

Managing Director















ASCA reports Q4 EPS on Wednesday and we are below the Street at $0.11. Below we’ve got a recap of management’s forward looking comments from the Q3 earnings release and conference call.



We are projecting Q4 EBITDA and EPS of $72.3 million and $0.11 versus the Street at $74.1 million and $0.13.  For 2010, we are only slightly behind the Street estimate, $1.02 versus $1.05.  ASCA is the only regional gamer where our 2010 estimate is close to the Street.


While lacking a catalyst, ASCA is unique in that it carries a significant free cash flow yield on net free cash flow, not just cash flow before discretionary capex.  This company is a cash cow.  We calculate a 13% net FCF yield, even after today’s big 4% stock move.  It is conceivable ASCA could grow it’s free cash flow by at least 3% over the next several years.  Management’s cash flow outlook will be an important topic of discussion on the call.





Property level commentary

  • Blackhawk: “We've had a substantial improvement in net revenues during October and an even more substantial improvement on adjusted EBITDA.”
  • “But at least during the month of October, the first month of the hotel being opening, the characteristics of the occupancy and the cash demand and cash ADRs are generally more of what we would see on a mature hotel instead of a brand-new one”
  • “We're starting to see some signs of impact from an intensive management effort including in Vicksburg.”
  • “Well, I think part of the issue with Vicksburg is the general economy. The Mississippi economy has never been the strongest that we operate in and with the current recession, there's been significant impact there. And there is additional competition, there's more gaming supply in the market which has affected our market share. I think we're seeing a little bit of light at the end of the tunnel in relationship to operating our new facility very efficiently and maximizing the customer satisfaction of coming to the new facility now…We're starting to see some margin improvement down there.”
  • “The changes we're making at Vicksburg will actually be completed during the fourth quarter. I don't know how much benefit we're going to really see in the fourth quarter that's demonstrable from that. I think we'll hopefully see some focus on margins down there irrespective of the changes.”


General Trends & Outlook

  • “We're seeing a little bit less spending per trip by patrons.”
  • “I do think it's going to be a longer and slower trajectory in terms of recovery from that in consumer spending but I think it's going to happen.”
  • “I think in East Chicago, we're looking a little bit more at the global issue with the economy and starting to see unemployment come back down. And I think in that particular market, unemployment is going to continue to go up for another quarter or two, no matter what your economist say.”


Balance Sheet/ Cash Flow and other

  • “We obviously don't anticipate borrowing any money in the fourth quarter.”
  • “We expect our leverage ratio will continue to improve. However, our fix charged coverage ratio is expected to decline slightly due to the increase in interest payments resulting from the unsecured notes offering.”
  • 2010 Capex: “What we're looking at for the coming year is somewhere in the neighborhood of say $75 million to $80 million.”
  • 2010 Capitalized Interest: “It's going to be very, very minimal. Nothing that you wouldn't want to take into account and booking at EPS.”
  • 2010 tax rate: “Next year, it should still be 42%, 43% on an annual basis.”

China's Chart Of The Day

In our presentation of our Hedgeye Macro Themes for Q1 of 2010, we used this Chinese PMI chart to emphasize our point. Our call was quite simply that the PMI was elevated and setting up to roll over from its recent 2009 highs. This morning the data reported for January did just that.


China’s PMI report for January slowed sequentially to 55.8 versus 56.6 in December.


While the sequential slowdown wasn’t material, the point is that the PMI stopped accelerating to the upside. Everything that matters in our macro model happens on the margin. The change of the slope of this line is a good example of that.


Did it matter? With Chinese stocks closing down another -1.6% overnight, taking them to -10.3% for the YTD, apparently it did. We are not calling for a crash in China. Our Chinese Ox In A Box call is simply that inflation will accelerated sequentially as growth slows. This is obviously starting to be priced in.



Keith R. McCullough
Chief Executive Officer


China's Chart Of The Day  - PMICH


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