Greenspan Groupthink

“Never ascribe to malice that which can adequately be explained by incompetence.”

-Napoleon Bonaparte


Whether it was watching Alan Greenspan and Hank Paulson on Meet The Press this weekend, or seeing Timmy Geithner interviewed from the G-7 meetings on ABC, I couldn’t help but laugh. At this stage of the game, these guys are actually quite funny to watch.


Paulson is basically on a book selling tour trying to remedy the reality of the reputation that history is assigning him. Whereas Greenspan is just losing it, and Geithner never really got it to begin with.


Maybe in another era we couldn’t analyze these men as effectively. However, today we have YouTube - and that just makes holding these guys accountable much easier. I don’t think there is any malice in their intentions. They should stop getting so defensive when we suggest that they aren’t patriots. They are simply incompetent when it comes to proactively predicting risks and recoveries.


When asked about the risk of the United States of America losing her triple-A credit rating, Geithner said “that will never happen to this country.” Conversely, the senior credit officer at Moody’s, Steven Hess, said: “If the current upward trend in government debt were to continue and become irreversible, the rating could come under downward pressure.”


Now I am not suggesting that Moody’s or the US Treasury is competent in analyzing risks before they become readily apparent. However, I’d argue that the Moody’s comment was more reasonable. In an America whose officialdom of research is a contra-indicator, everything is relative I suppose…


When discussing risks, didn’t anyone at the school of hard knocks teach Timmy to never say “never”? Ah, right – the poor Squirrel Hunter has never had a job in the real world. I almost forgot. Timmy, as a reminder, Greece’s deficit is 12.7% of GDP, and America’s is quickly approaching 12%.


Greenspan’s embarrassing forecasting track record speaks for itself. When asked for a forecast Paulson generally either pleads the fifth, reminds us that he was a banker, or looks to Greenspan for some confirmation bias. On Meet The Press yesterday, when they were being asked about where unemployment goes from here, all I could think to myself was that I hope the Chinese aren’t watching this.


Everyone and their brother in Washington DC will be worried about the unemployment rate in this country until their fears are entrenched in the rear-view mirror that history always presents. The reality is that Friday’s unemployment report was better than feared, but that doesn’t make it a bullish event for the stock market. Everything has a price.


Greenspan Groupthink argued on Sunday that “it’s important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity.”


This is precisely the kind of group-think that has made the US economy a boom and bust economy since Greenspan and Bernanke took over at the US Federal Reserve. The US stock market is not the only metric for a country’s long term health!


I know it’s somewhat unnatural for the manic media on CNBC to understand this concept; but better than feared economic news can be bad for stocks. Yes, the US stock market is one very important real-time metric for risk managers to absorb into their research process, but it’s certainly not the only one.


Last year we were bullish on anything priced in what we labeled the Burning Buck. For the start of 2010, we have been calling for a Buck Breakout. Now, everything priced in bucks is under pressure because the buck is smarter than Bernanke. The buck is baking in a change in Bernanke’s currently conflicted monetary policy. He needs to raise rates.


Hank Paulson wants everyone to fear the unknown. If I have to hear this guy tell me about “the alternative” to his endowing our great country with his emotionally charged state of 2008 one more time, I guess I am going to just have to keep calling him out on it. The alternative to Paulson and Greenspan Groupthink is exactly what this country needs.


The most obvious unknown today is how the US Federal Reserve signs off on an “emergency level of zero percent” returns for all Americans with a savings account with GDP running up +5.7% year-over-year, CPI (Consumer Inflation) up +2.7% year-over-year, and the unemployment rate rolling over.


Don’t ask an incompetent forecaster for the answer on where unemployment goes from here. They might actually get Washington to keep acting on their reactive opinion.


I was short the SP500 for most of last week, but covered my short position then went long it with the SP500 close to its intraday lows on Friday. I’ll be keeping a trade a trade on the long side of the US stock market as long as we have this circus act leading us down the next path to who knows where.


My immediate term support and resistance lines for the SP500 are now 1058 and 1085, respectively.


Best of luck out there today,





SPY – SPDR S&P 500 — We bought the S&P 500 for the immediate term TRADE on 2/5/10; the long term TAIL of support continues to be bullish.


FXA – CurrencyShares Australia Dollar — Aussi Dollar bulls finally capitulated on the sell side on 2/4/10. We bought FXA as a long term TAIL idea that remains intact, at a price. Glenn Stevens remains our favorite central banker, globally.


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 — We added to our position in Germany on 2/4/10 on 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 — The long term TAIL of support for Brazil's Bovespa remains intact. We added to our position and bought EWZ on 2/4/10 on a -6.1% drop in the ETF, because the math is telling us to.

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.


EWW – iShares Mexico We do not want to be net long Latin America (Brazil) anymore. Mexico short is a solid compliment to our short position on oil and our concerns about sovereign debt risks.


EWJ – iShares Japan We shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.


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. 


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.


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.


The S&P 500 finished higher on Friday by 0.29%.  Intraday the S&P500 for the immediate term was oversold, so we bought the SPY; the long term TAIL of support continues to be bullish.  Continued concerns out of Europe dominate the sentiment as the VIX was up 0.26% for the day and 6% for the week.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (22.29) and Sell Trade (27.02). 


On the MACRO front, January nonfarm payrolls were down 20,000 vs. consensus of 15,000; December nonfarm payrolls saw a significant negative revision to (150,000) from (85,000).  The unemployment rate dropped to 9.7% vs. consensus 10.0%.


On a better than feared unemployment report, the “Buck Breakout” continued putting pressure on commodities and the REFLATION trade.  The Hedgeye Risk Management model has levels for DXY at – buy Trade (79.27) and sell Trade (80.39). 


Despite the dollar rally on Friday, the Materials (XLB) was the best performing sector rising 1.9%.  Over the past month the XLB was the worst performing sector declining 10.7%.   Also seeing a bounce on Friday was the Technology sector (XLK).  Helping to support the move in the XLK was the semiconductors with the SOX up +2.4% on the day. 


The biggest looser last week was commodities with the CRB down 1.93% on Friday and 2.65% for the week.  On Friday oil traded down 2.67% and has now declined for four weeks in a row.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.57) and Sell Trade (74.21).


As we look at today’s set up the range for the S&P 500 is 27 points or 0.75% (1,058) downside and 1.7% (1,085) upside.  Equity futures are currently trading mixed to fair value and off earlier highs as the market is facing a quiet week on the MACRO front.  European sovereign debt issues remain in focus although CDS levels for those countries deemed most at risk of default are trading slightly tighter.


In early trading copper rebounded from a three-month low in London as a decline in the U.S. unemployment rate improved investor confidence in the strength of the global economic recovery.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.77) and Sell Trade (3.06).


In early trading gold is trading higher after declining 1% on Friday.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,055) and Sell Trade (1,090).


Howard Penney

Managing Director















We’ve been writing on the divergence between FSR and QSR of late but yesterday it was the divergence between BKC and YUM that caught my eye.  Yesterday, both YUM and BKC reported calendar 4Q09 EPS and the street’s reaction is clear in the table below. 


YUM greatly underperformed, declining 5.5% on a big uptick in volume as compared to its 30 day average.  On the other hand, BKC significantly outperformed (especially given that the S&P 500 was down 3%), closing up 2.9% also on strong volume.  Just looking at the short interest alone, the street was expecting something different, as reflected in YUM’s short interest at 2.1%, only slightly higher that MCD’s at 1%.  The BKC number, however, is a surprisingly high 11%.  Clearly, part of yesterday’s move in BKC was short covering, as the quarter was not that bad.  Investor reaction suggests that it was better than YUM’s.





While movements in the stock tell us something, the fundamentals seem to confirm it in this case.  YUM, MCD, and BKC, have all seen sharp declines in their U.S. comparable-store sales trends.  It is interesting to note that BKC’s U.S. & Canada two-year comparable-store sales trends actually improved on a sequential basis in 2FQ10, to -0.7% from -0.8% in F1Q10.  YUM’s U.S. comparable-store sales continued to decline on a one and two-year basis in 4Q09 at -8% and -3%, respectively.  This implies a 150 bp sequential decline in two year trends from 3Q09.  MCD’s two-year comparable-store sales trends also deteriorated in 4Q09 but remain positive at 2.6%, down from 3.6% two-year trends in 3Q09.


The respective management teams’ comments on recent conference calls were also informative; MCD and BKC expressed some optimism about trends in January whereas YUM implied no improvement in its U.S. QSR trends.  MCD stated that trends in January were better than in December when the impact from weather was factored out (which they estimated to be -3%).  BKC’s management labeled January a “bifurcated month” where the first two weeks were marred by bad weather but the last two weeks saw traffic bounce “back to positive again” in the U.S.  YUM did not sing to the same tune on their conference call, stating that they would not comment on sales trends in the middle of the quarter in the absence of “a very significant change in results”.   YUM emphasized that Pizza Hut has seen a “dramatic” improvement following the recent focus on value but did not give any update on trends in KFC and Taco Bell, which implies that we won’t see much of a pickup in underlying trends in the first quarter of 2010 from the 4Q09 trends of -8% and -5%, respectively (though comparisons do get easier).


YUM’s international trends have been a cause for concern.  On a sequential basis, for 4Q09, two-year comparable sales trends deteriorated for YUM’s China and International divisions.  Again, based on management’s comments, we are not expecting much of an improvement in the first quarter.  While the respective companies’ reporting methods do not allow for apples-to-apples comparisons of international trends, MCD’s APMEA trends have also shown softness, reflecting weakness in China, but two year trends improved in the fourth quarter from the relatively softer level in 3Q09.  MCD’s two year trends in Europe slowed slightly in 4Q09, but remain above 6%.  BKC’s EMEA/APAC and Latin America trends improved during the quarter on a two-year comparable-store sales basis.


Earlier this week I suggested that YUM’s aggressive capital spending in China over the last four years is starting to have an impact on the sustainability of the current growth rate.  The company went to great lengths on its earnings call to dispel this notion.  Time will tell.


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SKX: Inching Closer to a New DC

In an 8K released last night, SKX made the long awaited announcement that they have finally secured land to develop their new distribution center.  While much of the attention on the stock has shifted towards the success of its Shape-Ups shoes, supply-chain inefficiencies and its related drag on profitability has seemingly faded into the background of late.


With land secured, the company can now move forward in developing its new DC, which management has maintained will be accretive day 1. One thing to keep in mind here is that while this is indeed a positive from a longer-term sustainability perspective, the company will incur duplicative costs near-term. Once the new DC becomes operational, however, the costs eliminated and efficiencies gained from the transition will be a material positive (see notes below for details). The question now appears to be one of duration and whether the tailwind from Shape-Ups sales will persist as the company spends to build its business. If sales from Shape-Ups start to fade as SKX undergoes this transition later in the year or early in 2011, the upward trajectory in SKX’s margins could come to a end – abruptly.


Here are a few highlights from the 8K filing along with notes on the topic from our meeting with management a few months ago:

  • “The purpose of the JV is to acquire and to develop real property consisting of approximately 110 acres situated in Moreno Valley, California (the "Property"), and to construct approximately 1,820,000 square feet of buildings…” 
    • HE: at this size, capacity will be ~30% larger than the 5 building capacity currently in place.
  • “The Company, through Skechers RB, LLC, will make an initial cash capital contribution of $30 million
    • HE: This is within (below) the range of $35-$40mm mgmt expected to spend in add’n to what they’ve already spent on equipment for development –
  • “In the event that either the construction loan is not finalized or construction does not begin by June 1, 2010, the JV is null and void and the parties are entitled to receive return of their initial capital contributions in the form contributed.
    • HE: Management mentioned only 3-weeks ago out at ICR that they expect to break ground in March –
  • The base rent shall be $933,894.44 per month during the Lease.

Notes from recent meetings with management:


DC Transition Update:

  • Latest timing expected to be 3Q of F10 or 1Q of F11
  • Already spent $40mm in equipment (currently sitting in storage)
  • Will have to spend another $35-$40 in 2H F10 towards installation of equip, software, & programming (CapEx)
  • Will be located in southern California
  • Will be accretive day 1
    • Due to the savings from consolidating 5 buildings to 1 = $5-$7mm in transportation savings
    • Massive reduction in head count ~900 @ $50k/head = ~$45mm in payroll savings
      • 1 employees currently in 5 buildings
    • New equipment will be able to move 60-70mm pair of shoes /yr
    • ~$75-$80mm to depreciate over a 12-year period = incremental $6-$7mm in D&A
    • Currently have 1.4mm sq ft. in capacity in 5 buildings currently could hold 13-14mm pair
    • 30 containers a day delivered with 6k pair each

The Week Ahead

The Economic Data calendar for the week of the 8th of February through the 12th 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 - zz1

The Week Ahead - zz2






"The fourth quarter was a tough one for us, and we're disappointed.  While the first half of the year was solid, the continuing deterioration of the economy resulted in less visitation and lower play per customer. We started to feel the economic downturn in late summer and we increased our marketing efforts. As a result, we maintained or increased market share in many of our larger markets, but our margins declined."

- John Giovenco, Pinnacle Entertainment's interim chief executive officer


Highlights from the Release

  • "As we enter 2010, we are focused on our commitment to increasing shareholder value. We're concentrating on operating efficiency and, in particular, effective marketing. We're evaluating our underperforming and non-strategic assets; reducing corporate overhead costs; taking a disciplined approach to capital spending; and developing Sugarcane Bay and Baton Rouge in Louisiana."
  • "To achieve these goals, we redesigned both our Sugarcane Bay and Baton Rouge projects, resulting in a reduction of more than $100 million in Sugarcane Bay's cash construction costs; restructured corporate and property marketing to result in a significant net reduction in headcount; subsequent to year-end decided to put our Atlantic City assets up for sale; listed the company airplane for sale; hired two highly experienced general managers for Boomtown New Orleans and Lumiere Place; moved to consolidate our three Las Vegas offices into one; reduced corporate overhead; and plan to institute a new compensation program that rewards executives for increasing long-term cash flow and EBITDA. We believe these actions will improve operating results."
  • "Separately, the board has engaged the international recruiting firm Heidrick & Struggles to help conduct the search for a new executive to succeed Pinnacle's former chief executive officer... The search is well underway, and we will announce a resolution at the appropriate time."
  • "Banc of America Securities LLC and J.P. Morgan Securities, Inc. have been selected as Joint Lead Arrangers for this new credit facility, which has a maturity date of March 31, 2014. Commitments from banking institutions toward the new credit facility have been received in the amount of $375 million. The Company expects that the new credit facility will close in the next few business days."
  • Property specific commentary:
    • "L'Auberge du Lac's market share improved to 52.6% in the period from 50.2% in the prior-year period. While the overall regional economy was softer in the 2009 fourth quarter compared to the 2008 period, unemployment statistics remain more favorable in this region than the nation as a whole."
    • "Market share at Lumiere Place climbed from 17.1% in the 2008 fourth quarter to 20.5% in the 2009 period."
    • "Boomtown New Orleans was affected by market softness as reduced Katrina relief efforts and related spending, reduced construction activity, reduced discretionary income, and weaker economic conditions have dampened operating results throughout the region. As such, marketing efforts by the competition have increased dramatically. The Property's increased marketing programs did not produce intended results"
    • "These results reflect the opening of expanded and enhanced casinos at two competing facilities, as well as softer general economic conditions. As a result of competitive pressures in the market, 2009 fourth quarter results at Belterra reflect increased marketing spend to compete against the augmented competition."
    • "We were able to maintain market share; however, revenues in the Bossier City/Shreveport market were down 13% for the fourth quarter of 2009 compared to the prior-year period."
    • "Boomtown Reno has been affected by significant competition from northern California Native American casinos, as well as weak economic conditions in both the region and northern California. Employee headcount as of December 31, 2009 has decreased 11% from December 31, 2008. The Company has targeted additional areas at Boomtown Reno to further reduce costs in 2010."
    • "Revenues have decreased due to a recent decline in the value of the Argentine peso, as well as weakness in the Argentine economy. The decrease in Adjusted EBITDA reflects the currency decline and inflation of certain costs, principally payroll costs."


  • Other properties start to feel the pressure of the recession at the end of the 3rd quarter and in response they increased marketing. So they had a double hit to earnings, lower revenues and higher marketing
  • Attacking costs at the corporate and property level, continuing to reduce headcount throughout the company
  • Recently the board separated the roles of Chairman and CEO.  The committee is currently interviewing CEO candidates


  • How much costs can they take out of corporate and property level expenses?
    • More of a question on can marketing become more efficient.  So costs will get reduced as a function of increasing efficiency (marketing is the largest cost opportunity)
  • Pricing on bank facility will be at L + 400 bps based on current leverage levels, may close today or Monday. No LIBOR floor (now its 23bps).  Intention is to close the facility at $375MM in size. Covenants in new deal will be more "accomodative" to their current operating plans
  • Spent $75MM on cash capex in 4Q09, $57MM was River City. $9MM on Sugarcane & Baton, rest was maintenance
  • 2009 cash spend $213MM, $157 on RC, $15MM Sugarcane Bay & Baton Rouge
  • Belterra: What happened there? What are they doing to improve things, given that the competitive environment isn't going to change?
    • Had increased competition with several boats (Lawrenceburg) in the area and increased marketing costs in response - to a level that they shouldn't have
    • It all comes down to spending marketing dollars in an effective way, have been focused on implementing those processes over the last two months and will see some results
  • How to think about cannibalization from River City on Lumiere Place?
    • View those two properties as a singular portfolio.  Don't worry about the cannibalization, but rather how much they can do as a whole.
  • AC: hope to sell it as soon as a reasonable bid comes in. They just put it up for sale
  • CEO search has been narrowed to a smaller group of people including some internal people
  • Why move forward in Baton Rouge, given how under pressure that market has been?
    • Feel like they have a locational and product advantage
    • Economic pressures are likely to be short term in nature and by the time they open there should be a different environment
  • The R/C will not entirely complete their financing needs, but it is a large part of it. Still need some capital which they will get to on an opportunistic basis
    • Sugarcane is not quite fully financed at this point either (self imposed liquidity needs)
  • Impact of low hold on L'Auberge? $1.5MM
  • River City opening will not impact corporate overhead
  • New CEO will be more of an operating than a development guy/or gal
  • Total capex spend for 2010: $35-40MM of maintenance, completion of RC + Sugarcane & Baton Rouge and some smaller projects
  • Are they going to move the corporate office closer to their operations? No, they already have leases in place, and would need to relocate everyone
  • Why haven't they hired investment bankers to pursue strategic opportunities
    • Think they can do a better job operating their assets and thereby grow their share price
  • Free play in Indiana?
    • Monitoring it, but no idea of the chances
    • Tables games at Betteroff would have a negative impact on them
  • Have until March 31 to submit a construction contract for Baton Rouge and have no intentions to extend that deadline
  • Bossier City, what to they attribute their success to in that market?
    • Have good efficient marketing
  • Try to keep the Sr. Secured leverage low
  •  No more room on the Sugarcane budget

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