Selling Fear

“We have a product for sale called news, and I’m the salesman.”

-Shepard Smith


You can call Fox News what you will, at least Shep calls what he does like it is. Living a life in front of a camera definitely requires some off-stage face time with a mirror. I wish more people in the manic media would realize that. Self-awareness is important.


I’m my own media, and yes I’m a salesman too. I have no shame in saying so. Selling things you believe in is cool. Some people sell religion. Some people sell dreams. Some people sell fear.


It’s a lagging indicator, but Selling Fear is something that’s become quite popular for both Washington and Wall Street ever since most of these people missed calling the stock market crash. To some extent it’s about job security. To some extent it’s about group-think. To some extent it’s just plain sad.


Being a risk manager doesn’t mean waking up every morning and scaring the living daylights out of your readers or viewers. On quite the contrary, managing risk is about understanding that risk works both ways.


Orchestrating your decision making at the extremes of hope and fear is where the real risk management happens, not in front of a room full of sell-side bankers and brokers who are chowing down on some rubber chicken road-show lunch.


On the topic of Sovereign Debt for Dummies, I wrote about Harvard’s Ken Rogoff becoming a consensus-fear indicator yesterday. He’s right back at it again this morning, stealing the headlines of the manic media with a fear-mongering call to action against China. The headline reads “Rogoff Says China Crisis May Trigger Regional Slump.” Oooh. Ahhh. Scary, eh?


Not so much folks. You see, while some of these academics like Niall Ferguson, Nouriel Roubini, and Ken Rogoff should be commended on the highest order for calling out real risks before the crowd saw them coming, these guys aren’t God. At least not mine…


The manic media props these academics up as risk managers, when in reality what they become are classic contrarian indicators. Managing risk is like driving a car. The weather changes daily, and so do the hopes and fears of everyone else on the road. Real-time risk on the road doesn’t happen in the vacuum CNBC is piping you from the radio as the crash they missed calling is staring at you in the rear-view mirror.


Let’s get back to China. And for accountability’s sake, maybe you give us some knucks for calling out the Chinese Ox In a Box at the top, because my team did. China has tightened lending terms multiple times in the last 3 months, and has seen their stock market lose almost -10% of its value as a result. AFTER this self-induced correction in their own property and stock markets, Rogoff says “if there’s a this-time-is different story in the world right now, it’s China.”


Ok Ken. Thanks. So after selling off to higher-lows earlier this week, what did China’s stock market do on that overnight? You got it Pontiac - it went straight up…


China’s Shanghai Composite closed up +1.3% last night at 3022, and instead of being down -10% for the YTD, it’s now down -7.8%. Importantly, Chinese stocks are now making a series of higher-lows. They have also held what I see as their long term TAIL line of support (2897 on the Shanghai Composite). That, combined with Chinese crash calling becoming consensus fear is bullish, on the margin.


Again, the easier thing for me to do this morning would be to wake-up and dog-pile Rogoff’s warnings – Selling Fear. But that’s not the prudent thing to do for your portfolio. The risk manager in me is now asking the question that we asked of ourselves before getting bullish on China in December of 2008 – if there’s a consensus call lurking in the halls of those Selling Fear this morning, may that be the “short China” call that we ourselves have supported?


Rogoff says China’s GDP could drop to 2%. Sorry dude, not in the next 3, 6, or 12 months. Heck that might not happen for the next 3, 6, or 12 years; but, again, our risk management strategy isn’t to make open ended predictions like the one Ken just made. We focus on this thing called timing. That’s what academics like Roubini and Rogoff don’t do. Not saying when is the hallmark of Selling Fear.


I remain bullish on a Buck Breakout, bearish on US Treasuries, and bearish on gold. Over the course of this 2-day correction, I have moved to neutral from bearish on US stocks. At a price, I will go bullish. I dropped the cash position in our Asset Allocation Model from 64% to 61% yesterday. I’m in no rush to buy things, but Selling Fear is not what I recommend doing after virtually every stock market in the world is down on the year-to-date.


My immediate term support and resistance levels for the SP500 are now 1090 and 1121, respectively.


Best of luck out there today,





XLF – SPDR Financials — With sentiment negative and a Piggy Banker Spread hitting a record wide spread on 2/23/10, we bought red.


XLK – SPDR Technology — Technology is underperforming the SP500 YTD; a down day on 2/22/10 prompted us to buy more. We expect to see some positive mean reversion for Technology as M&A picks up.


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).

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 We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.


RSX – Market Vectors RussiaWe shorted Russia on 2/9/10 and maintain our intermediate term TREND bearish view on the price of oil.


XLP – SPDR Consumer StaplesGiven how many investors own Consumer Staples stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.


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.


So the “Big Four” slot suppliers each increased or maintained ship share in CYQ4. That’s what they said.  Sound implausible? It does to us. IGT needs to rerun its numbers.



Here our some quotes from Q4 CY2009 conference calls:


IGT Management - “But our internal estimates should base on tracking of one order to the next, would suggest we're somewhere around 40% on the replacement side, which is consistent with where we were for Q4”

  • More like 30% for replacement demand by our estimation
  • 31% including sales into new and expanded casinos, down from 42% in CYQ3 and 39% in Q4 CY2008.

BYI Management - We estimate that we maintained our game ship share in the low 20s…”

  • We calculate ship share was more than maintained, it actually grew from Q3 CY2009
  • 20% looks like the right market share to us in Q4 but we could be off by one or two percentage points

WMS Management - We've said previously that we would be disappointed if we couldn't get above that 30% replacement share. We think we did very well for the quarter but until everybody reports, we're not going to know. I believe that if we did compare favorably to our biggest competitor who announced last week, but until the others report, we won't know exactly what our share is but we're guessing it's in the low thirties.”

  • We calculate replacement ship share at 31%, in-line with management’s assertion
  • WMS did compare favorably with IGT, increasing its overall ship share from 20% in Q3 to 26% in Q4.  Nice work.

ALL Management - In North America, an increased ship share and growth in our gaming operations installed base was more than offset by significantly lower demand, including in the systems market.”

  • We agree 100%.


The following chart shows the slot ship share trends for the “Big Four” suppliers.  Since some of the analysis involves assumptions, we may be off by a percentage point or two here and there but for the most part we feel good about our numbers.  While one quarter does not make a trend, the other three suppliers seemed to gain share in Q4 CY2009 at the expense of IGT.



Duration Mismatch: Greece

With Greece still a top story from the Manic Media, we thought it worth posting the charts below that indicate the “big moves” associated with a scenario in which Greece defaults on its sovereign debt are behind us, for now.


Note that we’re not ruling out default over the intermediate term TREND (3 months or more); not only is history on our side for this call, but it’s fair to say that while fears have waned marginally on the inability of the Greek government to repay its obligations (see CDS and 10-yr bond yield charts), Greek officials have failed to convince the European community and investors at large that it will systematically draw down its spending and shave away its budget and public deficits. 


Yet cutting spending could be easier said than done.  Don’t forget that calls for government spending cuts have brought people to the streets and that a massive demonstration [riot] is scheduled for tomorrow, with public and private sector unions representing half of Greece’s five million workforce expected to walk off the job for 24 hours in protest.


Our next catalyst is a possible Greek 10-year bond issuance of 3-5 Billion EUR that could take place as soon as later this week. The demand for the bond could say a lot about the future direction for Greece.


Matthew Hedrick



Duration Mismatch: Greece - G1


Duration Mismatch: Greece - G2


Duration Mismatch: Greece - G3



Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.


Sanderson Farms stated today on its earnings call that the 36.4% increase in fiscal 1Q10 average jumbo wing prices was driven largely by continued strong demand for wings in both the food service and retail grocery channels.  BWLD’s same-store sales slowed throughout 4Q09 and restaurant level margin declined 90 bps YOY.  Sanderson Farms’ comment does not bode well for BWLD from a top-line or margin standpoint.


Increased Competition:


BWLD’s 4Q09 same-store sales came in +2.6% after being up nearly 6% in the first four weeks of the quarter, implying a significant slowdown in November and December.  Comparable store sales trends in the first six weeks of 1Q10 are only up 0.5%.  The company is lapping a +8% number from the same six week period in the prior year, but regardless, the +0.5% is soft relative to expectations.  Management attributed the soft start to the quarter to weather. 


Sanderson Farms does not appear to be seeing this same fall off in wing demand, which could signal that BWLD is losing share.  BWLD did comment that it will be promoting a Boneless Wing Thursday during the first quarter, in addition to its long-standing Wing Tuesday, in order to stay competitive as the value equation is top-priority for its guests.




Increasing Costs:

During 4Q09, the cost of traditional wings increased 40% YOY to $1.78 per pound.  Through the first two months of the first quarter, this cost has moved up to $1.95 per pound.  Assuming this $1.95 level for the entire first quarter implies a nearly 20% increase YOY (wing prices started to move relatively higher in 1Q09).  Management guided to 50 bps of YOY cost of sales pressure in 1Q10.  It is important to remember that traditional wings accounted for 22% of BWLD’s restaurant sales in 4Q09, up 100 bps from the prior year. 


When asked specifically about its full-year outlook on traditional wing prices, management stated, “We always would like to think there's an opportunity for wing prices to move lower. The average of the first five months was $1.95. We did see it go up from December through just shortly before Super Bowl and then there actually was a little bit of weakness in the market about that time, which typically you don't see. So I mean we'll still watch it and I'm sure everybody else will as we go through the month of February. But knock on wood, you'd like to think that it will start to trail off here as we get into the second quarter.”


Sanderson Farm’s comments about continued strong wing demand will have the biggest impact on the BWLD story from the cost side.  If demand continues to be strong, it is unlikely wing prices will start to trail off during the second quarter, putting increased pressure on BWLD’s margins.




Howard Penney

Managing Director


There is a disconnect between how the government is reporting the economy’s performance and how the consumer feels the economy is doing. 


As the Obama administration tells the story through its heavily padded economic data points, the US economy is improving and borderline hot.  The latest unemployment reading fell 30 bps to 9.7%, GDP is white hot at 5.7% and retail sales in January rose a better than expected 0.5% versus a -0.3% decline in December .


Today, the Conference Board is telling us that consumer confidence is at a 10 month low.  What gives?  The average consumer is just not seeing what the government is reporting. 


Following a disappointing University of Michigan confidence reading on February 12th, the Conference Board’s confidence index declined from a revised 56.5 in January to 46.0 in February, the lowest reading in 10 months.  According to the median of 68 estimates in a Bloomberg survey, Economists forecasted that the confidence index would decline to 55.0 from a previously reported 55.9 January number.


Could this month’s confidence number be an aberration or have consumers been too optimistic about how fast the recovery would actually impact their lives?  While a monthly aberration is always a possibility and the winter doldrums are surely a negative, this month’s decline in confidence was broad based.  There were declines in all of the elements of the present situation and expectations subcomponents, in all income classes, and in two of the three age groups. 


On the margin, some segments of the retail landscape (including Restaurants) have been showing sequential improvement in January.  While we are still cycling against very easy comparisons from last year, the decline in confidence does not help to maintain the positive momentum.


Another related, but not as relevant (it’s a December data point) consumer stat reported today is that home prices in the Case-Shiller Composite-20 City Home Price Index rose in December for a seventh consecutive month.  The index increased 0.3% from the prior month on a seasonally adjusted basis, more than anticipated and matching last month’s improvement.  On a year-over-year basis, the index was down 3.1% from December 2008, the smallest YOY decline since May 2007.  We will have more to say on this in the coming months, but for now, the Case-Shiller data is not statistically significant.


We remain bearish about the prospects of a consumer led rebound anytime soon…


Howard Penney

Managing Director





We think Feb table revs will be at least HK$11BN, up at least 54% YoY and down 15% or less sequentially. Market share gainers should be SJM and Wynn while LVS and MGM probably lost share.



After a slow start to the month, the Chinese New Year celebration kicked February into high gear.  Based on HK$9BN in table revenues through 2/21/10, we think the month could exceed HK$11BN. 


Despite a Rolling Chip hold percentage below significantly below January, both Wynn Macau and SJM managed to increase market share through the Chinese New Year Celebration by about 100bps each from January.  LVS and MGM gave up about 100bps of share each from January. 


The following chart shows the market share trends by company including February through 2/21/10:


MACAU: FEB SHOULD REACH HK$11BN - Macau Total Revenue Market Share

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.