The S&P 500 finished down 0.21% yesterday, but well off their worst levels of the day.  Thursday’s decline is largely a function of global MACRO headwinds, as the earnings season is in the rear view.   


Yesterday in the USA, initial claims rose 22,000 to 496,000 for the week ended February 20th, significantly above the 460,000 consensus.  Consequently, the 4-week rolling claims number rose 6,000 to 473,800 from 467,800.  This latest print pushes claims squarely outside our 3 standard deviation channel. For reference, our channel reflects the trajectory that's been in place since the March 2009 peak in claims. While we had been hesitant to call a reversal in the underlying improvement trajectory, the fact is that six weeks of data do make for a trend.  See our post on from yesterday for more details. 


On a global MACRO front, sovereign credit concerns were exacerbated after Moody's, the only ratings agency that still has an A-level rating on Greece, said that it may lower its A2 rating within months.   With the Moody’s data point a lagging indicator, the VIX was down 0.84% yesterday and has declined 2.6% over the past week and 20.9% over the past month.  The VIX is currently broken on all three durations (TRADE TREND and TAIL) and today’s Hedgeye Risk Management models have levels for the VIX—buy Trade (19.03) and sell Trade (22.82).


Yesterday, durable goods orders jumped a better-than-expected 3% in January, though upside was largely a function of stronger aircraft bookings, as orders excluding transportation declined 0.6%.  The Industrials (XLI), which is one of four sectors that is positive on both TRADE and TREND, was one of the three worst performing sectors.  Rounding out the bottom three performing sectors were Technology (XLK) and Financials (XLF). 


Yesterday, Technology (XLK) was the worst performing sector on the day.   Semiconductors were under pressure for much of the day; the SOX down just 0.3% on the day.  Since the beginning of the earnings season the semis seem to get out from underneath concerns about inventories and order cancellations. Additionally, the MOBILITY space took it on the chin with PALM down 19.3% after guiding Q3 revenue below consensus and catching multiple downgrades.


The two best performing sectors were Consumer Discretionary (XLY) and Consumer Staples (XLP).  The S&P Retail index gained 0.37% yesterday, following a 1.96% move on Wednesday.  Within the XLP, soft-drink stocks were in focus today after KO announced that it would purchase the North American operations of CCE, which was up 32.9%.  DPS also was up on M&A speculation and after the company boosted the size of its buyback and better than expected earnings and guidance.


On the MACRO calendar today we will see the first revision to Q4 GDP, February Chicago PMI, February final U. of Michigan Confidence, February NAPM Milwaukee and January existing homes sales.  Equity futures are trading above fair value in a continuation of the late rally yesterday which saw a majority of the session's losses erased by the close. The Q4 GDP report will be the main highlight of a number of economic reports today.  As we look at today’s set up the range for the S&P 500 is 26 points or 1% (1,093) downside and 1.5% (1,119) upside. 


Copper rose in London, paring its first weekly drop in three weeks, as the dollar declined and stronger Japanese industrial production fueled speculation that demand will remain strong.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.18) and Sell Trade (3.40).


India, the world’s biggest consumer of gold, raised import duties on gold, silver and platinum to reflect higher global prices for the precious metals.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,097) and Sell Trade (1,124).


Crude oil is in position for the biggest monthly advance since October, amid speculation OPEC won’t increase output quotas and as the dollar is slightly weaker.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (77.10) and Sell Trade (81.95).


Howard Penney

Managing Director














Why Toyota may cause higher interest rates

Nike (NKE): Black Book - Call Tomorrow


   Conference Call TOMORROW, Friday February 26th. 11 a.m. EST


We've been vocal over the last year about warming up to Nike as a key idea for 2010. Specifically, there are several developments masking the magnitude and duration of an earnings recovery.

Since we announced this conference call last week, Nike is now seeing an intermediate term TREND (3 months or more) breakout at $64.18, not to mention Goldman Sachs playing follow-the-Hedgeye and adding NKE to their sooper-dooper conviction buy list this morning.
We'll be releasing a Black Book and hosting a conference call for subscribers of Hedgeye's Institutional Retail vertical -- and for qualified prospective institutional subscribers -- tomorrow, Friday February 26, at 11 a.m. EST.
We will go through why, in detail, we think Nike deserves a closer look, focusing on the severe lack of context in how actions over the past three years are coming together today to re-accelerate earnings growth, specifically:


  • A strong catalyst calendar (analyst day in May, World Cup in June/July)
  • Increased product flow - as a result of enhanced productivity after last year's re-organization
  • Magnitude and duration of an earnings recovery - after 2 years of flattish earnings

Contact or reply to this email to request access to the conference call.




Nike (NKE): Black Book - Call Tomorrow - NKE BB 2 10 Cover








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We'll have more commentary in a separate note but we saw good and bad in the release. Wynn's Q1 Macau commentary, although well known, was positive. Wynn's Mass volume market share decline is troubling.




  • Profitability and efficiency of their tables in Macau has continued to increase despite more competition
  • Tracking substantially ahead of 2009 in 2010, and that's even before the opening of Encore, which will give them another boost. Encore opening April 24th
    • Yes well the market is tracking up 54% y-o-y in the first 2 months... so there's nothing new here
  • Unfortunately, Las Vegas doesn't look so rosy.  Doesn't see things getting worse, but doesn't see any improvement either


  • Net hold impact in Macau and in Vegas
    • Vegas, $15MM of EBITDA if they held 22%
    • In Macau held a little lower on VIP
    • Of course they didn't mention the high hold in Mass in Macau & higher then the run - rate hold on slots in Vegas. In Macau, Mass drop was pretty weak, only up 5% but better hold helped them by $15MM on gross revenues. Assuming 2.8% hold on RC they would have had $18MM more of gross table win.  Regarding slot hold in Vegas - 5.4% is their highest hold since 2005... the average has been about 4.7%, so higher hold helped them by $4.5MM in Vegas
  • 2009 corporate expenses would have been flat with 2008 if not for some unusual items
  • They have very good and tough credit assessment, have never had a charge. They are 45% reserved in Vegas and 65% in Macau - which is way more conservative than industry
    • That's true...
  • Philadelphia opportunity?
    • "Cutest casino" that we've ever seen - not slots in a box. No hotel rooms
    • Building 3,000 slot machines, Italian restaurant, Asian restaurant, and some poker tables.  The location is fantastic
    • Through an unrestricted subsidiary, not at the Wynn Las Vegas level. 
    • They know the region - they were in AC for seven years and dominated that market. Love the location of the Phily casino
    • 3 story structure including parking
  • Strategy in Las Vegas?
    • Capital structure is their salvation - they have the luxury to wait it out.  All he can do is do the basics better
    • They are opening Encore Beach Club, new night club, and improving Switch.  Beach Club opens May 21rst... will take the nightclub mentality into the daytime.  Nightclubs have 65% margins.
    • About to refurbish the rooms at Wynn because they are 5 yrs old
    • There's nothing that he can do with regard to customers getting used to lower ADRs - he can't have empty rooms
  • Think they will have a good 2010.  They are not holding high the first two months, they are at 2.8%
    • In Jan they did $174MM of gross VIP win, $42MM of Mass, and $16MM of slot win (In Jan 08, table revenues were $170MM).  We estimate that table revenue in Feb will be roughly $200MM (vs. $150MM last year)
  • In Macau 48% of their EBITDA comes from their general customer & slots (but their "general" customer is a lot better than just Mass- it includes a lot of direct play and their Mass is fairly "premium")
  • If another regional opportunity presents itself they will jump on it because they have the resources to do so
  • Macau is "maturing" ... said it in the sense of the facilities present
  • "We're more of a Chinese company" than US company at this point
  • Very keen about their Cotai project, "could be the  most beautiful project in the world after Encore".  They are constrained by the approval and their own planning process.  It will cost several billion. Will not have thousands of rooms.  "We raise our money before we break ground"...Ouch shot at Sheldon...
  • Is it too early to say that 2011 will be better?
    • Strictly convention booking - yes 2010 is better than 2009 and 2011 is better than 2010. But its complete BS to extrapolate that into total market results. It's crazy to extrapolate what 2011 will look like based on a few bookings on the books... thank you Steve for being honest. 
  • Are they worried about Singapore? Well, LVS designed the FS to steal their business 25 minutes away and that didn't happen
  • Southeast Asian customers are less than 5% of their base
  • Doesn't think that the Singapore market will be a threat to Macau - it will be primarily a Southeast Asian gaming market - people within a 1-2 hour drive.  However, that part of the world also has a large muslim population which doesn't really gamble
  • No, Encore is not what they thought it would be.  Thought that it would generate $250MM of EBITDA- clearly it didn't do it.  It was conceived in a different market. Don't know if they would have made even less without it, but would have an extra couple billion of cash... obviously would not have built it today if he knew what he knows today

Why we bought Turkey (TUR) yesterday

Position: Long Turkey via the etf TUR


The Turkish stock market flashed a negative divergence versus many European indices over the last days and we couldn’t explain the WHY behind the move. Then, yesterday, we got the rest of the story with news of the arrest of dozens of high-ranking Turkish military figures in what has been an ongoing investigation of suspects alleged to have plotted a coup against the government in 2003. The market had priced this in!


Taking a step back for context, 2003 marked the election year of current Prime Minister Recep Tayyip Erdogan and his Justice and Development Party, and his expedient end to the army’s control over the National Security Council. The latter point is an important and complex one to understand regarding the role of Turkey’s military in political rule, and it has significant precedence since the new Turkish state was founded by Mustafa Kemal Atatuerk in 1923. In fact, the military has ousted four governments since 1960, with the alleged 2003 coup meant to overthrow Erdogan’s government.


Certainly the political issues and tensions between a historically secular military and Erdogan’s current Islam-rooted government are complex. We’ll be grinding out more research on Turkey in the coming weeks, but our bullish take on Turkey is born out of a few positive catalysts: 


(1.)  The Istanbul Stock Exchange’s (ISE 100) recent tumble allowed us to buy Turkey via the etf TUR at a discount with TAIL line support down at 42,392 (see chart below).


(2.)  There’s huge upside to this emerging market economy with an improving GDP trend (see chart below). Annual Q1 GDP at -14.7% was a bottom and now in the rear view; we see favorable comps in 2010, and the government expects the economy to expand 3.5% this year, while the IMF forecast the EU and US to grow 1% and 2.7%, respectively, this year.


(3.) Turkey avoided an international bailout during the global recession after reducing its public debt to 47% of GDP last year from 67% in 2003 (Bloomberg). 


On the TAIL (3 years or less), bullish catalysts include: (1.) EU entry and increased trade; (2.) its powerful army—Turkey has the second largest standing army in NATO after the US Armed Forces; and, (3.) geographic benefit and influence resulting from its location between Europe and Asia, including energy transit. We’ll be writing on these topics in the coming weeks. Stay tuned.



Matthew Hedrick


Why we bought Turkey (TUR) yesterday - t1


Why we bought Turkey (TUR) yesterday - t2


Why we bought Turkey (TUR) yesterday - t3


US Consumer, Steiner and Plutocracy

Per Josh Steiner (Hedgeye's Financials Analyst): "My word of the day is Plutocracy. The high end consumer is bouncing back much stronger than the low end.  The following is a chart from JPMorgan’s investor day (going on now) that shows the different levels of recovery in spending volume based on household income levels."


Per Wikipedia: "Plutocracy is rule by the wealthy, or power provided by wealth. In a plutocracy, the degree of economic inequality is high while the level of social mobility is low. This can apply to a multitude of government systems, as the key elements of plutocracy transcend and often occur concurrently with the features of those systems."




US Consumer, Steiner and Plutocracy - 2 25 2010 12 43 28 PM

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