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Bewildered by The Present

“We’ve left our future largely in the hands of people whose single greatest characteristic is that they are bewildered by the present.”

-Joshua Cooper Ramo


I’m in the midst of reading Cooper Ramo’s, “The Age of The Unthinkable.” I’m halfway done, but ready to add it to the required reading list for anyone looking for an alternative solution to the Glaring Groupthink we have been witnessing on Wall Street and in Washington. We need our own alternative to what they try fear-mongering us into believing is the “alternative.”


While the Olympics inspired us to live with passion and pride, the challenge at hand for Americans will be to keep that fire of entrepreneurial spirit in our bellies. CNBC’s live Olympic coverage has been replaced with the backward looking anchors who didn’t see much of the crashes or the recoveries coming to begin with.


“Being bewildered by the present” is a great way to summarize what you think you are seeing in today’s financial and political leadership. Despite the SP500 moving back to positive for the year-to-date yesterday, we are waking up to another horrendous weekly consumer confidence reading of minus -49 from the ABC/Washington Post report this morning.


Politicians and reactive market strategists alike wake up Selling Fear. When I listen to some of these people and do a quick You Tube study of what they were saying at the levered-up highs of 2007 and the Great Depressionista lows of early 2009, I don’t blame them. They should fear whatever it is that gives birth to their bewilderment. These people don’t have a proactive analytical process. They never did.


So let’s lock arms and stop complaining about this. Last night veteran journalist Charlie Reese asked Americans to forward a well documented report card on our Congress titled “545 People.” While complaining is becoming consensus, it was one of the better vents I have read in a while.


Let’s stop letting those with Perceived Wisdom tell us what to think. In the spirit of Cooper Ramo’s conclusion – in ‘The Age of the Unthinkable’, it’s time to think for ourselves.


Now whether you sold the hope associated with the SP500 making its YTD high on January 19th (1150) or bought the Fashionable Fears associated with the February 8th YTD closing low (1057), you get the point. Let’s keep using those opinions who are “bewildered by the present” to our advantage. That’s a capitalism I can believe in.


Since the first week of February Freakout Lows, here’s what’s bewildered the group-thinkers:

  1. SP500 closed up for the 3rd straight day yesterday, taking it to its highest-high since January 21st = +5.8% return since 2/8
  2. Russell 2000 closing at 648 last night made the rally in small caps since February 8th = +10.6% return
  3. Chinese stocks are up +5.6% since February 2nd
  4. Greece’s stock market is up +11.3% since its February 8th low
  5. Greece’s credit default swaps (CDS) have dropped -26% since February 4th (from 428 at the peak of fear to 315 today)
  6. VIX (Volatility Index) is down -28% since February 8th

Now, I could go on and on here, but you get the point. I am not waking up this morning trying to “go after” people. To the contrary, my wife and I are expecting our 2nd child in the coming days and I am simply trying to do my part in making this America a better place.


I, like a lot of people now, am realizing that I have my own brain. I am not the problem. To the contrary, albeit I am one very small part of 300 million, I am part of the solution.


That’s right. This is exactly Charlie Reese’s point. It’s the same point that rings in the ears of these nasty American Consumer confidence readings. And I didn’t need to go to Yale to figure out the math. Collectively, 300 million Americans are definitely smarter than the 545 people running this place.


It’s time we rid ourselves of those who are bewildered by the present that they created. It’s time for America to take this as a tremendous opportunity to evolve. It’s time I stop this rant and get on with my day.


Before I do that, I’ll leave you with another thought from one of 300 million people out there who is thinking:


“Einstein’s theory of relativity showed that Newton’s laws had to be modified for object moving at higher speed; the same might be said of our international system. The old laws of power, confronted with a faster-moving and more intricately ordered system, are now in need of modification.”


And remember, that bewildered look on Hank Paulson’s face isn’t Newton’s…


At 1122, the SP500 is overbought. Please don’t chase the group-thinkers and buy them up here. They’ll give you plenty of opportunity to buy them lower. I have immediate term support down at 1107.


Best of luck out there today and God Bless America,





FXC – CurrencyShares Canadian Dollar — Canada's currency was on sale on 2/25/10 and we are bullish on the Loonie's long term TAIL, at a price. Look for rate hikes in Canada in the coming 6-9 months.


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.



IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10 and added to it on 3/2; we got the entry price that the risk manager makes a sale on strength.


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.


XLP – SPDR Consumer Staples Another capitulation squeeze is in full motion for the short sellers of everything "consumer". Shorting green as inflation starts to creep into the system again.


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.

US STRATEGY - Don’t stop asking questions

“Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning.”

-Albert Einstein


Yesterday, I was forwarded an article from a subscriber that made the statement “Politicians are the only people in the world who create problems and then campaign against them.”  The author of that article and Albert Einstein are right: “we can't solve problems by using the same kind of thinking we used when we created them.”  Therein lies a structural problem we need to deal with.  Washington has dug a very big hole and there is no real insight on how to deal with the issues, and now the politicians and Washington’s “groupthink” is begetting speculation that is potentially unhealthy. 


For the third day in a row the S&P 500 moved higher by 0.23%.  While volume was up 10% day-over-day, it was an uneventful day given the light MACRO calendar.  Some MACRO headwinds subsided as another round of austerity measures in Greece is making headlines.  Greek Prime Minister George Papandreou announced an additional $6.6 billion of deficit cuts as he tries to appease the balance of the EU. 


Additionally, the year-long M&A tailwind is gaining momentum, which is now includes takeover speculation rumors, coupled with an increase in shareholder activism dividends and share repurchase programs.  Auto sales also provided a positive tone to the market. 


The REFLATION trade popped up yesterday, as there were a number of positive developments in the Materials (XLB).  First, the dollar index declined following some early strength.  Today’s set up of the Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.27) and sell Trade (80.97). Second, the fertilizer group was underpinned by talk of a 15% export tax on potash in Russia.  Gold and steel stocks also outperformed.  The VIX declining 1.0% yesterday and today’s setup of the Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (18.68) and sell Trade (21.88).  The VIX continues to be broken on all three durations – TRADE, TREND, and TAIL.


The two worst performing sectors yesterday were Consumer Discretionary (XLY) and Technology (XLK).  Yesterday, retail saw a four-day winning streak snapped with the S&P Retail Index declining 0.8%.  Helping to drag down the sector was SPLS which was down on a Q4 miss and conservative guidance. DPZ was a bright spot in the restaurant space on better-than-expected Q4 earnings and revenues, while DENN was up on the back of shareholder activism.


While we continue to be long technology, there was no follow thru following Monday’s performance.  The semi group was unable to build on Monday’s rally, as the SOX was flat on the day. We are also long the Financials (XLF), which only slightly outperformed yesterday.  After underperforming on Monday, the large-cap regional banking was stronger on the day with the BKX (0.7%). 


As we wake up today, Equity futures are trading mixed to fair value having pared back gains from yesterday with Greece having unveiled additional austerity measures.  On the calendar today we have:

MBA Mortgage Apps

February Challenger Job Cuts

February ADP Employment Change

Feb ISM Non-Manufacturing composite

Fed Beige Book


After the close last night the ABC consumer confidence number rose slightly to -49 from -50.  As we look at today’s set up the range for the S&P 500 is 25 points or 1% (1,107) downside and 1.0% (1,122) upside. 


Copper, is little changed in early trading, although there continues to be reduced concern about potential disruptions to supply in the wake of the earthquake in Chile.    The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.30) and Sell Trade (3.43).


Gold is trading near a six-week high and may get further support after Greece’s government passed new austerity measures and a weaker dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,120) and Sell Trade (1,135).


Crude oil is trading quietly in the AM before the Energy department’s report that will likely show that crude inventories expanded for a fifth week in the U.S.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (78.09) and Sell Trade (80.77).


Howard Penney

Managing Director


US STRATEGY - Don’t stop asking questions - sp1


US STRATEGY - Don’t stop asking questions - usd2


US STRATEGY - Don’t stop asking questions - vix3


US STRATEGY - Don’t stop asking questions - oil4


US STRATEGY - Don’t stop asking questions - gold5


US STRATEGY - Don’t stop asking questions - copper6



Risk Management Time: SP500 Levels, Refreshed...

Today’s market move is probably driving the reactive price momentum chasers a little squirrely. Don’t let them distract you. This market is trading in a proactively predictable range.


Despite all of those who shorted the fear associated with a “Moody’s downgrade of Greece” (yes, that was a lagging indicator) last week clamoring for cover, the immediate term TRADE line of resistance that we gave you in this morning’s Early Look has held up pretty well today at 1122.


Importantly, what was the intermediate term TREND line of resistance in February has now become an important line of support down at 1103 (thick green line in the chart below). Use that as your buy/cover zone for any sales that you have been making into strength in the last 48 hours.


Keep your head up and on a swivel,



Keith R. McCullough
Chief Executive Officer


Risk Management Time: SP500 Levels, Refreshed...  - sptime

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I understand the math behind Keith’s thoughts that Ben Bernanke (aka “He who sees no bubbles”) needs to raise interest rates and maybe he did what he needed to do to keep his job.   


Maybe the question for Ben is not whether he should raise rates, but rather, whether he can raise rates as he continues to behave as though he has a serious problem.  Maybe Ben is aware of another problem that is preventing him from raising rates (outside of political pandering).  The notion that his behavior is consistent with someone who has a serious problem suggests that going forward the “economic” character of the market could surprise to the down side.  If this is true, the FED will raise rates when Ben’s “problem” no longer exists, which plays into the belief that the market will rally in response to a rate increase.  Not raising rates may lead to a new set of problems, but we will cross that bridge when we come to it. 


Recent surprises in weaker home sales, new jobless claims and declining consumer confidence have not been of any consequence to the market.  Are we being set up?  The complacency surrounding the market reactions to those numbers should not be lost.  Will the market continue to shrug off disappointing news as the general outlook shifts, from one of ongoing economic growth, to one of slowing growth and the possibility of a renewed recession?


Consumers account for more than 70% of GDP, yet growth in personal consumption cannot be sustained without growth in inflation-adjusted income.  Short-term benefits can be gained through debt expansion, but consumer credit continues to contract, and disposable consumer income is not keeping up with inflation.  This is a long-term structural problem, and, until it is addressed, there can be no sustained economic recovery. 


The most recently revised GDP report revealed another structural problem as currents trends are not sustainable.  Private inventory growth accounted for 4%, or 67%, of the revised 5.9% annualized growth in 4Q GDP.  That was up from 3.6%, or 63.0%, of the 5.7% reported initially. 


Again, without end demand, the buildup in inventories could be more detrimental to GDP going forward than the benefit it provided during the fourth quarter. 


Keith’s criticism of Ben Bernanke is well grounded, as the data is now in Keith’s favor.  The only reason the FED chairman can ignore the facts is because he has a problem, and if he has a problem, we all have a problem…  


Howard Penney

Managing Director


PROBLEM BEHAVIOR - chained PCE vs Income



In the last few days, President Obama’s approval rating has touched the lowest levels of his presidency.  According to the Rasmussen Daily Tracking Poll, on February 27th, 2010 President Obama was ranked a -21 on the Presidential Approval Index, which is the delta between Strongly Approve and Strongly Disapprove.  This tied his prior lowest rating on this poll, which occurred back on December 22, 2009.  While the President did see a slight bounce in early February, his approval rating for most of 2010 has been quite dismal.


Based on the Real Clear Politics poll average, the spread between approve and disapprove is +1.7, still demonstrating a positive spread in approval.  That said, the approval portion of this rating is 48.2, which is just slightly above the 2/20/10 low of 47.1, and still near the lowest of his presidency.  As we get nearer to midterm elections, with no bounce in Presidential approval seeming likely, it becomes more and more clear that the Republicans will take back some serious ground in November and perhaps reclaim both houses.


But, stepping back for a second, what has happened to President Obama?  Even we, which in hindsight were dead wrong, compared President Obama to FDR and had high expectations.  In the spirit of YouTubing ourselves we wrote back on 1/20/2009:


“Once inaugurated, FDR did not waste his popularity or the political capital that the election had bestowed on him. In his first 100 days, from roughly March 9 to June 16th, 1933, FDR sent an unprecedented number of bills to Congress, which all passed easily. Among the major bills that were passed by Congress during this time period were the bill that created the Federal Emergency Relief Administration, the Civilian Conservative Corps, the Reconstruction Finance Corporation, and the Tennessee Valley Authority. Congress also gave the Federal Trade Commission broad new regulatory powers and provided mortgage relief to millions of farmers and owners . . .


President Obama has followed this advice well. He has formed a solid economic battalion in the way of Summers, Geithner, and Volcker (to name three) and is charging forward with a large and broad based recovery plan. Even the most partisan of Republicans will have a hard time not supporting President Obama over the next 100 days.”


We were wrong on many accounts based on this statement, but most notably President Obama has turned out to be anything but FDR.  He has passed limited legislation and has been ineffective at utilizing his well regarded communication skills to maintain his approval ratings.  In very quick fashion it appears, also, that he has lost the support of the very independents that elected him.


On our Morning Call today our Healthcare Sector Head, Tom Tobin, suggested he was seeing a shift in momentum for President Obama.  A bounce, if you will.  Below we have attached a chart of the Rasmussen President Daily Tracking Poll and the Real Clear Politics Presidential Poll Average.  If one questions jumps out at us it is this: Where, Mr. Tobin, is this bounce?


The fact is, there is no bounce and the longer that President Obama’s approval numbers remain mired at these low levels, the worst for Democrats in the upcoming midterm elections.  Ultimately though, as it usually is, a deadlocked Washington may well be a positive catalyst for the stock market.  So as we begin looking towards the November midterms, and it begins to seem more and more likely that the Republicans will take back one house if not both, the impact on the stock market may be positive.


According to the Stock Trader's Almanac, a popular reference book on Wall Street, since 1949, “the Dow has gone up by an annual average of 19.5% when the White House was Democratic and Congress was Republican.”  A Democratic President and a Republican Congress is by far the best performing congressional combination for stock market performance based on history.  Obviously this is but one factor that will influence stock market performance, but with history as a guide we will certainly be focused on the potential for the midterms to provide a market catalyst.


Daryl G. Jones

Managing Director


Bounce? - pres1


Bounce? - pres2





"The stabilizing trends we've noted previously continued during the fourth quarter, and we were especially encouraged by our Las Vegas Locals business, which showed sequential improvement from the third quarter. Visitation to the city continues to grow, reflecting the popularity of Las Vegas as a destination. As the economic recovery accelerates, consumer spending will increase, providing us the opportunity to capitalize on our more efficient business model."

- Keith Smith, President and Chief Executive Officer of Boyd Gaming



  • "We saw stable visitation at our properties in the Las Vegas Valley, but continued to be impacted by depressed consumer discretionary spending."
  • "Stronger operating results at our three downtown properties were offset by lower pricing and higher fuel costs associated with our Hawaiian charter service."
  • "In Indiana, Blue Chip reported solid year-over-year growth, which was offset by previously anticipated weakness at our southern Louisiana properties."
  • "Borgata was able to maintain Adjusted EBITDA at prior-year levels despite the impact of severe winter weather in December."


  • Seeing early signs that the recovery is underway in Las Vegas, and the recovery of the Strip is vital to their locals market economy
  • Had the first sequential quarterly improvement in the locals business, for the first time in 18 months and are seeing those trends continue into the 1Q2010
  • Continue to look for attractive long term growth opportunities - primarily STN casinos
    • Even if STN's agreement with lenders comes to fruition, there will still be a number of their assets up for sale and they would be interested buyers
  • Will monitor MGM's divestiture process closely; BYD has the right of first refusal
  • Las Vegas locals region:
    • Business trends are finally improving on the strip - (really? I thought they were just getting less bad)
    • Saw a moderation of promotional spending in the 4th quarter and that trend has continued into the first quarter
  • Downtown region:
    • As many customer packages are purchased months in advance, they didn't reflect the rising fuel prices, and that negatively impacted them
    • Their share of the downtown market rose to 1/3
  • Midwest & South
    • Decline was due to declines in Louisiana. Lake Charles market was benefiting from hurricane money - which has finally run out.  Louisiana and Texas job markets have also softened (Delta Downs & Treasure chest)
    • Blue Chip did well, drawing more business from the Chicago market
    • Expecting similar y-o-y comparison in the 1Q2010
  • Borgata
    • If not for weather issues, they would have had $5MM more of EBITDA and revenue growth
    • Bad weather has continued into the 1st quarter - and the impact will be over $5MM of EBITDA as three weekends have been negatively affected by weather
  • Expect y-o-y declines in their results to continue to narrow in 2010
  • Leverage was 6.2x vs a 6.5x covenant
  • Their $1BN R/C availability is enough to complete any of the M&A pursuits (ie. STN's acquisition)
  • $1.8MM one time charge was recorded as interest expense in relation to the early reduction of the R/C capacity which resulted from their credit expansion
  • Pre-opening expense was entirely related to Echelon, no capitalized interest
  • Once the NJ commission allows MGM to move forward with the sale of their share of Borgata, BYD will have to consolidate their results


  • Echelon will have on-going minimal costs included in pre-opening expenses.  Will wind down to just security and site maintenance post 1H2010
  • Any other properties have weather hits? No - Midwest has had normal weather
  • Recap of Borgata?
    • They are looking at it - especially since the existing credit facility expires in 2011
  • Las Vegas locals trends are across the board with the Coast properties & Boulder Strip
  • Tax benefit in the quarter?
    • 4Q is always an anomaly because that's when they true up. Expect run rate tax rate to be 38% in 2010
  • Do they have any more room to cut costs at the property level? Just more rational marketing from their competition
    • A number of their competitors were spending a lot in Southwest Louisiana and the easing of that in the 1Q2010 will benefit them
  • Capex and Corporate for 2010?
    • Corporate shouldn't be much different than 2009 levels. For Capex they have a little left on wrapping up Echelon that has already been spent but needs to be paid ($25-30MM) plus another $50-55MM of maintenance
  • Don't need to contemplate issuing equity
  • VLT's at the Meadowlands?
    • Do not want to see that happen and are fighting it
    • It is a legislative issue that needs to pass a bill to get approved
  • Have been planning for the impact of table games in PA for a while.  Will likely step up market. Think that they are more of a destination market than the PA assets. They have much better amenities than PA, even with table games
    • We think they will obviously get hit - despite the better amenities
  • Because the debtor has a period of exclusivity (STN), they haven't been spending a lot of money on this effort

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