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Captain America?

“We saved the economy, but we kind of lost the public in doing it.”

-Tim Geithner


The most obvious reality of the entire financial crisis is that those who created it will not be held accountable for doing so. I was talking to my Dad about it at dinner last night (he’s a retired firefighter), and he likened it to an arson pleading to be recognized as the heroic firefighter. My Dad is right – this is just plain sad to watch.


Churchill once said, “a politician needs the ability to foretell what is going to happen tomorrow, next week, next month, and next year. And to have the ability afterwards to explain why it didn't happen.” Thank you Winston – you certainly didn’t lack the self-awareness that those living in the Bubble of US Politics do today.


Timmy, sorry to break it to you buddy – you didn’t save us. You “kind of lost the public” circa 1, when you became a lifer at the Treasury and Federal Reserve. I agree with the article in The Atlantic, you definitely became a “superstar of the bureaucracy” in the last 22 years. You tried your best to save the legacy of Groupthink Inc., and now it’s just time you realize that it’s over. As they say on American Idol, “America has voted.”


Last week, global stock markets around the world were saved from those who have been Selling Fear for the better part of the last month. The SP500 was up a big +3.1% for the week, taking its rise from the sovereign debt ashes of February 8th to +7.7%. History can be really hard to remember for those who sold the March 9th low of 2009, but the SP500 is up +68.3% since this historical day of last year.


For those of us who have come to grasp the global risk management concept of interconnectedness, it’s probably not surprising that February 8th was also the day that the Greek stock market bottomed. Since February 8th, the Athex Index in Greece is up +16.1%!


Did Timmy and the boys in Washington save you from getting squeezed on the short side of that move too?  Or did Groupthink Inc. in Washington have a proactive risk management process that saw sovereign debt risks to begin with?


Maybe Nicholas Sarkozy of France can save us from the evil doer “speculators” who happened to notice these wanna be Vogue star politicians piling debt upon debt upon debt as being a bad thing. Maybe someone in America should remind Timmy that the US deficit to GDP ratio of 11.4% is within 100 basis points of Greece’s, and that he should be working on that math instead of doing PR shopping trips to prove to himself that he is Captain America.


After moving to neutral (from bearish) on US Equities on the week of February the 22, I finally re-shorted the SP500 on Friday’s close. This doesn’t mean I am calling for a stock market crash. This simply means that the risk management system that we refresh for every 90 minutes of marked-to-market trading flashed an important sell signal.


I know, I know. Those who operate with more of a reactive than proactive risk management process are going to tell you that you can’t time markets but, at the same time, they can save you from all your fears. It’s kind of weird, but take their word for part of that – they definitely don’t do timing.


The SP500 is now in what we call a bullish intermediate term TREND position. Importantly, that TREND line of support is -2.8% from Friday’s closing price. That’s a downside risk level to manage towards. I also have a more immediate term line (3 weeks or less) of what we call TRADE line support at 1113, so keep an eye on that.


Other global macro stock market risk factors (bearish market indicators) to keep your Hedgeyes on would be:

  1. Chinese stocks remaining below intermediate term TREND line resistance of 3,153 on the Shanghai Composite
  2. Spanish stocks remaining below intermediate term TREND line resistance of 11,394 on the IBEX 35 Index
  3. Greek stocks remaining below intermediate term TREND line of resistance of 2,178 on the Athens General Share Index

Across asset classes, there are also some interesting developments this morning, particularly in the US Treasury market. Apparently Mr. Macro Market doesn’t see “the alternative” that these politicians continue to fear-monger Americans with in trying to justify a ZERO percent rate of return on your hard earned savings accounts. Put another way, Timmy saved the lenders, not American savers. Ching Ching to the Federal Reserve Club of New York!


Short term bond yields are breaking out to the upside this morning, with 3-month Treasuries hitting new YTD highs at 0.15% and 2-year yields breaking out to the upside above my intermediate term TREND line of 0.86%.


You didn’t just lose the public with this Great Depression narrative Mr. Geithner. You “kind of” lost whatever credibility was left in considering yourself, Larry Summers, and Robert Rubin the smartest guys in the room. In real life, smart people can get things really wrong.


What America fears now is very well placed. America fears the Perceived Wisdom of government bureaucrats. You guys simply don’t know what you don’t know. Please save us from having to endure watching your PR campaign. It reeks of the Bubble in US Politics that this marketplace’s real-time firefighters now have to manage risk around.


Best of luck out there today,





XLK – SPDR Technology — A down day on 2/22/10 prompted us to buy more XLK. 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.



SPY – SPDR S&P500We moved to neutral (from bearish) on the S&P500 on the week of February 22. At 1139, for the immediate term TRADE, we’ll go back to bearish. This market is finally overbought. We shorted SPY on 3/5/10.


EWP – iShares SpainThe etf bounced on 3/3/10 in part from a strong day from Banco Santander, the fund’s largest holding in the Financials-heavy (43.8%) etf. We shorted Spain for a TRADE again on 3/5/10 as every sovereign debt risk has a time and price to be short of. We have a bearish bias on the country; massive unemployment, public and private debt leverage, and a failed housing market remain fundamental concerns.


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.


Keith moved to neutral (from bearish) on the SP500 on the week of February 22.   On Friday at 1139, for the immediate term TRADE, he moved back to bearish and shorted the S&P 500. This market is finally overbought!


The S&P 500 finished out last week on a strong note, with the S&P500 closing up 1.4% on Friday and up for six straight days.  On the MACRO front, the calendar offered a fairly strong tailwind Friday as February nonfarm payrolls fell less than expected.   In addition sovereign concerns continued to wane with the New Greek austerity package and the success of its 10-year bond sale. 


In addition, there were no surprises out of China, as Premier Wen reiterated his aim of supportive fiscal policy and appropriately accommodative monetary policy.  As a result, the VIX continues to confirm the RISK AVERSION trade.  VIX declined 10.67% last week and today’s setup of the Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (17.29) and sell Trade (21.54).  The VIX continues to be broken on all three durations – TRADE, TREND, and TAIL.


As we highlighted in our morning meeting, the Financials sector continues to provide leadership to the upside; the Financials were the best performing sector on Friday, rising 1.9%.  The banking group led the way with the BKX +2.5%; regional and money-center names both out performed. 


The employment data seemed to be a big catalyst for the Financials given the implications for the credit cycle.  On Friday, nonfarm payrolls fell 36,000 in February vs. consensus expectations for a 68,000 decline.   The unemployment rate held steady at 9.7%, while a Bloomberg survey was looking for 9.8%. Also note that the household survey showed a 308,000 increase in employment following the 541,000 gain in January.  Average weekly hours fell a less-than-expected 0.1 to 33.8 in February, though average hourly earnings rose just 0.1% month-to-month and 1.9% year-over-year.


On Friday, Technology (XLK) moved to positive on TRADE and TREND.  That leaves Utilities the only sector broken on TREND.  Within the Technology, AAPL was up +3.9%, a bell weather for the group, broke out to new all-time highs after announcing that the iPad will be available in early April.   We continue to be long the XLK.


Commodity-related equities largely outperformed on Friday.   The RECOVERY theme got a boost on Friday from the February jobs number as the Energy (XLE) and Industrials (XLI) outperformed the S&P 500.  Although, it should be noted that the dollar was down slightly on Friday and only up slightly for the week.  Today’s set up of the Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.08) and sell Trade (81.07). 


As we wake up today, equity futures are trading modestly below fair value in what appears to be a slow start to the trading week on the heels of last week's move in the S&P.  Today's MACRO calendar is void of any significant events.  As we look at today’s set up the range for the S&P 500 is 37 points or 2.3% (1,113) downside and 1.0% (1,150) upside. 


In early trading copper is trading higher for a second day as the weaker dollar and signs of improvement in the U.S. economy increased investor demand for copper.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.33) and Sell Trade (3.49).


Gold is slightly lower in early trading, despite the dollar trading slightly lower.    The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,122) and Sell Trade (1,149).


In early trading, oil is trading at a two-month high above $82 a barrel in New York amid growing confidence that the economic recovery is proceeding and set to increase demand.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.74) and Sell Trade (82.13).


Howard Penney

Managing Director














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The sell side brushed off muted near term outlooks given by the suppliers on their last conference calls and now they are lowering estimates. Stocks are underperforming but do the next few quarters really matter?



Three issues for Q1 CY2010, the last of which should’ve been expected given the last conference call commentary:

  1. Alabama
  2. Weather – impacts gaming operations
  3. Replacements suck


So Goldman Sachs did a survey that indicated casinos were not accelerating replacement buying as much as he thought.  He lowered estimates on the “Big Three” and cut his sector rating and the rating on BYI and IGT.  Other analysts followed suit and cut estimates. 


The question we have is what took you so long?  It’s not like these companies were bullish about the near term.  Each management team made cautious comments about the March quarter:  WMS actually gave revenue guidance below the Street but analysts maintained their estimates and IGT was challenged for sandbagging but it's now apparent they were being realistic.  Bullish analysts were apparently blinded by, well, their bullishness.


Here are some thoughts about each of the Big Three:



  • We remain at $0.17 for FQ3 (March) while the Street has come down to $0.20.
  • IGT probably has more exposure to both the Alabama issue and the bad weather.  IGT’s market share in gaming operations is much higher than it is for slot sales so weaker play in the regional markets hurts them more than WMS or BYI.
  • Stock has been pretty weak lately but we still think IGT has company specific issues to contend with.  While their new products are solid, market share remains under pressure (FQ1 was awful) and the company remains over reliant on the “Wheel” games.



  • We are at $0.61, below the Street at $0.63.
  • Like IGT, BYI will take a hit from Alabama and to a lesser extent, the bad weather.
  • BYI is less reliant on slot sales so they may have a little more cushion.  However, software sales are very difficult to project.
  • At less than 15x our FY2011 (essentially forward 12 months) estimate of $2.68 the stock is beginning to look attractive.  Without a near-term catalyst, however, BYI could continue to trade off.
  • The real story is new markets, the potential for even more new markets (thanks to out of control state governments), and a bounce off trough replacement demand.  We think we are at the bottom of a five year bull cycle in earnings and stocks.



  • We remain at $0.47 vs. the Street consensus of $0.49.  We have a higher level of conviction in the March quarter for WMS than the other suppliers.
  • Alabama will not affect WMS.
  • WMS has the highest play per participation game of any of the three suppliers so they should be less impacted by the bad weather.
  • We expect WMS replacements in FQ3 to exceed that of FQ2.
  • WMS at $38.36 trades at only 16x our FY2011 estimate.  The stock could get cheaper as earnings expectations continue to fall.  Again, we think earnings will be fine.
  • The real story is new markets, the potential for even more new markets (thanks to out of control state governments), and a bounce off trough replacement demand.  We think we are at the bottom of a five year bull cycle in earnings and stocks.


Recent surprises in weaker home sales, new jobless claims (not including last week’s number) and declining consumer confidence have not been of any consequence to restaurant stock performance.  Along with retail sales in general, restaurant sales trends (primarily casual dining) continue to make sequential improvement.  Sales trends have improved across the board, but growth has been most evident in the chains that are better positioned competitively and appeal to higher end consumers.


The nearly two year decline in consumer credit has been a big contributor to lower customer counts in the casual dining sector.  The Government data posted on Friday suggest that the bulk of the contraction in credit is behind us.  While significant credit expansion is not likely any time in the immediate future, the current numbers are indicating that sales trends could be stabilizing.


A trend worth watching…


RESTAURANTS – CONSUMER CREDIT VS CASUAL DINING - knapp vs consumer credit outstanding Jan


RESTAURANTS – CONSUMER CREDIT VS CASUAL DINING - knapp vs consumer credit outstanding 2 yr Jan



Howard Penney

Managing Director

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