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The Principled One

“Today you cannot even do good unless you are prepared to exert your share of power, take your share of responsibility, and make your share of mistakes.”

-George Kennan


I flagged this quote from the book I mentioned I am in the midst of reading, “The Age of The Unthinkable.” The author, Joshua Cooper Ramo, has a deep respect for geopolitical history and, at the same time, attempts to understand the math behind how complex systems can be simplified. This, as we say at Hedgeye, is the new frontier of risk management. The interconnectedness of global macro matters.


I wonder what the legendary American strategist would think of the #1 headline on Bloomberg this morning: “Papandreou Will Press Obama to Support European Crackdown on Speculators.” They called George Kennan “the father of containment.” Containing said “evil doer” short sellers is hardy what he man had in mind.


The other George (Papandreou) is the Prime Minister of Greece. Since the Chinese told him to go fly his levered-up bureaucratic kite, Papandreou has been on a PR tour since Friday when he visited Germany.


Along the way, somehow he convinced France’s Nicholas Sarkozy that “speculators are creating malicious rumors” about his country. With some political wind from the left at his back, he took it up a notch ahead of meeting with Geithner today in Washington and called whoever he can’t see “unprincipled speculators.” George, you have to be kidding me. You have no idea what you don’t know.


First of all, hearing politicians talk about markets is like watching a southern belle try to ice fish. So I won’t waste time on ripping this poor guy a new one for using the word “speculator.” That would be too easy. It is this concept of “principles” that really has my arthritic hockey knuckles hammering on the keyboard this morning. What, almighty Principled One, in God’s good name is “principled” about levering-up your country’s balance sheet to 100% debt to GDP and a 12.4% deficit to GDP ratio?


President Obama, with all due respect, please heed our advice from New Haven, Connecticut this morning and send this Greek snake oil salesman home packing. American capitalism is having enough confidence problems right now – we cannot let a country like Greece, who across centuries (not just years or months) has earned the Reinhart & Rogoff title of “Serial Defaulter”, find a voice in some populist anti-Wall Street ring tone.


Market’s don’t lie; politicians do. Greece’s stock market is trading down a hefty -1.7% this morning, taking their YTD loss on the Greek Athex Index back to -6.1%. While we’ve seen a sharp stick to the eye short covering rally in everything dysfunctional European balance sheet (Greece up +16% from February 8th to March 8th), it doesn’t change the fact that Greece’s concept of fiscal principles is, well, “unprincipled.”


Despite this epic, one-month, Fear Covering rally, Greece’s intermediate term TREND remains broken. Mr. Papandreou, you can call me a speculator or a knucklehead not worthy of eating fine cheese on first class flights around the world, I will do nothing but choose to profit from your ignorance. Inclusive of this past month’s rip, the stock market in Greece has lost -29.3% of its value. ‘Tis you, dear Principled One, who Mr. Macro Market is flagging as lying, not the evil doer speculators you speak of…


Rather than shorting Greece, after letting the Fear Covering rally subside last week we opted to short Spain (via the EWP etf). Spain is more liquid. Spain has had less of a consensus focus from the Manic Media. And the Spanish Conquistadors of leverage have not yet landed on US political soil. Spain’s IBEX index is trading down -1.3% so far this morning and the intermediate term TREND line that we flagged for you yesterday (11,394) remains broken.


The Principled One and his first class travelling band of storytellers can whine all they want about being called PIGS. Its an acronym Wall Street is using to shorten a long term balance sheet problem. But the problem isn’t going away once he flies back to Athens. Real pigs don’t fly, but they do whine and squeal. At least they don’t attempt to walk on the moral high grounds of a “principled” trough.


We called out Sovereign Debt risks in December of last year. Our fundamental view has not changed (see our blue-liner, Daryl Jones’, article on Fortune.com this morning for the update). Only market prices and the storytelling around those prices have. While hope is not an investment process, that’s all we have left when we think about investors understanding that managing risk doesn’t happen in a vacuum, nor does it only work one way.


Today is the anniversary of last year’s stock market bottom and also the publishing of Wealth of Nations in 1776. Cheers to the real American risk managers out there like George Kennan of seasons past, and those who are using the inferred principles of Complexity Theory in their daily risk management models today. At least we can trust the science of mathematical principles, to a point.


My immediate term TRADE lines of support and resistance for the SP500 are now 1118 and 1143, respectively. We shorted the SP500 at 1139 on Friday and we bought volatility (VXX) into yesterday’s complacent close.


Best of luck out there today,





VXX – iPath VIX — Volatility (as measured by the VIX) has lost 1/3 of its implied value since February 8th (when both Greece and the US stock markets put in short term lows). We’re not buyers of complacency; more buyers of short selling fear.


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 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.


The Macau Metro Monitor, March 9th, 2010


SJM OPEN TO RESTRICTIONS macaubusiness.com

 SJM CEO, Ambrose So, says there is room to increase revenue per gaming table in Macau by cutting the number of tables if studies demonstrate that it would be beneficial to the industry. His comments followed China's vice president Xi Jinping saying that Macau needed to adjust, control and monitor the gaming industry, this weekend. So also agreed with China's vice president Xi Jinping's comments on better oversight in the gaming industry.

US STRATEGY – Retail on a Tear

If we modeled out volume like we do other stock and indices, I’m confident that volume would be broken on all three durations - TRADE, TREND AND TAIL.  Yesterday, the S&P 500 traded within a very small range on no volume.  The only sectors yesterday with news flow of consequence was managed care, which was a drag on Healthcare (XLV) after outperforming of late.  Commodity stocks and parts of the market leveraged to the RECOVERY trade also put in a mixed performance.


Yesterday, we bought the VXX.  Volatility (as measured by the VIX) has lost 33% since February 8th (when both Greece and the US stock markets put in short term lows).  As Keith said yesterday “I'm not a buyer of complacency; more a buyer of short selling fear.”  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.


Technology was the best performing sector yesterday, despite the SOX trading down slightly on the day.  CSCO was the standout in the communication equipment space, while YHOO outperformed the Internet names.  We continue to be LONG the XLK. 


Next to Financials (XLF), the best performing sector over the past month is Consumer Discretionary (XLY), rising 11.5%.  The retail sector is on a three weak tear and outperformed again yesterday.  Another bright spot was MCD, on the back of better-than-expected February global comps. 


Financials also continue to outperform the broader market.  Yesterday’s outperformance was on the back of M&A activity in the insurance sector, while investment banks and money center banks extended their recent outperformance. 


As we wake up today, equity futures are trading below fair value with the futures having turned lower since Europe's sluggish open.  As we look at today’s set up the range for the S&P 500 is 25 points or 1.8% (1,118) downside and 0.4% (1,143) upside. 


In early trading copper is trading lower after declining slightly yesterday.  Inbound shipments of refined copper fell for the first time in three months.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.34) and Sell Trade (3.50).


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 (1,103) and Sell Trade (1,149).


In early trading, oil is trading slightly lower as analysts forecast rising crude supplies in the U.S.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (80.07) and Sell Trade (82.36).


Howard Penney

Managing Director


US STRATEGY – Retail on a Tear - sp1


US STRATEGY – Retail on a Tear - usd2


US STRATEGY – Retail on a Tear - vix3


US STRATEGY – Retail on a Tear - oil4


US STRATEGY – Retail on a Tear - gold5


US STRATEGY – Retail on a Tear - copper6


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"With our redevelopment projects now complete, Great Canadian finds itself in a robust financial position. We attained this position by being conservative, and we will continue to adhere to this philosophy as we analyze options for our future. It is vital that we remain cautious about our markets' economic outlook. But we have made many improvements over the past twelve months, and I am confident that these will facilitate the creation of greater stakeholder value during the year ahead."

- Ross J. McLeod, Great Canadian's Chairman and Chief Executive Officer



  • "This increase was primarily due to the comparable period, which was negatively impacted by heavy snowfall, economic uncertainty, and disruption from construction at the property. The increase was also due to both the August 17, 2009 opening of the Canada Line mass transit station at River Rock and the November 19, 2009 completion of various upgrades at the facility. Despite the weakened economy, these redevelopments combined to generate significant improvements in visitation, table drop, and slot coin-in at the facility during the fourth quarter"
  • "Revenues at the Company’s Vancouver Island Casinos increased by 1% in the fourth quarter of 2009,
    when compared to the fourth quarter of 2008. This was primarily due to the installation of additional
    gaming capacity at View Royal during the third quarter of 2009, the benefit of which was partially offset by
    the impact of the weakened economy."


  • Concluded the year with a leverage ratio of 3.14x
  • River Rock outlook:
    • Canada Line has grown RR's visitation by roughly 20% and slot coin in by 10% since the opening of the Canada line.  February 2010 results: table drop, slot coin in and visitation saw double digit growth, which were all offset by low hold of 14.9%.  Combined with the closure of Hastings, revenues in BC decreased 7.6%
  • 2010 Outlook:
    • Many of GC's markets remain challenged. 
    • We cannot cost cut our way to prosperity
    • Every one of their BC properties has received a slot refresh
    • Georgian Downs will get another 150 machines in 2Q2010
  • While View Royal's expansion results have been disappointing they believe things would have been worse without it
  • Moved River Rock's poker room across the way and replaced it with a VIP room. They also increased slot capacity, at a cost of $2.75MM
  • Anticipate that development capex will be $15MM with an additional $10MM committed to maintenance in 2010
  • Developing and improving player tracking and reward programs
    • This is something new. In the past the BCLC didn't allow player tracking
  • GC will amplify its marketing programs throughout 2010, and this will result in a small increase in operating expenses, but they feel that they will be targeted and effective
  • Now that GC's major developments are complete, they will accumulate cash. They will use the cash to delever the balance sheet if no compelling investment opportunities arise
    • I wish they would have left the whole M&A comment out ... I doubt there is a lot of confidence in their ability to invest capital effectively


  • Slot system upgrade by the provinces? What are they doing?
    • BCLC is considering a new slot system
      • I believe there is an RFP out for this business
    • They are lobbying to be more involved with player tracking
    • In Nova Scotia they are in the process of going through a slot refresh but not considering a new system
  • Vancouver Island margins were very high. Are they sustainable?
    • They were actually disappointed with the margins given the expansion there.
    • Play at those properties were impacted by market hits to retiree savings - and while they have recovered somewhat, the play levels are still depressed
  • New competition in New Brunswick will open in May/June. They have some Halifax customers that will be closer to Moncton than their property.
  • No competitive changes from Gateway Casinos
  • Marketing budgets in 2010 impact on EBITDA?
    • Duh... they obviously think it will have a positive impact otherwise they wouldn't be doing it
    • If the marketing programs don't produce results they will dial them back
  • Any impact on March spending / patterns post Olympics
  • Normal tax rate going forward is around 30%
  • "We're in the consumer discretionary business and the consumer is still watching their spending"
  • Ok these hold questions are just completely idiotic... these analysts are clearly "generalists"
  • Deferred projects are still deferred - no ultimate decisions made at this point regarding those projects
  • Marketing questions are equally idiotic... please stop
  • Boulevard's weak results are impacted by increased competition from the New Villa, tough economy and the demographics in those markets.  There has also been significant road construction in that area which have impacted visitation
  • Once the R/C is paid down they will not pay down the notes bc there is a pre-payment penalty.  They'll accumulate cash
  • Canada Line is really driving the slot business, not the table business really.  Got a refresh of 300 machines at River Rock. Now they are at 1,000 from 854 machines.



The Macau Metro Monitor, March 8th, 2010



As LVS's US $1.75BN five-year loan deal draws to a disappointing close, eyes are now focused on Galaxy's HK$7BN (US $903MM) six-year financing package, which is expected to hit the market by the end of March 2010. LVS's financing struggles to find lenders as only four banks have joined in syndication so far, committing US$100MM in aggregate. Total commitments in general for Sands are expected to come to less than US$300MM or a selldown of less than 17% of the $1.75BN loan commitment, which is comprised of a $750MM Term Loan A, $750MM delay draw Term Loan B, and a $250MM R/C - tranche C. Banco Nacional Ultramarino, BoC (Macau), BNP Paribas, Barclays Capital, Citigroup, DBS, Goldman Sachs, ICBC (Macau), OCBC and UBS were the loan underwriters.


Galaxy's loan syndication has already run into several roadblocks, including: 1) Bank of China (Macau) rumored to have dropped out after it failed to obtain credit approval, supposedly as a result of China's tightening of  bank lending  2) BoA/ ML,  which was initially mandated to arrange the HK$6-$9BN bond and loan financing package, is now rumored to be handling the capital markets portion only. 3) Coming on the heels of a cold Sands deal could mean that lender exposure to Macau will be saturated, especially if syndication efforts prove less successful than hoped.


However, since Galaxy is a debut borrower and results at its flagship property, StarWorld, have been strong, they may have an easier time attracting capital then Sands - which banks already have a high exposure to. Galaxy Macau Resort, needs an additional HK$9BN funding to complete the HK$14BN project. Galaxy’s facility will have a term of less than five years and all-in spread of 500bps.


Sheldon Adelson said that LVS is gearing up to launch the sale of the Four Seasons apartment hotel tower in a cooperative form of ownership, at the Deutsche Bank 2010 Hospitality and Gaming Conference last week. This new agreement with the Macau Government seems to placate Macau lawmakers such as Au Kam San, who argued that the sale of serviced apartments on the lucrative Cotai Strip represents a flagrant example of profiteering.


“We want to sell the apartments just to players who lock in their loyalty to where they own their apartment,’’ Adelson said, “If we proceed in selling co-ops, I believe that the future and the perception of our company will change for the better, dramatically.”  Michael Leven, LVS's COO, said at the Reuters Travel and Leisure Summit that the co-op sales would bring in more than $1 billion.


UP Destination Macau

According to DM, the strong results seen in the last week of February will continue into March and that 2010 may even see a month where results break MOP 20BN (likely in November).  DM explains that whenever Macau experiences a surge in visitation, such as a Golden Week, there is usually a secondary pop about a week to two afterward when the friends of those who came in previously hear about all the new attractions and games that they missed out on, therefore decide to go and see for themselves. DM's consumer surveys show that more than two-thirds of Macau visitors come on the “advice and recommendation of a friend/relative”.  Hence, a strong CNY is followed by several strong weeks of visitation and gaming revenues.


 DM believes that even though credit may be tightening on the mainland, it's impact on Macau is being over shadowed by huge new wealth growth. DM sees overall red-hot gaming revenue growth, with month-on-month dips in April, June and September.


WYNN AND SANDS, RULE OK? Destination Macau

The DM is optimistic on the management team of Sands China under Steve Jacobs rule, in driving performance results, as every square inch of their properties is being questioned and examined to improve efficiency. DM believes that Sands EBITDA can exceed the $1BN mark in 2010.There are some delays on construction resuming on Lot 5&6, but those are most likely temporary.  


DM continues to expect outperformance from Wynn Macau especially as Encore opens and brings much needed room capacity to the property. 


Fernando Chui Sai-on delivers his first policy address a week from Monday. He will address the biggest headache facing the people running some of Macau's best casinos over how to raise their service standards by developing their staff better. Chui is ready to make labor importation a priority again, so don't expect an explosion of Blue Card approvals anytime soon. In addition, Chui will comment on how to make money for everyone important who doesn't necessarily own a casino license in Macau. He wants to reinstate the migrant investment scheme which is great news for those with property to sell, like Shun Tak and Sands China.



According to The Macau Post Daily, which quoted Ho Iat Seng, a Macau member of the Standing Committee of the National People's Congress (NPC), China's Vice President Xi Jinping said that Macau needed to adjust, control and monitor the gaming industry in order to ensure its orderly development. Xi stressed that while Macau's outlook was good, there was a need to grasp hold of key opportunities, particularly the opening-up of Hengqin Island, in order to create a climate of sustainable development in Macau.


As we said in our sales preview, “MCD FACING TOPLINE PRESSURE” (02/26/10), MCD had easy comparisons across the board for all segments.  This was especially true in APMEA because of the Chinese New Year calendar shift.  As expected, the headline numbers appear better than the underlying trends actually are.  As we rated the potential range of sales trends for MCD in February, all of the trends were in line with can be viewed as BAD; all regions showed a slowing in 2-year trends.  On a sequential basis, 2-year average trends slowed in the USA by 65 bps, Europe by 310 bps and AMPEA by 165 bps.  Given current trends, the next two months pose very difficult comparisons for MCD.









Howard Penney

Managing Director

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