Dublin Down

“All sins cast long shadows.”

-Irish Proverb


After expedited +11% and +17% rallies in the S&P500 and Greek Athex Composite, respectively, since their February 8th YTD lows, what have we learned? In the short term, we have learned that government bailouts continue to be bullish for stocks.


In the intermediate term, in looking at the US bailout exercise on its own, it’s pretty easy to argue that bailouts have been bullish for stocks as well. After closing just 1 point shy of its intermediate term cycle-high last night, the S&P500 is +73.5% since its March 9th low. This huge rally looks a lot like Japan’s initially did in the early 90’s.


In the long term, the sins associated with extending your off-balance-sheet liabilities (like the US is doing with GSE debt), remains a major concern for any analyst who considers sovereign debt for what it is. Those rightly placed long term balance sheet fears are probably perpetuating the last leg of this generational short squeeze of the short selling community. Some people just cannot reconcile why we are going higher.


We call this Duration Mismatch. Currently that’s what you are seeing develop between what people think is moral and “right” versus what will help you get the stocks right. These are two very different things. At Hedgeye, we try to capture the short term developments within the construct of what we call TRADEs (like Citigroup going from $2 to $4), but all the while try to maintain the sobriety of the long term TAILs (can the Pandit Bandit take Citi from $4 to $16?).


After making plenty of mistakes short selling things over the years, I’ve developed this language in an effort to build an investment research process that’s duration agnostic. Global markets and the information that feeds them are becoming more interconnected by the day. I don’t see any other way to adapt to such a dynamic ecosystem, yet.


In order to bring this investment point to a practical place, let’s consider the Duration Mismatch associated with the stock market in Ireland (all prices and dates for the Irish Overall Index):

  1. February 21, 2007 the market peaks (ahead of the US stock market) at 9968
  2. March 9, 2009 the market bottoms (same day as US stocks did) at 1916 (-80.8% crash from peak)
  3. September, 17, 2009 the global short squeeze of the Great Depressionistas gets you back to 3469 (a +81.1% return)
  4. February 15, 2010, the Irish eyes ain’t smilin’; stocks have dropped to 2862 (a -17.5% drop from the 9/09 peak)
  5. March 26, 2010, the fightin’ Irish are back after another squeeze from 2/15 of +12.2% (3212 on the Irish Overall)

Fun place for your retirement accounts or what? It’s called price volatility sponsored by a Bubble In Politics.


This Irish stock market story gets more interesting by the minute. In the last 48 hours, this country that the short sellers called a PIG in February has started to go down again. For the week-to-date, Irish stocks are flashing what we call a regional negative divergence (underperforming other countries in both the European region), and its doing so on very bad long term news.


The isn’t “new” news, per se, but everything has a price. Timing, when the long term TAIL of a “Bad Bank” plan (taking over toxic loans from dysfunctional lenders) like Ireland has imposed on their citizenry can obviously wreak some havoc on your stock portfolio. If you don’t invest alongside government-leaked inside information, your best path forward in Ireland is to wake-up every morning and understand when they are going to double down again on government debt.


Dublin Down is maybe a cute way of saying what happened yesterday in the Irish banking stocks, but there is nothing cute about this, ladies. Dublin based Allied Irish bank was down -17% yesterday on fears that the unknown is known again. After receiving over 7 Billion Euros in government support, Allied Irish could need as much as another 7.7 Billion Euros ($10.4B dollars) and the Irish government to take as much as a 70% stake in the company…


If you want to wrap all of these massive price moves in Ireland’s stock market around your head and consider what could happen to US stocks from here (if indeed the Irish continue to be a lead indicator for global leverage disease coming back into focus), you might want to get yourself a pint.


Look on the bright side, the Greeks have only seen their sovereign debt in default (or restructuring) about 50% of the time since the year 1800 (see Reinhart & Rogoff, This Time is Different). So, compared to that, the Irish look great from a historical and a relative perspective. Bear in mind, the Irish didn't declare independence until 1916. So give these political lads some time.


Yesterday, the fibbing Greek government issued 5B Euros of 7-year debt yielding 6%. That’s 3.34% more than German bunds of the same duration. How’d ya like to have some o’ that paper in your 401k!


Piling Debt, Upon Debt, Upon Debt may indeed make the short to intermediate term pricing of equity look good. But, in the end, the sins associated with these debts will be casting long shadows.


My immediate term support and resistance lines for the SP500 are now 1167 and 1175, respectively. We re-shorted the Euro via the FXE etf on yesterday’s strength.


Best of luck out there today,



Dublin Down - Allied Irish Banks



The Macau Metro Monitor, March 30th, 2010



A report from Reuters says an examination of Hong Kong court records, U.S. depositions of a former Sands executive and interviews with law enforcement in the United States and Macau show a connection between LVS and Cheung Chi-tai, an investor in a company that helps bring wealthy clients to casinos in Macau. According to Reuters, a Sands Macau patron also said that Cheung ran one of the VIP rooms at the property. Cheung has been accused of masterminding a scheme to murder a Sands Macau dealer suspected of helping a patron cheat millions of dollars from the business, the report said.

The allegations could have legal implications in Nevada for Las Vegas Sands: The state's Foreign Gaming Act requires officials here to determine if professional relationships involving international business partners and locally based casino operators would damage Nevada's reputation.


LVS officials say that Cheung is not listed as a director or shareholder with any gaming promoters the company uses in Macau. The operator also said it manages all its VIP rooms.


The S&P 500 closed higher by 0.6% yesterday as breadth expanded for the third straight day.  With Energy’s (XLE) out-performance yesterday, the sector moved to positive on TRADE and TREND.  The Utilities (XLU) now stand alone - broken on TREND. 


On the MACRO front, a number of smaller, but positive data points helped lift the RECOVERY/REFLATION trade. 1) the S&P affirmed the UK’s AAA rating, but with an negative outlook; 2) Europe had better than expected confidence numbers for March and; 3) Greece managed to raise €5B in 7-year bonds at 5.9% after an agreement at the EU summit last week.


In the US, personal spending was in-line with consensus at 0.3%. This is the fifth month in a row with an increase in personal spending.  On the other hand, February personal income was flat vs consensus +0.1%, but January Personal Income was revised to +0.3% from +0.1%. With spending up and income flat, the savings rate declined to 3.1% in February from 3.4% in January.


Yesterday, Energy (XLE) was the best performing sector, with support from a weaker dollar and higher crude prices.  The Philadelphia Oil exploration index was up 3.3% and the S&P 500 Coal index was up 3%.  Crude was up 2.7% to $82.17.


The Dollar index is in a three day correction, declining another 0.39% yesterday.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.62) and sell TRADE (82.51).  The Materials (XLB) continue to benefit from the weaker dollar, as it was the best performing sector on Friday and the third best performing sector yesterday. 


Yesterday, Financials (XLF) was the worst performing sector, but closed in positive territory for the sixth day in a row. With the regional and money center banks down slightly, asset management and brokers outperformed. 


The VIX declined 1% yesterday and remains broken on all three durations - TRADE, TREND and TAIL.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.01) and sell TRADE (18.34). 


In early trading, crude oil rose for a second day in New York on a resurgence in the REFLATION trade, as the U.S. economy continues to show signs of recovery.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (80.87) and Sell TRADE (83.49). 


Gold is higher for a fourth day in London as the dollar index weakens.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,082) and Sell TRADE (1,116).


Yesterday, copper surged to an 11-week high as inventories declined and the dollar declined.  Stockpiles of copper in warehouses monitored by the London Metal Exchange fell for a 19th straight time - the longest slump since July.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.36) and Sell TRADE (3.51).


In early trading, equity futures are trading above fair value with markets buoyed more by a lack of any bad news rather than anything distinctly positive. Events in Greece and Ireland remain in focus.  As we look at today’s set up the range for the S&P 500 is 8 points or 0.5% (1,167) downside and 0.2% (1,175) upside. 


Today's MACRO highlights are:

  • January Case-Shiller Home Price Index
  • March Consumer Confidence
  • ABC Consumer Confidence


Howard Penney

Managing Director













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Industry same-store sales and traffic trends are out for February.


Malcolm Knapp reported February same-store sales and traffic results of -3.2% and -3.9%, respectively.  For same-store sales, this constitutes a two-year average number of -3.6%, which is level with the two-year average decline of 3.6% in January.  The traffic number represents a two-year average of -4.8%, a sequential decline of 30 bps from January’s two-year average traffic number.  In the Knapp-Track report, it is explained that the first week of February was negatively impacted by the Super Bowl Football Championship game calendar shift (from 2/1/09 to 2/7/10).  Additionally, the unusually heavy snowfall, particularly in Washington, D.C., impacted trends.  California had rain “nearly every weekend”. 


February is the third consecutive month where comparable-store sales exceeded guest counts.  From May through November of 2009, driven by the aggressive discounting environment, guest counts had exceeded comparable store sales. 


The bifurcation between consumer confidence and consumer spending metrics continues; the Consumer Confidence Index is up 20.7 points from February 2009.  Importantly, as Knapp notes, while the Expectations component of the Consumer Confidence Index is up 36.5 index points year-over-year, the Current Outlook component of the Consumer Confidence Index decreased 2.9 index points from last year.  We continue to see inflationary pressure (particularly in the cost of gasoline) and unemployment suppressing any resurgence in sales trends. 



Howard Penney

Managing Director

Obama’s Air Traffic Controller Moment?

In less than a year and half, President Obama has governed through a roller coaster of both Presidential experiences and Presidential approval.  As we have often mentioned, he entered the Presidency with one of the highest approval ratings of any incoming President.  This was based on incredibly high approval from his base, but also very strong support from the independents, who embraced his “change” mantra after tiring of Republican leadership for eight years.  Over the past year and a half, Obama’s approval ratings have tumbled dramatically and his healthcare bill is being viewed in similar fashion.


A recent poll from Rasmussen highlighted current thoughts on the healthcare bill.  Specifically, 54% of those polled favor a repeal of the healthcare bill.  In addition, 50% now believe passage of the healthcare was bad for the country.  Obviously, these numbers aren’t incredibly positive for this bill, or for President Obama’s approval as it relates to his healthcare initiative.


Unlike President Obama, President Reagan was hardly given a mandate when he was elected.  At the convention in 1980, Reagan was very close to striking a deal with the moderate ex-President Gerald Ford to make him Vice President, which would have ceded some power over his agenda to moderate Republicans.  Instead, he selected George H.W. Bush, and was elected to his first term as President with the narrowest of popular vote margins, less than 51% in fact.


The most significant move that President Reagan made in the first year of his Presidency was related to the Air Controllers Strike.  Under law, the nation’s air controllers were not allowed to strike, along with a number of government unions.  Rather than negotiate with the union, as most thought he would do, President Reagan announced from the White Rose Garden that if the air traffic controllers “do not report for work within 48 hours, they have forfeited their jobs and will be terminated.”


Despite the threat of serious political backlash, President Reagan fired 11,345 striking air traffic controllers and broke the union.  While the nation’s air traffic control system would take years to recover, President Reagan had made his point and solidified his agenda.  He was on the side of private business and against big labor.  While this move wasn’t politically popular, it was important to President Reagan’s agenda.


The healthcare bill passage has parallels to the air traffic debate.  Despite risk of political back lash and to his approval ratings, both President Reagan and President Obama, pushed forward agenda items that directly reflected their ideologies, and not political appeasement.   On some levels, whether you agree with the politics or not, these decisions by both Presidents may be emblematic of their strong leadership.


In recent weeks, President Obama has made a number of decisions and taken a number of actions that seem to reinforce that he has had his Air Traffic Controller moment and is coming into his own as a political leader.  He hammered on healthcare and was successful in passing it.  He was strong on missile defense with the Russians, and was able to pass a successful arms control pact, even if delayed.   In a recent meeting with Prime Minister Netanyahu of Israel, President Obama continued to press for a halt a construction freeze in east Jerusalem.  Finally, President Obama recently made 15 recess appointments, including the contentions choice of Craig Becker to National Labor Relations Board.


So, what, if anything, will President Obama finding his leadership footing do for his approval and the Democratic party?  As of yet, the results appear decidedly mixed.   As of today, Obama’s approval rating on the Real Clear Politics poll average is 47.6%, which is basically at the lows of his Presidency.   On the Rasmussen Daily Tracking Poll, he has seen a slight positive move.  While those that Strongly Disapprove have held in at 44% over the last few days, which is his lowest reading since being elected, the Strongly Approve is now registering 30%, which is well off the March 9th trough of 22%.


As our Healthcare Sector Head Tom Tobin mentioned in his morning note, the midterm is widely anticipated to be a disaster for the Democrats.  But with some of President Obama’s recent moves, which do represent a leadership of sorts, perhaps consensus had become too bearish on the midterms for the Democrats.


Even if consensus is correct, perhaps it is less relevant for President Obama than many pundits currently believe.   Continuing with the comparison to Ronald Reagan, remember that President Reagan was first elected with just under 51% of the popular vote.  In his first midterm election, the Republicans lost 26 seats.  In his second Presidential election, President Reagan came back two years later and won an astounding 59% of the popular vote.  If this indeed is an Air Traffic Controller Moment for President Obama, perhaps we shouldn’t write him off just yet.


Daryl Jones

Managing Director


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