• run with the bulls

    get your first month

    of hedgeye free


Meany Manipulators

“Only free men can negotiate; prisoners enter into contracts.”

-Nelson Mandela


Nelson Mandela, the first South-African president to be elected in a fully representative democratic election in that country, knows a thing or two about negotiating.   He also knows a thing or two about being in prison, as he spent 27 years of his life in a South African penitentiary.  Upon release, he returned to the leadership of the African National Congress and led the multi-party negotiation that led to the first multi-racial elections in South Africa.  This Nobel Prize winner is one of the icons of our times.


It is no secret that his negotiations coincided with his release from prison.  Prisoners have effectively entered into a penal contract with the state (even if unjustly), so they have no bargaining position.  Even on the highest level of political and international relations, negotiations require thought, preparation, and tactics.  And, as Mr. Mandela says, “only free men can negotiate.”


The Art of Negotiation was a book published by Gordon Wade Rule in 1962.  The book provides a detailed plan for conducting a negotiation.  A couple of points he highlights as keys to success in any negotiations:

  • Realistically evaluate your bargaining position both with respect to individual points and overall possibilities of success;
  • Determine clearly your authority – if any – to settle each point within the maximums and minimums; and
  • Consider how and where you would like to see the negotiation get underway and proceed.

Today, and likely through the duration of the week, we will see whether Timmy Geithner understands The Art of Negotiation.  Timmy is in China today to meet with Chinese Vice Premier Wang Qishan.  The primary topic of these discussions will be Chinese exchange rate policy.  Interestingly, this visit will occur a week before Timmy’s boss, President Obama, will meet with Chinese President Hu Jintao.


In Washington, the political heat is being turned up on China.   U.S. lawmakers are currently moving forward with legislation that would require the U.S. to impose tariffs on countries with “misaligned currencies”.  As the ever chatty Professional Politician Senator Charles Schumer said yesterday:


“China will not act on their own because they want to maximize their wealth . . . every Treasury Secretary says “Let me talk to them, I can get them to change” and the change almost never occurs and when it does, it’s small, grudging and temporary.”


In contrast, Timmy actually delayed the release of the Treasury Department report on global currency policies that would likely name China a currency manipulator.  With this rhetoric from Congress it seems that the United States is undermining a number of core tenets from the Art of Negotiation.  Thus the talks today for Timmy, and next week for his boss, appear to have some challenges.


The most important challenge is, of course, determining whether the United States has any bargaining position at all.  In the Chart of the Day below, we have highlighted the growth of Chinese ownership of U.S. government debt.  Currently, U.S. debt in the hands of foreign governments is 25% of all U.S. government debt and more than 25% of that is owned by the People’s Republic of China.  China is the United States’ single largest foreign creditor.


One thing that United States officials need to consider is the appetite of the Chinese to continue to fund U.S. public debt in an environment where their currency is not pegged.  Since it is likely that the Yuan would appreciate under free market conditions, perhaps meaningfully, the value of the Chinese holdings of U.S. government debt could depreciate meaningfully and sour Chinese interest in further U.S. treasury purchases. 


According to a recent report by the Congressional Budget Office, the United States will be running close to a trillion dollar budget deficit annually for the next ten plus years.  If these projections are even in the ball park of reality, the United States needs good relations with its creditors. Calling your banker names, like Meany Manipulator, even if accurate, is not conducive to maintaining amiable relations.


For the first time in a long time (maybe ever), Keith applauded Timmy’s decision yesterday to delay the release of the currency  report ahead of his meetings with Chinese officials.  More specifically, the Treasury department cited upcoming meetings between between Chinese President Hu Jintao and President Obama on the sidelines of the Nuclear Security Summit on April 12-13, the second round of the U.S.-China Strategic and Economic Dialogue in late May, and the G-20 summit in Toronto in late June.  These will be critical global macro events to keep your Hedgeyes on.


Even as Professional Politicians like Senator Schumer continue to turn up the rhetoric on the Meany Manipulators, it does seem that Timmy and crew are taking a more balanced and thoughtful approach, though perhaps they have no choice.  After all, if someone lends you money, copious amounts at that, are you really any different from a “prisoner that has entered into a contract”?


Interestingly, Gordon Wade Rule dedicated his seminal book, The Art of Negotiation, to his country. His country and political leaders could use some art in their negotiation right about now.


Keep it real,


Daryl G. Jones

Managing Director


Meany Manipulators - Chinese Holding of UST


The S&P 500 finished lower by 0.6% yesterday, as the REFLATION trade gave back some of its recent outperformance; oil declined 1.1% on a larger-than-expected build in crude stockpiles.  On the MACRO front, Greek bonds fell and stocks tumbled on speculation that the bailout will unravel.  Despite the correction in the S&P 500 and in each of the sectors, the Hedgeye Risk Management models still have all nine sectors in a perfect formation - positive on TRADE and TREND. 


The EURO fell for a fourth straight session against the dollar; if today’s early gains hold, the dollar will be up for the past three days.   A stronger dollar and a 2.4% increase in the VIX provided some headwind for pockets of the RISK/RECOVERY trade. The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.09) and sell TRADE (17.63).  We are currently long the VXX.


The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.74) and sell TRADE (82.13).


A larger-than-expected decline in February consumer credit seemed to accelerate some of the selling pressure late in the day, as volume picked up 23% day-over-day.  Consumer credit declined $11.5B to $2.448T in February, the biggest decline in three months. A Bloomberg survey was looking for a much smaller decline of $1B. Revolving debt fell by $9.4B in February, while non-revolving debt was down $2.1B. However, January consumer credit, which posted the first increase in a year, was revised to reflect a jump of $10.6B vs. the originally reported $5B increase.


Despite a larger-than-expected decline in consumer credit, the Consumer Discretionary (XLY) was the best performing sector on the day.  The XLY declined only 0.36% on the day.  The retail group continues to extend its outperformance with upbeat expectations heading into March comps due out today.  The earnings calendar was also a net positive.  Restaurant stocks also outperformed following the rest of retail and the consumer discretionary names.  CKR +6.6% was the best performer after announcing that it had received a takeover proposal that may be superior to the bid it accepted from Thomas H. Lee Partners in February.


The Energy XLE was the worst performing sector yesterday.  The weakness was largely attributed to a selloff in oil, a stronger dollar and some bearish inventory data. Crude stockpiles rose 1.98M barrels last week vs. the Bloomberg consensus for a 1.35M barrel increase. The refiner’s coal names were among the notable laggards in the energy sector. 


The Financials (XLF) finished lower for the first time in four days, declining only 0.4%.  With C and BAC up on the day, the money-center banks outperformed the regional’s.  The investment banks were notable outperformers with GS and MS up 2% and 2.3%, respectively. 


In early trading, crude oil is looking lower for a second day n New York after a report showed U.S. crude inventories increased more than forecast last week.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (84.14) and Sell TRADE (88.47). 


In early trading gold is looking to decline on the back of a stronger dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1117) and Sell TRADE (1153).


In early trading, copper fell in London for a second day, extending a decline from a 20-month high, on concern that recent advances were not supported by demand from China.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.56) and Sell TRADE (3.69).


In early trading, equity futures are trading below fair value as global markets slip in the face of Greece's growing financial instability.  As we look at today’s set up the range for the S&P 500 is 16 points or 0.5% (1,176) downside and 0.8% (1,192) upside. 


Today's MACRO highlights are:

  • Initial Jobless Claims
  • Natural Gas Inventories
  • Treasury Auctions in 30-yr bonds


Howard Penney

Managing Director













Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


March data discrepancies, good foot traffic over the weekend, and MGM Cotai.



Below are some recent tidings from our contacts in Macau:


Thoughts on the March Data Discrepancies

The data leaks originating from Macau government sources are usually reliable.  So what happened in March when 60-80% growth turned into 42%?  There are a few theories floating around but we thought that these two were most plausible:

  • There is some chatter on the ground that in order to stem any potential Visa restriction tightening, government officials purposefully pumped up market expectations so that the healthy 40+% actual growth came across as disappointing. 
  • While revenues certainly slowed in the back half of the month, the magnitude implied by the 15 day, 28 day and 31 day mark were quite large and therefore we would have expected to hear at least qualitative evidence of a slowdown in play - which we clearly did not.  One explanation is that volumes didn't really change materially over the course of the month but that there was a reversal in luck.


Strong foot traffic in the first week of April

The Ching Ming holiday, which celebrates the oncoming of Spring, just ended and the traffic in Macau has been very solid. Apparently the Venetian had 110K visitors this past Saturday versus an average of 65k.  Our contact on the ground believes that strong trends will continue through Golden Week which takes place the first week of May.


MGM Cotai Site

It probably isn't a complete surprise that MGM is working to secure a Cotai site ahead of its IPO.  According to our sources, MGM's Cotai site sits directly behind Sands' 5 & 6 and is directly overlooked by City of Dream’s (COD) Hyatt hotel.  The road access is good although the location isn't great since it's on the back side of the strip.  The block size is almost exactly the same as 5 & 6.


Below is the a map showing the proposed MGM site plus two photos with a view of the current state and its position re: COD and lots 5 and 6.








The government released its G-19 data a short while ago (G19 = non-mortgage consumer credit for the uninitiated, i.e. credit card, auto and student loan debt). After last month's major slowdown in credit contraction in the revolving portion, we were eager to see whether it was the start of a trend or just an aberration. This month suggests it was an aberration. Revolving credit shrank $9 billion at an annualized rate of 13.1% in February as compared with positive growth (upwardly revised) of 2.1% for January. Currently, the peak to trough decline in revolving consumer credit stands at 12.0%, or $117 billion.


On the margin, this is a negative. The companies principally affected include Capital One (COF), Discover (DFS), American Express (AXP), Bank of America (BAC), JPMorgan (JPM) and Citigroup (C).


Joshua Steiner, CFA







FDO: 2Q Continues the Surge

FDO: 2Q Continues the Surge


Conclusion: Beat the Q with accelerating comp trends and SG&A leverage. Comp growth strength indicating discounters stores have some gas left in the tank here. Read throughs on DG, DLTR, and NDN.


1) Changes to our view on…

a) Company: Specific to FDO is the recent expansion of store hours, which is now chain-wide.  This has got to be helping but there has been no quantification as to what extent.  Net, net consumables driven traffic and some benefit from internal efforts (store hours, POS reset, improved consumables merchandising) is clearly taking hold here.  We’re no more inclined to own it here, but have a bit more evidence to consider before shorting.


b) Industry: Management was quick to point out that the payroll cycle appears to be as pronounced as it has been for while, which is interesting given the pick-up. Demand is coming across the store, even in consumables which has already been strong.  Overall demand is seemingly improving across all demographics, channels, and product offerings.  Pent-up demand, a slightly improve employment picture, and a favorable year over year tax credit environment (especially for lower income spectrum) contributed to uptick. 


2) Key Issue: Management expects same store sales to continue to accelerate throughout the year- largely a result of easing compares and the culmination of the company’s latest strategies. They’d better! With 1-year compares getting easier (especially in 4Q), the company’s guidance already suggests that 2-year trends are starting to flatten out. The big question here is whether there is some real underlying strength that we simply can’t explain (ie they’re sandbagging), or is this setting up to be a big deceleration story in 2H?


3) Read through for peers: Positive for DG, DLTR, NDN, WMT, HBI and GIL. Perhaps even positive for other retailers geared toward lower-priced discretionary items, such as Collective Brands (PSS).


FDO: 2Q Continues the Surge - FDO Comps Chart



Clean Headline: $0.81

Guidance: Updated on March 4th to $0.70 - $0.80

Street: $0.78

Last Year Clean: $0.43


Sales growth: +4.9% -- Revs slightly higher due to 3.6% comp growth which marked a 1 and 2 year acceleration. The increase in comparable store sales was a result of increased customer traffic, as measured by the number of register transactions, and an increase in the value of the average customer transaction. Consumables growth slowed sequentially to 5.1% from 5.8% in Q1 10 while home products, apparel, and seasonal/electronics improved on the margin.   


GM %: 35.4%, up 175bps yy. Result of higher purchase mark-ups and reductions in markdown expenses, freight expenses and inventory shrinkage.


SG&A: +4.1%, -20 bps, margin declined primarily as a result of lower utility costs and lower insurance expense which more than offset higher expenses related to expanded store operating hours and certain store maintenance and repair costs.


Balance sheet: Inventories down 10% on 5% sales growth. Good spread, sequentially improving. Capex as a % of sales was in line with Q1’s levels but increased on a TTM basis.


SIGMA: In sweet spot; positive trajectory to the upper right with better margins and improved sales-inventory delta.


Guidance: Increased 2010 guidance to $2.48 - $2.58 from $2.15 - $2.35, Street at $2.77. Expects Q3 EPS at $0.71 and $0.76 compared with $0.62 last year and street $0.70.  Comps for Q3 expected to increase 6% to 8%.  Favorable weather trends and the impact of the Easter shift have March comps +11%.


FDO: 2Q Continues the Surge - FDO SIGMA



the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.