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Opacity's Child

“Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary.”

-Alan Greenspan


Some of the financial ideologies born out of the Clinton Administration’s second term are something for sore eyes this morning. With ex-Goldman CEO and czar of all things Greek Philosophy, Robert Rubin, at the helm of the US Treasury, there was no stopping Alan Greenspan and Larry Summers from de-regulating us into oblivion.


Now some may argue that is too aggressive a stance to take on America’s Wizards of Oz (after all, they are “professionals”), but one of those people isn’t President Bill Clinton. Clinton made 3 explicit comments about his Treasury Secretaries (Rubin and Summers) on ABC’s “This Week” program yesterday:


  1. “I think they were wrong and I think I was wrong to take their advice.”
  2. “Their argument was that derivatives were expensive and sophisticated and only a handful of people will buy them and they don’t need any extra protection.”
  3. “Sometimes people with a lot of money make stupid decisions and make it without transparency.”

Now whether you are political or not doesn’t matter this morning. This Tiger Woods like PR nightmare for Goldman Sachs is political in principle and global in reach. In the UK, Gordon Brown is staring down an election on May the 6th, so don’t think his rushing out to the cameras to call this a “moral bankruptcy” was ironic in its timing.


Don’t think for one second that the Clintons don’t have a plan here if President Obama fumbles on the opportunity either. Hillary’s husband admitting he was wrong in the face of Blankfein reminding the world that he thinks he is smarter than you, opens the fences for one of the biggest political softball pitches in US history.


History is what matters this morning, not the semantics of a Goldman VP and the volcanic ash that has become him. On December, 15th of 2000 Congress took Robert Rubin and Larry Summers word for it and declared law that derivatives and swaps were free and clear from regulation and/or oversight by the CFTC (Commodities Futures Trading Commission). Then in 2004, Hank Paulson and Dick Fuld lobbied hard to have the SEC removed their leverage ratios (great for a derivatives business, if you have one).


Taking a step back, most people in America are becoming familiar with the name Brooksley Born. She was the chair of the CFTC who tried to regulate the swaps market early in Clinton’s second term. This was after Orange County’s derivatives bet blew up (1994) and before Long Term Capital Management imploded (1998).


I know, how dare she try to regulate the Goldman boys (she was elected President of the Stanford Law Review in 1963) when, according to my favorite financial historian Roger Lowenstein, “most of the women in law firms were still pouring coffee.”


Brooksley Born resigned in 1999 and the rest, as they say, is history. In Lowenstein’s latest book, “The End of Wall Street” you can get up to speed on the history of derivatives de-regulation in literally 7 pages (pages 57-63). On page 62, Roger quotes Greenspan when he was asked about the topic of derivatives regulation again in 2002: “Regulation is not only unnecessary in these derivative markets, it is potentially damaging.”


What’s really going to be damaging here is the deepening global perception of American financial markets being opaque. When the President of the United States pipes his message of ‘Transparency, Accountability, and Trust’ into CNN, some people out there actually take his word for it.


I think this Goldman case is going to be much larger in scope than those who “bought GS on the dip” on the technical merits of the SEC fraud case on Friday think. This is going to be a global debate about transparency versus opacity. Goldman will be opacity’s poster child.


The risk manager in me obviously asks about the downside before I start accepting the narrative fallacy of perpetual upside; particularly after Thursday’s closing YTD high of 1211 in the SP500 (which was +79.1% higher than where most of people were right freaked out by the fears that the likes of another Goldman beauty, Hank “The Market Tank” Paulson, helped perpetuate).


Not unlike Hank Paulson’s grossly miscalculated risk that Lehman filing for bankruptcy was going to equate in a “cleanup day” (Lowenstein’s “The End of Wall Street”, page 198), the idea that re-regulation of the entire swaps and derivatives market is going to equate to a 1-day selloff in stocks from their nosebleed highs is reckless in its historical assumptions.


We shorted the SP500 on Thursday April 16th, then issued a slide presentation on Friday outlining why our Hedgeyes see the risk outrunning the reward at SP as we head into May. No, we didn’t know that the SEC was going to make this move. No, we didn’t purport to not know how opaque our financial system was prior to the announcement either. Managing risk doesn’t happen in the vacuum of Opacity’s Child. If you are going to play this game, just know who you are playing against.


My immediate term support and resistance levels for the SP500 are now 1175 and 1214, respectively.


Best of luck out there today,



Opacity's Child - BL



The Macau Metro Monitor, April 19th, 2010


Sands China CEO Steve Jacobs said Monday that the expansion project in Cotai is on track to open in July 2011, and the company plans to have 670 gaming tables at the opening. According to Jacobs, Sands China has no funding constraints and is ramping up the construction of the project.


The comments come after Sands China postponed a news conference for a signing ceremony with contractors to restart construction of the project last month. The postponement raised concerns the project would face further delays after construction was halted in 2008 at the height of the financial crisis.


GAMING REVENUES UP 57.4% macaubusiness.com

According to official figures released by the Gaming Inspection and Coordination Bureau, Macau casinos raked in MOP40.95 billion in the first quarter of 2010, an increase of 57.4% YOY. Overall gross revenues from different gaming activities – including casino, greyhound racing, horse racing, Chinese lottery, instant lottery and sports lottery – rose to MOP41.25 billion. VIP baccarat continues to lead with MOP28.76 billion, around 70% of the overall gross gaming revenue, followed by mass market baccarat at MOP 8.02 billion. Together, both forms of baccarat accounted for almost 90% of the casino gross gaming revenues for the first quarter of the year.



Like elsewhere in the world, fees and taxes do apply to property purchases. With the exception of the Purchase Deed,  fees and taxes are applicable after the sales contract has been signed. Some fees and taxes to consider:


1.  Purchase Deed Fee: The cost varies according to your purchase price. Approximate fee is .1% of the purchase price. If your purchase deed involves a mortgage you will need to add approximately HKD1,500 to the fee quoted above.


2. Notary and Registration Fees--payable to the Macau Legal Affairs Bureau Fees are again determined by the property purchase price. A set fee of HK4500 is payable plus .3% of excess over 1Million. The registration fee for a property of the same value attracts a set fee of HK3500 plus .2% of excess over 1Million.

3. Property Tax--applicable whether you are an owner occupier or an investor. Property tax is 10% on the official rateable value for owner occupied property,  Tax is charged at 16% on the actual rental income or 10% on the official rateable value if not rented out.


4. Stamp Duty – Transfer of real estate is subject to a stamp duty equal to 3% + a further 0.15% of the property purchase price or the official ratable value, whichever is higher. Stamp Duty should be paid to the Macau Finance Department upon completion of the property purchase. The government has announced a reduction in stamp duty to 1% in 2009.



Now that there’s blood in the water, here come the sharks.  Germany and the UK calling for probe of Goldman Sachs.  What about Goldman’s link to Greece and its financial problems?  BofA/ML, Morgan - are they innocent?  What is to come of financial reform?


Time to pull up a chair and settle in, as we could be here for a while… For those trading GS today, the Hedgeye Risk Management models have levels for GS is: buy TRADE ($131) and sell TRADE ($164)


On the Goldman news the S&P finished down 1.6% on a big spike in volume and volatility.  Volume was up 54% day-over-day and the VIX surged 15.0%.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (17.08) and sell TRADE (19.67). 


The Hedgeye Risk management models have Utilities (XLU) broken on both TRADE and TREND, while Healthcare (XLV) is now broken on TRADE.


Friday’s carnage did not seem excessive and the mayhem seemed orderly.  The uncertainty over what happens next is what's important, especially considering that the financial regulatory reform bill is expected on the Senate floor next week.  The question surrounding the financials centers around what the business model looks like and how to value the cash flow streams.  This issue will plague the financials for the coming months. 


Fridays’ MACRO day points were mixed at best, although the housing data numbers were higher than expected.  March housing starts were 626,000 vs. consensus 610,000, and February was revised to 616,000 from 575,000.  Building permits were 685,000 vs. consensus 625,000, and February was revised to 637,000 from 612,000. Preliminary April University of Michigan Confidence was a bomb at 69.5, well below consensus 75.0. The final reading for March was 73.6. Lastly, the Eurozone March CPI was +1.4% year-over-years vs. consensus +1.5% and prior +0.9%; although an increase, consumer prices are still below the ECB’s target.


Along with Financials (XLF), Industrials (XLI), Materials (XLB), and Energy (XLE) all underperformed on Friday.  All of these sectors came under pressure as the dollar rallies and commodities collapsed. The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (79.61) and sell TRADE (80.88). 


The CRB declined 1.25% on the day.  On Friday, OIL traded down 2.97% and is currently trading at a three week low on the Goldman news.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (79.82) and Sell TRADE (83.43). 


In early trading, gold is trading at a two-week low.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,123) and Sell TRADE (1,150).


Copper fell to a three-week low in as investors shied away from riskier assets including commodities after U.S. regulators sued Goldman Sachs Group Inc. for alleged fraud.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.34) and Sell TRADE (3.59).


In early trading, equity futures are trading below fair value in continued global reaction to Friday's move by the SEC to charge Goldman of civil fraud.  Citi's Q1 earnings before the bell are expected to show a significant improvement year-over-year.  As we look at today’s set up the range for the S&P 500 is 39 points or 1.4% (1,175) downside and 1.8% (1,214) upside. 


On the MACRO calendar today:

  • March Leading Indicators


Howard Penney

Managing Director













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The Week Ahead

The Economic Data calendar for the week of the 19th of April through the 23rd of April is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2


I hope you had a great weekend!


Since Brinker’s announcement over six months ago about a new direction for Chili’s, we have wanted to see where they are going.  After the recent analyst meeting, and a little digging of our own, the timing is upon us.  There is a real, credible opportunity for management to create value and grow EBIT over the next 1-3 years.


The EAT Conference Call marks the publication of our EAT Black Book. The call is open to qualified institutional clients of Hedgeye's Restaurants vertical -- and for qualified prospective institutional clients.


The call, on Monday April 19th, at 11 a.m. EST, will cover in detail why we think EAT deserves a closer look, with real opportunity to invest free cash flow into an improving core business. Although we anticipate choppy near-term sales at EAT, we think menu changes and margin enhancement initiatives will lead to marked improvement across customer satisfaction and traffic, better execution and higher margins. We see EAT's potential corporate actions, alongside anticipated improved trends, as being beneficial to the stock.


Contact <mailto:> or reply to this email to request access to the conference call, or to request access/pricing on the EAT Black Book.







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.