Begging Blankfein To Speculate

“Bernanke is, in fact, begging us to speculate.”

-Jeremy Grantham


Jeremy Grantham is one of the most important thought leaders in modern day finance. After seeing the forest beyond the trees in the early 1970’s when he started one of the first index funds, he has successfully realized the art of managing money – having money to manage. With $107 Billion in assets under management from his perch in Boston, the investment world is a better place with his hedgeye for risk management in it.


Grantham’s Quarterly Letter for April 2010 was titled “Playing With Fire” and, as usual, it didn’t disappoint. There is actually an addendum to his letter titled “Friends and Romans, I Come To Tease Graham and Dodd, not to praise them” that is one of the better contrarian (and quantified) analyses of some of the Perceived Wisdoms associated with value investing that I have read. I highly recommend studying his conclusions.


Studying what we know is easy. In fact, it gets easier and easier to understand what we know if we choose to wake up every morning focusing on those certainties. Unfortunately, those who use VAR models (Value at Risk) have recently learned the hard way that managing risk in an ever increasingly interconnected world doesn’t start with certainty. Real-time risk management starts with accepting uncertainty.


Now, Grantham doesn’t spend as much time on interconnectedness as I do, but he certainly took some time in his letter to address the realities of the societal risk associated with a government sponsored Piggy Banker Spread (marking the short end of American savings rates to model so that the banks can borrow there and beg you to speculate on stocks/bonds). Without going through his entire note, here were some of his best quotes:

  1. “The Fed’s promises look good and, as long as you’re not a small business, you can borrow to invest or speculate at no cost.”
  2. “Collectively, we forego hundreds of billions of potential interest, but at least we can feel noble because we are helping to restore the financial health of the banks and bankers, who under these conditions could not fail to make a fortune even if brain dead.”
  3. “The urge to weasel and own a little more emerging is a direct result of the lack of clearly cheap investment alternatives.”

Over the short 12 years I have spent in this business, I have come to realize that the only people worth respecting are those who have the mental malleability to change. Markets and the risks embedded in them are constantly changing and we, as a profession, have a special duty to change with them. Grantham does a great job of calling it like it is, and shunning the Glaring Groupthink that ultimately gets investors run over.


Today, Lloyd Blankfein is going to get run-over by the populist madness of crowds. He’s already released his proactively predictable defense. He’s once again proclaimed his mystery of faith that he is smarter than you and Goldman “managed our risk as shareholders and regulators would expect.”


That’s actually a very appropriate summary of what Goldman did. They did exactly what the likes of Grantham and I would expect. They bought the 2006-2007 leverage top, saw in-house funds like “Goldman Alpha” get annihilated by “6 standard deviation events”, then asked their friends to bail them out as they “hedged” the final stage of the selloff, ultimately perpetuating a bottom.


Having their ex-CEO (who signed off on using VAR (Value at Risk) as a risk management tool as they levered themselves up the wazoo in 2004 and beyond) twilight as the US Treasury Secretary is risk management in and of itself. Gotta have the inside man if you want to get anything done in Washington folks. No wonder why Hank Paulson puked as the entire narrative fallacy what these guys call “risk management” blew up in their face.


We have a lot of friends at Goldman. Our call on the stock isn’t personal. It is what it is – right. We took plenty of heat for saying the stock would go to $151/share, but it went there and that’s all I have to say about that.


The point here is to hold certain actors of the new era of Goldman leadership accountable. Blankfein was a corporate tax lawyer and then a precious metals salesman, not God. He’s made his way to the top the good old fashioned American way. Now he’s looking over the precipice of history’s lessons. Real leaders take the fall.


There are $63B reasons (his derivatives book) and a huge ownership stake that will give the likes of Warren Buffett the opinion that Blankfein should be saved. Or are there? Maybe the stock is telling us something folks. At 7x earnings, value investors must be calling it “cheap”, but that doesn’t mean the Blankfein leadership discount won’t remain. The cheap gets cheaper - until it doesn’t.


In front of his shareholders, employees and Americans alike, Mr. Blankfein will be interviewing for his job today. We’ll see if he can detach his emotion and ego from the kind of risk management “shareholders and regulators” should “expect.”


On a breakdown and close through $151/share, our immediate term TRADE line of support for GS is now $142.29. The intermediate term TREND line of resistance that we signaled on Friday April 16th ($165.59/share) remains broken.


Mr. Blankfein, “value” investors around the world, are “begging you to speculate” that you are indeed smarter than the collective wisdom of the crowd. However populist these winds blow for or against your case today, Godspeed.


My immediate term lines of support and resistance for the SP500 are now 1207 and 1221, respectively.


Best of luck out there today,



Begging Blankfein To Speculate - blank



The Macau Metro Monitor, April 27th, 2010


MARINA BAY SANDS OPENS ITS DOORS Channelnewsasia, The Edge Singapore, Bloomberg

Adelson expects the resort to generate $1BN of EBITDA over the next twelve months and that LVS's $5.5 billion investment  in Marina Bay Sands will be recouped over five years. He expects 70,000 to 80,000 people to visit the complex daily when all the facilities are open. Singapore aims to lure 17 million visitors and triple annual tourism revenue to S$30 billion ($22 billion) by 2015, helped by two casino resorts, Marina Bay Sands and Genting's RWS. Marina Bay Sands is designed to cater to the corporate and convention crowd while Resorts World is aimed at families. Today, Marina Bay Sands opened 963 of its 2,560 hotel rooms, the casino, the meeting and convention facilities, parts of its shopping mall and some restaurants. A grand opening party will be held June 23 when the second phase is unveiled, including a sky park, additional shops and more restaurants. Asia is expected to contribute 85% of revenue once the Singapore casino “ramps up.” said Adelson.


Adelson also added that the gaming industry in Las Vegas is past the bottom, with hotel occupancy rates and the conference business rebounding. He said the company’s Las Vegas hotels are running at 96 to 98% occupancy in April, and expects that the average occupancy rate will be back in the 90s this year.


The unemployment rate for January - March 2010 held stable at 2.9% and the underemployment rate also remained unchanged at 1.8% in comparison with the previous period (December 2009 - February 2010). Total labor force was 323,300 in January - March 2010 and the labor force participation rate stood at 71.1%, with the employed population increasing by 600 over the previous period to 313,800.


Visitor arrivals to Singapore registered 17.3% growth to reach 928,000 in March 2010, the highest ever recorded in the month of March. In March,  visitor days were estimated at 3.5 million days, a YoY growth of 16.4%.




Yesterday, the S&P 500 closed down -0.4% on the day as concerns over financial reform  drowned out strong earnings from Caterpillar. On the MACRO front, the U.S. Treasury said it will approve an initial sale of 1.5 billion shares of Citigroup common stock. On the EU front, the possibility of a speedy bailout for Greece was stalled by German Chancellor Angela Merkel. 


Consumer Discretionary (XKY) outperformed yesterday, closing up +0.8%. That was followed by Basic Materials (XLB) at +0.4% and Industrials (XLI), closing up +0.2%. Those were the only sectors to close up on the day. Notable laggards were Healthcare (XLV) and financials (XLF), closing down -1.1.% and -1.6% on the day, respectively.  No doubt the government's plans to begin exiting it's 27% stake in Citigroup weighed on the sector.


The Dollar index closed up +0.2% on the day.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (81.09) and sell TRADE (81.89). 


Yesterday, the VIX closed up 5.1%. We currently have no position in the VIX, though we are managing risk around it. The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (16.83) and sell TRADE (19.41). 


 Yesterday, Crude Oil closed down -1.1% on the day. The Hedgeye Risk Management models have levels for the OIL at: buy TRADE (80.35) and sell TRADE (83.87). 


In early trading, Gold is trading down -0.2%.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,147) and Sell TRADE (1,165).


In early trading, Copper is trading down -1.5%. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.36) and Sell TRADE (3.52).


In early trading, equity futures are trading below fair market value.  As we look at today’s set up, the range for the S&P 500 is 14 points or 0.4% (1,207) downside and 0.7% (1,221) upside. 


Today is an important day on the MACRO front. The calendar reads:

  • FMOC Meeting Begins
  • S&P/Case-Shiller Home Price Index
  • April Confidence Board Consumer Confidence

Darius Dale














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Normalizing for taxes, WMS would have reported $0.49 which amounts to a disappointing quarter in light of "great expectations". Our long term thesis hasn't changed


WMS reported an inline quarter as we expected. However, given the "great expectations" going into the call, inline proved not to be good enough. Our long term thesis on WMS's outlook remains unchanged. We will have further thoughts on the quarter out shortly. Below are our notes from the call.



  • Expect only modest increases in customer budgets in 2010
    • Based on IGT's and WMS's replacement units, we estimate replacements will be up nicely y-o-y to roughly 12k units
  • Think that they got higher ship share gains in the quarter
  • Bluebird xD getting launched in the June quarter and should help them to continue gain ship share
  • Repurchased $25MM worth of shares during the quarter (So $5MM post Q filing)
  • 55% product sales margin target
  • Overall environment of constraint and conservative in NA - however, it's the first quarter where units increased y-o-y
  • Expect to deliver higher y-o-y unit increases in the June quarter due to entry into new distribution avenues and launch of xD
  • Expect strong ASP's again in the June quarter, more of their customers are opting to upgrade to their BB2 line when ordering new units
  • Australia will have a drag on ASPs, but will largely be offset by launch of BBxD which will sell at a premium price
  • Increase in their Average Daily Revenue in game ops is largely driven by higher mix shift of WAP units as a % of the overall install base
  • Gross margin decline in their gaming operations was due to mix shift towards WAP games and a benefit of favorable jackpot expense last year. They also had some royalty contracts roll off and are now servicing those customers directly (at a lower margin)
  • Expect their tax rate to be btw 36-37% in the F4Q2010
  • Had a $20MM WC benefit in the quarter partly due to lower demand for extended credit terms - however they are still above historical norms.
  • Expect an increase in capital expenditures to expand gaming operations footprint
  • September 21st analyst day in Chicago
  • 26% ship share in calendar 2009, and believe they had better ship share in the March 2010 quarter
  • Launching BlueBird xD cabinet in the June quarter.  Has a smaller footprint than comparable products.  Performing very well in current trials
  • Launching Price is Right in June Q and Lord of the Rings in July.  Lord of the Rings will have player recognition like Star Wars.
  • Shipped games to New South Wales in the the March quarter. Expect to increase shipments to that market in the June quarter
  • Mexico - shipped Blue Bird 2 units again this quarter and expect to gain further penetration in that market
  • Italy - expect first revenue earning units to be placed this fall
  • IL - expect first units to ship at the end of this calendar year
  • Expect commercial applications of Wage Net and first portal applications to launch at the end of this year (Jackpot Explosion - first commercial application). Working with 9 casinos to trial Jackpot Explosion
  • Revised 4Q Guidance of $213-223MM (lowered the range by $3MM)


  • Ship share in March?
    • Think they gained share in the March quarter vs. Dec Q
  • 50% of profit came from gaming operations
  • Expect to keep disciplined on supply of participation games
  • Thoughts on IGT's discounting - "dynamix package"
    • Continue to believe that as long as their games perform well, pricing will not be an issue
  • Will bring out 105 new titles this year
  • Would they have been able to sell more units if IGT had not bundled or if they had lower prices?
    • No
  • Not concerned about their WAP footprint for Q4 given their product pipeline
  • Got approval for Ruby Slippers at the end of March - so very few of those units are in the March 31st footprint - but they will be accretive to the footprint in June
  • Refresh the stand alone participation footprint each quarter (Monopoly/etc) so they aren't ignoring them at the expense of WAP
  • Why xD vs. BlueBird 2?
    • Same themes run at significant premium on the xD vs the BB2 - pricing is north of $20K at same margins as BB2





  • "Looking forward to 2010, the year is looking much stronger than many thought possible only a short time ago. We're expecting good yield growth despite a continued poor economy. Wave season's off to a strong start with good volume and even higher pricing. While we are also not seeing a dramatic run-up in pricing, our numbers demonstrate a slow but steady improvement in our revenue environment, consistent with a slow but steady improvement in the economy. This improving environment combined with continued focus on cost will be meaningfully accretive to earnings this year."
  • "It's encouraging to note that our yield guidance would still be positive for 2010 even if we excluded the Oasis- and Solstice-class ships."
  • 4Q09 "Ticket revenue benefited from stronger-than-expected close-in bookings, and even onboard revenue was slightly stronger than we had forecasted."
  • "Wave season is off to a promising start. Each of the last three weeks have generated record booking volumes for us at pricing that is running ahead of the same time last year. Clearly, we are not back to pre-recession demand level, but we are pleased to see yield recovery underway. As of today, our booked load factor and average net per diem are ahead of the same time last year for all four quarters and the full year."
  • "We currently expect yields to improve around 2% in the first quarter and between 3% and 6% for the full year."
  • "We once again had healthy close-in demand for our cruises in both Europe and the Caribbean. In general, volume was a bit better than what we thought at the time of our previous earnings call. Our onboard revenue also performed better than we had planned driven by shore acts [ph], gaming and onboard communications. And expenses were slightly under where we thought they would be driven by our focus on costs."
  • "In the Caribbean, we've continue to see close-in bookings for the first quarter. Some of this closed-in business is being driven with discounting. But overall, Caribbean pricing remains consistent with our expectations a few months ago."
  • "This summer's European season is looking very strong for Celebrity. Both Equinox, operating 10- and 11-night Med cruises from Rome, and Eclipse, our first ship dedicated to U.K. market operating summer cruises from Southampton, are performing well at very healthy prices. I'm pleased to say bookings are also performing quite well on our non-Solstice-class ships operating in Europe."
  • SG&A? "Cost on a reported basis will be flat to slightly up. And when you factor in base exchange rates, it'll actually be flat to slightly down next year."
  • "I think the Spanish economy continues to be likely the weakest that we are operating in these days. But I think we are feeling that Pullmantur has an opportunity of yield accretion in 2010."

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