Grinding Lemmings

“I am turned into a sort of machine for observing facts and grinding out conclusions.”

-Charles Darwin


It’s only fitting that after the weekly Institutional Investor “bearish” survey dropped to its lowest level since 1987 (only 17% of investors admitted to being bearish in the week of April 19th) that the US stock market got clocked. If you didn’t know that the buy-side of this business chases performance, now you know.


It’s actually somewhat sad that this profession has become a game within a game of who is the largest lemming. Like Moody’s or S&P’s ratings, I suppose everything has to be measured on a relative basis. The Johnny Come Roubinis getting amped up on the bearish side of the Sovereign Debt Dichotomy this morning are only -18.7% and -13.2% late (Greek and Spanish YTD stock market performance, inclusive of this morning’s short covering rallies).


Per Wikipedia, “the behavior of lemmings is much the same as that of many other rodents which have periodic population booms and then disperse in all directions, seeking the food and shelter that their natural habitat cannot provide.”


We’ll have to see where Darwin washes out the blindly bullish lemmings this go around, but this isn’t just about bulls having a couple of down days. Plenty a wannabe short seller has had their playoff season end the way that the Washington Capitals did last night in DC – miserably.


To have a deep respect for the opportunity that is developing on the short side of global markets, look no further than the quantification of the Pain Trade that the Roubinis and Rosenberg lovers of 2008 have endured. According to the Jedi Master of Grinding Lemmings, Sir Jeremy Grantham, “this time the recovery for the total market was 80% in one year, second only to 1932, and the really speculative stocks are almost double the market, as they also were in 1932.”


Now some lemmings will give you a blind stare when you start whipping around dates that don’t go beyond 2003, because a lot of people my age in this business had never really been forced to incorporate the macro morning research grind into their risk management process until 2008. Call your buddy and see if you can get a bead on what Ackman is going to file on next. While you are at it, sleep in.


After the Volatility Index (VIX) broke down below the 20 level in 2003, the VIX almost never traded above 21 until 2007. I for one made way too much money during that period, and I hardly believe that it had anything to do with anything more than a period of massive liquidity and depressed volatility. Never say never, but that was an aberrational performance run that will ring in my ears forever.


Four years like that can make people truly believe that their performance is due to their own intellect. When I was watching ex-Goldmanite, Josh Birnbaum, testify on Tuesday, I couldn’t help but think of the depressing reality that there are still some guys like that out there in this business. No regret or societal responsibility. No shame. The name on the back of their jersey always means more than the one on the front.


Now if you want to see someone who operates under a different mantra than that in real-life, turn on the NHL playoffs and watch a man drop his face in front of a 90 mile an hour slap-shot. He’ll take it in the teeth and hand his chicklets to the trainer on the bench so that he can get out there with his teammates for the next shift. The difference between what Blankfein’s and the NHL boys encounter is called accountability. Hockey dressing rooms have 4 walls, not a P&L and 4 trading screens.


Back to the macro grind, here’s what I am seeing out there today:



  1. SP500 range has immediate term upside downside in the SP-1201
  2. SP500 intermediate term support down at 1140; not closing/holding above 1201 into early May should perpetuate May Showers
  3. VIX breakout above both my immediate and intermediate term lines of resistance (intermediate term TREND support = 19.46)
  4. Volume studies continuing to flash bearish (yesterday’s up day came on -16% day/day volume)
  5. Sector Studies showing 4 out of 9 SP500 sectors now broken from an immediate term TRADE perspective (XLV, XLF, XLB, XLP)
  6. Sentiment moved, barely, yesterday in the II Survey with Bears going from 17% (lowest since 1987) to 18%


  1. China down another -1.1% overnight to -12.5% YTD remains broken on both TRADE and TREND durations
  2. Hong Kong equities down again last night (-0.81%) with the Hang Sang finally breaking its intermediate term TREND line = 21,129
  3. German unemployment surprises to the positive again at 7.8% in April versus 8% (March); remains our favorite country long side
  4. Russia cuts interest rates for the 13th time in the last year and the market was up another +0.73% taking YTD to +9% = inflation signal
  5. Latvia is getting hammered, trading down -4.6%; just one of the many countries with sovereign debt problems that are taking turns day-to-day
  6. Greek CDS finally narrows to 650 bps wide; every dog has its day; Greek stocks are still down -18.7% YTD, trading below the February 8th low

Grinding Lemmings is what we really enjoy doing. All is good and fine until you become one. Maybe that’s why the life cycle on a Wall Street prop desk is so short. After all, “it is unknown why lemming populations fluctuate with such variance roughly every four years, before plummeting to near extinction” (Wikipedia).


We love to win; we hate to lose; and if we ever lose respect for the name on the front of our jerseys, we won’t be pointing fingers or saying we don’t know and don’t remember. That’s what losers and lemmings do.


Best of luck out there today,



Grinding Lemmings - Pic of the Day



Another big month in Macau.



We've got mulitple indpendent sources confirming that April was another blockbuster.  Yesterday, MPEL management asserted that Macau gaming revenues would be up 70% in April.  Our sources confirmed at least 60% growth and that 70% was possible.  It seems unlikely that MPEL would throw around a 70% number with so much confidence unless they did their homework.  We wouldn't bet against it.


We did hear that hold was quite good so volumes may not have been as strong.  We won't know for sure until we get our proprietary numbers next week but volumes will still look very good on a year over year basis. 


Here are some other tidbits we picked up: 

  • Lots 5 & 6 – given that the condition that they are in that they would be hard pushed to be completed by 2Q2011
    • If the labor restrictions pass it will be a challenge to get Lots 5 & 6 up – since there just aren’t enough workers in Macau. Expectation that there will be announcement after May holidays on the topic
  • Apparently MPEL & Harrah’s were having intense discussions but they are dead because the government won’t allow Harrah's to get licensed
  • We've heard that there are some very high revenue share junket deals at CoD – Jack Lam’s tables at 55% rev share (like his deal at Grand Lisboa).  CoD's VIP salon mix is currently 50.50 RC/revenue share, but should move more towards revenue share
  • Golden Group also has a deal at 55% revenue share deal at Grand Lisboa
  • Larger junkets prefer revenue share since it's usually more profitable but since its also more volatile, smaller guys like the RC programs
  • North of 80-85% of volumes in VIP are revenue share – so commission caps really have no impact.  Apparently one of the reasons that the government didn't put in place a cap of revenue share agreements was because it was viewed as difficult to enforce but more so because many officials have interests in some VIP rooms
  • Thinks that Sheldon’s numbers for Singapore are quite a stretch according to the guys on the ground


After its largest one-day pullbacks since February 4th, the S&P 500 rallied yesterday (up 0.65%), while the NASDAQ and the Russell 2000 were basically flat on the day.  The continued upbeat takeaways from Q1 earnings season are helping to underpin market sentiment.   According to the latest Investors Intelligence reading (April 27), 54.0% of advisors are bulls (up from 34.1% in February) and 18.0% are bearish (down from 27.8% in February).


The RISK AVERSION trade was on the back burner with the VIX down 7% after a 31.7% moon shot on Wednesday.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (19.46) and sell TRADE (22.53).


The biggest MACRO driver continues to be the European sovereign credit concerns and what the total EU/IMF support package for Greece will look like. Treasuries gave back some of yesterday's flight-to-quality rally, while the dollar index was up 0.29% (up for the past three days).  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (81.21) and sell TRADE (82.34). 


The market also benefited from the some good news on the liquidity front as the FOMC maintained its outlook for an extended period of low interest rates.  The Fed left the federal funds rate at 0-0.25% and noted that it continues to expect that economic conditions and stable inflation expectations are likely to warrant exceptionally low levels of the funds rate for an extended period.  In addition, the FOMC sentiment offered a slightly more upbeat assessment of the economic recovery. 


The two best performing sectors were leveraged to the RECOVERY/REFLATION trade - the XLF and the XLB.  Despite the uncertainty surrounding the financial regulation, the XLF was up 1.4%, although it has been the worst performing sector over the past week.  The upside leadership was driven by the BKX up 1.4%. Goldman Sachs finished higher for a second straight day, up 2.6%. 


The Materials (XLB) was underpinned by 1Q10 earnings season, with Dow Chemical up 5.9% following its EPS beat on rebounding demand in the US and Europe.  The steel group was another bright spot with the S&P Steel Index closing up 1.2%.  Metals and mining names stocks were among the best performers, as Gold was up 0.9% yesterday.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,149) and Sell TRADE (1,172).


Copper traded slightly higher yesterday, but continues to trade near a one-month low on recovery concerns in China.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.36) and Sell TRADE (3.52).


The outperformance in the REFLATION trade is coming despite the Chinese market (Hang Seng) breaking the Hedgeye Risk Management intermediate term TREND line of 21,129 and declining 8 of the last 9 days.     


Yesterday, the worst performing sector was the Consumer Discretionary (XLY) sector.  The restaurant group, which has seen a big run-up year-to-date, weighed on the sector following disappointing earnings results from BWLD.  BWLD traded down 17.1% on the day.  Weakness in PNRA and PFCB also contributed to weakness in the sector.  After falling more than 3% on Tuesday, retail remained fairly sluggish today with the S&P Retail Index down 0.6% yesterday.  Homebuilders were among the better performing names with the S&P homebuilding index up 1.8% on the day. 


In early trading, equity futures are trading above fair value in the wake of yesterday's FOMC meeting where the Fed maintained the fed funds target rate.  In addition to another round earnings, Initial Jobless claims will be a key data point today.  As we look at today’s set up the range for the S&P 500 is 21 points or 1.0% (1,180) downside and 0.8% (1,201) upside. 


Today’s MACRO events: 

  • March Chicago Fed Nat Activity Index
  • Initial Jobless Claims
  • Natural Gas Inventories  

Howard Penney

Managing Director













Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%


The Macau Metro Monitor, April 29th, 2010



Under proposal is a new law that would restrict the number of nonresident workers on construction projects, potentially disrupting ambitious expansion plans by the territory's casino developers. The legislation would require one local construction worker be employed for every worker from outside Macau brought onto a project, a government spokeswoman said this week. The restrictions, if enacted, would make it difficult for casino operators to hire the workers they need to complete their projects without severe delays. Casino operators have become very reliant on foreign labor, especially those from mainland China, because of the labor shortage in Macau.


For example, Sands CEO Steve Jacobs said last week that it plans to hire all 2,000 qualified, available local workers for an expansion project, but that the rest of the construction force (~8,000 workers, according to analysts) would need to come from Hong Kong or mainland China. The company hopes to launch the new property in the third quarter of 2011.


"The quicker we get a long-term policy on foreign labor the better," said an executive at a casino operator, who also expressed concern about the news earlier in the month that the government would impose a levy of about 200 patacas (about US$25) per month on employers for each foreign worker they hire.


Secretary Yam said the government has not received yet any request from any gaming operator to sell part of its non-core business assets in Macau.

Tam’s remarks came after Las Vegas Sands chairman Sheldon Adelson said he hoped to raise up to US$12 billion (MOP96 billion) from the sale of the group’s malls and apartments in Macau. “We need to understand how a potential assets’ sale is to happen since the gaming concession contract states that, in the end, the casino must be handed out to the government,” Tam said. “We will study it on a case-by-case approach, depending on each request,” he added.



More units at Marina Bay Suites are expected to be released this week. The initial batch of 90-odd units released by the developer late last year were sold at between $1,900 per square foot and $2,600 psf. At the nearby Marina Bay Residences, units have transacted in the sub-sale market at $2,100 psf to $3,050 psf. Joseph Tan, executive director (residential) at CB Richard Ellis, which is one of the marketing agents for Marina Bay Suites, notes that owners of high-floor, prime facing units in the project are currently asking prices ranging from $3,800 to $5,600 psf. Over in the Holland Road area, CLSA Capital Partners Real Estate Fund and Lippo sold six units at their Holland Collection project last week. This means that the developers have sold eight units in the 26-unit project since previewing the project last month. Units sold last week include two penthouses (at about $6.3 million each) and a strata bungalow that fetched $6 million. The buyers in the freehold project are mostly foreigners. The eight units sold to date are priced between $1,850 psf and $2,200 psf. However, sales of condos on Sentosa Cove continue to be slow. For instance, CDL has to date sold about 25 units at The Residences at W Sentosa Cove. The 99-year leasehold project, priced at $2,500-3,000 psf, has been on the market for nearly a month now. To date, CDL has released 56 of the project's 228 units.



Property results were a little better than we projected. In this note we break down the numbers in a way the company will not.



MPEL reported property EBITDA slightly ahead of our estimate. In our preview, we forgot to model in corporate expense, so on the surface this appeared to be a miss. However, adjusting for our own mistake, MPEL reported a solid quarter; however, it was still below what the Street had hoped for. 


Since the company refuses to make our lives easy by breaking out win % and other data between the properties, we thought it would be valuable to estimate the breakdown for our clients based on our assumptions and proprietary database.




City of Dreams:

  • Net revenues were $11MM below our estimate, while EBITDA was $3MM better than we estimated
  • Lower net revenues versus our estimate of $347MM were driven by slightly lower gross casino revenues but were more than offset by slightly better hold percentages on mass drop and VIP RC
  • We estimate that the VIP win was $297MM and that hold was 3.03% 
  • We estimate that mass win was $98.5MM with a win % of 20.5%
  • Slot win percentage was 5%
  • We estimate that net casino revenues were $324MM and that the vast majority of the promotional expenses were at Altira
  • We estimate that fixed expenses (excluding costs for non-gaming revenues, taxes, gaming premuims, junket commissions and doubtful accounts) were roughly $51MM
  • If we use the midpoint of the MPEL's range for mass and VIP win percentages, EBITDA at CoD would have been roughly $56MM for the quarter
  • We project that CoD will do $255MM of EBITDA in 2010
  • For all the fuss over table caps, CoD removed 37 tables sequentially and 95 since opening


  • Net revenues were $1MM below our estimate, while EBITDA was $2MM better than we estimated
  • We estimate that the VIP win was $274MM and that hold was 2.77% 
  • We estimate that mass win was $10MM with a win % of 14%
  • We estimate that net casino revenues were $193MM and that non-gaming revenues and promotional expenses were basically a wash
  • We estimate that fixed expenses (excluding costs for non-gaming revenues, taxes, gaming premuims, junket commissions and doubtful accounts) were roughly $20MM
  • Altira also reduced their table count by 18 tables q-o-q and by 44 tables from their peak table count in 4Q08
  • Interestingly, management said that better results were due to lower commissions. They also told us that fixed costs were lower than last year....the math doesn't quite work since Altira had roughly $10MM more in casino win this quarter compared to 1Q09 and hold percentage looks fairly close (it was 2.79% in 1Q09). Management explained that the variance is due to different hold percentages on the RC and revenue share. So if RC program junkets hold high it's a bigger drop to the bottom line than if revenue share junkets drop. The only issue we have is that 80% of their rooms are on RC programs - so the variance must have been spectacular. I guess we will have to make a leap of faith here since management won't disclose win % for their properties.
  • We estimate that Altira can do $84MM of EBITDA in 2010

Other stuff

  • Mocha slots revenue was in line with our estimate and EBITDA was $1MM lower, for 2010 we expect Mocha to contribute $25MM of EBITDA
  • SG&A was $3MM higher then we estimated, offset by lower stock comp and pre-opening expenses
  • Factoring in corporate expense this time, we expect 2010 EBITDA of $316MM

Germany's Strong-Arm

Position: Long Germany (EWG)


While our macro team has been vocal on signaling global inflationary threats to keep your eyes on, today’s preliminary April report on German CPI confirms our bullish outlook based in part on the country’s favorable low inflation environment, registering +1.0% Y/Y, compared to +1.1% in March Y/Y, or a 10bps contraction month-over-month.  


As we highlighted in a post yesterday, “Merkel’s Struggle with Greek Junk”, Greece is just the beginning of the sovereign debt issues we see ahead.  Just today, Spain’s credit rating was downgraded by S&P to AA from AA+, and yesterday Greece and Portugal were reduced to BB+ (junk) and A-, respectively.


In the case of Greece, we believe the near-term weakness we’re seeing in government bond yields and the equity market (the Athex Composite is down -20.5% since 3/26), is overdone. While it is politically expedient for German Chancellor Angela Merkel to hard line Greece in receiving funds as her party campaigns for victory in an important state election on May 9th that addresses wasteful spending, we believe Germany’s contribution to Greece is inevitable.  Note that Merkel did say today that “it’s completely clear that the negotiations between the Greek government, the European Commission and the IMF need to be speeded up now” and the Athex close up on the news by +63bps as many European equity markets fell as much as 2.5% today. 


In view of the sovereign debt concerns, we continue to like Germany as a lower beta play on safety for an economy that should benefit from the government’s fiscal conservatism and an export base that should improve along with a weaker Euro (currently at a one-year low of $1.31), as companies benefit in margin from an environment of low inflation.  


Matthew Hedrick



Germany's Strong-Arm - deut


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