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Crackberry Minutes

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”

-Warren Buffett


Whether it’s Greece, Goldman, or British Petroleum this morning, it’s all one and the same thing. I agree with Mr. Buffett - reputational risk remains something you cannot control in a Crackberry Minute.


Despite one of the largest proposed government bailouts in world history, stocks from Athens to Hong Kong continued to sell off early this morning. Contrary to popular political beliefs, the people of this world apparently aren’t as stupid as the politicians would like to think. Thankfully, You Tube and Google are democratizing and expediting the discovery process. In the end, this will make our world a better place.


In between now and then, a lot is going to happen. While it may not be clear yet how this will end for GS and BP, for Greece it will end in default. There is no calculation that reveals a reasonable probability that after saddling themselves with another 110 Billion Euros of debt, the Greeks can grow GDP at the same time as they promise to cut the deficit. It’s not hard to figure this out and, as usual, Mr. Macro Market already has. It’s just math.


Understanding that most politicians don’t do math is important. Just see these Crackberry Debt Addicts for who they are as they chase one another for short term resolve to long term issues. Instead of Paulson, this time it’s Papandreou. The names have changed but this blue magic is exactly what Hank Paulson and his banking cronies tried to sell you in May of 2008. Borrowing short to fund long term liabilities eventually ends in tears (or in Paulson’s case, puking in the West Wing).


Puking isn’t cool, but it happens. That’s what you saw Friday with the conflicted and compromised sponsors of Goldman’s stock. Sadly, after writing my senior thesis on the credibility of his investment process here in New Haven many moons ago, I need to You Tube Mr. Buffett on that analytical score this morning.


Now before you read this Buffett statement about Goldman, please take a third of a Crackberry Minute and re-read the aforementioned Buffett quote on reputation.


“If you think about that, you’ll do things differently”…


Now here is the You Tube of Buffett from Berkshire’s annual meeting over the weekend: “There is no question that the press of the past few weeks hurt the company… the allegation of something didn’t fall in the category of losing reputation.”


Alrighty then…


Understanding that Buffett has $68B in derivatives exposure (yes, some of it is opaque) and a $5B preferred stake in Goldman that pays him as long as GS has capital, what did all of these reporters expect the man to say about Goldman? Before you take his or anyone’s advice on anything investment related in this world, please ask them how they get paid.


According to Buffett himself, “every day that Goldman doesn’t call our preferred is money in the bank… that’s $15 a tick. Tick, tick, tick. I don’t want those ticks to go away.” Cherry cokes, some DQ, and counting your government sponsored preferreds by Crackberry Minutes? Lovely…


For Americans to watch one of our most trusted investors tell us to trust him on this is just plain sad. I never thought I’d say this, but I have to this morning. Shame on you Mr. Buffett. Shame on you. We are looking for the Good Guys in this marketplace to lock arms with us, be accountable, and lead; not push their own book.


I had more replies to my Friday morning Good Guys note than I have in 2.5 years of writing my morning missives. For any reply, my Hedgeyes and I are always grateful. Each and every one of them provides us an opportunity to learn and evolve. Friday’s replies weren’t about tactical decision making however. They were unanimously from the heart. People want legitimate leadership they can trust, not lip service to the word capitalism.


And with that, a devastating oil slick, and the mother of all Keynesian European bailouts we shall carry on this morning. Feet on the floor, understanding that we can build a firm like this for the next 20 years and I will always be Crackberry Minutes away from letting the power of money ruin our reputation.


After shorting it on 4/29/10 at 10:19AM ($120.28 SPY), we remain short the SP500 in the Hedgeye Virtual Portfolio. At 10:26AM on Friday we re-shorted the Euro on strength. My immediate term support and resistance levels for the SP500 and Euro are 1179-1191 and 1.31-1.34, respectively.


Real-time, all the time. Transparency with no banking or brokerage fee slapped on it is our small contribution to being the change we want to see in this profession.


Our Sector Head for Financials, Josh Steiner, and I will be holding a conference call in our lunchroom today titled, “Underappreciated Legislative Risk for Financials.” Please email if are interested in participating in an open Q&A.


Best of luck out there today,



Crackberry Minutes - buff



Consumer Discretionary (XLY) is in a bullish formation but confidence is not.


According to the government, consumer spending rose by 3.6% in 1Q10 as compared to a 1.6% gain in 4Q10.  The increase was the biggest since the first quarter of 2007.  The strong consumer spending numbers are clearly being reflected in the Consumer Discretionary (XLY), which is in a Hedgeye Risk Management BULLISH FORMATION.  Looking at the year-to-date performance (coming into today), the XLY is the second best performing sector up 19.4%, right behind the Industrials (XLI) at 20.0%.   


This is in contrast with consumer confidence figures that do not reflect the level of spending being reported by the government.  Today, the Reuters/University of Michigan final consumer confidence reading for April dropped to 72.2, from a reading of 73.6 in March.


The figure stands in contrast to the Conference Board Consumer Confidence Index which was reported increases in both March and April.  The April reading was 57.9, up from 52.3 in March.  The Conference Board survey showed American consumers’ sentiment in April increased to the highest level since September 2008.   


Today's University of Michigan print is in line with the long term pattern of lower highs in consumer confidence that Keith discussed in our 03/26/10 note titled, “CONFIDENCE: IS IT REALLY A NEW SEASON IN AMERICA?”.  The questions posed in that note have not been sufficiently addressed and the chart below reflects that reality.  The storytelling that is so pervasive on Wall Street and in Washington is not being bought on Main Street.





Howard Penney

Managing Director

The Week Ahead

The Economic Data calendar for the week of the 3rd of May through the 7th 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 - cc1

The Week Ahead - cc2

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GS: Risk Management Update

I said my piece this morning in the Early Look (“Good Guys” at www. Hedgeye.com) on what I think about Bank of America’s hypocritical downgrade, but that doesn’t change the reality that managing risk around GS is simply a mathematical exercise augmented by an understanding of market sentiment.


If you’d like the opposite investment process of mine for a view, here’s the qualitative view on GS from one of America’s perma-bulls:


“I don’t think there’s any evidence that they would lose enough business that you would notice it… it’s much more of a political problem and a reputational problem that I believe will pass.” (Bill Miller, Chairman and CIO of Legg Mason)


The intermediate term TREND line of resistance that we signaled on 4/16 remains intact up at $165.11, and today GS is breaking down through an important immediate term TRADE line of support at $156.98. Next line of significant support = $143.96.


Don’t make analyzing this situation personal. It’s just math.



Keith R. McCullough
Chief Executive Officer


GS: Risk Management Update - GS


In preparation for BYD's Q1 earnings on Tuesday we've highlighted management's forward looking commentary from its Q1 conference call and subsequent investor conferences.




Business update from Barclay’s conference on 3/26/2010:

  • "We really don’t see ‘10 being much different than ‘09."
  • "The promotional environment in the Locals business has, I wouldn’t say is still fairly aggressive, but it has become a little more rational (same for the Lake Charles market)."
  • "We do need the Strip to recover before we would see a recovery in the Locals business, at least that’s our view right now."
  • "In Downtown, we run a very unique business with about 65 to 70% of our customers are from Hawaii. And really, absence of volatility of the fuel that’s associated with that charter, those businesses are very stable and actually growing."
  • On LV Locals market, "we continue to see the opportunity for further job losses in the marketplace largely around construction-related jobs unfortunately. Our loyal customers continue to come. Where we’re seeing the largest impact is on unrated customers and customers at the lower end of the radius spectrum. It’s just people are not spending money yet.  However, we’re optimistic that our competitors on the Strip are saying, they see forward bookings getting better."
  • On Borgata, "I think that we’ll just let MGM run their process and see how it plays out from our perspective. I think we are very happy with our 50% ownership, as I mentioned in our remarks. We don’t see anything wrong with the Atlantic City market, in fact we are quite optimistic. If you look at how the property has performed in this – in one of the most difficult economic and competitive environments it’s in, EBITDA has basically been flat through that period of time.  We control our own destiny in terms of table games being introduced in Pennsylvania. The reality is there are a lot of other drivers to that marketplace, that will make it beneficial for Borgata, that is, some of our competitors perhaps may go out of business. There will be some level of economic recovery in the region.


  • "Our Las Vegas Locals EBITDA was up by more than 10% from the third quarter. This marks the first sequential quarter-over-quarter improvement in the Locals region in 18 months. This growth pattern is continuing in the first quarter."
  • "When we spoke last, we noted that a stabilizing trend was developing in Las Vegas and that we believe we’ve reached the low point in the business cycle."
  • "Borgata has already lost three weekends to bad weather so far in the first quarter and we expect to
    see an impact on first quarter EBITDA in excess of the 5 million we saw in the fourth quarter."
  • "Our covenant steps up in the first quarter of this year to six and three quarters times and continues to increase for each of the next two quarters."
  • On adverse weather impact, "I think the weather for the most part in the first quarter moved up the eastern seaboard. So, as odd as it may seem, the Midwest has had a maybe a pretty normal weather."
  • On pre-opening expenses run rate, "It will continue to come down. We’re continuing to have expenses to wind down some of the capital costs that were really left over from 2008. Some of that cost is obviously capitalized and goes on the balance sheet and some of that goes into pre-opening expense. But I would say beyond Q1, Q2 timeframe of this year, we would get to a point where we’re probably are on the run rate that you could expect."
  • "I think for 2010 we would expect our kind of run rate tax rate to be around 38%."
  • "And that correction in the (Southwest LA market), which takes a couple of months to occur, will be a benefit, if you will, as we go towards the end of the first quarter into the second quarter, easing back on marketing expense."
  • "But I would say that corporate expense shouldn’t be much different than what you would expect to have
    seen from 2009 levels and...I expect 50 to $55 million of maintenance CapEx in 2010."

R3: The Real Question to Be Asking about Europe


April 30, 2010





We definitely saw a meaningful divergence in Timberland’s European results vis/vis what we should be seeing based on the underlying macro climate. The company noted that every single country in the region posted growth in its most recently completed 1Q.  This is the exception – not the norm. Several people have asked me if we are hearing of any weakness overall in Europe given the volatility in financial markets. While I have not ‘heard’ of things slowing down en masse, I think that  by the time any of us ‘hear’ about any broad-based weakness, it’s probably too late. Let’s accept the premise that things will slow – and anyone who is exposed to Europe that does not at least prepare for this coming down the pike from a risk management standpoint opens themselves up to a very big day of reckoning. In other words, the questions that we should be asking managements are “what are you doing to prepare for a potential slowdown” instead of “have you started to see any weakness.”





- While some supermarket bulls have been eagerly awaiting the arrival of inflation to help reverse negative sales trends for the traditional grocers, Safeway articulated that is not able to pass along price increases in certain key categories.  CEO, Steve Burd, noted that milk, eggs, and meat are categories that are still being promoted heavily to attract traffic, and therefore recent cost increases are not being matched with commensurate or even greater increases in retail prices.  Sounds like non-traditional grocers still have the upper hand competitively.


- In a unique collaboration, Fruit of the Loom and Amazon.com joined together to launch an innovative bra.  The innovation stems from the option which allows a woman to choose the left and right cup size independently, with each half costing $5.  While the product itself is unique on a mass level, it’s even more interesting to see Amazon as the online distributor of the product while Wal-Mart is bricks and mortar partner.


- Office Max noted that April trends are tracking below Q1 results as well as March.  However, when asked about what may be the cause of the sequential  slowdown, management was unable to fully articulate the key factors.  Instead, we were reminded of how the recovery is not linear and will be filled with “peaks and valleys” along the way.  In other words, small businesses still remain under pressure.





R3: The Real Question to Be Asking about Europe - Calendar





JNY in the M&A Rumor Mill - Jones Apparel Group Inc. could be close to a deal to acquire a stake in Stuart Weitzman. People familiar with the matter said that a deal between Jones and Irving Place Capital, Weitzman’s minority investor, could happen as soon as today. There is also some speculation that Jones could acquire more than Irving Place’s 40% stake. One investment banker said negotiations between Jones and Weitzman have been going on for a while. Weitzman himself has been very vocal about finding a succession plan. The founder, 68, is actively searching for a CEO and a president of retail. <wwd.com/footwear-news>


NWY Declares a New CEO for Next Year - Gregory Scott, a former chief executive officer of Bebe Stores Inc., will succeed New York & Company Inc. chairman and ceo Richard P. Crystal, who is retiring when his contract expires on Feb. 11. Scott, 47, will become president of the chain on June 1, and ceo when Crystal leaves. Scott will also join the board. The last president of New York & Company was Ron Ristau, who left about a year ago and was primarily an operations executive, rather than a merchant. Crystal, 65, assumed the responsibilities of president without taking the title. <wwd.com/business-news>


Beauty Giants Upping Ad Spending - The giants of the beauty world are priming their promotional pumps as they look to grab market share in an improving world economy. Procter & Gamble Co. attributed part of the 7.4% revenue gain in the third quarter to more aggressive advertising spending, much of it tied to the “Thank You, Mom” campaign run during the Winter Olympics and Paralympics which included 18 of the consumer products giant’s brands. In the U.K., Unilever said its advertising and promotional spend, as a percentage of sales, increased 220 bps in the period and advertising and promotional spending would be “comfortably ahead” for the full year. Revlon Inc. plans to augment sales growth through advertising in the current second quarter as the firm refines its focus “to build the brands we have today,” according to Alan Ennis, president and chief executive officer. The Estée Lauder Cos. said it would increase advertising, in-store merchandising and product sampling by 35% in the fiscal year’s final quarter as the firm seeks to encourage consumers to return to luxury products. <wwd.com/business-news>


Amer Sports Sees Winter and Outdoor Grow, Fitness Decline - Amer Sports Corporation's net sales reached €372.6 mm in the first quarter ended March 31, 2010, up 5% from the same quarter a year ago. Sales rose 11% in the Winter and Outdoor segment and 2% in Ball Sports, but declined 5% in fitness. <sportsonesource.com>


Germany's Metro Group Department Store Profitable - The Metro Group returned to profitable growth in Q1 for the first time since 2008. The German cash & carry, department store, hypermarket and electronics retail group reported net profit of 3 mm euros compared to a loss of 75 mm euros. EBIT more than doubled while sales grew 2.3%  <wwd.com/business-news>


Australia's Woolworths Cuts Growth Forecasts - Woolworths Ltd. cut its annual sales growth forecast because of lower food price inflation and the absence of government cash handouts that stoked demand a year earlier. Revenue may rise 3% to 6% vs. Feb. 26 announcement of sales growth in the upper single digits. Australia’s government distributed more than A$10 billion in cash to families in 2009, stoking sales of clothing, groceries and electronics, as the country sought to avoid recession. As Woolworths’ growth slows to below second- ranked Wesfarmers Ltd. for the first time in five years, it’s also seeing food prices rises stop. <bloomberg.com/news>


Japan's CPI Falls 1.2% in March - Japan’s consumer prices fell for a 13th month in March, indicating the economy remains hampered by deflation even as the export-led recovery starts to spread. Prices excluding fresh food slid 1.2% from a year earlier, after dropping 1.2% in February. Bank of Japan policy makers will probably predict today that consumer inflation will improve to at least zero for the year to March 2012, according to 14 of 16 analysts surveyed.  <bloomberg.com/news>


Jarden Corp Grows 4% in Q1 – Sales grew 4% to $1.19 bn for the entire company, which operates three other segments that make small kitchen appliances and other home consumer products , including Oster and Mr. Coffee, Ball canning jars, Bicycle playing cards, and First Alert home safety products. Jarden Corp’s Outdoor Solutions segment generated sales of $614.2 mm in the first quarter ended March 31, up 3.9% from $591.3 mm in the same quarter a year earlier. The unit’s brand portfolio includes Abu Garcia, Campingaz, Coleman, K2, Marker, Marmot, Penn, Rawlings, Shakespeare, Stearns and Volkl. <sportsonesource.com/news>


Vail Resorts to Purchase 30% of Specialty Sports Venture - Vail Resorts Inc. agreed to purchase the remaining 30% it doesn't own to take full control of the Specialty Sports Venture group of retail stores. The retail joint-venture includes Boulder Ski Deals, Colorado Ski & Golf and Bicycle Village. Both Tom and Ken Gart will be leaving their leadership positions with Specialty Sports Venture. <sportsonesource.com/news>


Callaway Swings 11% Sales Growth in Q1 - Callaway Golf Company reported that net sales for the first quaretr of 2010 were $303 million, an increase of 11% as compared to net sales of $272 million for the first quarter of 2009. <sportsonesource.com/news>