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The S&P 500 finished lower on Friday after trending down throughout the session and closing on the lows of the day. Despite ending on a challenging note, all major indices were up for the month. On Friday, Gold, Volatility and Utilities (XLU) were up on the day; the XLU was the only sector up on the day.


Last week, large caps outperformed small caps as the Russell 2000 declined 3.41% on the week. On Friday, the VIX was up 19.6%, rounding off a +32% move on the week; the strongest move in volatility since the week of January 22nd. The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (19.44) and sell TRADE (23.39).


On the MACRO front, real GDP increased 3.2% annualized in the first quarter; slightly below consensus of+3.3% and versus prior +5.6%. Personal consumption expenditures (PCE) were +3.6%; higher than consensus +3.3% and prior +1.6%. PCE accounted for 2.5% of the reported gain and business investment accounted for 1.6%, of which 1.5% was due to a continuing relative buildup in inventories. The big concern with the Q1 GDP report is the sustainability of trends in PCE.


Sustainable growth in PCE requires continued growth in disposable income. Without growth in income consumption can only be borrowed from the future quarters through additional debt and/or spending of savings. In the current environment, neither of those sources is real or sustainable. In 1Q, the quarter-to-quarter trend in real disposable income was contracting. (It should be noted that March income numbers are to be released today.) Real consumer credit, which has been reported only for January and February, was also contracting in the first-quarter versus the fourth-quarter.  In total, these trends show no basis for sustainable growth in PCE.


Also on Friday, April University of Michigan Confidence of 72.2 was better than consensus 71.0, but below March 73.6; preliminary reading was 69.5. Lastly, April Chicago PMI was 63.8; above consensus 60.0 and prior 58.8. Friday’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 storytelling that is so pervasive on Wall Street and in Washington is not being bought on Main Street.


On Friday GS was down 9.4% on a WSJ article concerning a possible federal criminal investigation; helping to make the Financials (XLF) the worst performing sector on the day and for the week. Other notable stocks MS and JPM declined 3.5% and 3.2%, respectively. Mortgage insurance companies also notably declined on the day.


With the Semi’s down (SOX -4.54%) on Friday, Technology (XLK) was also one of the biggest declining sectors on the day; last week the XLK lost 2.9%.


On the commodity front, crude remains in a BULLISH formation and was up 1.1% on Friday and 1.2% for the week (a three week high). The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (84.31) and Sell TRADE (86.31). In early trading, crude is slightly higher despite concerns that China’s third increase of bank reserve ratios will slow demand.


Last week, copper declined to a seven-week low on a decline in the China market and today’s news that the government ordered banks to increase its reserve ratios. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.29) and Sell TRADE (3.36).


Gold is in a bullish formation and is trading near a five-month high as the as the dollar is also higher on concerns the rescue package for Greece won’t be the last of the region’s debt crisis. The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,157) and Sell TRADE (1,182).


In early trading, equity futures are trading above fair value despite weak Asian and European markets and ahead of economic data. As we look at today’s set up, the range for the S&P 500 is 12 points or 0.6% (1,179) downside and 0.4% (1,191) upside.


Today’s MACRO events: 

  • March Personal Income
  • March Personal Spending
  • March PCE Core
  • April ISM Manufacturing
  • April ISM Prices Paid
  • March Construction Spending
  • Domestic Vehicle Sales

Howard Penney

Managing Director













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

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

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

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."

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