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Reality leaves a lot to the imagination. 

~John Lennon


In early trading, the U.S. stock-index futures are declining after the S&P 500 Index surged 4.4% the biggest move in more than a year.  The pressure in early trading is centered on the REALITY that the nearly $1 trillion emergency lending package does not fix the Eurozone's sovereign debt issues, as well as China being down 1.9% over night on signs of overheating. That brings China's year-to-date decline to -19.2%.  As we look at today’s setup, the range for the S&P 500 is 26 points or 1.4% (1,143) downside and 0.8% (1,169) upside. 


Inflation in China is also a REALITY.  China's consumer prices rose a greater-than-estimated 2.8% in April, the fastest pace in 18 months.  Chinese inflation accelerated from 2.4% March and the 2.7% median estimate on Bloomberg.  Chinese Producer prices jumped 6.8% from 5.9% in March and the 6.5% median estimate.  Importantly, China NDRC Housing prices rose by a record 12.8% in April from 11.5% in March.  The current government crackdown on slowing a white hot economy is having little impact as price pressures continue to build throughout the economy. 


The Hedgeye Risk management models have all nine sectors broken on TRADE and only three broken on TREND.  Two of the three sectors broken on TREND (XLE and XLB) are leveraged to the RECOVERY/REFLATION trade.  With the Chinese market also broken on TRADE and TREND, we would be looking to other sectors to outperform.  Currently, our 3% allocation to US equities is in the Q’s.       


Yesterday, short-covering was getting a bulk of the credit for the bounce, with parts of the RISK AVERSION trade was in place as the VIX down 29% on the day.  The Hedgeye Risk Management models have levels for the VIX at: buy Trade (25.90) and sell Trade (39.47).


Yesterday, the Dollar Index looked like it was going in for a rough ride, but ended up down only 0.35% on the day.  In early trading today, the DXY is trading up 0.5%.  The Hedgeye Risk Management models have levels for the DXY at: buy Trade (83.29) and sell Trade (85.52).


In Europe, today's REALITY is that the Euro is crashing right back down to the low end of our range from yesterday. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.25) and Sell Trade (1.29). 


Not surprisingly, the RISK/RECOVERY pockets of the market were some of the best performing sectors yesterday.  The Industrials (XLI), Financials (XLF) and Consumer Discretionary (XLY) were the three best performing sectors on the day.  Some of the notable subsectors that outperformed were, the S&P Machinery Index (up 6.9%), the S&P Steel Index (up 6.3%), Transports (up 5.5%) and S&P Homebuilder index (up 9.5%).


Within the XLF, the Banks lead the group higher; the BKX was up 6.2% on the day.  The mortgage insurers ran up sharply yesterday, while the Investment banks were some of the laggards (GS up 0.6% and MS up 4%). 


The SAFETY trade (Healthcare, Consumer Staples and Utilities) lagged the broader market after outperforming on the back of the defensive rotation seen last week. 


Yesterday, Copper and Natural Gas lead commodity prices higher.  Copper was up 2.6% yesterday, but is still broken on TREND and TRADE and in early trading, is following the Chinese market lower.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.06) and Sell Trade (3.34). 


OPEC raised estimates for global oil demand in 2010 on a more optimistic outlook for growth in China. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (75.06) and Sell Trade (80.36). 


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,184) and Sell Trade (1,217).


Reality is the state of things as they actually exist, rather than as they may appear or may be thought to be.


Howard Penney

Managing Director














As we expected, Great Canadian missed the Street's revenue estimate but beat on margins. Most of the call was focused on growing the business in the current state of the economy and use of free cash flow


"Great Canadian's results for the first quarter of 2010 present a mixed outlook for the year ahead. Many of our properties continue to witness the impact of a challenging economy.  While visitation levels have remained relatively robust, our patrons across Canada have become more conservative in their entertainment spending.  Throughout 2010, we will continue to improve every customer-facing facet of our business.  This is the most cost effective route to both recovering those revenues lost during 2009 and generating new growth."

- Ross J. McLeod, Great Canadian's Chairman and Chief Executive Officer



  • "The year-over-year revenue decline was due to the impact of the challenging economy, the mandatory February closure of Hastings Racecourse during the Winter Olympics, and the effect of the weakened U.S. dollar on the Great American Casinos’ revenues.  These declines were offset by a revenue increase of $1.8 at the River Rock Casino Resort."  
  • "Boulevard is currently facing challenges from both a competitor's facility and disruption related to provincial highway enhancements, in addition to the pressure the economy has placed upon its patrons.  We have already begun to address these challenges, and Boulevard will remain an area of focus over the coming quarters."
  • "The Canada Line and River Rock's recent redevelopments have created significant growth in both visitation and gaming volumes at that property.  Increased efficiency allowed this growth to translate into an impressive improvement in River Rock's EBITDA."


  • The provincial highway construction project causing access issues at Boulevard will be completed in 2013 and will likely continue to cause disruption at the property. Working on property enhancements at Boulevard to offset some of this disruption.
  • Moncton Casino opened in New Brunswick in May and may impact Nova Scotia (this property is over 200km away).


  • EBITDA margin guidance in light of the property enhancements that they are planning to implement at Boulevard and across other properties?
    • Will try to deliver similar types of performance. Mgmt basically avoided the question
  • Share buyback?
    • Thinking about it, but there is nothing that they can disclose. Doesn't sound like a decision has been made
  • Competition at Boulevard?
    • Cascades is being more aggressive
    • Quite a bit of construction that is impacting the traffic flow
  • Liquor license at Naniamo
    • They received the license last week and hope it helps on the margin - but won't be a game changer
  • Flamboro downs?
    • What is the risk that they don't renew the license.  OLG has been looking for a new CEO.  There are about 8 licenses that are in a wait and see mode as a result of the vacancy in the office.  It would be expensive for the province not to renew the license given that they receive the bulk of the revenues from the operation.  The OLG has rolled over every racetrack license that has come up for renewal thus far.
  • 1Q2010 is probably indicative for what they seeing going forward for F&B  revenues at Georgian Downs.
  • Hotel revenues at River Rock - is up y-o-y but not benefiting from the Olympic business as it did in the 1Q.
  • Gateway margin comparison - how much room is left?
    • Results at Gateway were achievable before they introduced amenities to their properties.
    • Basically when they had slots in a box, those 50+ margins were achievable not at a "full service" property
  • Capex: $10MM development and $7MM of maintenance for balance of 2010
  • Timeline on cash buildup before returning it to shareholders?
    • Don't want to leave themselves without options or flexibility.  So they will be patient on deploying that cash. Unclear when that happens.  But they are very focused on creating shareholder value.
  • They just paid down the line.  So it's not like they have a lot of cash laying around today - what they have is being used for working capital.  It will accumulate from here.  They are comfortable with their current leverage ratio. They aren't focused on any M&A opportunities.
    • They did hint at being keenly interested in the master redevelopment in Ontario if the law changes to allow table games
  • Boulevard - recently did a refresh of the casino
  • the BC gaming market has changed from a build it and they will come because of under penetration. BC is now a mature market that is fairly saturated and they need to start thinking outside of the box to generate incremental dollars and traffic. Just hired a new marketing person to cultivate new business.
  • Why didn't interest expense decrease when they paid down their debt this Q?
    • Lower interest income in the current Q vs. prior quarter.  The other issue is that they are no longer capitalizing interest.  Thinks that current net interest expense is a good run rate.
  • Higher stock comp?
    • Result of higher stock price (y-o-y) but lower number of options granted so it's valued higher under Black Scholes formula.
  • River Rock is benefiting from the Line opening but also improvements at the property. The Line continues to get more traction in the market place. 
  • Will they be investing more marketing dollars in Nova Scotia to offset any potential impact from Moncton?
    • They are already did a refresh and have some programs in place but think that there will still be an impact initially.
  • How much cage cash does the business require: $4.6MM at the end 1Q2010 + $15MM provided by the BCLC.

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SP500 Risk Management Levels, Refreshed

The SP500 bounced where it should have. Now it’s doing its best to close above the intermediate term TREND line (1143).


I see the potential for 2 high-probability scenarios playing out from here: 

  1. If the market can hold today’s intraday gains, there is no significant resistance until the dotted red line in the chart below (1168). From 1168-1188 there is significant resistance and each line in that range would establish a series of lower-highs. On the margin, lower highs are bearish. 
  1. If the SP500 fails to hold and close above the intermediate term line (1143) throughout this week, there is no reason to believe that the SP500 won’t test its prior closing YTD low of 1110. As of 1PM EST I am currently registering 1107 as downside support. On the margin, lower-lows are also bearish. 

Under each of these scenarios, The Risk Manager says you should be making sales today on strength. We’ve sold 3 long positions out of our Virtual Portfolio (CIT, BBBY, and PRSP) and sold our trading long position in SPY to take our Asset Allocation to US Equities down from 6% to 3%. We have not started to re-short stocks or ETFs yet.



Keith R. McCullough
Chief Executive Officer


SP500 Risk Management Levels, Refreshed - S P

JNY: More Fuel To The Fire

Here’s more context suggesting that 1) the Stuart Weitzman deal was entirely driven by Irving Place, and 2) the company is likely near peak margins.


Based on the feedback thus far, we struck a chord somewhere along the line with our JNY note this weekend. Footwear News has also since published what I thought was an insightful interview with Stuart Weitzman. Here are some excerpts that add fuel to the fire. Check out the full article at www.wwd.com/footwear-news/ for additional context.


FN: Why was now the right time for a deal?
SW: It wasn’t necessarily the right time or the wrong time for me. It was obviously the right time for Irving Place Capital.

Hedgeye Retail: This was entirely driven by what the private equity partner wanted – or needed.


FN: You’ve been looking to hire a new CEO and other top executives. How will this deal affect the search?
SW: If Jones can lead me somewhere, that’s great. I haven’t yet found the [people] I want, and maybe they have resources that can give me more opportunity to choose. ... With or without an association with Jones, I have to start passing a lot of this [work] along to talented people. [I’m the CEO, chief creative force and chairman], and I shouldn’t be wearing all these hats. We have the same officers running the major parts of the company as we did many years ago, and we’re [nearly] 20 times bigger. We [have been] stretched thin.

Hedgeye Retail: Find me any fashion brand that hit a point where it was ‘stretched thin’ with resources and had too few executives wearing too many hats that was NOT operating at peak margins. Seriously… being ‘stretched thin’ equals running near max utilization. To maximize throughput, you need to invest in more talent. Is JNY up to the task?


FN: Your wife, Jane, is a big part of the company. Will the deal affect her role?
SW: Certainly not. She’s EVP and handles special projects, particularly in public relations events and accessories.

Hedgeye Retail: Remember when LIZ bought Juicy and noted how vital the founders (incl Gela Nash-Taylor – wife of John Taylor, bassist from Duran Duran) were? Where are they now?


PIIGS Package, and other Charts

Position: Long Germany (EWG)


With Europe’s €750 Billion loan package facility headline news (and rightfully so), below are two incremental charts we’re looking at.


1. Piling on Debt, has consequences, including inflation.  While Europe’s loan package mutes the immediate term threats of contagion across Europe, it does not excuse Greece (or the other PIIGS) from issuing the necessary austerity measures to cut its deficits.


PIIGS Package, and other Charts - g1


2. German exports received a boost in March, rising 10.7% versus the previous month. As part of our Q2 Theme Sovereign Debt Dichotomy, we’re bullish on Germany, especially as a weaker Euro benefits exports.


PIIGS Package, and other Charts - g2


Matthew Hedrick

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