Our London contacts sent us some pictures of Chipotle’s first Euro-store.


The following pictures were taken at 11am GMT today, prior to the lunch rush.  The locals seem to think that prices are a little high.  In the U.S., lunch is the most important day part.  If the London location is open late, the higher price point would likely make it non-competitive. At night, it is unlikely the Brits will forgo an extra pint to afford a burrito if they can go to a kebab joint and eat for less.


















Howard Penney

Managing Director

Try Again

“I make many changes, and reject and try again, until I am satisfied.”



Managing risk in these globally interconnected times isn’t easy. That’s why we do it. You have to have your feet on the floor early every morning. You have to acknowledge new price data for what it is. You have to consume it, synthesize it, reject it – and try again…


This morning we are waking up to a whole host of Chinese numbers. On balance, they continue to confirm the conclusions embedded in all 3 of our Global Macro Themes for Q2 (Sovereign Debt Dichotomy, Inflation’s V-Bottom, April Flowers/May Showers) and remind us of one of the most important calls we made at the beginning of 2010, Chinese Ox In A Box (white hot loan and money supply growth in China would lead to inflation and government tightening).


We don’t try to shape the data to our investment themes. Sometimes it just does. The data is always changing, and our task as risk managers is to objectively change with it. Whether it’s the people who entered the year raging long everything China (after an 80% up year for China in 2009) or those who entered the month of May levered up long everything USA, it’s all one and the same. Making macro calls remains a competitive process. There will be winners and losers.


The biggest losers around the world today are those citizens who are hostage to the local inflation that they are experiencing in their domestic economies. At the end of the day, China is now importing the inflation associated with a politically charged Western World that creates fiat currencies out of thin air in order to attempt to solve for its sovereign debt problems.


Piling Debt Upon Debt Upon Debt results in long term inflation; particularly in countries where currencies are being debased. Last year, Timmy Geithner and Ben Bernanke debauched the Dollar. This year it’s Jean-Claude Trichet’s turn in clipping coins via a devaluation in the Euro. For those strategists who thought this wouldn’t end in a cyclical spike in global inflation, think again…


Here is a summary of the most important (inflationary) Chinese economic data released in the last 48 hours that took the Shanghai Composite down another -1.9% overnight to -19.2% for 2010 YTD:

  1. Chinese imports spiked to +49.7% year-over-year growth
  2. Chinese loan growth up +51% sequentially (m/m) in April to 774B Yuan (versus 511B Yuan in March)
  3. Chinese property prices (70 cities) +12.8% year-over-year representing the largest jump since 2005
  4. Chinese inflation (CPI and PPI) up again sequentially to +2.8% and +6.8% y/y, respectively
  5. Chinese Industrial Production (April) +17.9% versus +18.1% y/y in March
  6. China’s Money Supply (M2) for April slowed month-over-month by 100bps, but is still up +21.5% y/y!

Again, Inflation’s V-Bottom is a global reality born out of one of the world’s largest importers (China) buying things that are priced in Western Fiat Currencies. For those perpetual inflation doves and stock market bulls who don’t think creating 1 TRILLION Euros isn’t going to debase Europe’s currency value, try again…


After The Keynesian Elixir was applied to those wannabe short sellers of everything Friday May 7th oversold lows, we got what we wanted to see yesterday – the gut check. Did you chase or did you sell?


We sold… all day long…


For transparency purposes, here is my accountability card with time stamps (all EST) in the real-time Virtual Long/Short Portfolio at (if you’d like to receive them real-time throughout each risk management day please email ):

  1. 955AM – sold CIT
  2. 1005AM – sold BBBY
  3. 1010AM – sold PRSP
  4. 1045AM – sold SPY
  5. 320PM – sold MYGN
  6. 327PM – shorted BRK.A
  7. 335PM – shorted BX

While ECB Chief Jean-Claude Trichet is lucky that the Coinage Act that was signed into law by President George Washington in 1792 is no longer strictly or universally applied (death sentence to politicians who clipped the citizenry’s coins), that doesn’t change the fact that the Euro is getting smoked right back to new lows again this morning. These politicians have no idea where their inflationary decisions fit in the halls of the last 3 centuries of global economic history. Nor do they care. It’s sad.


Some people have a blind trust that US and European governments are doing the right thing for markets. Some people don’t see the largest Sovereign Debt Bubble in world history as a leading indicator for inflation. Some people don’t see any risks in global markets until it’s too late.


My job as your Risk Manager isn’t to be willfully blind. It’s to make as many changes as I can to my positioning until it feels right. I need to accept and reject data as it finds its way into the correlations associated with marked-to-market pricing. I need to respect that consensus can be right or wrong longer than I can remain solvent. I need to be accountable to every decision I make, because getting it wrong is the only path to figuring out how to get it right again.


My immediate term support and resistance levels for the SP500 are now 1143 and 1168, respectively. On a breakdown and close below 1143, I see no support for the US stock market until 1107. Yesterday I raised my Cash position in the Asset Allocation Model to 58%, dropping my allocation to US Equities from 6% to 3% on strength.


Best of luck out there today,



Try Again - USDEURO



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













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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.

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

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