The Biggs Squirm

“I wouldn’t be surprised to see us go to a new recovery high, just to make everybody squirm.”

-Barton Biggs, May 27, 2010


Mornings like these are what I love about this game. A veteran player steps up to the plate and grabs headlines being on the polar opposite side of my positioning. Barton Biggs is now officially the bull who is going to dance with the Thunder Bay Bear.


The aforementioned quote comes from the #2 story on Bloomberg early this morning: “Barton Biggs Says Stock Market Set to Pop in Days.” Notwithstanding that this is a fairly easy call to make after the futures are already “popping”, what I’m more interested in here is whether or not the likes of Mr. Biggs are teeing themselves up for another performance redo of their 2008 seasons. There is systemic risk in that.


With the exception of our short selling and risk management processes, Biggs and I have a lot in common. We both went to Yale. We were both student athletes. We are both overly confident strategists who fancy ourselves as men of the Global Macro Gridiron.


We are both actually pretty grumpy too…


All pleasantries aside, these days it’s Mr. Biggs who is doing the squirming. His NYC based global macro hedge fund, Traxis Partners, cannot afford to prove that the rumor is indeed true – he cannot make money in down markets…


Biggs isn’t alone in this camp. So let’s just call this for what it is. A lot of people grew up in this business like Biggs did, not having to manage interconnected global macro risk on a marked-to-market basis (he was on the sell-side). After going to the buy-side, Biggs missed calling the global macro crash of 2008, and now he is missing the global equity and commodity market meltdowns being perpetuated by the Keynesian Fiat Fools.


I am all for doing global macro but when it comes to defining global macro at Traxis, what is it exactly, Mr. Biggs, that you do? Let’s go through who has been doing the squirming in 2010 to date.


I have no idea what Biggs is down YTD, but here’s a summary of what the perma-bulls in global equities may have missed:

  1. Asian Equities: Chinese Ox In Box – the Chinese tightened and knocked their stock market to -22% YTD on May 20th 
  2. European Equities: Sovereign Debt Dichotomy has proven disastrous for all of the major European indices, with Greece, Spain, and France down -28%, -24%, -12% YTD, respectively.
  3. Latin American Equities: Inflation’s V-Bottom has provided the impetus for Mereilles to raise rates in Brazil and mark the Bovespa’s lows at -14% on the YTD low which was established earlier this week.

Now if Biggs’ version of global macro is simply being long-only US Equities, he’s probably doing a lot less squirming. After all, all squirming must be relative, right? Nevertheless, he is calling for a “recovery high” on the morning after the SP500 made a fresh YTD low?


The SP500’s closing low of 1067 yesterday was a lower-low for both the YTD and the current cycle. We called for this at the beginning of Q2 with our April Flowers/May Showers slide presentation. I hope Biggs wasn’t buying stocks on the April 23rd peak of 1217, because the market has lost 12.3% of its value since and is now down -4.3% YTD.


We are all for a good bull/bear battle. We want to be the change that we want to see in this business. That starts with being transparent and accountable to our market positioning, real time. If Mr. Biggs is going to get on Bloomberg TV and call our bearish call on European and US Equities “ridiculous”, he will be forced to dance with the Bear in front of a larger audience. Ridiculous is as ridiculous does…


This isn’t Morgan Stanley anymore Barton. Crises in our industry has created a generational opportunity and youth is ambition’s ladder. My former Morgan Stanley analysts are all grown up now. Don’t expect them to be the underlings who will stand down to your former title. The modern day Roman Empire of Wall Street Perceived Wisdoms is falling.


We have moved to 70% cash in our Hedgeye Asset Allocation Model. In terms of US Equities, our asset allocation remains ZERO percent and we are short both the SP500 (SPY) and Nasdaq (QQQQ).


We are still a seller of all buy-and-hope oriented strength. We will likely short the SP500 (SPY) again today. We will cover our shorts when the real squirming out there is over.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Biggs Squirm - Biggs


Of the 40 companies we track, 70% of the companies saw an increase in short interest in the past month (43% of the companies were in the QSR sector).





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 80.43%
  • SHORT SIGNALS 78.34%


May seems to be a weak month in the East for gaming and we are hearing similar things across the country.  Here are our notes from our 2 day trip.



Sands Bethlehem (5-24-2010)

  • Table games should be up and running by mid-July.  The state is looking to open 3 properties at a time over a 3-week period.
  • The hotel is scheduled to open in May 2011 with 300 rooms.  Think that the hotel will help them keep growing their business.
  • Busing program:
    • Focusing on busing Asian customers.  Have 5 runs per day from Chinatown/Flushing and Port Authority NYC.  Most of the busing is from PA and NJ. 
    • On busy days, they bring in 1,500-1,800 people and on slow days, they bring in 500-800 people.
    • Customers pay for their own bus tickets (roughly $15/day from NY for example).  The cost to Sands gives customers $30/day in free play and a $5 coupon for food.
    • When tables go in, they can increase busing programs to Chinatown & Flushing to 15-20 tables per day.
    • Pulling out most of the electronic tables when they go live with tables.  Of the 28 tables they have now, they are only keeping 6 E-tables.
    • Slots mix:  IGT- 45%, BYI - 24%, WMS- 13%, Konami – 4%, ALL- 6.5%, Speilo/ Atronic less than 2%
    • There are no participation games in PA, only leased games.
    • 6% of Sands slots are leased.
    • Have 780 employees at the facility and will add 400 more when tables games are added.  330 of the employee additions will be dealers.
    • 50% of business is local.
    • May could be their best month, primarily due to the ramp in their database.  Tables 16% tax rate decreasing to 12% in 2 years.
  • Sands may have the most incremental growth from the addition of table games in PA.
    • Will be the closest casino with table games to NYC
    • Big Chinese population in NYC
    • Will offer a significant number of Baccarat tables
    • Efficient busing from Chinatown and Flushing - the two Asian centers

PENN MGMT meeting notes: 5/24/2010

  • Not building to get a mid-teen return, but rather to optimize returns as much as they can on each project.
  • Columbus - will be a home run.
    • Downtown vs westside.  Westside supports the construction / downtown doesn't.  Prefers new site - more suburban - can expand if there is capacity.
    • Own Beal racetrack outside of Columbus - if slots at tracks get passed, they will try to move the license.
    • Columbus should be the best ROI on their return.
    • Think that Vegas will have underperformance for another 6-18 months of softness, so they may get another bite at the apple.  They are following City Center very closely.  Like Mirage for their customer base.
    • Aqueduct came out with an RFP - they submitted questions and are waiting for answers.  Bids are due at the end of July and decision will be made in August.

Harrah’s Chester 5-24-2010

  • Struggling in May because of construction disruption to make room for tables and overall demand weakness.  They are moving 2,200 games.
  • How they deal with the AC vs. PA conflict:
    • Don’t see a conflict-- view it as “Earn here, play there” mentality
    • Get a lot of trip frequency in PA but less spend per visitor
    • PA will have credit for the first time with the intro of table games.
    • Think that they will get $75-$78mm of incremental table revenue.  Think that the table margins are going to be a little higher then slots even after taking into account for the lower tax rate.
    • With tables, Chester can get up to 20% margins.
    • Will begin to seed their database with communication about table games in June and use their Philly/AC database to market to them.
    • Will only keep 4 electronic table games or 20 out of 120 seats for now.
    • Don’t need a hotel
    • Racing business makes a couple hundred thousand
    • Only have 100 or so leased games.

Tim Wilmont, CEO of PENN (5/25/2010)

  • Iowa and WV are the only 2 states that have previously allowed tables to be added to slot-only facilities.  On average, slot revenues increased 6-8% when that happened.  Table games generated 10-15% of total revenues in competitive local markets.
  • Cecil County: 1,500 VLTs, 95mm of capex, 1600 parking spots. Hollywood Perryville will be located 30 miles NE of Baltimore. The investment in Cecil is targeting an addressable population of 375k – however, until other facilities open, its addressable population will be more like 1MM - so the initial returns should be very good.
  • Ohio:  Thinks gaming will be a $2bn industry in Ohio; 33% tax rate; $50mm upfront fee per casino; $250mm min spend; 34k new jobs (19k construction 16k permanent jobs).  $1bn of gaming revenues is currently generated by Ohio residents gambling in neighboring states.
  • City of Columbus voted no on issue 3 so they had to move one of their sites. They decided it was easier to go to a new site that was cooperative then a contentious one.  The facility will have 2,000 permanent employees.
  • Toledo - hope to break ground in 3Q 2010.  Area has 71% of the population of their Penn National Race Course (PA) location.
  • Ohio Timeline:
    • June 3: Deadline for enabling passing of gaming legislation
    • Fall 2010: Effective date of legislation
    • 4Q 2010/1Q2011: Appointment of a gaming commission
    • 1Q2011: Licensing investigation

The Contagion Drag

Position: Long Germany (EWG); Short France (EWQ)


As part of our Q2 theme Sovereign Debt Dichotomy, we advised that one possible play on sovereign debt risk in Europe is to be paired off long Germany and short Spain.  Our bullish thesis on Germany included a tighter fiscal balance sheet than many of its European peers, the advantage of a weaker Euro for an export-heavy economy, low inflation, and a stable rate of employment. While we’ve seen significant divergence in the underlying German and Spanish equity markets over the last weeks, including a spread as wide as 2000bps between the DAX and IBEX 35 on May 7th, the increasingly larger share of the ‘bill’ that Germany will bear for the Eurozone’s collective bailout is bearish for German capital markets (see chart 1 below).  


Since our initial conference call on the dichotomy on 4/16 we’ve traded around Spain on the short side (we are current short France in our model portfolio) and recently have seen weakness in reported German fundamentals. Further, from a tactical position, our TAIL line of support for the DAX at 5,639 could soon be tested with a close today of 5,758.02, and our TREND line of support at 5,928 is already broken (chart 2).


Today, the GfK German Consumer Confidence survey for June fell to 3.5 from 3.7 in May (chart 3). Last week German PMI contracted; services fell to 53.7 in May from 55.2 in April and manufacturing dropped to 58.3 versus 61.5 in the previous month. Also, earlier last week, the ZEW economic sentiment survey, which forecasts for 6 months ahead, fell to 45.8 in May versus 53.0 in April.


While the German unemployment rate remains positive, declining in the latest reading to 7.8% (versus the Eurozone average of 10% and 20% in Spain) and is underpinned by the government’s successful part-time labor programs, contagion from European sovereign debt risk persist despite the $1Trillion European loan/debt buy-up facility issued on 5/9. Additionally, Germany’s unilateral ban on naked short selling on 5/25 is adding fuel to the fire and enhancing market volatility.


On the margin, the fundaments we’re following in Germany and the broader stock market suggest a downward reversion to the mean, especially as risk in Europe (and globally) is pushed further out. One area to look to for confirmation of this is the bond market (chart 4), where we’re starting to see German yields rise.


Matthew Hedrick



The Contagion Drag - c1


The Contagion Drag - c2


The Contagion Drag - c3


The Contagion Drag - c4

Squeeze Me: SP500 Risk Management Levels, Refreshed

This morning, I’m the one getting squeezed. On the SPY short position I put on into yesterday’s close that is. That’s what we You Tuber’s of America call a mistake and that’s no one’s fault but my own.


When you make a short term mistake, the goal is to not immediately make another one. Over the immediate and intermediate term, compounding your mistakes gets easier if you don’t have a proactive risk management plan.


My plan in shorting the SPY yesterday was to short strength up to the two lines in the chart below: 

  1. Immediate term TRADE line resistance = 1101
  2. Intermediate term TREND line resistance = 1144 

While the long term TAIL line of support has held (1074), that doesn’t mean it can’t be broken. When markets that are broken on short and intermediate term price momentum rally to lower-highs on decelerating volume, the probability of long term support being broken increases.


Probability and scenario analysis needs to be measured dynamically if you want to have a shot at winning this game. I personally learn a lot more from my losses than I do from my wins. Today’s mistake is different than ones I’d make 3 and 5 years ago, in that time and mistakes help a man’s risk management model evolve.


If SPX 1074 breaks and VIX $26.19 holds, there will be a very high probability that we see 1048 in the SPX in the very near term. We shorted QQQQ on this morning’s opening market strength as well.


Keith R. McCullough
Chief Executive Officer


Squeeze Me: SP500 Risk Management Levels, Refreshed - S P

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