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The Macau Metro Monitor, June 10th, 2010


Wynn Macau COO Linda Chen said that she believes GGR will exceed the forecast of 30% growth but still sees a slowdown in the 2nd half of the year.  Chen said she expects the VIP market to grow at a faster rate than the mass market segment, contrary to comments from SJM (see note below).  She does not think the weak stock market and tight monetary policies could affect VIP gambling revenues in the second half.


Meanwhile, Steve Wynn said its mega resort on Cotai could break ground next year.  He added that the project could have 1,200 to 1,300 slot machines and be ready by 2014.  Wynn said he will be "splitting the headquarters" of Wynn Resorts between Las Vegas and Macau.



Frank McFadden, president of SJM's joint venture and business development division, said gaming revenue growth will slow in the 2nd half as wealthy Chinese take a hit from a weak stock market and tight monetary policies.  "We see a softening in the VIP market and continued growth in the mass market. The VIP gaming market has been driven by a rising asset base in China and a rising stock market in China."  McFadden believes if VIP slows down, even though mass continues to accelerate, overall gaming revenues in June will decline sequentially.  McFadden said the 2nd half could see 60% of SJM's revenues come from the VIP segment, down from 65% in the first quarter. 


SJM continues to take a 'wait-and-see' approach on Cotai.  McFadden expects SJM to have around HK15 billion in cash by the end of 2010.  He stressed that the strong cash position would help the company secure a prime location on Cotai if the government takes back some of that land.  "We're a bit cautious because the level of equity that you'll need to invest will be high in order to compete," he said.  If SJM does build a property on the Cotai Strip, it could predominantly be geared towards gaming.  McFadden said that "95% of spend here is gaming when the visitors come.  It would be arrogant to think that by building what they call an integrated resort, you can change the consumer behaviour of 1.4 billion people." He added that he wasn't aware of any talks between SJM and Sands or Studio City about a land deal.


The Cotai integrated resorts will create “15,000 to 17,000 job opportunities in the next 18 months,” said CoD president Greg Hawkins. Hawkins said that City of Dreams currently has around 8,000 employees, while The Venetian has more than 10,000.  The vacancies could be good news for the 9,600 residents unemployed in Macau.


Hawkins said the SAR Government “has always been very open” to the demand for non-resident workers. The key will be getting the balance right."


Meanwhile, Galaxy IR, Peter Caveny, is optimistic on the Guangzhou–Zhuhai Intercity Mass Rapid Transit (MRT).  He predicts the rail will bring 400,000 people a day to Macau when it opens this November.


BALLY HIGH ON MACAU macaubusiness.com

Bally Technologies is targeting to supply 20% of the total slot machines to Sands China’s parcels 5 and 6 and Galaxy Resort.  “If they open with 1,500, we would expect to get 20% of the order,” Cath Burns, vice president for Bally Technologies’ Asia-Pacific operations, told Reuters, referring to Sands China´s projects. “Same with Galaxy — that’s what we are targeting with both groups now.” 



The ban on smoking inside casinos could lead to a 20% drop in gaming revenues, the president of American Gaming Association (AGA) Frank Fahrenkopf told reporters during G2E Asia.


Meanwhile, Taiwan will conclude legislation on gaming by 2012. However, lawyer Benjamin Li told Lusa, that just like Singapore, Taiwan should not issue more than two licenses.


Universal Entertainment Corp, a Japanese pachinko game maker and the biggest shareholder in Wynn Resorts, plans a HK IPO  within three years for a unit that is building a $2.7 billion, 99-acre Manila casino resort.  "Universal Entertainment aims to lure VIP players from China to the Manila resort," said Kazuo Okada, Universal Entertainment's Chairman.  The first phase of the resort will include a casino, a hotel and an aquarium. The completed project will include two casinos, two hotels and a residential building and may be finished within five years, he said.


Companies are attracted by the Philippines' lower tax rates.  “Our gaming tax is lower than Macau and slightly higher than Las Vegas,” said Rafael Francisco, President of Philippine Amusement and Gaming Corp. Licensed casinos pay 25% gaming taxes, along with a corporate income tax for entertainment and other non-gaming income, he said.



R3: Retail Pulse – June Update


June 10, 2010





In light of mixed commentary on sales trends coming out of May, we took a look at the latest wave of comments coming from company management teams.  While the majority of retailers noted the final two weeks of May showed improved trends, largely driven by better weather, did this last into June?  Most recent comments suggest positive trends have held.  However, to be fair and as Keith reminded us this morning on our call, what is the incentive for a management team to update the Street with bad news?   We agree that this is in some ways a biased sample set based on those companies willing to toot their own horn, but the reality is there is a diverse group of retailers seeing positive momentum in early June.  Yes, we know the calendar shift helps, but this is also widely known at this point and fully incorporated into company plans.  More importantly, we’re reminded once again that the sector and underlying health of the consumer on any given week can be quite volatile.  For now though, the consumer appears to be holding up, at least from a retailer’s perspective.

  • 6/8/2010- Coach’s CEO: “First, the growth that we experienced in the third quarter -- our third fiscal quarter ending in March has continued through the first two months of the current quarter. We are enjoying very healthy growth in our North American businesses, in our international businesses, led by China.”  Recall that F3Q North American comps increased by 5.1% and by “significant double-digits in China”.
  • 6/8/2010- Dollar General recently reiterated that the company still expects same store sales to be in the 4-6% range, which is consistent with the company’s view back in March.    First quarter same store sales were up a better than expected 6.7%.
  • 6/8/2010- Talbot’s management noted, “we're only half way through the second quarter, and our comps for the quarter are in the mid single digits.”  Current trends mark an acceleration from 1Q reported comps of 2.4%.
  • 6/8/2010- Sherwin Williams CFO comments: “I think we still feel pretty good about our guidance for the second quarter. We had not updated. We said we'd be in the high single digits. I think we feel it's relatively strong.”  Why he “thinks” things are relatively strong rather than “knows” is an entirely different question.  However, it sounds like business has held up.
  • 6/8/2010- New York and Co. CEO comments: “To give you some perspective, we entered the spring season with low inventory levels. We saw business improving as we went through March, and we were encouraged by this. We chased some inventory, as one of our priorities was to drive comparable store sales increases. We thought we saw consumers returning. To do this, we needed right levels of inventory, so we pursued- aggressively chasing some categories of merchandise.  And as we had seen improvement in the first quarter, by the time we got to late April, early May, as we mentioned, we saw some softening. We had some big promotions planned for end of May, and also a merchandise group that was to come in the end of May. That group was disappointing, as well as the promotions, and especially in the T-shirt, Dress and Short category, where we think that we got too young and too forward in terms of fashion.”  Self inflicted for sure, but still a noteworthy outlier.
  • 6/8/2010- The Children’s Place comments: “We gave guidance when we announced earnings (5/20), and we're confident in the guidance that we gave. We're early on in the quarter to really call it other than-- any differently than we had seen when we gave the guidance. We're comfortable.  And just for those of you that don't know, we did guide to a low, single-digit comp for the quarter.”  Recall that 1Q comps declined by 0.5% and a low single digit increase would mark a sequential improvement.
  • 6/8/2010- Cache comments: “And we talked again about the development of the process at the end of our first quarter conference call and validated that, indeed, we were seeing positive comps for the first time in the Company consistently from March onward. I'm please to say and announce, because we are on a webcast, that our May results were the strongest results that we've had in quite some time. The Company has had seven consecutive of negative comp store sales. So we've turned the corner.”  No official comment on June, but sounds positioned to keep positive momentum alive.
  • 6/8/2010- Urban Outfitters noted in its 10-Q filing that “thus far during the second quarter of fiscal 2011, our total comparable retail segment net sales remain favorable as compared to the prior year comparable period."  Recall that 1Q comps increased by 11%.
  • 6/8/2010 – Oxford Industry’s CEO: “So we're very happy with our business in the last few weeks, and very happy about the prospects in the back half of the year.” After a strong Q1 it sounds like sales may actually have accelerated in recent weeks. Additional commentary suggesting that bookings for the company’s recently launched holiday line have been “very, very strong” are also unequivocally positive.
  • 6/8/2010 – Phillips Van Heusen CEO: “Our retail comp trend has only accelerated as we've gone through May and strengthened towards the end of May, going in June. For the first six weeks of the quarter, our comps are running about plus 13% in the United States.” As a point of reference this compares to 12% comps in Q1. Manny continued to assert that “All of our sportswear businesses are on or ahead of planned at retail. Fall orders are very strong and holiday orders are very strong, so we feel very good about our sportswear business. And our Calvin Klein businesses continued to accelerate. In the first quarter, our licensing revenues were up about 32%. We see that trend continuing into the second quarter.” There was zero ambiguity that business is clicking on all cylinders thus far in Q2 for PVH.
  • 6/8/2010 – Guess CFO noted that they have not seen indications of business rolling over yet in Italy and that May “continued to be very strong in Europe with very strong comps.” More notable was Dennis’ perspective on the Italian consumer largely dismissing sovereign debt concerns stating “We are less concerned maybe about the Italian consumer behavior because we know that consumer savings and family savings are really high in Italy. Italian families are not in debt. The country is in debt, but not the families.” Last we checked – as the country goes, so does its consumers Dennis.
  • 6/8/2010 – Deckers Outdoor COO remarked that  on the topic of retailer demand, with fall bookings complete there will be little indication of mid-quarter demand aside from Nordstrom’s anniversary sale in June.
  • 6/9/2010 – Cabela’s CEO commentary around recent trends was focused around the success of its new smaller format (75,000 sq. ft. vs. 150,000+ avg.) store in Grand Junction Colorado, “I can tell you that thus far, now three weeks is not a trend, but that store has met or exceeded all of our expectations.” It was also mentioned that bigger ticket items are at a minimum stabilizing and no longer deteriorating.
  • 6/9/2010 – Big Lots CFO: “the 6% comp we posted in the first quarter, and a 4% to 5% comp that we have guided in the second quarter is certainly an acceleration that we are pleased with. we are not sure how the consumer will respond in the back half of the year. And you look at the last couple of weeks and we are very hopeful.” Not exactly hard evidence of improved trends, but there’s something to be said for not backing off expectations too.
  • 6/9/2010 – Collective Brands CEO: With near term trend discussions focused primarily around the toning product, Rubel noted that sales are “doing great. So as soon as we get them in, they sell out. So we will continue to flow the product.”  He went on to say that they are actually increasing flows as the company looks to ramp toning from ~1% of sales in Q1 upwards of 4% of sales by Q4.
  • 6/9/2010 – Crocs CFO: “our same-store comps are showing up 4% in April and up 5% in May and then up, so far, in June. For the first nine days we're up 14% in June.” While more favorable weather can be thanked for some of the acceleration in June comps, this was the most notable pick up from any retailer over the last few days by a long shot.

Eric Levine

Casey Flavin





- According to a 2010 survey by WPP, Burt’s Bees and Whole Foods top the list of 10 U.S brands perceived to be the greenest. Other brands in order include, Tom’s of Maine, Trader Joe’s, Google, Aveeno, SC Johnson, Publix, Microsoft, and Ikea. The survey also found that 60% of consumers worldwide want to purchase products from environmentally responsible companies. However, in the U.S., 80% of respondents said they are more concerned about the economy than the environment.


- While there are few retailers without an e-commerce presence, fast fashion brands H&M and Zara are among the minority. However, Zara just announced it will be launching ecommerce this Fall, with a focus on key European markets. Unfortunately for U.S consumers, there is currently no site in the works.


- Even if soccer (football) isn’t as popular here in the U.S as the rest of the globe, there’s no question retailers are looking to capitalize on the World Cup hoopla. In fact, shipments of soccer balls to the U.S from Asian factories nearly doubled the monthly average in May. With this in mind we expect to see many more people out kicking a ball around to get in the World Cup spirit.





Guangdong Shoe Exports Grow 25% in April, Export Price Down 6% - Guangzhou Custom in China announced that the Province exported 360 mm pairs of shoes in April, reflecting a year-on-year increase of 25% and a month-on-month growth of 35%. The average export price was US$2.3 per pair, down 6% year-on-year. In the first four months of this year, the province's footwear export volume reached 1.32 bn pairs, up 19% year-on-year, and the export value increased by 10% year-on-year to US$3.43 billion. The average price was US$2.6 per pair, 7% less than in the corresponding period of 2009. <fashionnetasia.com>


By Design Acquires Majority Stake in Denim Label David Kahn - Knitwear maker By Design LLC has acquired a majority stake in David Kahn for more than $10 mm and hired a new chief executive officer for the premium denim label. By Design, a New York-based manufacturer that generates annual volume of $200 mm in private label tops sold at retailers, including Nordstrom, Kohl’s and J.C. Penney, purchased the trademark and assets of Los Angeles-based David Kahn. It now owns a 90% stake in the firm, which was founded in 1999 and tallies annual sales of $15 mm at more than 1,100 doors in the U.S. and Canada. <wwd.com/business-news>


AEO Heads to China - Seeking to capitalize on China’s consumer spending boom and a perceived void in the teen market, American Eagle Outfitters Inc. said Wednesday that it will open stores in Hong Kong and China through a franchise agreement with Dickson Concepts (International) Ltd., which operates more than 400 stores in Asia. AEO will unveil three stores in Hong Kong, Beijing and Shanghai in early 2011. American Eagle will offer the brand’s complete seasonal assortments, intimates and dormwear from the aerie sub-brand. The only concession to consumers in the region will involve size. “We won’t change the assortment, but we may alter some of the styling and colors,” said Christopher Fiore, executive vice president of AEO International. The U.S. retailer will provide merchandising and marketing input, and Dickson Concepts will handle all operational functions. <wwd.com/retail-news>


Target Announces Store Makeover at Shareholder Meeting - Target Corp. is aiming to upgrade the stores to build upon the momentum of last year, when the firm generated the strongest retail segment profit in its history. Gregg Steinhafel, CEO of TGT said, “The changes beyond food are so extensive, they resemble a brand new store.” He said there will be renewed emphasis on “more open, visually compelling departments.” In the beauty department, there will be efforts to “upgrade the environment so customers feel like browsing,” rather than just popping in to buy a tube of lipstick and heading out the door. Footwear is also changing with gondolas closer to eye level, and more mirrors and seating have been added with backdrops of seasonal product. While children’s wear results have been disappointing, the use of a more friendly color palette in kids’ departments has started to turn things around, aided by merchandising that, through mix-and-match presentations, makes it easier for parents to match tops with bottoms. <wwd.com/business-news>


UK Home Improvement Retailer Home Retail Group Plc Sees Sales Worsen in Q1 Due to Weak Consumer Spending on Video Games & Televisions - The U.K. owner of Argos catalog stores and the Homebase home-improvement chain, said sales worsened in the first quarter as consumers pared spending on video games and televisions. Argos outlets comps declined 8.1% after comps declined 2.2% in 2H of 2009. Sales of video games slumped 20% in the quarter while the overall TV market “has not grown at all,” despite the World Cup soccer tournament, which begins tomorrow. Home Retail is adding product ranges, broadening its online offering and limiting store openings to drive profit. <bloomberg.com/news>


Nike Promoting Basketball in World Festival - This summer, Nike, Inc. and USA Basketball are launching the inaugural World Basketball Festival, a four-day celebration of the performance and culture of the game, an event that Nike has committed to reprising every two years. The event, to be held in New York City, will feature some of the world's best basketball teams and top musical performers. <http://www.sportsonesource.com/>


Adidas and DC Comics Partner to Create Superman-inspired Merchandise Featuring Dwight Howard - Adidas has partnered with Warner Bros. Consumer Products and DC Comics to create a Superman-inspired line of merchandise featuring the iconic superhero and NBA All-Star Dwight Howard of the Orlando Magic. Howard, whose athletic persona has been compared to the Superman character, said in a statement, “I’ve always been a big fan of Superman and to be able to team up on this new line is a dream come true.” The holiday ’10 line will consist of footwear and apparel, to be distributed globally at department stores, sporting goods shops and stadium shops.  <wwd.com/footwear-news>


Chinese Shoe Maker and Retailer Anta Sports Expects Q4 Growth to Exceed 25% - Mainland Chinese biggest sports shoe maker Anta Sports Products expects its order book value to grow more than 25% in the fourth quarter of this year. Due to an improved product mix and quality materials, the brand saw the average selling price for footwear and apparel rise more than 5% from a year earlier at its trade fair held in May. Anta will launch a series of marketing campaigns in the fourth quarter ahead of the Asian Games. Its sales growth is expected to be between 15% and 20% in 2010 because the company will open more stores. Anta, which is based in Jinjiang, Fujian Province, plans to increase the number of its outlets by 9% to 7,200 this year <fashionnetasia.com>


FitFlop Launches Toning Clog - FitFlop is launching its own clog version this week. Its patent wellness clog, called Happy Gogh, comes in five colors — poppy-red, berry-red, blue, plum and black — and retails for $119 exclusively through Kirna Zabête in New York. “Clogs are really hot, and we needed them to be available now,” said FitFlop founder Marcia Kilgore at the brand’s London press day last week. Kirna Zabête has already amassed a waiting list for Happy Gogh on its website. The retailer is offering 1,000 pairs starting this week, and U.S. retail distribution is set to widen in August. <wwd.com/footwear-news>


Social Media Tactics: Offer Coupons or Rally Consumers Around Special Events - The brands that have enjoyed the most success using social media to drive consumers toward purchases follow one of two paths: Either they offer coupons or discounts, or they position themselves in front of consumers during sales or other special events, according to eMarketer. One-quarter of respondents to a survey conducted by Chadwick Martin Bailey said that coupons and discounts were the primary reason they became fans of a brand on Facebook. An additional 21% said it was because they were already customers. Another survey, by Morpace, found that 37% of Facebook users joined fan pages because they wanted to get coupons and discounts.


R3: Retail Pulse – June Update - 1


Social Media Growth Road Map - Social network usage rose sharply in 2009, thanks to the ever-increasing popularity of Facebook. eMarketer estimates that 57.5% of Internet users, or 127 million people, will use a social network at least once a month in 2010. By 2014, nearly two-thirds of all Internet users, or 164.9 mm people, will be regular users of social networks. Adults will continue to increase their use of social networks, driving most of the growth in the next few years. This year, 59.2% of online adults will visit regularly, up from 52.4% in 2009. By 2014, 139.6 mm US adults will be regular users, up 56% over 2009. Teen usage, already very high, will increase at a slower rate. In 2014, 21 mm teens will use social networks on a monthly basis, up 19% compared with 2009. <emarketer.com>

R3: Retail Pulse – June Update - 2 


Brazil World Cup Fever Fashion - The fact is that it is not just a question of football or soccer in Brazil. It is also a question of fashion molded by famed Brazilian flair and colored by the hues of its national flag. Optimism is high in Brazil not only with its great selection of players and original fashion but also by the Brazilian GDP growing by 9% in the first quarter of 2010. The national colors are prevalent in the latest products to hit the high street characterized by the blue, green, yellow and white of the national flag.  Here is a small selection of footwear, socks and bags which reflect the country’s mood and its team strip as the XIX FIFA World Cup kicks off on Friday, which grip the  country for one whole month.  <fashionnetasia.com>

R3: Retail Pulse – June Update - 3



Initial jobless claims remain high. The reported number dropped 3k to 456k this week, but that's after revising the prior week up by 6k. Net of this revision, claims actually rose this week by 3k. Either way, the bottom line is that claims remain in the ~450k range. Rolling claims actually climbed 2.5 to 463k week over week. Remember, we need to see initial claims fall to a sustained level of 375-400k in order for unemployment to fall meaningfully and, by extension, lenders' net charge-offs to return to normalized levels.  We remain well above that level.  


JOBLESS CLAIMS STILL STUCK AT ~450K - rolling claims


Below we chart the raw claims data. 




As a reminder (as was made vivid in last Friday's jobs report), May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.  




Joshua Steiner, CFA


Allison Kaptur

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*** We've added subsector and company correlations to initial jobless claims later in this note. ***


Initial jobless claims remain high. The reported number dropped 3k to 456k this week, but that's after revising the prior week up by 6k. Net of this revision, claims actually rose this week by 3k. Either way, the bottom line is that claims remain in the ~450k range. Rolling claims actually climbed 2.5 to 463k week over week. Remember, we need to see initial claims fall to a sustained level of 375-400k in order for unemployment to fall meaningfully and, by extension, lenders' net charge-offs to return to normalized levels.  We remain well above that level.  


Below the jobless claims charts, we show the correlations between initial claims and each of the 30 Financial Subsectors. Not surprisingly, Credit Card and Payment Processing companies show the strongest correlations to initial claims, with R-squared values of .62 and .72 over the last year, respectively.  Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up.  These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.  




In the table below, we found the correlation and R-squared of each company with initial claims, then took the average for each subsector.  For composition of the subsectors, see Chart 5 below.  




The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical.  




Astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .32 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared. 


Below we chart the raw claims data. 




The table below shows the stock performance of each subsector over four durations.   




As a reminder (as was made vivid in last Friday's jobs report), May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.  




Joshua Steiner, CFA


Allison Kaptur

You've Got It In You

“I definitely know I’ve got it in me. I’ve just gotta focus on what I can control.”

-Stephen Strasburg


Winners just win. There are plenty of great leaders in this country who prove that where it matters every day. From Washington to Chicago this morning, they’ll be putting their Professional Politicians on mute. This is progress.


The Chicago Blackhawks won the Stanley Cup and in his MLB debut 21-year old Stephen Strasburg struck out 14 batters leading Washington National fans to hope that the future in the Capital could be brighter than the present.


Hope, as we like to say, is not an investment process however. Until we change the said leadership of everything American finance, we are going to be hostage to the gravity of analytical mediocrity.


I was on a flight to Los Angeles while Ben Bernanke was testifying yesterday. Between his reckless forecasts and the Manic Monkeys on CNBC taking his word for it, I was left with one option – re-short the SP500 (SPY) on strength.


Not unlike professional athletes, our Hedgeyes believe in putting our market view on a tape for everyone to see, real-time. Our clients love it. Our detractors hate it. This is the New Reality of finance. I think Americans are sick and tired of pretend portfolio managers blowing their capital up in smoke and saying “everyone missed it” every time there is a major loss to reflect upon.


This isn’t to pump my own tires. This is to challenge any of these mouth pieces in the Manic Media to simply put it on the tape. Caution to the Jim Cramers of the world who tell you to buy Bear Stearns or BP obviously - a time stamp on everything you recommend will be held against you every day. There is nowhere to hide.


This is how a practical firm’s interpretation of Transparency and Accountability works. At 12:27PM yesterday we sent a message to our clients that said:


“Re-shorting what we covered profitably. We remain bearish and today's rally reminds me that consensus belief in Bernanke's forecasting ability is not yet Bearish Enough. KM”


You can look at the intraday chart from there and hold me to the score associated with that “call” – whether the call is right or wrong, no matter where I go at 230AM here in California as I write this, there it is…


“I definitely know I’ve got it in me. I’ve just gotta focus on what I can control.”


Think about that winner’s attitude. That’s what we need in this country. Not a bunch of group-thinkers who don’t do their own work and can’t focus on anything other than what the guy focusing on his job security next to him imputes in his forecasts. Do your own work. Have a process. Plan to change it when the plan is not working.


Back to Bernanke…


Here’s the written YouTube version of what he was forecasting yesterday, and we are going to hold him accountable to it:

  1. Double Dip? - “unlikely, but it can’t be ruled out”
  2. 2011 GDP forecast? - “3.5-4%, but it’s difficult to say”
  3. European Debt impact on USA? - “modest impact, but we will monitor it”

Ben, are you kidding me, man? You hold the precious value of the world’s reserve currency in the palm of your hands and everything you forecast is not only infrequently accurate from a risk management perspective, but everything you forecast has a sheepish “but”…


I haven’t had enough sleep, so take my tone for what it is this morning. I’m human too and I am finally at wits end with where the Perceived Wisdoms of Officialdom in this country is taking us. We are headed down a European road to perdition and someone needs to block the road.


Enough of my rant, here are the global macro Risk Manager’s answers to the same questions:

  1. Double Dip? - Post last week’s employment report and the SP500 losing -13.3% of its value since April 23rd, the probability of a rollover in the US economic cycle has gone up considerably. In probability speak, we’d call a double dip much more likely.
  2. 2011 GDP forecast? - I can say that it’s not difficult to say that Bernanke’s estimate is way too high.
  3. European Debt impact on USA? – It’s already marked-to-market so I’ll let Mr. Macro Market speak for himself on this front day-to-day. The answer to the question is obviously that there has been considerable impact and that rather than adhering to a Buy-And-Hope model based on Bernanke’s definition of “monitoring”, we maintain our ZERO percent asset allocation to US Equities in the Hedgeye Asset Allocation Model.

ZERO is the level of respect that Bernanke and the Fiat Fools from Japan to Europe have for the cost of capital. ZERO is the respect you get when you come to the game unprepared and then don’t hold yourself accountable to your performance.


Look on the bright side - if the European version of TARP turns out to be as big a loser as Hank Paulson’s was coming out of the gates, this is what the President of The European Fiat Union has to say about that:


“And if the plan were to prove insufficient, my answer is simple: in this case, we’ll do more.” –Herman Van Rompuy


Obviously Van Rompuy and Bernanke share the same views of accountability. Good thing they didn’t play sports. Ignore these losing ideologies and focus on what you can control this morning. You’ve got it in you.


My immediate term support and resistance levels for the SP500 are now 1037 and 1077, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


You've Got It In You - S P


Despite the fairly dovish comments from Fed Chairman Bernanke during his testimony in Washington yesterday, the S&P ended the day down 0.6%.  The weakness was concentrated in two sectors: Energy (XLE) and Financials (XLF).


The move in XLE was not that surprising given the weakness in the Energy (XLE), with a sharp selloff in BP down 15.8%.  Pressure from the Obama administration on BP to suspend its dividend was one major factor in the steep decline.  Other names leveraged to the Gulf of Mexico disaster such as APC (down 18.6%) and RIG down (8.1%) came under meaningful pressure as the market focuses on the potential for bankruptcy. 


The Financials were actually the worst performing sector on worries that Senator Lincoln's derivatives legislation will remain part of the financial regulatory overhaul; this put pressure on the money-center and investment banks.  In addition, the fundamentals surrounding the housing market continue to erode.  As our financials analyst Josh Steiner wrote yesterday “mortgage applications have done a base jump off their April levels and haven't hit bottom yet in the wake of the April tax credit expiration pull-forward. “  The MBA Mortgage Purchase Application Index, a leading indicator for home sales activity, declined 5.7% from last week bringing the decline since April to 32.8%. The month of May was down 18% vs. the month of April.


There is some level of uncertainty surrounding today’s ECB meeting, but the Euro has rallied for three days and is currently trading just above $1.20 versus the U.S. dollar.  We will see if it can close higher today.   The consensus is that Jean Claude Trichet will leave the benchmark rate at a record low of 1%.  The Bank of England, also meeting today, will likely keep its emergency stimulus in place and maintain the benchmark interest rate at a record low of 0.5%.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.18) and Sell Trade (1.21).  A higher Euro will help to put a bid under the RISK trade. 


Treasuries finished well off their worst levels on the day with the pickup in the risk aversion trade.  The dollar index was down 0.56%.  The positive correlation between the USDEUR and the TED spread (on a trailing three month basis) tightened yesterday to 0.98.  The inverse correlation with the EURUSD and the TED spread tightened to -0.97.  The Risk Management models have the following levels for the USD – Buy Trade (87.40) and Sell Trade (88.21).  The VIX was flat on the day, closing at $33.73.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (32.34) and Sell Trade (38.04).


Materials (XLB) and Consumer discretionary (XLY) were the two best performers yesterday with retail and media as the bright spots in the sector.  The S&P 500 Restaurant Index climbed 1.2% on the day. 


Technology (XLK) was unable to sustain its early outperformance that came on the back of upwardly revised guidance out of TXN.  The S&P Software index closed down 0.8% on the day. 


The voices of corporate stability are helping to provide some support for the market:


(1)    VIA.B rallied after announcing the resumption of its share buyback program; the company increased the funds available to repurchase shares to $4B.

(2)    BF.B said that it would buy back up to $250M worth of shares.

(3)    CAT +0.4% raised its quarterly dividend by 5%.

(4)    KBR up 10.1% after the company announced plans to repurchase up to 10M of its shares.

(5)    Monsanto announced a three-year, $1B share repurchase program. 


The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.66) and Sell Trade (2.94). 


Oil is moving higher for a third day on expectations of stronger demand after China’s crude imports increased and a weaker dollar.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.01) and Sell Trade (74.68).


Gold is indicating lower for a third day as a stronger Euro and better-than-expected economic data in China is mitigating some of gold’s safe haven status.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,202) and Sell Trade (1,246).   


As we look at today’s set up for the S&P 500, the range is 40 points or 1.8% (1,037) downside and 2% (1,077) upside. 


Howard Penney













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