The S&P 500 finished higher on Friday and rose 2.5% for the week, despite some mixed MACRO economic data.  On Friday, the preliminary June Michigan Consumer confidence Index hit its highest level in more than two years in June, though retail sales unexpectedly fell in May for the first time since September.


MACRO data points for the week pertaining to the consumer pointed to mostly weaker trends. Consumer credit trends, mortgage applications, initial jobless trends and retails sales all showed softness.  Coming into Friday’s release of retail sales, consumer spending had been one bright spot since last October.  May Retail Sales declined 1.2% vs. consensus of 0.2%; ex-Autos (1.1%) vs. consensus 0.1%.  April Retail Sales was revised downward to 0.6% from 0.4%; ex-Autos revised upward to 0.6% from 0.4%. 


In contrast to the weakening macro data points, confidence showed stronger trends.  On Wednesday last week, the ABC confidence numbers showed a slight tick positive and on Friday the preliminary June Michigan Consumer Confidence also improved.  June University of Michigan Confidence (prelim) 75.5 vs. consensus 74.5; the final May reading was 73.6.


Technology shares climbed for a second consecutive day, and the NASDAQ ended up roughly where it started on Monday.  Strong results and optimism from chipmakers attempted to stifle concerns around a slowdown in the space. Pharma rallied around numerous upgrades and investors taking on new risk.


On Friday, the three best performing sectors were Materials (XLB) up 1.1%, Technology up 0.9% and, Healthcare up 0.81%.  With the S&P 500 up 2.5% on the week, the Hedgeye Risk Management models now have Energy (XLE) and Utilities (XLU) positive on TRADE; there are no companies positive on TREND.  The three worst performing sectors on Friday were Consumer Staples (XLP), Consumer Discretionary (XLY) and Utilities (XLU).  The XLP and the XLY were the only two sectors down on the day.   


The DXY rallied 0.4% on Friday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (86.32) and Sell Trade (88.21).  The VIX declined 5.8% on Friday and 18.6% last week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (27.11) and Sell Trade (36.41). On Friday, Treasuries gained modestly with the long-end outperforming.


In early trading, the EURO is trading higher by 1.1%.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.18) and Sell Trade (1.23).


A notable standout on Friday was Healthcare (XLV). The (XLV) was up 0.8%, led by strength in Biotech with the BTK +1.8% and Pharmaceuticals (IHE) up 1.4%.  The second best performing sector on Friday was Technology (XLK).  The S&P software index was up 2.2% on the day and the SOX improved by 1.4%. National Semiconductor’s earnings and upbeat guidance lifted its shares by +5.0%; May quarter revenues, earnings and gross margins all beat consensus estimates.  Coupled with TXN’s (0.3%) bullish outlook earlier this week, investors are beginning to get a clearer picture of how the second half could take shape in Semis.


In early trading, crude oil is trading above $75 on speculation of continued growth in the U.S. economy. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (73.73) and Sell Trade (76.40).


In early trading, Copper is trading higher for the fifth straight day.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.89) and Sell Trade (3.05). 


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,214) and Sell Trade (1,245).   


As we look at today’s set up for the S&P 500, the range is 22 points or 0.9% (1,082) downside and 1.1% (1,104) upside.  Equity futures are trading above fair value and close to session highs in a continuation of Friday's late rally and ahead of a busier week for economic releases which include May's CPI reading on Thursday.


Howard Penney














MGM may have trouble making consensus Q2 EBITDA estimates. A Q2 miss may mean more to investors than the Q1 miss.



Paulson & Company took a big stake in three gaming companies:  MGM, BYD, and HET.  In each case, the successful hedge fund manager took on significant exposure to the three worst performing casino markets:  Las Vegas Strip, Las Vegas Locals, and Atlantic City.  What is he thinking?


We don’t have a line in to John Paulson but he is clearly making a recovery bet.  Those three markets were hit the hardest, so a trough to peak recovery would be the greatest.  Moreover, these markets have not begun to recover.  We won’t take issue with the BYD bet on the LV locals market other than the timing. 


The problem with the MGM bet is two-fold.  First, the likelihood of MGM missing the Q2 consensus estimate is high which means forward estimates will have to come down.  So much for a V-shaped recovery.  Second, MGM’s valuation seems to already reflect expectations of a V-shaped recovery.  Granted, our estimates are below the Street, but MGM’s enterprise value multiple of 2011 EBITDA is right at 12.6x.  I’ve covered this sector since 1996 (I’m old) and double digit multiples for Las Vegas assets have been generally confined to periods of cheap money and sub 4x leverage.  MGM currently has a leverage ratio of around 9x.  Bulls better hope for a V-shaped recovery, although hope is not an investment process.


The following chart shows our estimates relative to the Street's for MGM’s Las Vegas Strip EBITDA.  We present this comparison because this is where we really differ from the Street.  On a consolidated, as reported, basis, our 2011 EBITDA estimate is $1.15 billion versus the Street at $1.40 billion.  We think the Street will come down in 2010 and 2011, closer to our estimates following the Q2 release.




Macau is the one strong market for MGM.  However, they continue to underperform in that market following a surge in share late last year.  Investors expecting a Macau IPO catalyst for MGM may be disappointed.  We think MGM will generate significantly below the $500 million that some expect.

The Week Ahead

The Economic Data calendar for the week of the 14th of June through the 18th 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 - c1

The Week Ahead - c2

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 80.52%
  • SHORT SIGNALS 78.67%

Forecasts Revisited: Germany vs USA

Position: Short France (EWQ)


Germany’s Bundesbank raised growth forecasts for the country in its bi-annual economic outlook report today, calling for +1.9% this year (versus a previous estimate of +1.6%) and +1.4% in 2011 (versus +1.2%). For comparison, Bloomberg’s average GDP forecast for Germany is +1.8% in 2010 Y/Y and 1.7% in 2011.


We agree with the report that inflation levels will likely be moderate over the medium term, despite the Euro’s depreciation, and that exports may get a boost from a weak Euro and improving global demand.


However, we’re cautious on the contagion threats from sovereign debt default across Europe. As we’ve pointed out in our Q2 quarterly theme work, investment risk related to sovereign debt default or restructuring is not limited to Greece, but will spread to Spain, France, and Italy, much larger economies than Greece with significantly higher levels of debt exposure to European banks, especially in Germany.  


Flipping to the other side of the pond, we think that growth estimates for the US, like Germany, may be lofty.


At the Federal Budget Committee hearing on Wednesday, Fed Chairman Ben Bernanke forecast 3.5-4% GDP growth in 2011. For comparison, Bloomberg’s average GDP forecast for the US is +3.2% in 2010 Y/Y and 3.0% in 2011.


Keith wrote the following comments in response:


“So Ben Bernanke is not only forecasting a higher level of US growth than the Bloomberg consensus for 2011 but now more than a DOUBLE of the Bundesbank’s forecast for Germany in 2011!


With both pending US deficits and debt maturities demonstrably higher than Germany’s, we have a very hard time comprehending the world Bernanke sees coming in 2011. Much like our differences in forecasts versus Bernanke’s in 2008 this, unfortunately, remains a consistent divergence of analytical opinion.”


Tack on a jobless recovery that could run out of stem in 2H10 and headwinds facing the consumer coming down the pike – including housing – and it’s easy to see why Bernanke’s Bet might be a bit too aggressive.


Matthew Hedrick

1-Day: SP500 Risk Management Levels, Refreshed...

It’s certainly been an interesting week for the SP500:

  1. Monday – lowest-closing-low for the YTD at 1050 (down -13.7% from the 1217 peak)
  2. Tuesday – bear market rally of +1.1% to 1062
  3. Wednesday – failure to follow through on Tuesday’s lift, closing down -0.6% at 1055
  4. Thursday – massive +3% price squeeze on low volume to 1086

And after another 1-Day rally, the US stock market sells off once again to 1081 as of 230PM EST…


What do we do from here?


Stay short, watch, and wait.


The long term TAIL line for the SP500 is 1081. This line deserves the bearish benefit of the doubt until it doesn’t. There is significant immediate term downside to this Buy-And-Hope market simply because consensus is not yet Bearish Enough.


When 1-Day rallies stop empowering the perma-CNBC-bulls to actually cheer themselves on, this will change. Until then, 1-Day rallies should be taken as selling opportunities, not opportunities to hope-up a mini-bull market that is freshly broken.


We see no support for the SP500 down to the dotted green line in the chart below at 1039. That’s -4% downside from here versus immediate term upside to 1103 (2% upside). When risk outruns reward 2:1 and we have a bearish fundamental macro view, we’ll remain short the SPY.


Enjoy France vs. Uruguay.



Keith R. McCullough
Chief Executive Officer


1-Day: SP500 Risk Management Levels, Refreshed...  - S P


The role of Disposable Income in elections is considered by some the only reliable predictor of elections.  If people are hurting, they take their anger out on incumbants.  Compared to 1994, President Obama is lagging what was then an unthinkable Republican House takeover. 


Not that Obama needs any more trouble but the opposition effort to turn the Sestack Jobsgate failed.  I think they will try again.  Scandal typically hunts a President in his second year in office.  I guess it takes that much time to dig something up by the opposition.  Maybe the Elliot Spitzer scandal was just Republican legislators good fortune, butt does seem odd that the "steamroller" Governor was caught in March of 2008, in his second year in office. 


The turn to Deficit Hawkishness that seems to be bubbling up from the White House is maybe a pre-emptive move toward support.  That is not a good turn for healthcare.  A tougher stance on deficits and healthcare spending is not a good scenario.  Particularly, if the cost savings initiatives I heard about yesterday are being widely adopted.


The conclusion appears to be that while cost savings are already being sought in this difficult operating environment, expect more if the Obama's move toward the Deficit Hawks.  Given what Disposable Income is suggesting, he'll have to get very hawkish.


Thomas Tobin

Managing Director





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