No More Bullets

“Show me a guy who can’t pitch inside and I’ll show you a loser.”

-Sandy Koufax


Keith is vacationing this week in his hometown of Thunder Bay, Ontario.  As a result, various members of the Macro team will be batting leadoff and writing the Early Look throughout the week.  So, rather than just the McCullough fastball coming at you every morning, this week you will get an opportunity to see some other pitches from the Hedgeye Research Bullpen.


Sandy Koufax at his prime was one of the best pitchers the game of baseball has, and perhaps ever will, see on the mound.  He played his entire career with the Brooklyn / Los Angeles Dodgers.  The peak of his career was from 1961 to 1966.  In that period, Koufax won three unanimous Cy Young Awards (the first three time winner in baseball), he pitched four no hitters (the first pitcher in baseball to do so), and on September 9, 1965 he became the sixth pitcher in the modern era to throw a perfect game.


Then in 1966, at 30-years old, after pitching in the Major Leagues for only nine years, Sandy Koufax retired. Many baseball pundits called it premature, but Sandy knew the truth.  He was out of bullets.


As I contemplate the economic leadership of the country, primarily Chairman Bernanke and Secretary Treasury Timmy Geithner, I have no doubts that they are smart men and have had some good seasons in their careers. Their challenge now, of course, is to play the game in front of them.  While 0% interest rates for an extended period is an interesting experiment, akin to playing around with the knuckleball in practice, it is not indicative of a Perfect Policy Game.


Chairman Bernanke gave us a bit of an inside look at his next pitches on Friday when he stated the following in his speech:


“Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee’s communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists–namely, that the FOMC increase its inflation goals.”


The Chairman indicated he would only use the additional policy bullets above if the U.S. economy slowed further and that he is expecting the U.S. economy to pick up in 2011. 


The economic view from Hedgeye remains quite divergent from Chairman Bernanke’s.  We are pretty sure we couldn’t see a Koufax fastball, and we definitely don’t see an economic recovery in 2011.  The implications of Bernanke’s hope for a recovery in 2011 being wrong is the likelihood of more monetary pitches being thrown at the U.S. economy.


Unfortunately, we aren’t sure we have the right pitchers on the mound.  As Sandy Koufax said:


“A guy that throws what he intends to throw, that’s the sign of a good pitcher.”


One good metric for evaluating the economic leadership and their ability to know what they are pitching is the unemployment rate.  In the chart below, we’ve highlighted the unemployment of the G-7 over the past three years.  In order to further emphasize this point, we’ve highlighted directly below the increase (a positive number), or the decrease (a negative numbers), of unemployment for these nations over the past three years:


-          Canadian unemployment increased by 1.9%;

-          French unemployment increased by 1.7%;

-          German unemployment decreased by (1.3%);

-          Italian unemployment increased by 2.0%;

-          Japanese unemployment increased by 1.6%;

-          U.K unemployment increased by 2.5%; and

-          U.S. unemployment increased by 4.9%.


The scoreboard obviously doesn’t lie.  The score as it relates to the one critical factor of unemployment suggests that the economic leadership team of the United States needs to go down to the minors for some seasoning to work on their ability to hit the strike zone.  Most disconcerting, of course, is that one core objective of the stimulus plan was to offset an increase in unemployment.  When we see unemployment set to accelerate and government debt growing, it’s pretty clear our pitchers in Washington “didn’t throw what they intended.”


The one key takeaway from Chairman Bernanke’s speech should be that he remains somewhat naïve about how much the U.S. economy has slowed, and its ability to regain trend line growth.  But even if he does find economic faith and begin to understand the economic reality of the United States, the fact remains, the Chairman’s out of bullets.


Daryl G. Jones

Managing Director


No More Bullets - sandy


Not surprisingly, SJM reports strong results.



“Our strong balance sheet provides a solid platform for the group to pursue its strategy of growing our mass market and VIP businesses. In addition to our flagship casinos Grand Lisboa and Lisboa, the restructured third party-promoted casinos are contributing nicely to the revenue and earnings of the group and our newest casino Oceanus is ramping up to meet our expectations.  We expect that the year 2010 will be a rewarding one."


--Ambrose So, CEO of SJM Holdings



  • SJM grew faster than market in 2Q
  • Oceanus performing close to expectations
  • Will expand Portuguese school site, which SJM is pursuing


  • Grand Lisboa results--2Q driven by volume, not hold.
  • Satellite casinos margin decrease QoQ
    • Lower margin because of better volume from VIP business, which has lower margin
  • Provision for losses attributable to junket is the lowest in the industry
  • Oceanus walkway has support from government authorities  
  • Grand Lisboa 32 tables--migration from other properties, not new tables
  • Mr. Fok appointment-- contribution to cultural and non-gaming activities
  • Interim dividend: more cautious.... Full-year 2010 dividend will continue 50% payout policy
  • Capex YTD: $305 MM; $500MM-600MM for 2nd half of 2010, used for Oceanus, Grand Lisboa, and Ponte 16; for 2011, less than 2010 until movement on Cotai
  • Cotai: negotiating one of the plots with adjacent owner; hopefully, will be settled by 1Q 2011. No land premium has been paid, still waiting for land grant from Government.
  • Expecting some pressure on labor costs with new products coming online on Cotai
    • Some promotions and then backfill those positions; may see up to 10% rise in labor costs
    • Will have a retention plan in 4Q 2010
    • For 2Q 2010, 8.1% YoY increase in labor costs
  • 3rd party casinos
    • VIP business least susceptible to downturn
    • 3-5% revenue share contracts--3-4 year contracts
    • If in a downturn, they will close down tables and give them to SJM, which it can use for expansion purposes
  • Dr. Ho is recovering well

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The Week Ahead

The Economic Data calendar for the week of the 30th of August through the 3rd of September 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

Bear Market Macro: SP500 Levels, Refreshed

It’s been a great week for the proactively prepared. This week’s action in the SP500 reminds us that managing risk works both ways.


While the SP500 remains broken across all 3 of our investment durations (TRADE, TREND, and TAIL) it’s also proving to have some predictability in terms of how it behaves on the downside.


In my Early Look note this week titled “Focus On Risk”, this is how we laid out Risk/Reward:


“Risk/Reward: For the sake of this illustration I’ll use the SP500 (SPY) short position – moving to a 3 standard deviation level of downside support I was coming up with 1040 (the 2.5 standard deviation level = 1053), and in terms of immediate term TRADE upside I was registering 1077 on a 2 standard deviation move.”


Now that partly explained why I covered some short positions on the drawdown to 1040 (the intra-day and intra-week low for the SP500 was 1041). The next risk management question is obviously where do we put our short position in the SPY back on? My answer as of 3PM EST is 1067. That’s our refreshed level of immediate term TRADE resistance. A close above that puts 1092 in play, in short order. A close below that, puts 1035 in play on the downside.




Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed  - S P

No Confidence, but we have “Preconditions”

No matter where you turn, the evidence of an economic slowdown is here.  The recent figures are showing slowdowns in housing, business investment and consumer spending!


Despite these facts, Ben Bernanke is in a room full of “Fiat Fools” in Wyoming today saying that “preconditions” for growth in 2011 are “in place.”  A quick turn to Google and you can see that a precondition is defined as a “condition that must exist or be established before something can occur or be considered; a prerequisite.”  In computer programming, a precondition is a condition or predicate that must always be true just prior to the execution of some section of code. 


What condition is present that gives the Fed chairman the ability to use the word precondition? What can he or President Obama do to reignite growth in the USA?  Call the Chinese? 


Over the past 18 months, government spending programs have not create any new demand; they only shifted the time at which American consumers were going to make purchases they were going to make anyway.  And today’s consumer confidence print from the University of Michigan is proof of that.       


The University of Michigan final index of consumer sentiment came in at 68.9 from 67.8 in July, which was the lowest reading since November 2009.  What is even more interesting is that the FED chairman made the statement of “preconditions” knowing that 2Q GDP was going to slow by 50% quarter-over-quarter.  


All that government spending accomplished was to not let the market forces run their course and added uncertainty into the economy, which is making it harder for businesses to plan their next move (i.e. not hiring additional employees).  The leveraging of our balance sheet did not create new wealth for consumers; it diverted capital and resources from other places. 


Given the facts as we see them today, we see the preconditions in place for a significant slowdown in consumer spending in 4Q10.


Howard Penney


No Confidence, but we have “Preconditions”   - hpchart

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