EARLY LOOK: Walk The Line


“Because your mine, I walk the line.”

-Johnny Cash


EARLY LOOK: Walk The Line - chart2





Since we introduced it at the beginning of July as our intermediate term TREND line of bearish resistance for Q3, it’s no secret that the 1144 line on the SP500 has been our line. Now that the SP500 has rallied sharply (+9.8%) from what we called immediate term TRADE support (1040), it’s time for me to walk the line.


Will I be bullish? Will I be bearish? Or will I be neither? I don’t have to make a call; I make calls when the probability in my math tells me to. I already made my selling moves yesterday and I will be accountable to them.



EARLY LOOK: Walk The Line - cash



It’s NFL season. This is a great time of year in America because it allows us to remind ourselves how real winners in this country behave. Professional athletes and their coaches like making calls too – unlike professional politicians of the Fiat Republic, they thrive on accountability.


Before the Monday Night Football game between the San Francisco 49ers and the New Orleans Saints, 49er head coach, Mike Singletary, made the call that “we will not try to stop Drew Brees – we will stop Drew Brees.”


After the game Brees said, “we won the game and that’s all that counts.”


Ultimately, this business is a lot like professional sports in that being right or wrong is really all that counts. This isn’t a charity. This isn’t a philanthropic venture. This is meat and potatoes bids versus asks. Take your position, and walk the line.


No matter where I go this morning, here I am. Here are the moves I made yesterday:


1.  09/20/2010 02:45 PM SHORTING XLY $33.34

We covered this short position on August 24th and now we'll put it back on as we are bearish on US Consumer Spending for the intermediate term TREND, from this price. Timing matters.



2.  09/20/2010 10:42 AM SELLING CAF $28.24

Chinese stocks have closed down for 4 consecutive days and have broken their immediate term TRADE line. Could Chinese growth slow in SEP vs AUG?



3.  09/20/2010 10:34 AM SELLING GLD $125.22

I said I was going to do it in this morning's Early Look, so I'm doing it - booking a gain here in gold as it is immediate term TRADE overbought.



4.  09/20/2010 10:28 AM COVERING HCBK $12.14

US Housing data this week won't be as much of a bomb (relative to expectations) as the AUG24th report was. We'll cover here and re-short later.



5.  09/20/2010 10:22 AM SELLING ASPS $27.48

Steiner remains bullish on ASPS for the intermediate term TREND, but it is finally overbought here from an immediate term TRADE perspective. Selling high.



6.  09/20/2010 10:16 AM SHORTING HOT $53.23

Jordan and I remain bearish on the market's intermediate term expectations for revpar growth. Shorting green.



In summary, one of the first takeaways you’ll have from these 6 position changes is how mixed the research reasoning is. That, Dear Fundamentalist Sir, is the hallmark of both chaos theory and how you apply it to a modern day risk management model. Managing risk has nothing to do with the certainty of your “valuation model” or your latest super-duper “one-on-one” with a company. It has everything to do with accepting uncertainty.


When I make a call, I immediately start trying to prove myself wrong. Each position in the Hedgeye Portfolio has to undergo a disciplined and repeatable line of examination every morning, afternoon, and night. If you want to have a position playing on my team, your research is mine.


Sounds hard core, because it is. We’re not here to sell our clients some broken Greek bond promise, CNBC advertising, or an investment banking fee. We’re here to win – and the best way to ensure that is to keep moving as the game does.


My immediate term and intermediate term lines of resistance (TRADE and TREND) are the same line this morning, 1144. It’s time to walk the line.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer



This note was originally published at 8am this morning, September 21, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK and PORTFOLIO IDEAS in real-time.

The EU’s Guiding Hand

Hedgeye Portfolio: Long Germany (EWG); Long British Pound (FXB); bullish on EUR-USD


We thought we’d flash you a couple charts of Portugal, one country alongside Greece that is failing to meet its debt and deficit reduction targets for 2010, with Portugal’s Finance Minister saying today that it’s likely its budget gap will equal 9% of GDP by year-end, well above its target of 7.3%.


Our call on European debt and deficits threats remains one that is duration sensitive.  We think that for the near term TRADE and intermediate term TREND there’s plenty of downside for Europe’s fiscally weaker countries, especially those “affectionately” labeled the PIIGS. We highlight the risk trade with Portugal in the charts below:  (1.) yields on the 10YR Portuguese bond are rising above those last seen at the height of concern over Europe’s sovereign crisis, which culminated in the issuance of a €750 Billion rescue package on May 9th; and (2.) CDS is breaking out to the upside to a critical inflection line of 400bps, a line we initially discuss in late ’09 and 1H10 in regards to risk parameters for Greek default.  Certainly, Portugal is now flirting with this line. 


We’re also quick to point out that Greece’s default scare and the associated shock to the Euro put enough fear into the European community that we’d expect the EU to remain a backstop to support the Union at all costs should sovereign default fears rear its ugly head again. Recent data also helps to substantiate that a moderate floor could be in place, as Norway’s sovereign wealth fund (the 2nd largest in the world) decided to buy an undisclosed amount of Greek, Spanish, Italian and Portuguese debt a week ago, a bet that the EU will continue to feed its children the bottle during any time of need.


Again, we expect the inability of countries to cut deficit and debt levels to present further downward pressure on markets, however not to the extent that Greece did.  Therefore, we’re “surprisingly” bullish on the EUR-USD, given where we were 3-6 months ago, and outright bullish on the Pound-USD. Our bullish intermediate term TREND lines for the Euro and Pound are  $1.26 and $1.52, respectively.


Matthew Hedrick



The EU’s Guiding Hand - mh1


The EU’s Guiding Hand - mh2

Bear Market Macro: SP500 Levels, Refreshed...

Nothing has changed other than Heli-Ben daring investors to day trade on government-intervention at an accelerating rate. If you are more bullish than I on Bernanke, you can just call this daring investors to chase yield.


Our Bear Market Macro intermediate term TREND line of resistance is under assault. There isn’t a bull in the building who isn’t cheering Bernanke on.


I just sold our position in long term US Treasuries (TLT). I don’t know how any rational analyst can trust US government credit in perpetuity here.


Refreshed immediate term TRADE lines of support and resistance are now 1124 and 1149, respectively.



Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed... - 1


Conclusion: The number of job cuts in North America is accelerating after seven months of declines.


We are headed into a critical time for corporate America.  As of the close last night, the S&P 500 was up 8.88% month-to-date, the best September performance since the 1930’s, as the MACRO data points are not getting any worse - for now. 


Despite the market rallying on improved expectations, we are seeing the number of companies announcing layoffs begin to accelerate.  So far, the number of layoff announcements in September 2010 is above the total number for all of August. 

While the absolute numbers are modest compared to what we saw in 2008 and 2009, the MACRO backdrop suggests that the number of layoffs will accelerate from here.


So far in September, Philip Morris, Fed Ex, Genzyme, Merck and Boeing have announces layoffs.  The interesting stand out is FedEx which announced it is laying off 1,700 people versus 1,000 in April 2009. 


In the 2Q earnings season, 32% of the companies in the S&P 500 missed on the revenue line, while only 17% missed on the bottom line.  With GDP declining sequentially and bonuses on the line for making “the numbers”, I fully expect to see more corporate restructuring and layoffs in the coming months. 


To a certain extent, the pattern of layoffs is seasonal, as management teams plan for the next fiscal year and we are headed into the budget season.  In a slowing economy and a difficult consumer environment, trying to anticipate revenue growth is very difficult.  A real-time example of this is CAG.  The company said today, “Promotional programs did not drive increased consumer purchases to the extent expected, reflecting the prolonged economic challenges consumers have faced and the difficult retail environment.” 


We know from the labor department that, despite 3.7% and 1.6% GDP growth in the first two quarters of 2010, the economy did not add any jobs.  With GDP growth likely to slow in 2H10, corporate cost cutting will take center stage in the coming months.  The easiest way to cut costs is to cut employees, as we have seen over the past two years.  Complicating the process in 2011 will be inflation.  Despite what Ben Bernanke says, there is real inflation in the U.S. today.  Again, just look to CAG’s results today, the price of gold, the price of foodstuffs or a number of other asset prices. 


Given current trends, we calculate that between 160 and 200 companies in the S&P 500 are faced with a challenged revenue environment.  The bulk of the companies that are feeling the pain are in the Financials and Consumer Discretionary sectors.


Howard Penney

Managing Director





Heli-Ben Flies Japanese

Ivory towers of modern day US and Japanese monetary policy perceived wisdoms, Ben Bernanke salutes you. Doing more of what hasn’t worked for the last decade is hopefully going to inflate asset prices until the conflicted get paid at another lower-high for the US stock market. 

  1. No change to US monetary policy
  2. No new bond purchases
  3. No acknowledgement of sequential inflation. 

This breed of Keynesians doesn’t change when the facts do (although, tying a Fed Head record, Hoenig dissents for the 6th consecutive meeting).


US Treasury yields continue to hit lower-lows, looking more and more Japanese by the day.


This will not end well,



Heli-Ben Flies Japanese - 1


Here are some notes from the WMS Analyst Day




  • Harrah's is looking to have a facility in Vegas with all the newest products
  • Speed to market is a key advantage for WMS - makes it easier to do business with WMS.  Bluebird 1 + 2 have a 2 week lead time for delivery; xD has a 6 week lead time.
  • Their sales people cover fewer accounts which allows them to cover clients more thoroughly. Recently increased salesforce by 50%.
  • In the past, customers didn't have to justify ROI of new machines; now they do. Two weeks ago, Ho-Chunk was visiting - haven't bought machines for 2.5 yrs and just ordered machines from WMS.
  • xD took 18 months from conception to market.  They are spending a lot of time to continuously improve their supply chain. Goal is to reach 60% gross margin and 30% operating margin.  60/40 product sales vs participation - once replacement ramps - running at 30% capacity for manufacturing.  Combine that with continued product improvements.
  • xD should get to BB2 gross margins or better by 4Q2011.  xD margins were weaker at launch - multiple new suppliers and new product (not BB1 evolution) - so there is some ramp time. Beginning to see some improvement already in the Sept quarter; should continue through 4Q. Will show QoQ improvement. They shipped a decent # of units this Q.

Strategy & Development:

  • Lean Sigma: started in manufacturing and now headed into product development
  • Strategy Deployment:- focusing efforts and priorities on a critical few. 3-5 year strategic initiatives.

Supply Chain & why speed is so important:

  • Now that they are a bigger supplier, there are a lot more suppliers that will deal with them.
  • 85% of their inventory is replenished based on consumption; replenished within 2 hrs
  • They closed 3 outside warehouses because they consolidated their inventory so well.  Midwest is a hotbed of supplier activity. 65% of their suppliers are located within a 100 mile radius.
  • Inventory was 30% of revenues 5 yrs ago - now 4.5%
  • Goal is to get to $25mm of inventory balance - spent $18mm on chips for their BB2s recently - which they will work through.
  • Have a little bit of finished goods from Barcelona, in Waukegan, and some in Vegas (where they keep the product that comes back (participation) and repurposed).
  • Working on putting USB technology into the cabinets - i.e. simplifying what goes in the box.
  • 90% of their games are built out with only 10% to be customized
  • They doubled their manufacturing capacity without additional money or people; have industry leading supply times
  • Feel like they still have lots of room for improvement

Factory tour:

  • BB2 just looks slimmer. Can make 100 games per day per line. Track production goals hourly. Can build reels and videos on same lines now - 80 reels per hour. Have constant employee cross training.
  • xD not cannibalizing their other products.  Lots of the margin improvement will come from training their workers, redesigning, negotiating, working better with suppliers. xD also has a different finish.

Participation refurbishment:

  • Strip them down, clean them up and then repurpose them.  Will remove a lot of components for testing and cleaning (bill validator/cpu)


  • 5 yrs ago, it used to take days to get supplies from the dock to the factory - now it's 5 hours - goal is 2hrs
  • Cut inventory space needed in half
  • Everything is barcoded now
  • Takes them 2 days to do a physical inventory count

Inventory mgmt:

  • Inventory reduced from $72mm in June 05 to just $31mm last quarter
  • Scan out empty bin - and they get replenished
  • Super core : 90% complete - can be turned into video or reel.  80% of their customers take games that are pretty plain vanilla.  Margin on the custom games are even better. Only impacts lead times (so 4-5 weeks).

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