TODAY’S S&P 500 SET-UP - October 11, 2010

As we look at today’s set up for the S&P 500, the range is 18 points or -1.21% downside to 1151 and 0.33% upside to 1169. Equity futures are trading above fair value in tandem with gains seen overnight across Asia and Europe although trading thus far has been quiet. Crude oil has risen on a weakening dollar as expectations of further QE gather pace in the wake of Friday's disappointing jobs report

  • Barron’s - Brinker International (EAT) may climb to $0.42 per sharein next year on new kitchens, menus
  • Barron’s - CIT Group (CIT) may rise >15% during next year and may be a target for a “capital-starved” bank.
  • Cypress Bioscience (CYPB) agreed to sell its diagnostic business to Exagen Diagnostics
  • J.C. Penney (JCP): Vornado Realty Trust (VNO) acquired ~9.9% JCP stock
  • Barron’s - Regal Cinemas (RGC) and Cinemark (CNK) are “cheap” on a free- cash flow basis, Barron’s said.
  • Barron’s - SuccessFactors (SFSF) may fall on stronger competition, growth.
  • Targa Resources Partners (NGLS) boosted Q dividend to 53.75c a unit from 52.75c, matches forecast


  • One day: Dow 0.53%, S&P 0.61%, Nasdaq +0.77%, Russell 2000 1.4%
  • Year-to-date: Dow +5.52%, S&P +4.46%, Nasdaq +5.85%, Russell +10.94%


  • ADVANCE/DECLINE LINE: +1467 (+1707)
  • VOLUME: NYSE - 943.44 (+3.63%)  
  • SECTOR PERFORMANCE: Every sector rose on Friday - Reflation, Reflation and Reflation.
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: CF Industries +11.42%, Gannett +8.02% and H&R Block +7.47%/Tyson -7.74%, Adobe -5.93% and Owens Ill -4.08%.
  • VIX: 20.71 -3.94% - YTD PERFORMANCE: (-4.47%)
  • SPX PUT/CALL RATIO: 1.69 from 1.38, +22.06%


  • TED SPREAD: - 17.45
  • 3-MONTH T-BILL YIELD: 0.12% -.01%
  • YIELD CURVE: 2.06 from 2.05


  • CRB: 295.11 +2.72% - up for the last 7 weeks
  • Oil: 82.66 +1.21% up 3 weeks in a row
  • COPPER: 377.45 +2.58% - up 7 of the last 8 weeks
  • GOLD: 1,343.85 +0.69% up 5 of last 6 weeks


  • EURO: 1.3939 +0.38% up 5 of the last 6 weeks
  • DOLLAR: 77.325 -0.08 down 5 of the last 6 weeks




  • European markets edged higher, though activity is subdued with little major economic or corporate releases and US bond markets are closed today for a public holiday.
  • Major European indices gave up modest opening advances, drifting back to trade little changed before edging higher and currently trade just below the session’s earlier highs.
  • The majority of European sectors trade higher led by the technology and auto sectors. US futures trade higher
  • France Aug Industrial Production +0.0% m/m vs consensus +0.3% and prior revised +0.8%
  • France Aug Manufacturing Output +0.0% m/m vs prior +1.2%


  • Nikkei (closed); Shanghai Composite +2.50%
  • The Hang Seng saw a two-year high as expectations of further Fed easing boosted resource stocks, while Sydney and Shanghai saw five-month highs.
  • Asian markets rose today after Friday's US jobs report raised expectations that the Fed will announce new measures aimed at propping up the weak economy and the dollar continued its deterioration.
  • The dollar hit a new 15-year low against the yen after last week hitting an all-time low against the Australian dollar since the Australian dollar was allowed to float in 1983 Japanese markets are closed today
  • Chinese officials over the weekend rejected calls for a significantly stronger renminbi. China’s unit hit a new post-2005 revaluation high vs the dollar of Rmb 6.6645
  • China raises deposit reserve ratio for six big banks by 50 bps 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














The Macau Metro Monitor, October 11th 2010



Golden Week (October 1-7) visitors surpassed 680,000, an increase of nearly 13% YoY. More than 470,000 were from Mainland China, a 12.38% YoY growth.  The average occupancy rate of three-to-five-star hotels during the National Day Golden Week holiday reached 90%, a 2.7% point increase YoY.  The ADR of three-to-five-star hotels was MOP1,422 (US$178), up 16% YoY.


IM is concerned about the the overflowing traffic at the Gonbei immigration checkpoint.  The capacity limit at the facility is only 300,000 visitors per day.  The very long wait lines may deter visitors to Macau for next year's Golden Week.

Defend Yourself

“Defense is superior to opulence.”

-Adam Smith


Thankfully, I didn’t waste much of my time this weekend listening to professional politicians at the IMF meetings in Washington make their proactively predictable protectionist comments about global currencies. As the aforementioned Scottish moral philosopher aptly put it, “all money is a matter of belief.”


Neither Adam Smith’s ideas about free market capitalism, nor his citations from “The Wealth of Nations” get much air time in the manic media these days. US stock market cheerleaders are much more focused on “New Keynesian” economic theories of Big Government Intervention that  are allegedly going to help policy makers save themselves from adhering to the laws of gravity.


Rather than engage in a philosophical or ethical debate about ideas coming out of the Scottish Enlightenment this morning, I’m going to give you some advice in modern day plain English – Defend Yourself. That’s right and that’s it – defend yourself because, unless you have a legitimate Global Risk Manager managing your money, no one else will.


Notwithstanding the obvious protectionist commentary coming out of the world’s top 3 economies this morning (USA, China, and Japan), here are a few other representative central banker quotes that came out of the IMF meetings:

  1. Brazil: “Brazil won’t pay the price for several countries’ imbalances. Our position is: Brazil will protect its economy regardless.”
  2. Philippines: “In the face of possible further weakness in the US Dollar, the central bank continues to assess investment diversification options.”

At the end of the day, the world is still too long of the US Dollar and the broken promises that back it. This isn’t new (we’ve been short the US Dollar since June 7th). It’s simply becoming consensus. And, unlike stock market consensus, global political consensus is much more difficult to reverse.


The “consensus” 2-2.5 month direction of the US stock market has been often reversed in 2010. Students of the Real-Time Market Enlightenment get this. As a result, they will likely continue to profit from the Mathematical Enlightenment called mean-reversion.


Since we made our call for May Showers on April 16th, I haven’t seen such obvious signals to suggest you defend yourself from a US stock market exposure perspective. Never mind what the dude at Citi thinks about our levels, Newton and Einstein would most likely love this call as our Hedgeyes are intensely focused on measuring both time and space.


Time (duration) and price (space) aren’t very useful for economic theoreticians who have never traded a market in their life. Today’s selling opportunity is really amplified by the Academic Dogma that is driving US political consensus that QE2 is going to end well. As your local professional politician Burns the Buck, global politicians are becoming increasingly protectionist about what it means for their constituencies.


Admittedly, we were a little early with the April Flowers/May Showers macro call by about a week (the SP500 topped for 2010 YTD at 1217 on April 23rd). But early is as early does – seeing something coming before it actually occurs and having the patience to wait for your entry point (or in this case, selling point) is easily the most challenging aspect of my risk management day.


In the spirit of keeping the accountability pants on, as a reminder here are the market factors I’ve been looking for since the morning of September 29th when I wrote a note titled “A Heavier Crash”:

  1. We need to see the SP500 get squeezed one more time in the next few weeks to a price north of 1164.
  2. We need to see volatility (VIX) get oversold towards 20.
  3. We need to continue to see the world’s said “reserve currency” lose its credibility.

And no matter where we go this morning, here we are. Check, check, and check on the levels. Fellow Risk Managers, ‘tis time to defend yourself.


I started buying protection by investing in volatility (VXX) on Friday. I get that it’s not a perfect instrument when considered alongside the volatility index (VIX), so we model the risk/reward and probability in the VXX from the bottom-up on its own historical price, volume, and volatility merits.


I have not yet shorted the SP500 (SPY) as my risk management model was flashing amber lights on Friday to wait and watch for the 1169 line in terms of the US stock market being immediate term overbought.


Yes, Dear Theoretical Dogmatists, Hedgeye reserves the unalienable right to change our game-plan as the game changes. Defending ourselves against your Ivory Tower economics is our advice as we drift ominously higher toward 3 more Fridays in October.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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The first 10 days of Oct were off the charts in Macau. Normalizing the rest of the month produces full month estimated growth of 63-72% YoY growth.



Macau produced HK$8.6 billion in table revenues in the first 10 days of October.  Of course, while stunning, this number was impacted by the Golden Week celebration.  After normalizing the rest of the month and adding slot revenue, we arrive at a full month revenue projection of $20-21 billion or YoY growth of 63-72%.  This seems stronger than general consensus.


In the chart below, we list the market shares for the first 10 days of the month.  We have been hearing Wynn’s hold percentage has been running high the last few weeks and that seems to be corroborated in its October market share.  While 14.2% is better than the low hold impacted September at 12.0%, October is so far only in-line with its substandard summer share. 


LVS share moved over the 20% mark thus far in October.  We suspect The Venetian’s VIP push is paying off.  The property appears to be advancing commissions to junkets for up to two months.  Another positive is MPEL, which is on its way for a fourth straight month of above trend market share.  MPEL has been even more aggressive with junket credit than Venetian and the property’s Mass business continues to ramp.  Do these guys finally have their act together?  We may have to conclude that they do.


As expected, MGM’s share continues to strengthen as it readies itself for the IPO.  MGM has been as aggressive as MPEL in advancing commissions on a 3-4 month basis.  In terms of losers, it looks Galaxy is taking one on the chin.  We’ve heard they have been mauled on the tables.




Still a work in progress but PENN takes a major step to a Vegas presence



Earlier today, Penn announced it has purchased all of The M Resort bank debt plus $160MM of subordinated debt formerly held by MGM, from Bank of Scotland for $230.5 million.  Since M Resort's TTM EBITDA is in the "teens" and cannot service its debt, the property has no equity value and therefore Penn effectively purchased M Resorts for $230.5MM.  That said, a few things need to happen before Penn can take the keys and begin operating this property.


While Penn was licensed in Nevada this summer when they took a minority stake in a slot manufacturer headquartered in the state, they still need to get a license to operate the property.  According to our sources, securing an operator license in Nevada takes approximately 6 to 12 months.  Until Penn gets licensed, they need to play nice with the Marnell family, who currently holds the license.  It's likely Penn will pay Marnell to operate the property during its licensing period.  We also believe that during this period, Penn will likely file the property for bankruptcy to clear it of any outstanding claims and liens.  The bankruptcy process should be rather painless but is good precaution to make sure that once they take over the property they are free and clear.


So what do we think of the deal?  Well, it's probably one of the cheapest ways for Penn to get a foothold in Vegas and takes away any overhang of them doing an expensive 'bad deal.'  While on the surface the purchase price was expensive, it's actually not a terrible deal when taken into account that:

  • The property will be debt free
  • Is brand new and requires minimal capital expenditures for the next few years
  • No taxes will likely be paid any time soon
  • EBITD is at trough levels

In addition, Penn believes that it can operate the property more efficiently and get rid of some of the overpaid executives at the property which will help lift EBITDA.  Over time, Penn will also be able to use this property to cross market and offer their best customers a place to gamble in Vegas a la the Harrah's model.  While we wouldn't characterize this deal as a game changer and it will take some time for the payoff, it seems like a smart strategic move for PENN

The Week Ahead

The Economic Data calendar for the week of the 11th of October through the 15th 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 - caly1

The Week Ahead - caly2

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