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"My way of joking is to tell the truth.  It's the funniest joke in the world".

-George Bernard Shaw


Both the Reserve Bank of Australia and the Reserve Bank of India certainly have their version of the truth today as both raised rates on inflation fears; for India’s central bank it’s the sixth such move this year. 


At home we have multiple storytellers giving their versions of the truth.  George Bernard Shaw was most commonly known as an Irish playwright skilled in many spheres of literature.  As you can probably tell from this morning’s quote, his work tended to fall into the satire or black comedy categories.  The black cloud that is the political theatre unfolding in the U.S. certainly would have provided Shaw with some material, were he alive today.


While Shaw held some controversial views that were anathema to many of those around him, his flair for music, literary criticism, journalism and drama was widely recognized.  Reconciling the vilification Shaw endured for his stances on the World Wars and other topics with the broad acclaim he received for his work (including a Nobel Prize for Literature and an Oscar) is difficult.  The bottom line is that most people love a good story line and can appreciate the person who can tell one.


In the run up to today mid-term elections, the Political Partisan Playwrights have been kicking into overdrive.  Political Prose has been weaved around every political theme imaginable; government spending, taxes, and immigration, to name but a few.  The resulting narratives have been recited ad nauseam and I can’t wait until it’s over.  Political commercials seem to get worse every election cycle.


We can argue which political versions of the truth are more tenuously linked to fact than others but the only certainty about every politician on the soap box is this: none is as allied to the truth as they are to their prospects of being elected.


At Hedgeye, we prefer to examine data than listen to political sound bites (however amusing).  As my colleague and Managing Director of Macro, Daryl Jones, wrote yesterday on the election, “The turnout measures for Republicans are very positive and should drive a big Republican win to the tune of a net gain of 9 seats in the Senate and more than 65 seats in the House”.   Daryl’s mathematical reckoning anchored on a selection of political polls that he has been following closely as part of this macro process.  While the likely Republican gains have already been priced into the markets, we will continue to be confronted with political versions of the truth for some time past today’s vote. 


Economic versions of the truth are just as commonplace in our manic media.  The interpretation of the ISM and personal income yesterday are perfect cases in point.  George Bernard Shaw died in 1950 but even if he were alive today, despite his talent for literary criticism, I think he would struggle to follow the convoluted economic plotlines being laid out by some present day commentators – and he was a co-founder of the London School of Economics! 


The main question I have for the storytellers is as follows: how does the economic reality we are faced with marry the expectations imbedded in Wall Street Groupthink?  Yesterday I posted a note on the ISM and personal income print titled, “Q4 2010 THEMES UPDATE – CONSUMER CANNONBALL”, that outlined the moving parts behind a major component of the U.S. economy.  The ISM print was less-than-comforting given that the upside was primarily driven by exports (a small part of the economy) while personal income and spending weakened (pertaining to the largest part of our economy). 


Government support is waning and taxes are going up.  We are in the midst of Jobless Stagflation and the data is continuing to confirm that.  If you ever had any doubt that political motivations can sway departments of government to take artistic license (especially a week before elections) with economic data, take a look at the chart below.


The story of the 3Q10 GDP number would be a masterful piece of black comedy – and a fitting ode to Bernard Shaw – if it were funny.  The consumer services sector is growing while consumer goods are decelerating but the evidence of government propping up the respective components of GDP is obvious.  Inventory accounted for 72% of 3Q10 GDP growth and exports declined even with the Almighty Buck burning at the stake.  Whatever version of the truth you choose to believe, the trends are unsustainable given our ever-increasing deficits. 


One version of the truth that is front of you today is that risk is clearly building in the market and most choose to ignore the facts.  Over the past six trading days the VIX is up 15.2% and the S&P 500 is UP +0.10%.  The inverse correlation of the VIX and the S&P 500 is 0.84.  The prospects of the FED saving the anemic economy are clearly priced in.   


Some may find it unappealing to consider that America’s economy can be as fragile as the data suggests.  As I wrote last week in my Early Look note titled, “BEING A LADY”, “America is a great nation and I’m proud to be an American”.  As a proud American, I would pay good money to see any political party come to grips with reality and face the cold hard truth.    


As Shaw himself would say, “All great truths begin as blasphemies”.


Function in disaster; finish in style,


Howard Penney




Pretty much an in-line quarter.  Commentary in a forthcoming note.



“Fiscal 2011 first quarter total revenues and product sales revenues rose to record first quarter levels as strong demand for our new Bluebird xD gaming machine contributed to our ability to overcome the challenging industry environment for replacement unit sales”

- Brian R. Gamache, Chairman and Chief Executive Officer



  • New unit shipments in the U.S. and Canada: 3,192
    • Replacement: 2,900 units
  • International shipments: 2,146
    • "Growth in Mexico and New South Wales, Australia, along with modest growth in Asia and Latin America, were the primary contributors to the Company’s international growth that more than offset lower shipments to Europe, which continues to be impacted by the challenging economic environment."
  • 10% ASP increase was attributed to "significant initial demand for the new Bluebird xD category-creating gaming machine that was launched in June 2010."
    • "The premium-featured, networked-ready Bluebird®2 and Bluebird xD units represented 90% of total global new unit sales"
    • "Bluebird xD units accounting for 35% of total global shipments"
    • "Mechanical reel products were 20% of global new unit shipments"
  • "Gaming operations revenues were essentially flat at $76.3 million, reflecting a 1% increase in the average installed participation footprint to 10,379 gaming machines and average daily revenue of $76.36 per unit"
  • "The launch of THE LORD OF THE RINGS game on our Adaptive Gaming® platform was the principal contributor to the 556 unit year-over-year net increase in the percentage of coin-in participation category. Other gaming operations revenues reflect a slight decline in royalty income as a result of WMS’ direct entry into markets previously served through content licenses to third-parties."
  • Guidance for Dec 2010 Q:
    • Revenue of $198-to-$205 million with an operating margin of 19.0%-to-19.5%
    • "Our December 2010 quarterly revenue guidance anticipates that the domestic marketplace will continue to reflect gaming operators’ restrained capital budgets and a lower rate of new casino openings and expansions. The operating margin guidance for the December 2010 quarter reflects sequential improvements in product sales gross margin and operating costs declining as a percentage of revenues compared with the September 2010 quarter."
  • Reaffirmed FY2011 revenue guidance of $830-to-$850 million
  • "$3.8 million pre-tax, or $0.04 per diluted share, charge related to the costs of closing the Company’s main Netherlands facility and consolidating its operations into other WMS facilities"
  • "During the September 2010 quarter, we invested $22.9 million in gaming operations equipment...and $50 million in share repurchases.... Our balance sheet remains strong with $122.5 million in total cash and no debt."


  • They are seeing improving sentiment among operators to refresh their floors
  • Units for Penn's new MD casino were not in this quarter's shipment but will be accounted for in the Dec quarter
  • In New South Wales: WMS had 4 of the top penny denomination games and therefore believe that there is meaningful upside to sales here
  • Revenues from gaming operations were basically flat. Average win per day was lower YoY as a result of WAP product that was really refresher product vs. growing the footprint, and the weak consumer environment.
  • Lord of the Rings is pricing as a % of coin in despite being a stand alone unit. 
  • 54% of their sales came from product sales this quarter vs 59% last year.
  • They have identified things to increase xD gross margins and expect to reach margin parity btw xD and BB2 by June 2011, even as they plan to increase BB2 margins at the same time
  • D&A continued to decrease as they benefited from the greater longevity of their units in gaming operations.  They do expect the absolute D&A to increase in the future.
  • Increase in notes receivable reflects their increased direct selling into markets that traditionally depend on 3rd party financing like Indian gaming markets or markets where they go through a distributor
  • In the December quarter this year, there are fewer new openings and expansions in NA but there are opportunities in portal applications, UK margins, Mexico and New South Wales
  • Ultra Hit progressive is live at 5 sites across 100 games. Coin in has increased as much as 35% across these machines.
  • Piggy Banking - 2nd themes in the 1st portal family will launch soon. There will also be a Pengwin launch as the 1st theme in the 2nd portal family.
  • Expect to commercially launch their UK online casino later this quarter but their revenue guidance has very little coming from this business and they expect slightly negative margins
  • PlayersLife web services was also recently launched
  • Already have over 500 Lord of the Rings games rolled out, already have over 125,000 unique sign-ons for LoRs
  • Will demonstrate over a dozen games with PlayersLife capabilities at G2E
  • Will have 4 unique games that will demonstrate the capability of CPUNext 3
  • Do not expect any meaningful increase in replacements in 2011 over 2010 levels
  • Expect to reach their 55% margin for product sales as they fix their margins on xD



  • Thoughts on shipshare?
    • Guess that it's similar to last quarter "31-32%"
    • Of the trade-in games they took - 2/3rds were competitor games
    • Feel like they gained share in the Q
  • Game Ops - was a good quarter vs. their budget. Have 4 WAP launches in Q2 & 3 - lots of the growth is derived from launches which will make for a good Q4. Up against a tough comp when Wizard of Oz was at its zenith.
  • Product sales growth margin - BB2 margins are likely in-line with what it was last year. The issue is that they sold a higher % of xD than they thought and that had a bigger margin impact.
  • Price Is Right didn't place as many units as they thought probably bc they launched with the mechanical spinning reel version instead of the video
  • Margin guidance for FY2011 excludes the Netherlands charge
  • Customer feedback on replacement demand seems similar to last year's - hoping that this year isn't a head fake
  • Is operating margin guidance ambitious for the back half of the year, given their guidance for the Dec quarter?
    • Price increases in Jan
    • xD improvement
    • Additional volume
  • Italy - when should that start to have an impact?
    • Start in the June 2011 quarter
    • Operating lease market rather than a for sale market
  • They have been providing conversion and sale packages to customers for a long time. There is no difference to that approach. That ends up being deferred revenues until they are used by the customers.
  • Discrepancy between cash used on stock buyback in the release and what's on the CFS is due to the closing of the trades during the last 2 days of the quarter
  • Did Cosmo ship in the Sept quarter?
    • yes - most of them shipped 
  • There was no capex spent on Italy in the quarter. Two thirds was on the BB1 to BB2 refresher and the rest was on the Lord of the Rings roll out.
  • Reason that the MD units was delayed was because of the 90 day acceptance clause in the contract.  All the games were for sale.
  • There is an uptick in the quality of their competitor participation product
  • Think that less than 40% of new unit shipments will be international over the next few quarters - still thinks it will be closer to 35%
  • Any overall slowdown in Mexico for Class 3 conversions? Think that the market could be much larger than it is today (40,000 units)
  • Order size in NA is still on average 15-18/units per facility. Class II was a little bigger for them in terms of unit size orders.
  • Bally's lawsuit - litigation cost baked into guidance given in F4Q 2010 earnings release.

Taking Sanity Seriously

This note was originally published at 8am this morning, November 01, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Everything is changing. People are taking their comedians seriously and the politicians as a joke.”

- Will Rogers


This weekend during his 200,000 plus people “Rally To Restore Sanity And/Or Fear”, Jon Stewart joined the ranks of calling the press out as the Manic Media. “If we amplify everything, we hear nothing,” he said. “The press is our immune system. If it overreacts to everything, we eventually get sicker.”


I don’t think he was precluding the financial media from that statement either. At least in politics there’s a core competency in being raging Republican or Democrat. In the arena of finance, the incompetence of academic dogma and Keynesian policy is pervasive. What sell-side lovers amplify as “news” becomes a contra-indicator that we make money from. Thank God for that.


This week brings us the Super Bowl of market hope:

  1. Tuesday = Midterm Elections
  2. Wednesday = Federal Reserve’s Decision to Debauch The Dollar
  3. Thursday = European Central Bank and Bank of England Fiat Fool statements

Then on Friday, everyone will come back from their mid-term election and Dollar debasement parties in Washington DC to be hung-over by Hedgeye reminding them that neither Republicans or Quantitative Guessing will result in anything more than what we already have in this country, Jobless Stagflation.


Jobless Stagflation? What’s that? Don’t ask Barron’s – they decided to title this weekend’s cover story “Bye-Bye, Bear”…


No, I couldn’t make that up if I tried… and no, I don’t think the probability is very high that Barron’s is a leading indicator on the US stock market’s next major move either.


Let’s start Taking Sanity Seriously and understand what’s occurred since Ben Bernanke exercised his conflicted and compromised right to give the perma-bulls and financial media alike something to cheer on since the Jackson Hole Groupthink Summit on August 27th:

  1. The SP500 is up +13%
  2. The CRB Commodities Index is up +14.5%
  3. The Input Price component of Chinese manufacturing is up +15.5%

Seriously? Yes, this is a very serious level of expedited inflation folks.


But what does it mean? Doesn’t this mean that Burning The Buck at the stake is a credible, everybody-wins, strategy? Or does the Manic Media on the Western side of the world get paid to suspend disbelief and take the Groupthinker’s word for it that this is going to end in jobs?


The Manic Media doesn’t do buy-side equations, but we’ll give them another one to chew on now that our clients have their positions on:


QG = COGS inflation


Seriously. It’s sort of one of those IF/THEN equations that they can build upon using the equation we gave them a few weeks back:


QE = i


Take these equations very seriously.


If, Quantitative Easing (QE) = inflation, and QE = QG (Quantitative Guessing), then QG = COGS (cost of goods) inflation. I know, I know. This is as brilliant a mathematical revelation as Morgan Stanley cutting its US Dollar forecast this morning “As The Federal Reserve Sets To Ease.” That and “Thirty Three Hour Race May Induce ECB Surrender on Weak Dollar” are top Bloomberg headlines this morning, fyi.


Notwithstanding the analytical incompetence of the political media on financial matters, this turns Jon Stewart into a very savvy politician, of sorts. Or is he a politician? Maybe he’s just simplifying the common sense signals that normal human beings have in their heads as Washington attempts to fear-monger you into believing that there is only deflation and, as a result, you should earn 0.17% on your hard earned savings in perpetuity?


Here’s what the Chinese think about this American style Burning of the Buck this morning:

  1. “US Dollar depreciation exacerbates currency war” –China Trade Ministry
  2. “China should buy gold, oil, to avoid US Dollar losses” –Chinese Business Reports
  3. “Yuan deposits rise as Hong Kong currency peg debate heats up” –Bloomberg Asia

Seriously? Yes, the Chinese  are seemingly sane folks.


Oh, and they have the real-time price data to support it. There was a creepy little Halloween critter in China’s better than expected PMI reports last night (54.7 OCT vs 53.8 SEP) called COGS (cost of goods) that showed input prices rise to 69.9 in October versus 65.5 and 60.5 in September and August, respectively. At the same time, South Korea released a new high in their inflation report of 4.1% overnight versus 3.6% in September.


If you’re taking the global interconnectedness of markets and prices seriously, you’re seeing inflation rise, globally, as joblessness stagnates locally. This is called Jobless Stagflation. And we don’t think the Manic Media’s stock market cheerleaders will make that go away by the end of this week.


My immediate term support and resistance lines for the SP500 are now 1169 and 1192, respectively. In the Hedgeye Portfolio, I remain short both the US Dollar (UUP) and the SP500 (SPY). I’ll be a seller of all buy-and-hope oriented strength this week.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Taking Sanity Seriously - SERIOUS

Early Look

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Bear/Bull Battle: SP500 Levels, Refreshed...



Fortunately, I didn’t waver this morning. All I did was sell. While I’m running out of long positions to sell, the bulls are running out of time.


Bearish intermediate term TREND signals have been developing since October 13th. In the last few trading days we’ve picked up some very bearish immediate term TRADE signals. Today’s intraday reversal in US equities only adds to a growing list of market risks.


The most problematic risk factors in the immediate term are: 

  1. TIME – the bulls have no time left on the bullish catalyst clock (Midterms and Quantitative Guessing)
  2. PRICE – both from an immediate term TRADE and RANGE perspective, signals are bearish (TRADE line resistance = lower-high of 1188)
  3. VOLATILITY – last week’s bullish immediate term TRADE breakout in VIX (+12.8% w/w) is being confirmed by another +3% rise today 

For the rest of my reasoning (Growth Slowing, Inflation Rising, and Interconnected Risk Compounding) please see my EL note from Friday titled “Drowning in Sweat.”


Immediate term TRADE support is now 1167. Today was a great day for risk management.




Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed...  - 1


In preparation for WYNN’s Q3 earnings release on , we’ve put together the pertinent forward looking commentary from WYNN’s Q2 earnings release/call.



  • "So, I think we’ve been looking at every segment of the market and we’re finding some modest improvement, and we’re able to actually start to improve our rates. We become less dependent on the Leisure business and the Promotional segment, that’s the segment where we’re aggressively out there marketing and stimulating demand, and we’re trading that business for a little stronger kind of Convention and Group business, which last year averaged somewhere around 12.5% of our mix, and is trending closer to 17, 18% now."
  • [Asian business in  LV] "I think Asian business has decreased, but probably has sustained the best
    among all segments of the business."
  • Any improvement in spend per occupied room outside of room rates? "No material change. I think we’re just going to see just the benefit of a better mix. So, we’re displacing promotionally oriented, or leisure, more kind of value conscious customers with people that hopefully spend a little bit more. So, we’re not seeing by segment an increase in spend per room night. But we’re going to see some improvement just because of the shift in mix."
  • [Convention bookings] “We're booking through anywhere from 6 to 8 quarters. So, there’s a long tail on that. But we’ve had good, healthy bookings in the year for the year. Not what we would have liked to have seen coming into the year. But in the Convention segment, particularly, we’re seeing some strengthening going into next year.”
  • [Cotai] “We’re going to have 500 tables and 1,300 slot machines…we’re going to just build the most amazing hotel that anybody’s seen. And it will accommodate a lot of people, it will have 1,500 or between 1,500 and 1,600 rooms...We’re going to open before [MGM and SJM]...We’re not going to be any bigger than we are in the Peninsula in terms of gaming."
  • "Higher customer acquisition costs and table drop being down will continue into the second half of the year."
  • "We’re seeing good solid lift in the food and beverages outlets over at Encore. La Cave will open in early November."
  • "Wynn Macau generates 25% of the EBITDA in the market and 40% of the net income."
  • [Wynn Las Vegas remodel] "It will cost 99--45 for the typical room, 46 for the suites, and for the villas, another 10." 


Conclusion: As we illustrated during our 4Q 2010 Macro Themes call on October 5th, consumption trends are under pressure as government supports subside and taxes increase.  The data released today shows this occurring in September and we expect this dynamic to continue in the fourth quarter and into 2011.


First, the ISM prints beats at 56.9 in October (the highest since May) from 54.4, that’s good news.  The contradicting and not all completely good news is that the upside appears to be completely driven by exports having increased 6 points in October while inventories dropped in October.  Not really a positive sign given that exports are such a small part of the economy and that the inventory builds accounted for 1.5% of the 2% GDP in 3Q10 (prior to the upcoming revisions).


What about the part of the economy that does matter, domestic consumption? A few bullet points:

  1. Both personal income and spending weakened in September.  Personal income fell 0.1%: the first decline since last September.
  2. The decline in income was driven by a $25.5 billion reduction in emergency unemployment insurance benefits.  Emergency benefits had boosted transfer income by $20.5 billion in August.
  3. Interest income (due to the Federal Reserve emergency interest rates fell 0.9% for the third straight month.
  4. Tax payments are up, driving disposable income down 0.2%.
  5. Real spending was up 0.1% driven by consumers diving into the savings rates which fell to 5.3% - matching its lowest level in over a year.

The Hedgeye consumer cannonball theme suggests that the next several quarters will be very taxing for the US consumer.  The thesis is based on very difficult year-over-year comparisons as Uncle Sam runs out of crutches and can no longer prop up the consumer.  A key takeaway from today’s data from the BEA is that transfer income is fading and taxes are on the rise.


While corporate profits are strong, the lack of confidence in the direction of the economy is holding back job growth as the unemployment rate will hit 10% before it will hit 9%.  The data continues to bolster our conviction; the private sector cannot make up the slack in income and the economy is experiencing Jobless Stagflation.


Howard Penney

Managing Director


Q4 2010 THEMES UPDATE - CONSUMER CANNONBALL - personal income taxes up tp down

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 80.51%
  • SHORT SIGNALS 78.32%