IGT may have weathered the storm better than BYI and WMS.



What does the big guide downs by WMS and BYI mean for IGT?  Probably not as much as people think.  Lower earnings at BYI was concentrated in the systems business and a company specific mix shift.  On the surface, the WMS

pre-announcement looks like it would have direct implications for IGT’s quarter.  The WMS miss versus our expectations was almost entirely due to lower products sales and lower product gross margins.


So why won’t IGT punt the quarter as well?  Well, we do expect a slight miss – we are at $0.19 versus the Street at $0.20 as we wrote about in our 4/6/11 IGT earnings preview.  While we are constructive on the long-term outlook for all the suppliers, we’ve favored IGT over the near term for a few reasons that may be playing out. 


First, our view is that over the near-term, WMS was a market share loser while IGT and BYI were likely gainers.  BYI’s miss was not related to product sales but WMS was, so we may have been right.  Further, during our trip to Vegas in late March, we didn’t get any indication that replacement demand had subsided in any way for IGT.  Thus, market share losses could’ve contributed to the WMS guide down.  Second, we’ve maintained that IGT has more margins levers to pull which we clearly saw in the company’s FQ1 and guidance. 


Does this mean we feel rock solid confident in IGT’s FQ2?  Not really but we do believe investors are seeing a worse picture as painted by WMS and BYI than reality.  IGT is off almost 7% from its recent high on April 6th, and that is before today’s likely drop.  A slight miss or better next week will likely be a big boost for the stock.




TODAY’S S&P 500 SET-UP - April 12, 2011


As we look at today’s set up for the S&P 500, the range is 17 points or -1.09% downside to 1310 and 0.19% upside to 1327.




Yesterday, the XLU broke TRADE leaving the Hedgeye Sector models with 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.    


THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: -1180 (-214)  
  • VOLUME: NYSE 818.71 (+0.36%)
  • VIX:  16.59 -7.16% YTD PERFORMANCE: -6.54%
  • SPX PUT/CALL RATIO: 1.37 from 1.73 (-20.74%)




  • TED SPREAD: 23.71 -1.014 (-4.101%)
  • 3-MONTH T-BILL YIELD: 0.05% +0.01%
  • 10-Year: 3.59 from 3.59
  • YIELD CURVE: 2.74 from 2.76 



  • 6:15 a.m.: New York Fed’s Dudley to speak in Hong Kong
  • 7:30 a.m.: NFIB Small Business Optimism, est. 95.0, prior 94.5
  • 8:30 a.m.: Import Price Index, est. 2.1% (M/m), prior 1.4% (M/m)
  • 8:30 a.m.: Trade balance, est. (-$44.0b), prior (-$46.3b)
  • 9:15 a.m.: Kansas City Fed’s Hoenig speaks on “Too Big to Fail”
  • 10 a.m.: IBD/TIPP Optimism, est. 45.0, prior 43.0
  • 11:30 a.m.: Fed to sell $40b 4-week bills
  • 12 noon: DoE monthly short-term outlook
  • 1 p.m.: U.S. to sell $32b 3-year notes
  • 2 p.m.: Monthly budget statement
  • 2:45 p.m.: Fed’s Fisher moderates panel in Dallas on growth
  • 4:30 p.m.: API inventories



  • Commodities drop after Alcoa earnings miss.
  • Tokyo Electric Power Co. slumps 10% after saying the damaged Fukushima plant my release more radiation than Chernobyl.
  • Greek banks fall on concern about the country’s ability to rebound from its crisis.
  • IEA Says $100-Plus Oil Price May Be Incompatible With Recovery
  • Sokol Spoke With Lubrizol Bankers on Dec. 17: WSJ




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Copper Declines a Second Day on IMF Growth Outlook, Alcoa Sales, Japan
  • Japan Rice Buying May Outstrip Supply on Hoarding, Marubeni's Shibata Says
  • Rio Tinto's '11 Profits Signal No Boon for Shipping Lines: Freight Markets
  • Corn Drops as Feed Millers Seek Cheaper Grain Subsitutes; Soybeans Decline
  • Gold May Advance as European Debt Crisis, Conflict in Libya Add to Demand
  • Rising Railroad Shipments Reflect Increasing Momentum in U.S. Expansion
  • Oil Falls a Second Day as IEA Says High Prices Hurting Economic Recovery
  • Rubber Drops From Five-Week High in Tokyo on Oil’s Fall, Growth Concerns
  • China May Reduce Export Rebates for Some Metals, Securities Journal Says
  • Crop Insurance to Get Boost From New EU Subsidy Policies, Allianz Predicts
  • Yellen Says Surge in Commodity Costs Doesn't Warrant Fed Stimulus Reversal
  • Europe Commodity Day Ahead: Silver Options Show Bet on Price Drop by July  



THE HEDGEYE DAILY OUTLOOK - daily currency view



  • Europe markets are trading lower slowing growth and accelerating inflation concerns.
  • Germany Mar final CPI +2.1% y/y vs prelim +2.1%
  • UK Mar CPI +4.0% y/y vs consensus +4.4%; RPI +5.3% y/y vs consensus +5.5%
  • British Retail Consortium March total sales (1.9%) y/y vs prior +1.1%,SSS (3.5%) vs prior (0.4%) worst since records began
  • UK Mar house price survey (23) vs consensus (24) and prior (26)
  • European Central Bank Governing Council member Michael Bonello says risks to growth outlook remain, in comments at press conference in Valletta, Malta. (1) ECB liquidity may reduce incentive to fix problems; need to embark on more fiscal consolidation; (2) “sovereign debt crisis still not behind us” (3) Oil surge has put pressure on inflation; (4) positive on Spain’s moves
  • German investor confidence falls for a second month; German ZEW current conditions index 87.1, est. 85.2; Euro-zone ZEW investor confidence index 19.7, prior 31.0; ZEW says expectations didn’t change significantly after quake; ZEW says economy hasn’t much room for further improvement







  • Asian markets went down today, with sentiment dulled by Alcoa’s (AA) unimpressive start to the earnings season.
  • Japan raised the severity level of the Fukushima Daiichi nuclear accident to the highest gradation and was hit by two more earthquakes.
  • China gave up morning gains and finished flat.














Howard Penney

Managing Director


Notable news items from the past few days and price action from yesterday.


  • MCD's Amit Jatia of McDonald’s India describes how the company adjusted the menu and the marketing strategy for expansion in the country.  Full story on
  • MCD independent franchise operator, Arcos Dorados Holdings Inc., is seeking to sell shares at almost twice the valuation of the parent at 28x EPS.  A Brazil bubble?
  • Burger King has unveiled the Meat Monster – a modified Whopper that includes a chicken breast and bacon; the Meat Monster is only available in Japan.  The American versions of the ingredients, would have 1,160 calories, 24 grams of saturated fat, 240 milligrams of cholesterol, 13 grams of sugar, 54 grams of carbohydrates, 69 grams of fat, 1.5 grams of trans fat and 2,290 milligrams sodium.
  • DIN's largest concept, Applebee's, said Monday it was immediately retraining its workers nationwide after a server at a suburban Detroit location accidentally served alcohol to a toddler.
  • EAT appoints three new board members: Dave Dino (former CFO of YUM brands), Jon Luther (Chairman Dunkin Brands) and Michael Dixon (former CFO of CAKE).
  • RT continued to suffer from the fallout of its disappointing quarter yesterday with EAT, BWLD TXRH and DIN all down on accelerating volume.
  • WEN declined accelerating volume for the 2nd day in a row.





Howard Penney

Managing Director

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


“The name of the author is the first to go
followed obediently by the title, the plot,
the heartbreaking conclusion, the entire novel
which suddenly becomes one you have never read,
never even heard of


-Billy Collins, Forgetfulness


Human beings are forgetful creatures.  Coaches the length and breadth of this country berate their players to never make the same mistake twice on the court, field, ice, or track.  In retrospect, having tried my utmost to follow this adage in my sporting – and later in my professional endeavors – I think “never make the same mistake ten times” would perhaps be a more realistic goal to set! 


Even with regard to that diluted standard, I am sure I have fallen short.  Nonetheless, I am going to make a bold statement to begin this Early Look in earnest: investors, being human, are forgetful.  Believing what they want to – or are paid to – believe, many commentators are pointing out the differences between “this time” and “that time”.  While there are differences; it is 2011 now and it was 2008 then, the similarities are also striking.  This earnings season could very well shape up to be the period where similarities become glaringly obvious.


Last night AA officially started the 1Q11 earnings season with a miss on revenues and beat on earnings; investors’ attention is turning towards the balance of the earnings season.  StreetAccount reported last week, for the fourth straight time, that negative preannouncements had outnumbered positive updates over the prior seven days. 


The market has been notably resilient in the face of major geopolitical unrest, natural disasters, and a veritable tsunami of freshly-printed Greenbacks originating from the epicenter of Modern-Day Keynesian Dogma: Washington, D.C.   Despite this, and besides the greasing of the market coming from the Free Money Fed policies, the outlook for the S&P 500 merits caution, if not outright divestment. 


Currently, in the Hedgeye Asset Allocation model, Keith has maintained near a 0% allocation to US Equities in recent weeks (though is currently at 6%) and is short the S&P 500 in the Hedgeye Virtual Portfolio.  Downward revisions to GDP numbers on a global basis are being coupled by endemic inflation in commodity markets as the US Dollar is debauched.  Hedgeye has been vocal that this current period represents a pivotal process in the market where growth slowing and inflation accelerating is being felt by corporations, citizens, and even bureaucrats alike.  The cycle of corporate earnings is peaking.  Tops are processes, not points.


The tone AA set is important, with a market cap of $19 billion and a business model that is tethered to the global macroeconomic climate.  AA represents a prism through which we can attempt to view part of the global economy.  The issues AA faces go beyond this quarter as the stock remains 64% below the peak set on 7/16/07.  Importantly, from a top-line perspective, we think AA will not stand as an outlier this earnings season.


Despite the recent optimism, much of it grounded in reality (for a change), surrounding the improving job market and the solid top-line environment evident in corporate earnings, AA’s quarter could be just the beginning of a string of corporate earnings that call the sustainability of the current trend into question.   Consistent with the past few quarters, FX tailwinds and various types of productivity gains will likely allow many companies to meet earnings expectations. 


Having said this, it is worth noting that the deep cost-cutting measures that were made in the midst of the Great Recession have left the majority of companies, on balance, leaner and needing less revenue growth to leverage fixed costs.  Nonetheless, with expectations high and inflation accelerating, revenue growth remains a key focus of corporate management teams.  If such a scenario plays out this quarter, it would corroborate quite neatly with Hedgeye’s view that margins – at the level of the past few quarters – are set to roll over.


In my view, expectations have already begun to moderate under the threat to profit margins from surging commodity and raw material costs, along with the shocks to the global supply chain from the earthquake/tsunami in Japan.  Alcoa’s management team’s statements confirmed this, as it stated, “earnings were curbed by a weaker U.S. dollar and higher energy and raw-material costs”.


As we proceed through this earnings season, I would argue that it is important to recognize the signs of demand destruction that is going to result from inflation.  Gas prices, thus far, do not seem to have impacted consumer spending as meaningfully as one may have thought, given that prices at the pump over the past couple of months have steadily risen. Perhaps the consumer is somewhat accustomed to high food and energy costs, having been there before, or at least has faith that prices will come down, be it by Centrally-Planned or Divine means? 


In the US, consumer behavior has not been as affected, as immediately as it was during the last spike in gas prices.  However, signs are starting to manifest themselves that Americans are not impervious to the effects of inflation, even if the Chairman of the Fed is.  Darden Restaurants’ Inc. CEO Clarence Otis opined on his company’s most recent earnings call that gas prices were “having a dampening effect” on Darden’s business.  Other casual dining companies have since echoed Otis’ comments, predicting that the almost-certain-to-be higher gas prices during the upcoming summer months will result in demand destruction that will hurt their profitability via the top-line.  


The case for inflation-induced demand destruction is playing out in the UK today. UK retail sales dropped by 1.9% (on a same-store basis sales declined 3.5%) in March as accelerating inflation squeezed households’ spending power at the fastest rate in 60 years; the decline is the biggest drop since the series began in 1995.  


It is not late 2007/early 2008, it is 2011, but lest we be forgetful, this is the same country that it was three years ago.  Gas prices at this level will matter on the corporate bottom line and, if one listens to the early indications from executives such as Otis, they already matter a great deal.


The Faithfully Forgetful may point out other differences between 2008 and 2011.  Housing was more of an issue then, someone might say.  At Hedgeye, we would argue that the housing markets of 2008 and 2011 are eerily similar in that not enough attention is being paid to the fundamental strength, or lack thereof, in the housing sector.  As our Financials Team has reiterated for months on end, housing is set to decline sharply throughout 2011.  This call is no longer a prediction; it has been playing out for months now as Corelogic, Case-Shiller, and New Home Sales data continue to highlight softness in residential real estate.   As always, feel free to reach out to if you would like to see the detail of Hedgeye’s Housing Headwinds thesis.


Rather than pointing out the obvious differences, I believe it is the similarities between this market and that of three-and-a-half years ago that are far more interesting.  A market showing resilience in an upward trend is encouraging for investors and so it should be.  However, a market barely breaking stride in the face of tectonic shifts in global geopolitics and parabolic price action in commodity markets exhibits a detachment from reality and should not be comforting to investors.  Having blind faith in the appearance of resilience, and forgetting how the story may end and has ended before, could prove a costly mistake.


Function in disaster; finish in style,


Howard Penney


FORGETFULNESS - EL 4.12.11 gas pump


FORGETFULNESS - Virtual Portfolio

Charming Bears

This note was originally published at 8am on April 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I bear a charmed life.”

-William Shakespeare


How bearish are you? I know I’m bearish at a price, but I don’t think I am Bearish Enough. Some people on the Street might say they are bearish – but unless they run their own firm, I highly doubt they are bearishly positioned.


When I say Bearish Enough, I don’t mean whatever being “underweight” means. I mean having either 50-75% of your assets in cash and/or running with a net exposure of -20-30% net short. Those are not consensus positions. Neither, in most cases, are they allowed.


Does the market owe us a return? Do we have to chase yield? Or is this the biggest failure that hasn’t yet been realized by the institutionalization of our industry that’s coming down the pike – Too Big To Perform?


These are serious questions associated with a serious problem that has not been fixed alongside this +98% two-year inflation of the US stock market. When I started in the hedge fund business 12 years ago, the correlation of returns between funds was approximately 0.3-0.4. We made money in down markets (2000-2002). We didn’t whine. Since 2007, returns have reverted to the mutual fund industry’s 0.7-0.8. That’s a problem. It’s called over-supply.


In his illuminating interview with CNBC earlier this week, hedge fund pioneer Michael Steinhardt made this point in a way that only a man (without a boss) who has been in the hedge fund business since 1967 could - “it aint an elite business anymore.”


How charming…


No matter where you go this morning, there it is  - a massively understated correlation risk to global markets – the risk of everyone doing the same thing … at the same time…


Qualitatively, anyone who has managed real-time market risk prior to 2008 gets this. Quantitatively, for those of you who are new to this globally interconnected game of risk, here is some data to chew on this morning:

  1. Hedge fund net leverage in February 2011 hit its highest level since October 2007 (the last market top)
  2. Hedge fund net-long exposure to Commodities has eclipsed the prior 2007-2008 peak in 2011 (special thanks to The Bernank)
  3. Institutional Investor’s Bullish-to-Bearish weekly survey just tanked to one of its lowest Bearish readings ever

When we talk about ever, no matter whether it is in terms of leverage, asset class concentration, or net exposure, we think of ever as a very long time. I’m obviously in the business of getting paid by the industry, so I have no compensation incentive to walk you through this over-supply problem other than being right.


When I think about an investment and/or risk management idea (they aren’t the same things), my team’s baseline model has 3-factors: Supply, Demand, and Price (I learned that running a grass cutting business in Thunder Bay, not at Yale). Using that simple framework, this over-supply call and its related risks to market prices is a trivial one to grasp.


That said, as a practical matter, it’s not always easy to hedge this industry’s oversupply/correlation exposure in your portfolio. However, not having an easy answer to a big problem doesn’t mean that the underlying risk associated with that problem ceases to exist. Remember, the market doesn’t owe us anything. That’s why markets crash.


I’m not calling for a crash this morning, but I am explicitly flashing amber lights. I called for a correction and the heightening probability of a crash in mid-February – and I got both. The 6.5% correction came in US Equities. The crash came in Japan.


Now before you jump out of your screen at me on Japan – don’t worry, I get it - natural disasters aren’t things that you can “make calls” on. However, what you can do, from a risk management process perspective, is make calls on the increasing or decreasing probabilities that a person, company, or country is putting itself in to crash. Anyone want to be levered long of Charlie Sheen because he’s going up?


That’s been the slow moving train wreck associated with 1,000,000,000,000,000 YEN in Japanese sovereign debt (that’s what a quadrillion looks like in real-life). That’s Portugal this morning. That’s a debt-financed-deficit movie coming to an American theatre near you.


Everyone knows this now. That’s progress. Not everyone is allowed to be positioned for it. That’s risk.


I have a 27-factor Global Macro risk management model that dynamically re-weights for real-time market price, correlation, and volatility risks. I can show you the heat that’s associated with seeing what I see – it’s right here on my screen. If you want to shrug it off because you don’t understand it – that’s cool. I didn’t in Q2 of 2008 when I went to 96% cash. And I sure as heck won’t now. I started this firm so that I could be allowed to make these calls.


The most important question I need to ask myself on the way to my danger zone SP500 price level of 1342-1346, is why am I only in 43% cash today?


The last time I signaled this risk (February 14th, 2011), weekly sentiment on the Bear side of the II Bullish/Bearish survey had dropped -31% in a week to register a reading of 18% (in other words, only 18% of the pros in the survey admitted they were bearish in mid-February). Three weeks later, the SP500 lost -6.39% of its price inflation.


This week’s drop in weekly Bear sentiment (week-over-week) was -32%. Only 15.7% of the Bears are left. How charming…


My immediate-term support and resistance levels for oil are now $106.16 and $110.98, respectively. My immediate-term support and resistance levels for the SP500 are now 1325 and 1342, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Charming Bears - Chart of the Day


Charming Bears - Virtual Portfolio

CHART OF THE DAY: $4 Gas - How Could We Ever Forget?



CHART OF THE DAY: $4 Gas - How Could We Ever Forget? -  chart

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.