TODAY’S S&P 500 SET-UP - April 20, 2011


As we look at today’s set up for the S&P 500, the range is 25 points or -0.20% downside to 1310 and 1.70% upside to 1335.




THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: +1026 (+2908)  
  • VOLUME: NYSE 836.38 (-19.8%)
  • VIX:  15.83 -6.7% YTD PERFORMANCE: -4.45%
  • SPX PUT/CALL RATIO: 1.80 from 2.11 (-10.82%)



  • TED SPREAD: 21.291  22.305
  • 3-MONTH T-BILL YIELD: 0.06%
  • 10-Year: 3.39 from 3.40
  • YIELD CURVE: 2.71 from 2.71



  • 07:00a.m.: MBA Mortgage Applications, Apr 15, 5.3% actual
  • 10:00 a.m.: Existing Home Sales, est 5.0m, 4.88m prior



  • DoJ said to query market participants about how takeover of NYSE would affect competition in equity listings
  • Chi-X Global said to be in advanced talks with four banks, trading firms to sell minority stake: FT
  • Berkshire Partners in talks to buy Husky Injection Molding Systems in deal that could be worth up to $2b: Globe and Mail
  • EBay may announce as soon as today purchase of WHERE, service that lets mobile-phone users get info. on nearby businesses
  • AES agreed to buy DPL Inc. for $3.5b in cash, adding more than 500k customers in Ohio, AES said earlier today
  • Panasonic set to announce plans to move its North American HQ to Newark, New Jersey, later today




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Gold Exceeds $1,500 as Dollar Drops on Concern About U.S., European Debts
  • Sugar Exports From Thailand to Climb 36% as Yields Surge on La Nina Rains
  • Copper Rises as Dollar Weakens; Aluminum Reaches Highest Price Since 2008
  • Tepco's LNG Imports to Jump 50% as Japan Rewrites Policy: Energy Markets
  • Wheat Set for Longest Advance in Three Months on Dry Weather; Corn Climbs
  • Sugar Rises for Second Day as Brazil Supply May Be Delayed; Coffee Climbs
  • Cotton Farmers in China Fail to Boost Crop, Top Agency Says; Prices Climb
  • India May Ease Sugar, Wheat Export Bans Amid Predictions for Normal Rains
  • China Issues Emergency Notice to Curb Aluminum Projects Amid Overcapacity
  • Cotton Moving Average Signals 12% Drop, FCStone Says: Technical Analysis
  • Cut Diamonds Outpacing Gold Still `Grossly Undervalued': Chart of the Day
  • Rusal May Reach Agreement on $4 Billion Syndicated Loan as Early as May
  • Corn, Cotton Rallies May Weaken as U.S. Output Shifts, Deere's Allen Says
  • Hindalco, Sterlite Said to Have Doubled Copper Refining Fees After Quake 




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • European Stocks Rise as Peugeot, L’Oreal Sales Spur Confidence in Recovery
  • Bank of England Voted 6-3 to Hold Rate as Majority Highlighted ‘Downside’
  • Company Refinancing, Sovereign Debt Hurt European Recovery, Moody’s Says
  • Peugeot First-Quarter Sales Rise 10% on New Models, Emerging Market Demand
  • Vodafone May Consider IPO of Indian Joint Venture After 2011, Colao Says
  • ECB Raising Rates May Turn Into Mistake Weakening Euro, Standard Life Says
  • Cat Bonds Find Bottom After Quake Triggers Biggest Losses: Credit Markets
  • Long Bond Scrapped as Yield Gap Nears Widest Since January: Russia Credit
  • Farmers Get Rich as Wheat Trade Gives Deere Record Profit: Freight Markets
  • Yen, Dollar Decline as Stocks Gain; Euro Advances on Interest-Rate Outlook
  • Audi Targets ‘Suburban Mommies’ With Compact SUV Rivaling BMW’s X1 Model
  • Skyscraper Boom Reaches End as City of London Goes 'From Vanity to Sanity'







  • Asian Stocks Rise as U.S. Housing, Earnings Boost Confidence; BHP Advances
  • Li’s ‘Superman’ Status Tested in Hong Kong as Yuan IPO Meets Tepid Demand
  • China Mobile First-Quarter Profit Rises, Helped by Wireless Internet Usage
  • Thailand Raises Benchmark Interest Rate to 2.75% as Inflation Accelerates
  • Power Bonds Rally Before First Global Bond Offering of 2011: India Credit
  • China Issues Emergency Notice to Restrict Aluminum Projects; Prices Jump
  • Indonesian Millionaire Uno Sees More Buyouts as Conglomerates Sell Units
  • Vedanta May Use $1.5 Billion Cairn India Purchase as Hedge for Open Offer
  • Acer Declines to Lowest in Two Years After Cutting Forecast for Shipments
  • Tepco's LNG Imports to Jump 50% as Japan Rewrites Policy: Energy Markets
  • New York Loses to Shanghai as Toyoda, Ghosn Head to China’s Top Auto Show
  • Christchurch Banker Exodus After Quake is Aftershock For Property Market













Howard Penney

Managing Director


In preparation for IGT’s FQ2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from its FQ1 earnings release/call and subsequent conferences.




  • “Over the last few months is a return to stability in that wide area progressive business with some of these new brands helping us start to regain some floor share in that space.”
  • “But currently, we’re very focused on how do we reduce the reliance on the need for North American replacements, continue to grow the business globally, very focused on cash flow generation, as last year we paid down about $410 million of debt, and arguably what could be considered a pretty trough here. And we’re very focused on driving higher ROICs particularly on our game operations business.”
  • “Very focused on every dollar of R&D spend. I think we are probably going to be somewhere around $200 million a year in R&D spend. I don’t know if there is much opportunity to shrink that number. But we know there’s a lots of opportunity to make a better line of sight to every dollar that’s spent there so that we are focused on the greatest opportunities first, for driving value.”
  • “The strategy in our systems business now that, particularly if you look at the server-based technology, a lot of the efforts to this point could be characterized as working on the infrastructure, developing the infrastructure. We’re now shifting the focus to applications that can drive higher value for our customers.”
  • “And as it relates to driving higher ROICs, what you are going to notice is, we are doing a lot more standardization at the platform level so that when a game like Sex and the City, for example, runs its economic life and there’s a need to refresh that box on a floor, we no longer have to bring that box back into our facility and refurb it in some fashion or re-merchandize it. All of that can be done now in the field, very simply with a software download of the new game that you want to put on there. And that a little bezel that snaps off the top box and a new ones snaps on to kind of differentiate the two products from a point of sales standpoint. And we’ve done that throughout our game operations business, particularly in the segment that are the highest yielding, the mega-jackpots. So we eliminated the need to disrupt a casino operation when we are moving the equipment on and off the floor. And how this relates to higher ROIC is, if we are able to run new software across that platform, we will be able to extend its useful life on the floor and thus we’re going to be able to have a change in estimate around depreciable lives which will be very impactful at the gross margin.”
  • [Macau]“We are probably the number two position behind Aristocrat, which that market historically was served out of Australia. And a lot of the casinos are operated by the management teams that are out of Australia. So there is a maybe a natural bias to that product. And also the familiarity on the part of the consumers that play there. But I think, we are gradually getting better at it.”



  • “Fiscal year 2011 is expected to be lighter in new and expansion units versus last year or next year.”
  • “For the current fiscal year 2011, we are updating our earnings guidance to $0.79 to $0.87 per share, excluding the $0.03 per share from our lower tax rate in the first quarter, and the $0.01 gain on an investment sale.”
  • “We expect total R&D expenses for the full year to remain similar to fiscal 2010.”
  • “We expect to see SG&A stay about flat on a dollar basis, when compared to fiscal ‘10, as we invest in the people and processes necessary to take advantage of the expected industry turnaround and new business opportunities.”
  • “We also had a respectable quarter in our Gaming Operations business, and we continue to see stabilization yields with a return hopefully to more normal seasonal patterns.”
  • [Game Ops margin] “It’s going to be a little bit volatile, as it always has been, but I think what you’ve seen over time is the mix within there becomes less heavily weighted to jackpot bearing-type links, because naturally whenever you don’t have a jackpot, you’ve got an actually higher margin activity. And I think that’s a continual trend we see over time, but it’s still going to be a little lumpy, and probably interest rates, to the extent we experience volatility there, will move it around a little bit.”
  • “While the installed base isn’t expected to grow meaningfully this year, we have begun in earnest to replace some of our older participation games with new titles and platforms, a trend that should continue, and may accelerate.”
  • “We expect the tax rate to be 36% in each of the next three quarters or approximately 34% for the full year.”
  • “Additionally, there are more than 70 North American sbX and Tier 1 opportunities that we are working on.”
  • “The sense is from our travel customers, they’ve been fairly resilient in the downturn, continue to invest at a lower than normal, but steady rate. Some of our commercial regional customers are feeling more optimistic, feel more optimistic, but aren’t necessarily spending any more money and have a hard time giving us visibility to whether they will.”
  • [Fiscal Year guidance driver] “I think it’s all around product sales.”
  • [What’s in guidance?] “I think the Italy piece is. The Illinois, I think, we probably misspoke if we led you to believe that it had. I don’t believe there’s any Illinois in the guidance.”
  • “Our CapEx spend has been almost universally on the Games Operations business. So, I think it’s more reflective of just kind of that natural rate of CapEx that’s needed to churn those assets as necessary, and, of course, right now we’re trying to get our installed base upgraded to the newest technology so we can avail our own installed base of the latest and best games.”
  • “I would say that if you could take fierce and up it a little bit, that would be the U.S. marketplace. Konami has been doing very well over the last couple of quarters with some of their games, but we actually expect that. I mean, we actually move forward with this notion that we’re going to be in a competitive environment forevermore.”

CHART OF THE DAY: The Case of the Missing Stimulus


CHART OF THE DAY: The Case of the Missing Stimulus - Chart of the Day

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 80.43%
  • SHORT SIGNALS 78.34%

The Case of the Missing Stimulus

“The case has, in some respects, been not entirely devoid of interest."

-Sherlock Holmes


Sherlock Holmes is the fictional detective created by Scottish author and physician Sir Arthur Conan Doyle.   Doyle based the character of Sherlock Holmes on a number of prominent physicians of the late 1880s.  Indeed, criminal detective work certainly has parallels to a medical examination.  The role of the physician is to provide a diagnosis after thoroughly collecting information both from and about the patient.  Great investment research incorporates a similar process.


In our daily morning research process, each Sector Head provides relevant facts in our internal research meeting, which underscores our moves in the Virtual Portfolio that day (in combination with our quantitative models).  Quite often, which makes sense when you get enough”Type A”  Hedgeyes in a room, we have much broader discussions.  A few weeks back our Financials Sector Head Josh Steiner asked, effectively, whether the federal budget deficit could be narrowed by just reversing the stimulus.  That is, shouldn’t compares on stimulus spending get much easier, which would effectively narrow the deficit?  As usual, a great question.


To back up, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was passed by the 111th U.S. Congress in February 2009.   According to many reports, the act was nominally worth some $785 billion to the economy.  Roughly 1/3 of this came in the way of tax cuts, while almost 2/3s came in the way of increased government spending. 


The philosophical rationale for ARRA, according to our friends at Wikipedia, was as follows:


“The stimulus was intended to create jobs and promote investment and consumer spending during the recession. The rationale for the stimulus comes out of the Keynesian economic tradition that argues that government budget deficits should be used to cover the output gap created by the drop in consumer spending during a recession.”


Seems simple enough, even for a hockey head like myself. 


Interestingly, if we look at government spending in the 2008 – 2010 period we can actually see the impact of the stimulus act on government ledgers.  In fact, according to the U.S. federal government spent $2.98 trillion in 2008 and $3.59 trillion in 2010.  So, the net increase over this period was just over $600 billion, which roughly equates to the spending portion of The Stimulus.


In theory, Dear Watson, there then should then be a step down in spending as ARRA, or The Stimulus, winds down and begins to compare against itself. Interestingly, in 2011 federal government spending is actually expected to step up to $3.61 trillion!


The long run compounded annual growth rate of federal government spending from 1990 to 2007 is 4.47%.  If we apply this growth rate to the 2008 – 2011 period, 2011 normalized government spending on that basis would be $3.42 trillion, almost $200 billion less than what the government will actually spend and roughly one-third the size of ARRA, or The Stimulus. So, where did the stimulus go? Confused? I certainly am, but it seems that cutting government spending is not as simple as favorable compares against a “one-time” spending program.


But on to a more interesting case, that of today’s global macro investment outlook.  While Keith is enjoying Disney World with his two little risk managers, Jack and Callie, the Hedgeye Research Juggernaut continues to grind.  Three key data points to call out this morning are as follows:


1.  Europe – Overseas on the continent, equity indices are rallying hard this morning up almost 2% across the board with the FTSE and DAX leading the way.  Interestingly sovereign bond market are flashing a different signal as bond yields continue to rise in the PIIG nations and both Spain and Portugal are selling debt at much higher rates than even three weeks ago.


2.  Asia – Asian equity markets are also positive across the board, with China the clear negative divergence up only 27 basis points.  The noteworthy callout from Asia is the following report: “A senior Hong Kong monetary official told The Wall Street Journal on Tuesday that China's central bank is "actively considering" new rules that would make it easier to bring yuan funds raised offshore back onto the Chinese mainland.” This is positive for the long position we are holding in the Chinese Yuan in the Virtual Portfolio.


3.  Technology earnings – We are long the technology sector in the Virtual Portfolio via the etf XLK and are seeing serious fundamental support this morning from a number of key technology bell weathers.  In fact, Intel, IBM, Juniper Networks, and VMware all exceeded analyst expectations.  The results suggest that businesses are spending again. That said, IBM is trading lower as contract signings, an indicator of future demand, were less than expected.


Before I let you get back to your detective work this morning, I’ll leave you with one last quote from Sherlock Holmes:


“How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth?”




Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


The Case of the Missing Stimulus - Chart of the Day


The Case of the Missing Stimulus - Virtual Portfolio


Wynn blew out our Street high LV estimate even after normalizing hold %. Don’t expect the same results from the rest of the Strip though.



As we expected, Wynn started off 2011 with a bang – blowing away Street EBITDA estimates by 28% and exceeding our estimate by 10%.  The entire beat vs. our number was due to better Vegas results, which were driven by very high hold on the table side. Wynn Macau numbers fell slightly short of our Street high estimate due to what looks like higher junket commissions.  Overall, luck boosted Wynn’s Q1 result by $44MM on net revenue and $42MM on EBITDA.  [Wynn Vegas: $50MM revenue benefit and $35MM EBITDA benefit; Wynn Macau: $6MM revenue negative impact but a $7MM positive EBITDA impact]


Las Vegas

The upside in Vegas this quarter vs. our Street high estimate was mostly driven by high hold.  Net revenue of $395MM was 11% ahead of our estimate and adjusted property EBITDA of $132MM was 51% above our estimate.  If hold had been normal, we estimate that net revenues and EBITDA would have been $50MM and $35MM lower, respectively – still a terrific beat vs. Street at $74 million and even above our $87 million.

  • Net Casino revenues of $194MM came in 13% above our estimate
    • Table win was $32MM higher than we estimated, entirely due to high hold. Assuming a more normalized hold rate of 22.5%, table win would have been $50MM lower and EBITDA would have been about $35MM lower
    • Table drop increased 14% YoY – less than the 20% increase we estimated
    • Slot win was $1MM above our estimate.  Wynn has historically had one of the lowest win % on the Strip so we assume they adjusted their slot mix.  Slot handle grew 7% less than our 10% estimate.
    • Rebates on gross win increased to 19% of gross revenue vs. an average of 16% in 2010
  • Non-gaming revenues net of promotional allowances were 12% higher than our estimate
    • Room revenues were $8.6MM higher than we estimated driven by RevPAR that was 8% better than we estimated. Wynn chose to push rate ADR 18% while occupancy declined 2% YoY.
    • Promotional allowances fell to 25% of net casino revenues, down from a 2010 average of 33%
  • It appears that SG&A was flat YoY at $50MM in Las Vegas


Wynn Macau came up a little short of our estimate but still 4% ahead of Street EBITDA estimates. Wynn Macau’s net revenue was 1% below our estimate while EBITDA was 7% below our estimate. We believe that the majority of the EBITDA miss vs. our estimate was due to higher junket commissions.

  • Net casino revenue of $812MM was $7MM below our estimate
    • Gross VIP table win was $2MM below our estimate while net VIP table win of $553MM was $5.5MM below our estimate
      • Table volume of $29.3BN was $200MM below our estimate while hold of 2.69% was 1bps above our estimate.
      • Direct play was 10% for the quarter vs. our estimate of 11%, due to the introduction of new junket operators. We would expect the direct play share to fall a bit further for the balance of the year with the introduction of 20 more VIP tables.
      • The rebate rate was 82bps (vs. our estimate of 80bps) or 30.5% of hold %.
      • Had hold been normal at 2.85%, gross table win would have been $47MM higher and net revenues would have been $33MM better while EBITDA would have been $8MM higher. 
    • Mass table win was $1MM below our estimate
      • Table volume grew 29% YoY vs. our estimate of 50%. However, lower volume growth was offset by high hold.
      • Assuming 24% hold, revenues would have been negatively impacted by $27MM and EBITDA would have been $15MM lower
  • Non-gaming revenues net of promotional allowances was $2MM below our estimate due to slightly lower F&B revenues and slightly higher promotional allowances
  • We estimate junket commissions (in excess of rebate rates) were $17MM above our estimate
    • Our best guess is that the blended commission rate increased to 43.6% compared to 40.6% in 2010 and 42.2% in 2009.  We had estimated a blended commission rate of 41%.
    • We estimate that fixed costs were $94MM in the quarter – in-line with our estimate

Other stuff

  • Corporate came in $9.5MM lower than we estimated – down 50% sequentially and up 13% YoY


In preparation for PENN’s Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from its Q4 earnings call and subsequent conferences.




  • “The first half of the quarter I would say, was pretty challenging in terms of weather. The second half it’s been a lot better, and I think so when you average it all out it’s sort of in-line. But I think it’s going to be interesting to see what sort of the consumer holds for us in the next couple of months here, because looking forward you can sort of wave that away, that sort of rebound that we saw in the second half of the first quarter due to pent-up demand. We won’t have that excuse in the second quarter. And so we’re going to be interested to see where the consumer spending trends lie. So far so good in terms of what we’re seeing, at least as we end March. The fourth quarter – in terms of same-store sales – was the first quarter that we were up in terms of same store spending over the last three years. So hopefully that trend continues over the next four quarters.”
  • M Resorts
    • “Well, we pointed out earlier that the 28,000 slot machines that we have in our portfolio, in our footprint, and when we add in the capacity that we expect to bring from the three new greenfield projects plus the M Resort which again will consolidate probably in the – at the end of the second quarter this year. You’re talking about a 32% increase in slot machines and hopefully a similar or greater increase in profitability for us.”
    • “M Resort, basically kind of an old story, but we acquired all of the debt in October of 2010 for $230 million. We have reached an asset purchase agreement with the Marnell’s. We are really just waiting for regulatory approval from the state of Nevada. We’re getting indications that that will probably happen in June, maybe in May, and then obviously, we would go ahead and close out the facility at the time.”
    • “We’ve already booked, the M Resort only has 390 rooms. And we have already booked about 2000 room nights, and we’re only halfway through that marketing cycle. So I think, we are feeling, we are feeling pretty good about this acquisition and the return potential, subject to regulatory approval of course.”
  • Ohio
    • “It’s probably more likely than not at this point those VLTs are legalized at the tracks in Ohio.”
    • “There is going to be no smoking in Ohio.”
    • “We’re in a process right now where we think by April – we’ve got our construction permits filed with the state. They owe us a response by April, but obviously Ohio and Columbus has been a very difficult process to say the least.”
  • “ We generated free cash flow of $301 million last year. We think that number is going to rise to $340 million this year.”
  • “We are very focused on margins. This last year has been probably the single focus from an operations perspective on how we can improve our operating margins, and it has been a tough environment. Obviously, the economy is not exactly robust. But we’ve been able to do a nice job over the last year, and I think you’ll continue to see us make some progress in that area certainly going forward.”
  • “And then Perryville opened up in September. We basically planned to spend $98 million, we had spent roughly $86 million. The bulk of that will get spent as we finish up our billings from the construction folks down through the first quarter and maybe even a little bit into the second quarter.”
  •  “Kansas is in a race with Toledo right now to see who opens first. Kansas is about three weeks ahead of Toledo right now.”
  • “Our project CapEx spending is going to be approximately $340 million or $350 million in 2011.”
  • “As it stands today and I am not saying that our stock is overvalued by any stretch, but it’s not as compelling obviously as it would be if it was in the lows 20s. And I would point out, even back in ’08 from a debt perspective, we had roughly $1.2 billion available to us at the time. We could have purchased more, but Peter’s first and my first concern is let’s not be over leveraging ourselves, let’s make sure that the company is going to be viable and that we are not putting ourselves in a position like some of our competitors have done in the past where we’ve gone out and bought back a bunch of shares and then had to turn around and reissue them at a lower price. We find that to be rather counterproductive.”



  • “We’re seeing flat year-over-year kind of spending behaviors across most of our businesses. And our outlook for 2011 is more of the same. We are not seeing any downward trends that we saw maybe a year ago, that has stabilized. But we are not seeing any strength and any rebound in the consumer to any note. So we’re flat, we continue to expect it to be along those lines until we see the fundamentals of the macroeconomic conditions improve, which we haven’t seen yet and that’s how we’re thinking about 2011.”
  • “With regard to Lawrenceburg, we already expect competition coming in the Cincinnati market with Rock’s development. They are going to have their groundbreaking, I believe, later this week. And we expect late ‘12, early 2013, they are going to be opening. So we know ‘11 and ’12 are going to be the last two years where we’re not facing competition there. I think the land-based casino in Cincinnati will be more of a competitive threat to us than what River Downs may do or what may happen elsewhere in that market and we’re trying to manage that business with the expectation it will get smaller in 2013.”
  • “What we’re seeing out there in all these regional markets is a rational environment for promotional spending. We’re not seeing any of these markets that are having any of our competitors trying to capture share with increased marketing reinvestment.”
  • “Looking forward to next year, we’re expecting CapEx in the first quarter to be $108.4 million with new projects representing roughly $70.2 million and maintenance CapEx of roughly $26.9 million. And for the year – and then on top of that, is $11.3 million for the Hollywood – our expected contributions for the Hollywood Kansas Speedway. And for the year we’re looking at roughly $289 million in new projects, $88.5 million in maintenance CapEx, and $71.1 million for the Hollywood Kansas Speedway joint venture which totals up to $449.2 million.”
  • “Corporate expense [yearly run rate] is roughly $78 million.”
  • “And with regard to slot capital, I don’t think, Steve, much has changed in 2011 as we’ve thought about it in years past. It’s still about 60% of our total maintenance capital which gets us to refresh about one-seventh of the floor across the enterprise. So, nothing really has changed. We’re going to continue to keep our product fresh; and relative to our competitors, I’m very confident that we’re not going to be behind any slot product that’s out there in a competitive environment.”
  • [Casino Rama] “No, the contract formally ends in July. We’re in the process right now of negotiating an extension, which we think is going to be a bridge to the RFP process for complete new re-bid activity. But since we don’t yet have the contract or the extension formally signed and we haven’t finalized the terms, we’re basically not including that in our guidance at this time. Obviously when we give next quarter’s guidance if we’ve managed to nail this thing down, then obviously we’ll put it in because we’ll have a good handle on what the term is and what the fee structure is.”
  • [Back-end increase in 2011 depreciation guidance] “The full year impact from obviously there’s the M, there is also the Perryville, there’s the addition in Joliet, which just came online. We’ve also got full year impact from the Charles Town and Penn National."

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