6x EBITDA but what do you expect for a declining business?  Neutral to earnings but the cash position is building.


The sale of Barcrest to SGMS is only dilutive (by a penny) if one assumes that IGT just keeps the proceeds as cash.  Despite its recent struggles, IGT is really starting to accumulate cash and should be able to take out the convert next year or commence a large buyback – both would be very accretive.  By our math, IGT should generate around $300MM of excess cash per year.



Barcrest Sale Details

Purchase price:  $66MM; which includes $12M of receivables that are on extended payment terms.  The Barcrest business includes both sale and gaming operations.


Product sale impact:

  • In FY2010, 8,600 units were sold at an approximate unit price of $4k.  Margins on the for sale business are in the mid 30s%.  We estimate that in 2010, the for sale business generated $34MM of revenues and $12M of gross margin.  In FY2011 we estimate that unit sales will fall to just under 6,000 units and generate revenues of $24MM and gross margin of $8MM
  • The for-sale business has been declining for the last decade.  Before FY2003, IGT was selling over 30,000 units.  By FY09 the unit sales fell to 12,150 and continue to decline. 

 Gaming operations impact:

  • In FY2010, the install base of Barcrest units was roughly 8,000, earnings a daily yield of approx. $12.  All the Barcrest units are part of IGT’s leased install base. We estimate that gaming operation business generated revenues of $36MM in FY2010 and a gross margin of 70% or $25M
  • While the Barcrest install base has been declining, the declines are modest in nature so we assume that in FY11 gross margin contribution would have been about $24MM

 Impact on R&D, SG&A, and D&A:

  • Barcrest overhead is about $27-28MM in the form of SG&A and R&D and about $1MM of D&A

Forward multiple/ EBITDA:

  • We see EBITDA declining from $15MM in FY10 to about $11MM in FY11. Therefore, on current year EBITDA the multiple is ~6.0x


TODAY’S S&P 500 SET-UP - April 29, 2011

As we look at today’s set up for the S&P 500, the range is 34 points or -1.99% downside to 1333 and 0.51% upside to 1367.



The Financials remain the only sector broken on both TRADE and TREND.




THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: 691 (-141)  
  • VOLUME: NYSE 961.53 (+0.06%)
  • VIX:  14.37 -6.38% YTD PERFORMANCE: -19.04%
  • SPX PUT/CALL RATIO: 1.21 from 1.15 (+5.28%)



  • TED SPREAD: 22.25
  • 3-MONTH T-BILL YIELD: 0.06% -0.01%
  • 10-Year: 3.39 from 3.34
  • YIELD CURVE: 1.96 from 1.21 



  • 8:30 a.m.: Personal Income, est. 0.4%, prior 0.3%
  • 8:30 a.m.: Personal Spending, est. 0.5%, prior 0.7%
  • 8:40 a.m.: Fed’s Bullard to speak on community development in Virginia
  • 9:45 a.m.: Chicago Purchasing Manager, est. 68.2, prior 70.6
  • 9:55 a.m.: U Michigan Confidence, April final, est. 70.0, prior 69.6
  • 10 a.m.: NAPM-Milwaukee, est 63.0, prior 66.0
  • 12:30 p.m.: Bernanke speaks at Fed Community-Affairs Conference
  • 1 p.m.: Baker Hughes rig count, prior 1800



  • Russia Unexpectedly Raises Benchmark Interest Rate Quarter Point to 8.25%
  • PPC facing at least $500 million in higher feed costs this year
  • Berkshire Hathaway annual meeting this weekend




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Gold-Buying Central Banks May Signal Bullion Extending Record Price Rally
  • Copper Futures in Shanghai Heading for Second Monthly Loss on China Curbs
  • Gold Heads for Best Monthly Gain Since November 2009 on Inflation, Dollar
  • Crude Oil Falls From Highest in 31 Months; Heads for Eighth Monthly Gain
  • Coffee May Climb 40% on Brazil Frost Risk as Kraft, Smucker Raise Prices
  • India Said to Consider Freeing Urea Price to Reduce Spending on Subsidies
  • Corn Demand in China to Outstrip Supplies on Livestock Feed
  • Naphtha’s Rally Not Over as Japan, Korean Demand Rebounds: Energy Markets
  • Wheat Futures Gain  as Rains in U.S. May Have Come Too Late for Harvests
  • China May Face Power Shortages in Summer as Demand Beats Growth in Supply




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • U.K. markets closed for the Royal Wedding. Also closed Monday
  • Inflation Accelerates in Europe on Oil Surge as Business Confidence Wanes
  • European Stocks Are Little Changed; Yara, SSAB Rise on Earnings, YIT Sinks
  • Euro Zone April CPI 2.8% y/y vs 2.7% consensus
  • France Mar PPI +6.6% y/y vs. consensus +6.4%               







  • Asia stocks mixed as US economic growth slows
  • Yuan strengthens to post-’93 high against dollar as China fights inflation
  • Taiwan’s economy grows more-than-estimated 6.19%, adding pressure on rates
  • Japan was closed for Showa day.













Howard Penney

Managing Director

Gaming Policy

This note was originally published at 8am on April 26, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Conditions never persist. They change. Bureaucrats really hate that.”

-Jeffrey Tucker


That’s a quote from a book I read on my family vacation last week, “Bourbon for Breakfast – Living Outside of the Status Quo” (and, no I’m not taking up sipping on Canadian Club by the pool with my morning coffee). Nor do I aspire to ever be a professional politician in America.


Never mind understanding how the interconnectedness of the Global Macro market works, most professional politicians in America don’t get how a market works. Most of them still call this game of Big Government Intervention a “free market.”  I call that a joke.


The good news is that a lot of people get the joke. Gaming Policy is the new hedge fund game in town – so game or be gamed. There are  higher prices being paid (read: trading commissions) for “one-on-one” access to private meetings with DC bureaucrats than ever before. Sad, but true.


You don’t need inside information if you have a multi-factor, multi-duration, risk management process that flags real-time pricing of these “data points.” Anyone who has traded real-time risk capital in markets knows that someone always knows something…


We’ve titled one of our Q2 Global Macro Themes, “Indefinitely Dovish” (see yesterday’s Early Look) primarily because we think the market is pricing in Bernanke remaining dovish into and out of tomorrow’s FOMC meeting.


When we say “the market”, we mean the globally interconnected one – not just US stocks:

  1. Currency Market – the US Dollar Index is trading down again this week (for the 14th out of the last 18 weeks) and the Euro is making new highs by the day ($1.46 last) because, for the 1st time since Fed head Arthur Burns was attempting to monetize the US Debt and devalue the dollar (1970s), US monetary policy is more left leaning and dovish than even what the ex-Finance Minister of France is delivering. Jean-Claude Trichet’s comments overnight were explicitly hawkish: “it is extremely important to continue to solidly anchoring inflation expectations in a period which is marked  by uncertainties and turbulence.”
  2. Bond Market – global bond yields continue to push higher as Asian and European central bankers continue to back their rhetoric with rate hike action. Meanwhile, US Treasury yields are breaking down through our intermediate-term TREND support lines of 0.71% and 3.46% for 2-year and 10-year UST yields, respectively. Indefinitely Dovish in America is as dovish does…
  3. Commodity Market – higher-highs on rallies and higher-lows on corrections for Gold, Silver, and Oil. This is where the US Dollar Devaluation driven monetary inflation is – not in GDP growth oriented commodity pricing (copper, sugar, etc.). With the Saudis trying to talk down oil prices at these levels (calling them “uncomfortable” overnight), WTI crude oil sold off a whopping 50 cents.

And Equities, well – we’re right back to where we were in mid-February where Asian Equities (growth markets) are starting to negatively diverge versus US Equities (the Gaming Policy market). China, India, and Indonesia are rightly worrying about The Inflation that will be perpetuated by a US Currency Crash.


Have no fear however – The Bernank and Groupthink Geithner are here. They have the world’s back on this Currency Crash thing. Having never seen an oil price (including $150/barrel oil) that they thought was inflationary, we don’t think they’re about to start calling $113/oil inflationary now. While Bernanke will acknowledge rising commodity prices tomorrow, he’ll offset that hawkish shift with an incrementally dovish one on US growth.


In the Chart of The Day (attached), Darius Dale calls out how super duper the sell-side has become in leading The Bernank and The Groupthinker’s Washington boys to believe that US GDP Growth was going to be all good and fine in Q1 of 2011 – then not so much.


The good news here is that Gaming The Sellside is still one of the oldest and most profitable games in town. They haven’t learned much since missing US GDP Growth Slowing in Q2 of 2008.


If you are looking for leadership on the Currency Crash thing, the President of the United States had this to say over the weekend on gas prices:


“There’s no silver bullet that can bring down gas prices right away…”


Really? If The Bernank raised rates at tomorrow’s FOMC meeting, oil prices would break $100/barrel in a day.


We’d like to remind all of our friends and foes who are still beer-bonging the Keynesian Kool-Aid that there are 3 things that burning your currency at the stake with generational levels of leverage (debt) does to an economy:

  1. It perpetuates The Inflation priced in US Dollars
  2. It structurally impairs the sustainability of long-term economic growth
  3. It dares institutional investors to chase “yield”

No, we’re not saying that these conditions will persist as a perpetually preferred dividend for those of us who are long of The Inflation. Neither are we saying this will end well. What we are saying is that playing the game in front of us right now is the game of Gaming Policy – and, as sad a state of a “free market” as this is, when this game changes, it will change abruptly.


The bureaucrats are going to really hate having to deal with that.


My immediate-term support and resistance lines for the SP500 are now 1320 and 1341, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gaming Policy - Chart of the Day


Gaming Policy - Virtual Portfolio

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Cosi announced comparable restaurant sales for the first quarter and, while not a disaster by any means, it seems that March was a soft month for a number of companies I track.


COSI released comparable restaurant sales results for the first quarter today after the close.  Company-owned comparable restaurant sales grew 3% in the quarter.  The number was comprised of 1.5% price and 1.5% average check and implied two-year average trends of -0.7% or 40 basis points below 4Q.  This is a disappointment because, as the chart below illustrates, the last three quarters had brought sharp gains in the two-year trend for company owned restaurants’ comparable sales growth. 





During the 4Q10 earnings call on March 28th, management disclosed that company comparable store sales had grown 1.6% in January and 6.2% in February.  Assuming equal weights for each of the three months would imply March comps came in at roughly 1.2%, which is a disappointing number.  However, while the market may react negatively to this print tomorrow, I think there is one important caveat to keep in mind.  March of 2010 was the first month of the year where company comparable restaurant sales growth was positive. 


Clearly March of this year had a difficult comp.  If the company can produce a one-year comp better than -3.3% for 2Q, the two-year average trend for COSI’s company comps will turn positive.  With that in mind, March 2011 comparable sales being up 1.2% versus a positive March 2010 is not quite as bad as many may initially fear.  Thus far this earnings season, a number of companies including EAT and PFCB have reported soft March comps.


I believe the sales trends in 2Q11 have accelerated from the 1Q11 level.  


Howard Penney

Managing Director

Transitory Commodity Inflation?

This note was originally published April 28, 2011 at 15:09 in Macro


Yesterday in his press conference, Chairman Bernanke highlighted his belief that high commodity prices are simply transitory in nature.  He pegged the current rise in oil prices to both supply and demand.  On the supply side of the equation, he noted unrest in the Middle East as currently constraining oil production, which is fair point, especially given the sharp decline in Libyan production (normally ~1.8MM barrels per day).  On the demand side, he highlighted the continuing growth in demand from emerging markets.  Interestingly, he made no mention of monetary policy, or a weak dollar, in the role of commodity price inflation. 


In the chart below, we highlight the intraday move in oil, represented by WTI in this analysis.  At roughly 10:30 am, WTI sold off sharply based on a release from the Department of Energy that showed a much larger than expected build in crude inventories.   According to the report, inventories were up 1.7% week-over-week, which was just more than 6 million barrels.  On a year-over-year basis, the growth in inventories was roughly 1.5%.  Clearly, this negative supply data point surprised oil investors and WTI sold off accordingly.  Interestingly, two hours later, in conjunction with the release of the Federal Reserve’s statement, oil rallied and completely closed the gap on the prior sell-off related to the fundamental build in inventory.


Transitory Commodity Inflation? - wti intraday


This rally in oil following both the FOMC statement and Chairman Bernanke’s press conference is not surprising.  In the FOMC statement, the Fed noted that residential housing continues to have issues, while, in their view, “measures of underlying inflation continue to be somewhat low.”  Both of these points, allow Chairman Bernanke to remain Indefinitely Dovish.  Clearly, in the view of the Fed, tightening policy would adversely impact both the tepid recovery of the housing market and economy at large. 


In contrast to the Fed’s stance, many central bankers globally continue to either tighten or make hawkish statements.   In fact, the ECB has already raised interest rates once YTD.  Based on 2.7% inflation readings from the Eurozone in March, it is likely that the ECB again raises rates at their next meeting in July.  This is confirmed by Euribor futures and the European interbank rate, which are pricing in an increase in rates in the July / September time frame.  This continued widening in global interest rate spreads should further weaken the dollar, which will further support the price of inflationary commodities (oil, gold and silver). 


On our March 23, 2011 theme call, “What’s Next For Oil?”, we highlighted three key factors that will drive the price of oil.  A brief update on these factors is below:


  1. Geopolitical – In late March our key takeaway was that civil unrest was set to accelerate in the Middle East and it has done so.  Currently, the key hot spots are Libya, Egypt, Syria and Bahrain, with long term outcomes still difficult to determine.   Since the March call, this factor has become even more prevalent.
  2. Supply & Demand – In the United States, which consumes roughly 20% of the world’s oil production, demand is clearly starting to slow as indicated by the most recent data points from the Department of Energy, which showed a much larger than expected build in oil inventory.  Conversely, Chinese demand was up 11% year-over-year, which suggest continues strong growth of oil demand out of the world’s second largest consumer, albeit this was a (-300bps) slowdown from February.  Of our three factorss, this is the one that is marginally less positive from our long oil call on March 23rd.
  3. Monetary Policy – Based on Chairman Bernanke’s comments from yesterday, it seems unlikely that the Federal Reserve will raise rates over the intermediate term TREND.  In that period, it is likely that most other major economies raise rates at least once, if not more than once.  Thus global monetary policy will, over the course of the next few months, move even further away from U.S. monetary policy, which is negative for the U.S. dollar and positive of the inversely correlated price of oil.


In the chart below, we’ve highlighted our quantitative levels on oil, and it remains in a bullish formation.  This bullish formation was underscored by yesterday’s price action, which verified our view that the Fed’s dovish monetary policy continues to lag the world and lend support to higher oil prices.


In reality, commodity inflation is about as transitory as our Chairman Bernanke’s Keynesian economic policies. When they change, so too will the price of oil.


Daryl G. Jones

Managing Director


Transitory Commodity Inflation? - wti KM levels

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