Uncertainty: SP500 Levels, Refreshed

POSITION: Short Financials (XLF)


I accept Uncertainty in my risk management process. Period.


The only thing that I am certain about is where my risk management lines are and that they will change as price, volume, and volatility data does.


I’ve been saying there was a heightening probability of a market drawdown on Fed “expectations” day. That’s all risk management is – understanding which way the uncertainty is tilting and considering heightened or lowered probabilities.


While it looked like the SP500 had an immediate-term shot at making a lower low of 1108 today (when it was down 2% in a straight line post Bernanke not doing QE3), it obviously looks less likely now. That could change in 3 hours. So I’ll just wait and watch.


The long-term TAIL of resistance remains at 1256. Immediate-term TRADE resistance is now 1183. And immediate-term TRADE support moves up 2 points to 1110.


In the Hedgeye Portfolio, I covered our Italy short (EWI) this morning as Europe rallied “off the lows” into the close. That makes the LONG/SHORT positioning pretty much neutral with 10 LONGS and 10 SHORTS, for now…



Keith R. McCullough
Chief Executive Officer


Uncertainty: SP500 Levels, Refreshed - SPX

JCP: Shorting Again


Keith just re-shorted JCP in the Hedgeye virtual portfolio - again here on an up day managing near-term risk around a very high conviction TREND and TAIL short idea with Trade Support at $23.03. There is no change to our thesis on the name, only price.


Please contact  if you would like see our fundamental view on why there is a meaningful duration mismatch between the storytelling on the Street vs. economic reality.


JCP: Shorting Again - JCP Trade Trend 8 26 11



Two Schools of Thought

Conclusion: Call us dogmatic, but we continue to stand by our belief that currency debasement in the form of deficit spending, debt buildup, and Indefinitely Dovish monetary policy is not supportive of the long-term prosperity of America.


Ahead of the “free” world awaiting word of more Fed “stimulus” out of Jackson Hole, we thought we’d take the time to give you a brief glimpse at what sober and proactive monetary policy looks like.


During three hours of questioning today, Reserve Bank of Australia governor Glenn Stevens had the following to say regarding the RBA’s current monetary policy stance: 

  • “In terms of macroeconomic ammunition, there would be not that many countries who could say they had more than us in the event of a really big episode.”
  •  “If we did see a very dramatic change for the worse in the global economy, certainly we have plenty of interest rates to play with if need be.”
  •  “Our banks are strong, our currency is sound and our sovereign credit position is in the international top tier.”
  • “If we are entering another period of weaker international conditions, this is a pretty good starting point from which to do so.”
  •  “Consumer ‘caution’, while making life hard for the retail sector, is also building resilience in household balance sheets.” 

Australia, which has the developed world’s highest benchmark interest rates at 4.75% (nominal) and 1.15% (real) and is on track to deliver a fiscal surplus in the upcoming fiscal year, has a lot of ammunition left indeed should it need to react to a potential European banking crisis or a prolonged period of slow global growth. Contrast that with the U.S., where both the Fed and Congress are running out of bullets and the last shot fired (QE2) largely resulted in Sticky Stagflation as a result of higher commodity prices.


Two Schools of Thought - 1


Another thought: rather than do all that he can to entice overleveraged Australian consumers (155% of disposable income vs. 133% for U.S. households prior to the financial crisis) to re-lever, Stevens is welcoming and respecting the move up in Australia’s household savings rate, which accelerated to 11.5% in 1Q. This is in stark contrast to the Fed’s official policy stance, which, for the last 3-plus years has been trying aggressively to suspend the gravity that accompanies both the economic cycle and structural changes in the economy.


It’s no secret that we’re fundamentally opposed to Keynesian monetary and fiscal policy. And as the global economy continues to slow, we think the number of people willing to evaluate U.S. monetary and fiscal policy for what it truly is will grow. Whether Republican presidential candidate Rick Perry teams up with Dallas Fed President Richard Fisher and gives the U.S. a Ronald Reagan/Paul Volcker-like shock in 2013 is something we don’t have any edge on at the current moment. It is, however, the biggest risk to anyone buying “cheap” U.S. equities for the “long term” because Heli-Ben told them too.


Darius Dale


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ASP’s have been stable despite historically weak demand.



Over the last 5 years, average selling prices (ASP’s) for slots have increased at a healthy clip.  Since 2007, ASP’s for the 4 public suppliers increased 22%. Over the last year though, we’ve seen ASP growth decelerate to about 3%. 


SLOT ASP’S STILL STRONG - slot supplier


The industry also experienced some dramatic shifts in wallet share since 2007 among the ‘Public 4’.   WMS’s wallet share jumped 15% from 19% in 2007 to 34% in 2010 at the expense of BYI, IGT and to a smaller extent, ALL.  During the first half of 2011 we saw some reversal of this trend as WMS was the biggest wallet share donor – losing 3% YoY mostly to BYI and IGT, who each garnered 2% more of operator wallet share.


Despite the big moves down in their stocks following calendar Q2 earnings releases, both WMS and BYI increased their wallet shares this past quarter.  Consistent with our replacement demand analysis, the pricing picture does not seem as dire as the recent stock price performance suggests.




The slot picture is not as ugly as many believe.



Replacement demand is growing nicely.  The problem is that the industry is in a bad stretch for new casinos and expansions.  Next year, the two start to grow at the same time.  Is this the beginning of the long awaited growth phase for slot suppliers?


Now that the numbers for Aristocrat are out, we know how many units and dollars the “big five” manufacturers reaped from this ‘challenged’ market in the first half of 2011.  We estimate these suppliers represent about 95% of total North American slot sales.


Approximately 34k new slots were sold in 1H11, a 3% increase from 1H10.  The vast majority of new slot sales came in the form of replacements – which we estimate accounted for 84% or 28.6k of total slot sales compared to 77% of total slot sales in 1H10.  Replacements increased 13% YoY while sales of new and expansion slots declined 31% YoY.  Based on our research, replacement shipments bottomed out in 2008 at 38k units and have been increasing ever since.  Unfortunately, any growth in replacements has been offset by the absence of new market growth and lack of expansions.  That should change in 2012. 





In the first half of 2011, Konami and IGT gained market share YoY.  BYI’s share market share remained flat YoY, while WMS lost 4 percentage points of share YoY and ALL’s share fell 1% YoY. For 2Q11, BYI, IGT and Konami gained share YoY while ALL and WMS lost share YoY.

  • IGT:  2Q ship share of 28% and 29% in 1H11, compared to 28% and 27% for the same periods in 2010 and better than full year 2010 share of 27%
  • WMS:  2Q ship share of 25% and 23% in 1H11, down from 28% and 26% for the same periods in 2010 and full year 2010 share of 25%.  We believe WMS overshot for a couple of quarters but share around 25% is probably reasonable going forward
  • BYI:  2Q ship share of 18% up from to 17% in 2Q10. 1H11 ship share increased 1% to 15%. 2010 ship share was 15%.  With its new platform, BYI should stabilize in the high teens
  • Konami:  2Q ship share of 9% and 15% in 1H11, up from to 8% and 12% figures for the same periods in 2010. Konami’s 2010 ship share was 13%.
  • ALL:  1H11 market share declined 1% YoY to 11% 





Notable macro data points, news items, and price action pertaining to the restaurant space.




SAFM reported a disastrous quarter yesterday and the stock was only down 2.3% on accelerating volume studies (+117%).  The short interest at 30% is the highest in the group and is a RED flag not to be short.  We are looking to pick our spots on the long side.






The FSR names significantly underperformed yesterday.  I believe that the underperformance is due to a rumor in the market that the “KNAPP” numbers for August are looking ugly. 


EAT, DRI and TXRH are the notable standouts from yesterday’s performance






  • KKD Q2 SSS: Company-owned +2.5% vs consensus +3.5% and domestic franchise +6.3% vs consensus +4.5%
  • YUM - Taco Bell chief marketing officer David Ovens has resigned for personal reasons after four years.




  • CBRL - As pointed out by Jonathan Maze at the Restaurant Finance Monitor Biglari Holdings owns the website domain name "" (BH registered the domain back in July.) 
  • “This is a key element in the Biglari Corporate Takeover Playbook. When the San Antonio investor tried to win seats on the board at Friendly's, he started a website called "" That effort resulted in the chain's sale to Sun Capital Partners. He did so again when he tried to win board seats at Steak N Shake (—an effort that won him seats on the company's board and ultimately its chairmanship, from which he turned the chain into a hedge fund-style investment vehicle. A group of copycats last year did the same thing in an effort to win board seats at Denny's. That effort failed. The investors use the websites to help fuel a broad media blitz against the company. The sites are filled with numerous press releases and other information that is laced with hyperbole. Biglari has also employed billboards outside corporate headquarters in his proxy fights. (For now, at least, there is nothing on the site.)”





Howard Penney

Managing Director



Rory Green


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