Do You Believe?

“All money is a matter of belief.”

-George J.W. Goodman


If he was writing today, George Goodman would have thrived as an “economist” of The People. The competition in the land of Market Practitioner (money manager) turned Author is light. I think he would have crushed Paul Krugman, like a bug.


Best known for his writings under the pseudonym of “Adam Smith” when he first published one of the all-time greats on my bookshelf  “The Money Game” in 1968, Goodman went on to write “Supermoney” in 1972 and “Paper Money” in 1981. The similarities between the times of his writings (US Dollar Debauchery, US Debt Monetization, and Big Keynesianism) and today are glaring.


Let me re-state that – they are glaring to the non-willfully blind who would, of course, have to accept some level of responsibility in their recommendation. Much like history has forced Nixon, Carter, and their Fed Chief (Arthur Burns) to in the 1970s.


Do You Believe?


“Credit derives from the Latin, credere, “to believe.” Belief was there, the factories functioned, the farmers delivered their produce. The Central Bank kept the belief alive when it would not let even the government borrow further. But although the country functioned again, the savings were never restored, nor were the values of hard work that had accompanied the savings…” (Paper Money, 1981)


In that excerpt, Goodman was talking about The German Hyperinflation of 1923. Obviously a lot has changed since then, but the idea of the world’s largest man-made Money Printing Bazooka (ever) will be as alive as ever in the next 24 hours.


If you want to believe that the Swedes, Russians, and British aren’t already feeling the anticipated inflation associated with the centrally planned destruction of the Eurozone’s common currency, just go there… and ask them…


In the US, it’s already here. Only from the artist formerly known as an “economist” from The Goldman Sachs (NY Fed Head Bill Dudley) would you hear that talking up QG3 for a +9% one-day energy rip in the price of oil isn’t inflationary for those of us driving somewhere to eat something for our American Thanksgiving.


Thanking God’s Work for that…


Back to reality, what do The American People believe?


1.   US Consumer Confidence: after the biggest 21 day stock market and commodity inflation almost ever (which is a long time), US Consumer Confidence for the month of October plummeted yesterday to 39.8 versus the 46.4 reading when inflation toned down in September. To put that print in context, US Consumer Confidence in October of 2008 was 38.8! (see chart)


2.   US Institutional Sentiment: if there’s one certainty grounded in the Uncertainty of 2011, it’s that institutional investors are forced to suspend disbelief, often. BEFORE this 3-week, +13% inflation of the oil price, the II Bullish to Bearish Survey had a Bearish Spread of minus -12 points (bulls minus bears). AFTER the move, we have a Bullish Spread this morning of +2 points (40% Bulls versus 35.8% last week and 37.9% Bears versus 41% last week).


3.   Hedgeye’s Moves: we made the “Short Covering Opportunity” call on October the 4th and the “Shorting The SP500” call on October the 24th. Back-check, Fore-check, Time Stamped.


But never mind what we did when few wanted to pull the trigger … or what went on in Germany in 1923 … or in the USA in 1978. Those were lessons that history has offered to us – and our said leaders can ignore them at their own risk. The American Zeitgeist that no one can simplify is actually really simple – The People no longer believe that stock and commodity market inflations are good. Period.


Our 2011 Strategy: Growth Slowing. The Keynesian 2011 Strategy: More Policy.


The difference between our views and theirs is not that complicated. What is complicated is having The People believe in these ridiculous acronyms (TARP, EFSF, etc). So now, in the spirit of simplicity, the Obama Administration is mixing it up with ones that commoners and journalists alike can pronounce – like HARP (Home Affordable Refinance Program):


HARP is the next Policy Idea coming out of Washington that’s had the US Housing Index (ITB) trading with what The Bernank would call The Price Stability (ie +3% daily price moves in the stock market).


If you read into this Policy Idea, it’s effectively a short-term subsidy for losers, which will serve notice to the American Dreamers that their deadbeat neighbor can afford a shiny new car lease with his government handout. Or will they?


Our resident Financials and Housing gurus, Josh Steiner and Allison Kaptur, have boiled down the HARP 2.0 as follows:

  • It doesn’t really help consumers much at all
  • Consumers will be pressured into shortening the duration of the loan
  • Net-net, monthly payment flat when principle and interest is taken into account

OK. So what do you do with that?


The conservative, head down, American saver gets even more upset because every Policy Idea we come up with rewards leverage and losing. Meanwhile the policy itself doesn’t help the most delinquent Americans anyway!


Nice. Really nice. Can we get some more of that?


As the pretend American Capitalists of Adam Smith’s Invisible Hand spend the next 24 hours hoping and begging for the Heaviest Keynesian Hand offered to Global Markets ever, I’ll leave you with Goodman’s summary of what I think Americans Believe:


“… yet they had lost their self assurance, their feeling that they themselves could be the masters of their own lives if only they worked hard enough; and lost, too, were the old values of morals, ethics, and decency.” (Paper Money, 1981)


My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $$1, $88.62-93.67, 5, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Do You Believe? - Chart of the Day


Do You Believe? - Virtual Portfolio


The Macau Metro Monitor, October 26, 2011



PAC ON TO BE MACAU'S MAIN FERRY TERMINAL Macau Daily Times, Intelligence Macau

According to the Infrastructure Development Office (GDI), the new Taipa Ferry Terminal will be completed in 2Q 2013 and have a capacity of 15MM passengers a year.  It will be the territory’s main maritime border crossing, Chan Hon Kit added.  When asked if the Taipa temporary ferry terminal (Outer Harbor Ferry Terminal) would be totally destroyed, GDI coordinator Chan Hon Kit said, " The temporary Pac On facilities will be important for the future construction of the permanent terminal. The equipment will be used in the new infrastructure."  Chan Hon Kit added there is still no decision on the future role what will be of the Outer Harbour Ferry Terminal, whose control the government is set to take back in December 20. 


According to IM, the closure of the old ferry terminal would impact the Golden Dragon casino (SJM-owned), Fisherman's Wharf, and Sands Macao.  IM says if Sands Macao gets pinched, it will make a big dent in the parent's profits.



The cineplex includes nine 3D-capable screens and up to 1,000 seats.  It was also announced that Galaxy Square will open alongside UA Galaxy Cinemas on December 15.  The 2,100-square-metre square will have a 19-meter-high atrium that can accommodate a stage and red carpet events, giant-size LED walls, a broadcast studio and a covered limousine drop-off area at the main entrance.

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We are reminded every day how humbling this business can be.  For me, PNRA is the latest example. 


Consistent with the trends reported to date this earnings season, PNRA 3Q11 results and forward looking commentary are better-than-expected and driven by strong top line momentum.  The strong sales momentum is allowing the company to fight off accelerating inflation trends, leading to higher EPS guidance for both FY2011 and FY2012. PNRA reported 3Q EPS of $0.97, exceeding guidance of $0.92-$0.94 and our $0.94 estimate that matched consensus.


Panera is the sixth concept within the domestic QSR space to have reported same-store sales results for the third (calendar) quarter.  Of those, three (YUM) have reported negative comps and three have reported sequential decelerations in two-year average trends.  Company-operated café same store sales at Panera increased 6% in the third quarter including a strong 7.8% figure in the month of September.   The 3Q11 two-year number declined from 7.0% to 5.8%. 


The Company-owned comparable net bakery-cafe sales increase in 3Q11 was comprised of transaction growth of 2.6% and average check growth of 3.4%.  Importantly, the average check growth was comprised of price increases of approximately 2.5% and positive mix impact of approximately 0.9%.  The improvement in mix comes after two consecutive quarterly declines.


Restaurant level margins were up about 160 bps year-over-year despite food costs that were up 160 bps as PNRA gained leverage in nearly every other line item.  We see this trend ending in 4Q11, but that will also be functions of sales trends which seem to have strong momentum; for the first twenty-seven days of the fourth quarter, comparable bakery-café sales growth was +6.7% (shown in first chart, below).  Additionally, despite 50-100 basis points in anticipated operating margin deleveraging, the company raised its EPS target for 2011 to $4.63-$4.65. The company also initiated FY12 EPS growth of between 16% and 18% versus the midpoint of the FY11 range.


Putting it all together, PNRA continue to post results that are in the “Nirvana” quadrant of our sales versus margin chart.  Not many operators are posting positive same-store sales and expanding margins.  Our research has indicated that companies that do typically see their stock awarded a higher multiple by the street.  The earnings call is later this morning but we doubt there will be any significant news or data point that would lead to concern about the company’s performance in the near-term.


PNRA IN NIRVANA - pnra quadrant


PNRA IN NIRVANA - pnra pod 1



Howard Penney

Managing Director


Rory Green





TODAY’S S&P 500 SET-UP - October 26, 2011


This is what Bernanke and Dudley call The Price Stability!!


As we look at today’s set up for the S&P 500, the range is 32 points or -0.57% downside to 1222 and 2.03% upside to 1254. 












SENTIMENT - This morning’s II Survey is a big blow to the bulls as Bullish Sentiment pops from 35.8% to 40% and Bears drop to 37.9%, making the Spread Bullish by +2pts vs the -12pts to the Bear side in early October.

  • ADVANCE/DECLINE LINE: -1979 (-3970) 
  • VOLUME: NYSE 1008.45 (+8.75%)
  • VIX:  32.22 +10.12% YTD PERFORMANCE: +81.52%
  • SPX PUT/CALL RATIO: 1.94 from 2.24 (-13.38%)




  • TED SPREAD: 41.71
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.14 from 2.25    
  • YIELD CURVE: 1.88 from 1.95


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week Oct. 21
  • 8:30am: Durable Goods Orders, Sept., est. -1.0%, prior - 0.1%;
  • 10am: New Home Sales, Sept., est. up 1.7% to 300k, prior 295k
  • 10:30am: DoE inventories
  • 1pm: U.S. to sell $35b 5-year notes
  • 2pm: Bank of England’s Adam Posen speaks in New York
  • 5:15pm: Bank of Canada Gov. Carney speaks in NY


  • European leaders meet in Brussels today to discuss Greece’s second bailout, the recapitalization of banks, strengthening the EU440b ($612b) rescue fund
  • Nokia hosts conf. in London, unveils Lumia smart phones with Microsoft’s Windows OS
  • President Obama speaks on American Jobs Act at University of Colorado - Denver, 12:45pm
  • Democratic members of Congress hold news conference to call on supercommittee members to preserve Medicare, Medicaid and Social Security benefits, 1pm
  • Bullish sentiment increases to 40.0% from 35.8% in the latest US Investor's Intelligence poll; bearish sentiment decreases to 37.9% from 41.0% and those expecting a market correction decreases to 22.1% from 23.2%

COMMODITY/GROWTH EXPECTATION                                             


OIL – zoom; with the flick of a headline, Dudley’s role at the NY Fed is fulfilled, keeping the USD under pressure this week and Oil ripping US Consumption at exactly the wrong time (pre Halloween and Thanksgiving). The good news is that WTI is failing at its long-term TAIL of resistance ($93.89) this morning as the USD holds TREND and TAIL line support. Short Oil, buy the USD.





  • Thai PM Warns ‘50-50’ Chance Inner Bangkok May See Floods
  • Oil Contango’s End Sparked by Falling Stockpiles: Energy Markets
  • Gold Climbs to One-Month High as Europe Debt Woes Spur Demand
  • Floods Ruining 14% of Thai Rice Erases Global Glut: Commodities
  • Oil Trades Near 12-Week High as China Considers Economy Stimulus
  • ArcelorMittal Quits $5.1 Billion Peabody Bid for MacArthur
  • Agriculture Puts Surge After ETF Rises Most Since 2009: Options
  • Russia to Sell $4 Billion Rail Fleet to Billionaires: Freight
  • Copper Advances on Speculation China May Ease Monetary Policy
  • Freeport Declares Force Majeure on Indonesian Mine Strike
  • Jiangxi Copper Sees ‘Good’ China Demand on Building Projects
  • Corn, Soybean Imports by China Seen Surging in ‘Golden Age’
  • Copper Rises on Speculation of More Demand in China: LME Preview
  • Iron Ore Price Slides 7.2%, Biggest One-Day Drop Since 2009
  • Corn Gains as Imports Into China May Surge; Soybeans Advance
  • Goldman Sachs, JPMorgan Raise Stakes in London Metal Exchange
  • Cosan Gets No Respect as Barclays Sees Upgrade: Brazil Credit
  • Argentines Ditch Steak as Beef Beats Inflation: Chart of the Day








ITALY - Monster Pig Paper issuance by the Italians this morn, selling €8.5B 6-mth fiat with yield 3.53% vs 3.07% - ECB running out of bullets? The ECB has been supporting the Italian sovereign bond bid and its not working anymore – with yields rising like this, does the market have it wrong? We don’t think so. Italy has their guy running the ECB by next week – I’m sure the German people are just going to love that…






China’s 3Q job creation (+3.4 million QoQ; +6.8% YoY YTD; and 4.1% unemployment rate – flat sequentially) was rock solid and is supportive of our belief that the gov’t is actively supporting a rebalancing of the economy towards consumption growth. We don’t think it is sustainable if the EU and US slow incrementally from here, but it does quiet hard landing speculation for now.


Hong Kong exports (-3% YoY) are a very negative leading indicator for global demand. Went slightly negative in back in June ’08 and then decidedly so in Nov ’08.








The Hedgeye Macro Team

Howard Penney

Managing Director


In preparation for BYI's FQ1 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



YOUTUBE from FQ4 earnings call


“Our fiscal 2012 is a tale of two years with the first part of the year being more investing; in the second half, more harvesting.”

  • “We released the Pro Curve, the first of its kind gaming device with a curved LCD display.  All of our ALPHA 2 cabinets are equipped with the iDeck, another first for the industry.  We continue to develop exciting player-centric applications for iVIEW network and now we have acquired MacroView, a leader in mobile gaming applications”
  • “While opportunities in our systems business had been frustratingly slow to convert to revenue, we are now confident more than ever in the long-term outlook for this segment.”
  • “During the quarter, we fixed the interest rate on the entire term loan of our new facility through its maturity at approximately 2.07%.  For the foreseeable future, we anticipate continuing to allow the rate on the revolver, which amounted to approximately $219 million as of June 30, 2011, to float with LIBOR.”
  • “We also began shipping our Pro Curve this quarter, which contributed to our record ASP.  We are very happy with the success of our Pro Series cabinets; however, this success has come at a short term impact to our game sales margins”
  • [Systems] “We anticipate similar growth in maintenance revenues in fiscal 2012”
  • “We expect that our effective tax rate for fiscal 2012 will be between 36% and 37%.”
  • “Our replacement game sales grew by 18% since the fourth quarter of fiscal year 2010, the first meaningful increase in replacement sales in four quarters.  Approximately 77% of our domestic sales this quarter consisted of video, which exclude sales of our new Pro Curve.  Our Pro Series cabinets, which made up almost 50% of our worldwide shipments for the year and 72% in the current quarter, helped to drive our North America ship share for the quarter to around 19%.”
    • “Playboy Hot Zone was our top-selling domestic team this quarter. We sold 1,015 games in international markets.  We officially launched in Australia with almost 100 units.”
  • “Gaming operations had a record quarter in many different ways including overall revenue and our best revenue per day levels ever.  Our premium units increased by 7% during the quarter and by almost 20% during the year and we established a quarterly record in terms of revenue per unit. This was driven by the successes of Cash Spin, Vegas Hits and Cash Wizard.  There are over 500 Cash Wizard units in the field today.  With the release of Betty Boop and Money Vault during the third quarter of fiscal 2011, we are now seeing a steady increase in the number of WAP units, win per day, and overall revenue.”
  • “For the year, more than 80% of the systems revenue came from current customers.  About half of the major go-lives during the quarter were at relatively smaller sized casinos, a segment we are penetrating at an increasing pace now. We will be releasing SDS on Linux solution on the same SDS code base, providing smaller casinos with a platform choice, Windows and Linux.  Our systems market share in Macau in terms of slot machine connections has grown from 30% in 2009 to 64% in 2011.  In terms of the number of tables and our TableView system, our market share in Macau has grown from 7% to 33%.  I think it’s reasonable to expect that we can repeat that kind of performance in other international markets as well during the next couple of years.”
  • “Due to a seasonally low number of planned implementations and go-lives, our first quarter fiscal 2012 is expected to represent a slow start to the year in terms of systems revenues. However, in spite of the lower system revenue level in the first quarter we expect systems revenues to get back to a good growth mode this year”
  • “We positioned ourselves to be the leading U.S. company in the new Italian market with orders for over 5,000 machines which should start to generate long-term revenue for us by the end of this calendar year.”
  • “We were selected as the preferred systems provider for major Canadian provinces and expect the initial revenues from these Canadian systems to begin within six months and run for about three years thereafter.”
    • “We expected initial revenues from Canada system procurements to begin toward the end of this calendar year.  We still feel that way”
  • “We signed major new systems deals in Sun International to include iVIEW or iVIEW DM across 12,000 games: Caesars DM, Golden Nugget, Navajo Nation and others.”
  • “Financial guidance for 2012, we currently expect fully diluted earnings per share to exceed $2.15 a share and first quarter to exceed $0.40 a share… we’ve included things and we’ve talked about in our release that we do expect some contribution from Canada.  We do expect a contribution from Italy.  We expect contribution from Aqueduct; but we thought it prudent at this point to put in a minimum EPS target because the timing of those large projects have moved around a little bit over the last year and so we wanted to put out a number that we know we can exceed.”
  • “We would have roughly the 5,400 units that we’ve announced in Italy; an average cost of anywhere between $7,500 and $8,000; and then 50% of the Aqueduct units, so that’s roughly 2,250 units at about the same cost.”
  • “We do believe that SG&A will grow slightly YoY during the year.  If you look at the fourth quarter run rate that’s more in-line with what we might anticipate for the year.”
  • “At this point we’ve identified 10% to 12% cost reductions that we think we can get out of Pro Series over the next say 12 months or so and that will be gradual.  We’ve achieved some cost reductions already, but we’ve also had some royalty expense that hit this latest quarter.  So look for our margins to sort of steadily increase over the next three to five quarters and get back to reasonable as we enter fiscal fiscal 2013.”
  • “The largest impact in this quarter was the fact that more of our cabinets and our conversion kits were weighted towards royalty-based themes as opposed to non-royalty based themes.”
  • “Obviously in this kind of environment, we’re not assuming a strong replacement cycle this year at all, not much uptick at all in that.  We are assuming a little improvement in our ship share that we’ve shown the new Pro Series can do and we know our historical innovation and what we’re doing in game ops should allow us to regain some ship share.  We are assuming some improvement in gaming ops because of the great product offering we have as well as Italy and New York coming online.”
  • [iVIEW DM Margins]: “Well, in general we expect margin on that product to be in excess of 50%, and it sort of depends on volume purchases.  We’re also working aggressively on our cost for that product as we see volumes coming up.  But we do expect it to be sort of above most hardware margins but below our software margin.  Also keep in mind that we expect iVIEW DM to drive a whole lot more software application sales as well.  It is not just about the margin of DM alone.  That has a much higher potential to drive our other Elite Bonusing Suite and other bonusing kind of applications behind it”
  • “Well, first of all, we are pleased with the performance of our games in Australia, and right now we’re just in New South Wales.  By the end of this fiscal year, we expect to be in Victoria, so we’ll have the two largest markets of Australia covered.  So Australia requires a pretty big investment because of the technical complexity of the market, the size of the market.  We’ve also added a game development studio there for which we don’t yet have game content.  So it’s been an expensive market for us but one we’re excited about long-term. So look for us to continue to do better in Australia as the year progresses.”

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