• run with the bulls

    get your first month

    of hedgeye free


Self Indulgence

“The crisis, he came to believe, was a consequence of the self indulgence of the older generation.”

-Niall Ferguson (High Financier, page 64)


That’s what Siegmund Warburg thought about European governments coming out of the 1920s. I wonder what he’d think about them now? Top 3 headlines on Bloomberg this morning: 1. Olympus (massive Japanese corporate fraud), 2. Berlusconi (budget vote on the Italian Job) and 3. Cain (to grope or not to grope, remains the question).


Alleged or not, there is a pattern here. Self Indulgence by 21st century central planners is really wearing on The People. When I write about Old Wall Street, I don’t mean old people – I mean the mentality, opacity, and process that is what these conflicted people do. Governments, banks, and their legacy media “contacts” are all intertwined like never before. The People get that too.


Good News: Wall Street 2.0 is going to change that. The truth is very difficult to hide on Twitter. How else would sources with no real names be building higher levels of credibility than both heads of state and the manic media correspondents who are tasked with being “connected” with them? Change is good.


Back to the Global Macro Grind


On October 4th(at the US stock market’s 2011 bottom), Harvard’s Ken Rogoff wrote an Op-Ed in the Financial Times titled “Debt, Deficits, and Deadlock: Welcome to 2012.” While I think Rogoff’s “This Time Is Different” is one of the most important empirical works in recent economic history, in the belly of his article he made a statement that blew my mind:


“…it is absurd to be worrying excessively about a 1970s stagflation.”


Notwithstanding the inflammatory wording of the statement, given the data that’s emerged in both recent history (and across the longest of long-term data in his book) that piling-debt-upon-debt-upon-debt with fiat currencies produces inflation, I have no other choice this morning than to highlight something many of these academics have a hard time dealing with – real-time market prices.

  1. Brent Oil prices are pushing back toward $115 (ie up +15% from the time of Rogoff’s article)
  2. WTIC Oil prices are pushing back above our long-term TAIL line of $93.88/barrel to $96.12 (up +23% since October 1st)
  3. Gold is moving back into a Bullish Formation (bullish TRADE, TREND, and TAIL), up +10% since early October

At the same time, European economic data continues to show classic signals of Stagflation (Slowing Growth, Accelerating Inflation):

  1. British Retail Sales drop -0.6% y/y in October (a 4 month low) as British GDP is tracking at 0.5% y/y w/ +5.2% inflation
  2. France’s Services PMI report dropped to a rock bottom 44.6 in OCT, signaling a recession in French Consumption Growth
  3. Italy’s inflation for OCT was +3.8% (vs +3.6% in SEP) as unemployment hit a new highs and GDP growth is signaling recession

Never mind the “absurdity about worrying about stagflation”, if oil prices remain near generational highs (using the 2008 all-time peaks is not what a long-term investor should be normalizing), there is a very high probability that Western Europe is entering an intermediate-term period of negative GDP growth and accelerating inflation growth (ie Stagflation).


Before the Keynesians hit the roof on these calculations (accepting responsibility for their policy recommendations? how absurd!), let’s bring in another market practitioner’s view. In his most recent monthly note titled “Pennies from Heaven”, Bill Gross asks a very simple question: “Can you solve a debt crisis by creating more debt?”


Of course not.


Why? Because, as Reinhart & Rogoff empirically prove in “This Time Is Different”, once a country crosses the proverbial Rubicon of 90% debt-to-GDP (Japan, USA, Italy, etc), creating more debt structurally impairs/slows whatever economic growth that was left.


So, as we worry about the worries of the day – the crises that politicians have created so that they can now save us from the “depression” of it all – remember that the US Treasury market has had this right all year long. Growth Slowing is structural. And, as a result, I’ll Self Indulge and ask Mr. Rogoff why it is so “absurd” to be “worrying” about these very probable Global Macro risks?


My immediate-term support and resistance ranges for Gold (Bullish Formation), Oil (Bullish Formation), German DAX (bullish TRADE; bearish TREND) and the SP500 (bullish TREND; bearish TAIL) are now $1, $93.88-96.28, 5, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Self Indulgence - Chart of the Day


Self Indulgence - Virtual Portfolio


McDonald’s will announce October sales before the market open on 11/8. 


McDonald’s reported stronger-than-expected sales and EPS for 3Q which has given the stock a boost.  September sales were especially strong, with global comps coming in at +6.6% versus expectations of +3.9%.  APMEA was the largest upside surprise, with comps at +6.9% versus consensus at +2.7%.  Europe printed the same number, versus the Street at +3.3%.  The US came in at +5% versus expectations of 4.1%. 


During the third quarter earnings call management struck a positive tone and gave October-to-date global comps, as of 10/21, of between +4% and +5%.  Consensus seems to be clinging to the low end of that range at 4.1%, according to Consensus Metrix.  Judging by the Consensus Metrix data, the consensus numbers of 3.42% and 4.27% for Europe and APMEA, respectively, imply a sequential decline in two year average trends in October.  While Europe was helped in September by a calendar shift related to Ramadan which alone may make a sequential decline two-year average trends more likely, the turmoil in Europe is also a concern.  Also a concern is slowing growth in Asia, which could negatively impact APMEA comps.  However, growth was slowing in September as well and MCD posted an impressive +6.9% comp that month.  Growth in important APMEA markets such as China and Australia has been trending lower throughout the year.  We believe there could be upside risk to the consensus figures in those two divisions.


Compared to October 2010, October 2011 had one less Friday and one additional Monday.  As a result, we would expect a negative calendar shift.  In January 2011, when there was the same calendar shift versus January 2010, the impact was between -1.3% to -0.4% varying by area of the world.  For the purposes of this post we are assuming that the same calendar shift occurred in October 2011.


Below we go through our take on what numbers will be received by investors as good, bad, and neutral, for MCD comps by region.  For comparison purposes, I have adjusted for historical calendar and trading day impacts and make the aforementioned assumption for October 2011’s calendar shift.



U.S.: facing a compare of 5.6% (including a calendar shift which impacted results by -0.2% to +1.2%, varying by area of the world). 


GOOD: A print above 4.5% would be considered a good result, as it would imply a sequential acceleration in two-year average trends in October.  Following what was a strong month in September, a further acceleration would be a good indication for the strength of the domestic business.


NEUTRAL: A number between 3.5% and 4.5% would be considered neutral given that, on a calendar-adjusted basis, the midpoint of the range would imply trends that are roughly in line with September.  We are holding the domestic business to a high standard because we believe that investors are expecting MCD to continue to take share in the U.S.


BAD: A number below 3.5% would imply a sequential deceleration in two-year average trends which would be received as a bad result by investors.  Given the high standard MCD has set, a deceleration – especially after the 10/21 guidance of 4-5% global comps – would be a disappointment.





Europe: facing a difficult compare of 5.8% (including a calendar shift which impacted results by -0.2% to +1.2%, varying by area of the world). 


GOOD: A print of 4% or higher would be received as a good result by investors because, while it could imply a sequential deceleration in two-year average trends, two-year average trends would still be in line with the year-to-date average and far in excess of the poor trends in August (albeit impacted by Ramadan shift). 


NEUTRAL: A number between 3% and 4% would be interpreted as a neutral result by investors, as two-year trends would have deteriorated somewhat on a sequential basis but would still be roughly level with year-to-date trends on a calendar-adjusted two-year average basis. 


BAD: Below 3% would be received as a bad print from a headline perspective; any comp below 3% is low for MCD Europe.  August was a case of an unfavorable Ramadan-related calendar shift impacting traffic but a repeat in October could lessen investor confidence.



APMEA: facing a compare of 5.3% (including a calendar shift which impacted results by -0.2% to +1.2%, varying by area of the world). 


GOOD: A print of more than 5.5% would be received as a good result by investors.  While this result would imply a sequential decline in two-year average trends, the absolute level would be above the year-to-date average calendar-adjusted two-year average trend.  Growth has been slowing in important APMEA countries and this has been reflected in APMEA comps, therefore we feel that a calendar-adjusted two-year average trend between 5.5% and 6% (which a 5.5% print would imply) would be received well by investors.


NEUTRAL:  A result of 4.5% to 5.5% would be received as neutral by investors.


BAD: A print of less than 4.5% would be interpreted as a bad result by investors as it would imply a strong decline in two-year average trends.



Howard Penney

Managing Director


Rory Green




Difficult to find the silver lining in this quarter


“We already are realizing tangible benefits from our recent restructuring and realignment actions, which we expect will lead to a resumption of quarterly sequential financial growth in the December 2011 quarter and through the remainder of fiscal 2012.”


Brian R. Gamache, Chairman and Chief Executive Officer




  • Increased the BBxD margin by 27% YoY. Anticipate a stronger product sales margin in 2H12 vs. 1H12.
  • 45% complete with capex initiative to transition their participation base to BB2 from BB1 
  • Expect that most of their gaming operations placements will be replacement units and that growth will not resume to gaming operations until 2H12
  • Enhancement from performance on portal units continues to be very encouraging
  • Continue to see growth opportunities in international markets


  • Product approvals have been slower than they expected which is why the quarter is worse than they expected
  • They will not cut R&D
  • Going forward, you'll see their margins get back to 53-55%
  • Mexico receivables write-down
    • At the end of August there was a fire in Monterrey which spurred the government to look into shutting down casinos that were not completely on the up, given safety issues. So they decided to take some writedowns. Most of their customers are international customers with good credit. They're not giving up on getting their machines back but thought it was prudent to take reserves
  • Gaming operations - games have been out there for a long time which have led to a big drop off in performance and the lack of new product has really hurt them and caused a drop off in performance of average revenue per day.  Won't look for any improvements in Q2 but should see an increase in win per day and install base.
  • Balance buybacks with growth opportunities (M&A included)
  • They are very excited about the backlog of their participation games
  • Shipped games to Penn's Kansas Speedway, Kansas Star, and Miami Jai-Lai.  Also shipped into a lot of expansions. Think that their ship share was 20% at Penn and the other 2 were just below that.
  • 2011 operating margin improvement off of clean margins - backing out impairments. 
  • 18-20% ship-share this quarter - which is about where they thought they would be
  • They are taking a very conservative approach to their guidance.  Think that they have marked their inflection point 
  • How much did the elevated sale of conversion kit sales help their game sales margins?
    • 50% came from higher conversion revenue and 50% from lower costs on BBxD
    • There were no price increases in the quarter but they did have some special promotions on conversion kits in the quarter
  • Declines in gaming operations? 
    • Q2 is always a challenge. Would look for some stabilization in Q2 
  • Revenue from portal applications is still very small, despite doubling the number of units out there from Q4 to Q1. 
  • Gaming operations is still more competitive than it used to be
  • The increase that they are expecting in gaming operations install base is sequential not necessarily YoY.  They would be disappointed if they didn't make some YoY progress.



  • WMS's $0.07 EPS number includes $0.17 of one-time items - so $0.24 is the "clean" number
    • "Pre-tax impairment and restructuring charges of $9.7 million, or $0.12 per diluted share, primarily for separation-related costs and charges related to the decision to close two facilities"
    • "Non-cash, pre-tax charges of $4.3 million, or $0.05 per diluted share, to write down receivables following government enforcement actions at certain casinos in Mexico"
  • “First quarter results reflect initial cost savings from these actions and we believe we are firmly on track to reduce annual operating costs by an expected $20 million." 
  • "We’ve now received at least one jurisdictional approval for all of the participation products that were originally expected to be commercialized in fiscal 2011. During the next several months, we expect additional approvals for these innovative products, and we expect a return to a more consistent pace of approvals for other new products beginning in calendar 2012."
  • "With our focus on capturing near-term revenue opportunities and an expanding flow of new products being commercialized, we anticipate building on the expected quarterly sequential improvement in December 2011 quarter’s operating results with further quarterly sequential revenue and margin improvement in the second half of this fiscal year that will also reflect a resumption of year-over-year revenue and margin growth in the March 2012 and June 2012 quarters"
  • Recent Operational and Strategic Achievements:

    • "Initial jurisdiction approvals received for five participation games: THE WIZARD OF OZ, Journey to Oz, BATTLESHIP, Leprechaun’s Gold, Pirate Battle and MONOPOLY Party Train games."
    • "Initial jurisdiction approvals received on more than 30 new for-sale games... including new G+ Deluxe and Innovation series of games – Colossal Reels, Invaders! 5X4 and Reel Boost themes."
    • "First three Portal application themes – Jackpot Explosion, Piggy Bankin and Peng Wins themes – now installed on a total of more than 480 gaming machines at 27 North American casino properties including trials, and a total of 700 gaming machines networked with WAGE-NET Remote Configuration and Download functionality, along with two recently completed installations of the WAGE-NET system with Remote Configuration and Download functionality at two international casinos."
    • "Extended the distribution agreement with our Australian distributor, eBet Limited, on a new five-year rolling basis and added the potential to expand into new territories including Queensland and Victoria, in addition to New South Wales."
    • "Selected by Alberta...  to participate in their VLT replacement initiative for the province."
    • Partners with Caesar’s ... for introduction of...  participation game expected to launch in mid-calendar 2012."
    • "Amended and expanded our revolving credit facility to $400 million, with a $100 million accordion feature, for a five-year term with lower spreads on interest rates and commitment fees and more flexible financial and non-financial covenants"
  • New unit sales: 3,918; ASP: $16,574; 51% GM
    • US & Canada: 2,530 (1,600 replacement)
    • International" 1,388 (35% of total shipments)
    • "Reflecting in part the previously anticipated impact from customers’ delayed capital spend in the September quarter pending their opportunity to see WMS’ newest products at the G2E industry trade show, as the show’s timing changed from the middle of November to early October this year"
    • BBxD: 32% of global new shipments; mechanical spinning reel: 16% of new units sales
  • "Other product sales revenues declined to $22.2 million...reflecting lower revenue of used gaming machines, mostly offset by higher conversion kit revenues. Approximately 2,500 used gaming machines were sold in the September 2011 quarter at lower average prices, including a higher number of used competitor units.. while we recorded revenue on approximately 5,500 conversion kits in the September 2011"

  • Gaming operations install base: 9,562 and Average revenue per day: $71.70
    • "The declines in the average and period-end installed base and average revenue per day primarily reflect the previously discussed lack of new participation products." 
  • "The product sales gross margin increase relates to progress with continuous improvement efforts to reduce costs on the Bluebird2 and Bluebird xD cabinets and higher revenues from higher-margin conversion kit sales partially offset by the impact from a lower volume of new unit sales and the lower margin achieved on sales of used gaming machines."
  • "Gaming operations gross margin was 79.1% in the September 2011 quarter compared with 81.0% in the year-ago quarter primarily reflecting higher licensing royalty expense and costs related to the start-up of our new operations launched in fiscal 2011"
  • "Notwithstanding the expectation for second-half growth assumptions...WMS now expects fiscal 2012 annual revenue to be modestly below the fiscal 2011 level, while operating margin is expected to improve year over year. WMS continues to expect that growth in the second-half of fiscal year will be driven by its improvement initiatives, modest growth in WMS’ gaming operations business and the expected improvement in new unit demand related to new casino openings and expansions in calendar 2012."
    • No incremental revenue from IL, Ohio or Italy
    • Assumes limited, if any, improvement in the industry replacement cycle in calendar 2012. 
    • R&D spending: approximate 13% of total annual revenues. 
    • "Quarterly revenues and operating margin are anticipated to be lowest in the September 2011 quarter and increase in each subsequent quarter with the highest revenue levels and operating margin in the June 2012 quarter." 

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


In preparation for IGT's FQ4 2011 earnings release Tuesday afternoon, we’ve put together the recent pertinent forward looking company commentary.




  • U.S. Court of Appeals for the Federal Circuit affirmed a district court's judgment against Bally for infringement of two of IGT's patents.
    • IGT's patents (U.S. Patent Nos. RE37,885 and RE38,812) claim certain methods of paying bonuses at gaming machines.  Two of Bally's products, Power Rewards and ACSC Power Winners, were found to infringe.


  •  IGT and Aristocrat have cross-licensed each other to their patents and they will have the right to offer all the products which were the subject matter of the litigations subject to certain royalty obligations. This settlement ends all present patent litigation between IGT and Aristocrat and their subsidiaries.



  • "We believe the improvements we are driving across the organization have the potential to generate steady,
    attractive returns."
  • "We will continue to remain focused on efficiently deploying capital to drive positive returns for our shareholders."
  • "Strong performance of our domestic wide area progressive games positively contributed to the increase in yield. Consistent with last quarter, our coin in machine per day was up 13% in our wide area progressive units. Average revenue per day decreased sequentially due to a higher mix of lower yielding international units."
  • "The games that support Center Stage are performing extremely well. We expect to leverage this platform by introducing new content and themes to extend the life of the hardware."
  • "Our international organization continues to break records. Driven by strong replacement demand for our premium products in Europe and Australia, we achieved an average selling price of $16,600 in international product sales, our highest ever. While our ASPs are setting new benchmarks, our product gross margin is also healthy at 57%, a 400 basis point improvement over last year."
  • "Early returns on our six new Asian-themed games are encouraging and a testament to the demand for localized content. We will continue to deliver games in greater volume that are specifically designed for our international markets"
  • "Our interactive business grew revenue over 20% and increased gross profit nearly 30%."
  • "We also demonstrated several new applications for our sbX system. We expect to be delivering a steady flow of new bonus, community, and game-play applications in the coming quarters."
  • “We are raising our 2011 earnings guidance to $0.89 to $0.93 per share on an adjusted basis.”
  • “Our strategy in our purchase of Entraction and the work we’re doing to integrate Entraction into IGT is a 100% ex-U.S. strategy...So what you’ll see us doing is expanding from casino into poker, bingo, and sports betting on a B2B basis in legalized markets likely outside the U.S., in the short term, moving to the U.S. when and if those markets open."
  • [Product sales margins] "I think if you look at the 59% gross margins that we enjoyed this quarter... it’s a combination of mix... And the mix can be the variable component between whether or not you can get to 60% or not"
  • [Size of the online business as a percentage of total] "I’d like to think it never gets to 10%... because it’s shaking our core business revenue as it grows. So that’s going to be one of the challenges, as the market gets healthier in the core business, then it has to chase that up. But I don’t think it’s unrealistic to think in 2013-2014 we could see this playing a significant enough role that you all start getting all visibility into it" 
  • "We’re very focused on outside the U.S. on our Casino Link product"
  • [New opportunities market share] “We set our sights on kind of a north of 50% number on a new opening.”
  • “A stabilization in the wide area progressive component – that’s where we had suffered previously a fair amount of degradation over the last three years.  And then slightly you’re starting to see a shift in favor of wide area progressive in lieu of standalone.”
  • "Internationally, average selling price was up 16% year over year, primarily due to favorable shifts in product mix and foreign exchange rates...A number of things contributed to the lift. It was regional mix, it was product line mix, and it was foreign exchange. So foreign exchange was less than half of the impact on lift, and the other two were the balance.”
  • [seasonality of slot play] “We’ll watch it as we go into FQ1, because that’s generally the quarter where you see slot play decline somewhat sequentially.”
  • “You should expect to see units continue to grow in the international marketplace. They tend to be lower yielding, so you’ll see yields on a per-unit basis a bit lower. And I think that’s kind of the trend that we have seen in the international marketplace. But the profit per unit, which is what we probably focus more on here in the company, continue to see that expand as well.”
  • “I would say South America, Latin America, Caribbean, and Asia, which is generally where we’re focused.  More so than Australia and Europe. You see the game ops side of our business expanding in those two regions.”

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.