Notes from IGT Investor Day. Nothing major yet.



2011: Deliverables

  • Growing game ops: increased domestic install base, first time since 2007; drove yields up 9% YoY
  • Improving profitability by decreasing COGS
  • Improving their competitive positioning internationally by restructuring their organization into 3 regions and introducing localized content
  • Increased their interactive presence - acquired Entraction: poker, bingo, & sports betting
  • Improved FCF: returned $120MM to shareholder; very focused on cash flow generation

Over the past 10 years...

  • Generated $2.5BN of cash flow over the decade while their competitors have generated almost none (BYI & WMS)
  • Returned $4.3BN to shareholders through buybacks and dividends compared to $250MM by WMS and ~$600MM for BYI (and that's over the last 2 years)
  • Generated $11.5BN of gaming operations revenues, which is the most valuable part of their business
  • They've nearly doubled their international revenues.  Have a +13,000 unit install base internationally.

Plan: "The World of Possible"

  • Grow revenue from $2.0BN to $2.5BN - didn't disclose over what time period so pretty useless
  • Grow international ship share from mid-teens to mid 20's
  • Gross margins from 58% to north of 60% through managing their promotions and having the best products
  • Operating margins of 27% to +30%

How will they achieve their goals?

  • Product, product, product and then focusing on process e.g. Sony
  • They need to enter new markets that they aren't participating in with more relevant products, particularly locally
  • Energize interactive division
  • Next generation platforms: leading the "cloud transformation" bringing new technologies to small facilities - first outside the US and then in the US; this will change the way content gets delivered.
  • Continue to be ROI-focused and being good stewards of capital

Merkel's Marathon

This note was originally published at 8am on December 02, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I thought about running a marathon a long time ago, but I’m just not a runner.”

-Shannon Miller


I’ve woken up to some pretty ambitious central plans this week, but this morning’s caught my attention most – Angela Merkel is going to become a marathon runner.


“Marathon runners often say that a marathon gets especially tough and strenuous after about 35 kilometers…”

-Angela Merkel (speech to the lower house of German parliament)


While she doesn’t appear physically prepared to reach 35k on her own, looks (when gravity is being banned) can be deceiving. Central planners can try just about anything and have people who are paid by short-term stock and commodity inflations cheer them on.


Preparing for marathon, of course, requires some form of a diet, discipline, and sacrifice.


“The lives of a lot of French people are even harder after three years. Everybody has had to make an effort; everybody has had to make a sacrifice… it’s been a genuine revolution that’s begun.”

-Nicholas Sarkozy (speech yesterday in France)


Never mind the last 3 years of French hardship. French and German bankers have been sacrificing 3 hour lunches for conference calls with La Bernank for the last 3 weeks. Convincing the Great Depressionista that we should melt The People’s Savings again must be hard a hard life.


Back to the Global Macro Grind


Life for real-time Risk Managers is hard too. God forbid none of us were born to this earth to constantly beat beta. But “god’s work” might have a different outlook than the 2 and 20 plan.


This, of course, like most things in human history, has happened before. The inability for asset managers to beat beta that is …


After Japan tried their 3rdand 4thquantitative and coordinated easing (and their stock market continued to make lower-long-term highs), beta was all that was left. What do you pay a manager to earn you beta?


Volatility kills returns, fund flows, and economic growth. Right now, all 3 of these factors are as clear as the sun rising in the East to anyone who manages money or a business.


But… we, as an industry, continue to beg for the very thing that perpetuates economic and market volatility – Big Government Interventions. Be careful what you beg for. In the long-run, we might all still have to live with its unintended consequences.


This morning, across the board in Global Macro, we’re seeing the Correlation Risk ramp as the US Dollar falls. Correlation Risk, if you are long and short, works both ways. It’s always on.


Looking across the asset classes in my model and across my core 3 durations (TRADE, TREND, and TAIL) here’s what I see:

  1. SP500 moves to bullish TRADE (1233 support); bearish TAIL (1270 resistance)
  2. US Equity Volatility (VIX) moves to bearish TRADE (31.02 resistance); bullish TAIL (23.07 support)
  3. Global Equity Volume remains in a Bearish Formation (bearish TRADE,  TREND, and TAIL)
  4. Chinese Equities remain in a Bearish Formation (closing down another -1.1% overnight and down -0.8% on the wk)
  5. Japanese Equities move to bullish TRADE (8344 support); bearish TREND (8706)
  6. Indian Equities remain in a Bearish Formation (BSE Sensex bearish on all 3 durations)
  7. Germany Equities move to bullish TRADE (5895 support); bearish TREND (6279 resistance)
  8. French Equities move to bullish TRADE (3074 support); bearish TREND (3274 resistance)
  9. Italian Equities remain in a Bearish Formation (predictable divergence versus German stocks)
  10. Brazilian Equities move to bullish TRADE and TREND after cutting interest rates
  11. Commodities (CRB Index) remains in a Bearish Formation with TREND resistance = 321
  12. Oil (Brent and WTI) are now back into a Bullish Formation (inflationary, big time)
  13. Gold scales back into a Bullish Formation with TREND line support (was resistance) = $1743/oz
  14. Copper moves to bullish TRADE ($3.47 support); bearish TREND ($3.72 resistance)
  15. US Bond Yields are testing a TRADE line breakout (2.12% is the TRADE resistance for 10-year yields); bearish TAIL

All the while, the driver of all this Correlation and Duration Risk remains the US Dollar Index. With the US Dollar being debauched by Bernanke this week (down -1.8% on the week to $78.21), that’s why you see all these immediate-term TRADE breakouts in the aforementioned market prices.


But, Cher Bernank, a TRADE does not a sustainable economic TREND or TAIL make. Neither does an overweight and overleveraged economy sprinting out of the money printing blocks for the 1st three miles of what will be a deleveraging and deflationary marathon.


My immediate-term support and resistance range for the SP500 is now 1233-1258. If this morning’s full employment report inspires you to chase beta, run like the wind.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Merkel's Marathon - Chart of the Day


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Hope Control

“We want control. We need control. And bad things happen when we don’t have it.”

-Dan Gardner   


That’s an excellent behavioral psychology quote that I dog-eared this year after reading “Future BabbleWhy Expert Predictions Fail and Why We Believe Them Anyway.” (page 134)


Why political consensus still believes the Keynesian Quacks who promise them that money printing in Japan, Europe, and the USA is the best long-term path to prosperity is officially beyond me at this point.


That said, the market can remain beyond what any of us think for longer than even a centrally planned bank can remain solvent. While the core principle of Chaos Theory that Hedgeye’s Risk Management Process adheres to (Embrace Uncertainty) is what I start my every day with, it seems that these government people want to issue you the failed hope of the opposite, daily.


Hope is not a risk management process.


Back to the Global Macro Grind


First, let me preface this morning’s strategy thoughts with the Top 3 “Most Popular” headlines on the Bloomberg machine:

  1. Geithner Backs French-German Plan
  2. Bloomberg News Reponds to Bernanke Criticism
  3. Citigroup To Cut 4,500 Jobs On Slumping Revenue

Now let’s set aside Washington DC’s Hope Control messaging for 2011 that this Time Is Different, and focus on what’s actually happened since the beginning of the year on all 3 of these headline scores:

  1. Tim Geithner has spent 47% of his born life working on Big Government Intervention at the US Government – he is doing his very best to make said US style “free-market capitalism” look like whatever Europe is. He needs government control.
  2. Bernanke, like Obama, has talked a lot about “transparency, accountability, and trust” since 2006. As a functional matter, the US financial system has never looked so compromised, conflicted, and constrained. Main Street America doesn’t trust the Fed or its crony workings. Bloomberg pasted Bernanke to the boards with this article. It’s about time.
  3. Citigroup’s Vikram Pandit is going to cut costs so that he can get paid. That’s Old Wall Street. That’s what public financial services companies who are missing their revenue targets do. Meanwhile, as Yale’s vaunted Keynesian Economist, Irving Fisher, pleaded from 1, consensus pleads “but stocks are cheap because corporate profits are good.”

Fisher, Keynes, and all of their Big Government Intervention friends of the “Roaring 1920s”, of course, blew up most of their net worth buying on the way down well before we had a depression in this country.


Keynes, who was quite certain about the ‘devalue your currency and hope for exports model’, actually imploded early (in 1928 he was long corn, rubber – you know, the commodity trade baby!).


After this European Summit, where are we going? Where have we been? Contextualizing reality matters in mean reversion.


If you pull back the multi-duration and multi-factor curtain of what markets have actually done into and out of Big Government Interventions for the last 100 years, you’ll quickly notice that there has never been a central economic plan to debauch a citizenry’s currency that saved the world.


They’ve only saved us from what, allegedly, would have been even worse…


God Save The Geithner.


Timmy continues to take the other side of pretty much everything I think. Yesterday in Europe, this is what he said:


“This of course will take time… and a very substantial commitment and sustained commitment of political will.”


In other words, Japan and the US needed even bigger bailout and socialization bazookas. Timmy believes “deeply” in being fully “committed.”


And if we, The American People, were as “committed” to centrally planned risk taking and price volatility as Geithner and Bernanke wanted us to be, we’d all be fine. That’s what Irving Fisher and John Maynard Keynes said in 1929 too…


In other news – the rest of the world’s Growth Slowdown doesn’t cease to exist:

  1. Brazil reported its slowest year-over-year GDP number in 2 years (+2.1% y/y in Q311 vs +3.1% last quarter)
  2. China called the current slowdown in Global Export demand “under severe pressure”
  3. Santa’s Global Consumption Sleigh is running on $110/barrel oil

Follow the bouncing ball of hope. Piling-debt-upon-debt, bailing out banks, and money printing A) Shorten Economic Cycles and B) Amplify Market Volatility. The Hope Control’s market volume is running on empty. “And bad things happen when we don’t have it.”


My immediate-term support and resistance ranges for Gold, Brent Oil, German DAX, French CAC40, and the SP500 are now $1, $110-112-39, 5, 3104-3234, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Hope Control - Chart of the Day


Hope Control - Virtual Portfolio


TODAY’S S&P 500 SET-UP - December 7, 2011


As we look at today’s set up for the S&P 500, the range is 33 points or -2.02% downside to 1233 and 0.60% upside to 1266. 






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE:  +17 (+1681) 
  • VOLUME: NYSE 801.88 (-10%)
  • VIX:  28.13 +1.04% YTD PERFORMANCE: +58.48%
  • SPX PUT/CALL RATIO: 1.60 from 1.46 (+9.59%)



  • TED SPREAD: 53.78
  • 3-MONTH T-BILL YIELD: 0.00%
  • 10-Year: 2.10 from 2.09   
  • YIELD CURVE: 1.84 from 1.84


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications (prior 11.7%)
  • 8:30am: Fed’s Raskin speaks on data use in Baltimore
  • 10:30am: DoE inventories
  • 3pm: Consumer Credit, est. $7.0b (prior $7.4b)



  • Treasury Secretary Geithner to hold talks with French President Nicolas Sarkozy in Paris today
  • Citigroup to cut ~4,500 jobs in coming qtr, to take 4Q pretax charge of ~$400m tied to reductions
  • JC Penney said to pay $38.5m for 16.6% stake in Martha Stewart Living Omnimedia in deal to be announced today: NYT
  • Talbots said it would “evaluate” Sycamore Partners’s offer to buy co. for $212m
  • U.S. Consumer Financial Protection Bureau planning to release simplified credit-card agreement for possible use by issuers
  • Lehman Brothers said to be trying to raise ~$2.6b to buy controlling stake in Archstone as part of plan to sell or liquidate asset for $6b or more
  • Expedia plans to spin off TripAdvisor unit as publicly held business around Dec. 20
  • BP, Shell aim to resume drilling exploration, boost production in Libya
  • Missouri Public Service Commission said they need more time to make recommendation on Energy Transfer’s $5.2b purchase of Southern Union
  • ING Groep to take charge of as much as $1.5b as lower interest rates and stock markets hurt U.S. annuities
  • Moelis said to be named as financial adviser for creditors committee in AMR Corp.’s bankruptcy
  • AMR creditor panel risks split as unions claim three seats
  • Cablevision sued Verizon on advertising campaign it claims misrepresents Cablevision’s Internet speeds
  • GM said to be near completing package of proposed fixes for Chevrolet Volt battery pack: Reuters
  • U.S. gets highest rating from int’l investors in more than 2 yrs on optimism economy will weather Europe’s financial crisis, avoid recession in 2012: Bloomberg poll
  • Most int’l investors predict at least one nation will eventually dump the euro: Bloomberg poll




OIL – Santa’s sleigh better run on Dunkin’ because $110/barrel is tight! Consensus is anchored on the sequential US GDP gains we saw that came in Q3 (as oil fell to its lows in SEP); Rising Oil slows US Consumption Growth and we see US GDP falling, sequentially, from 2% to 1.4% in Q4. Not a disaster, but slower – and it’s the slope of the line that matters more than the absolute.

  • Tyson to Gain as Hen Flock Falls to 15-Year Low: Commodities
  • Oil Rises a Fourth Day on Concern Iran Tension May Curb Supply
  • Copper Climbs as Officials May Step Up Crisis-Solving Efforts
  • Palladium Climbs to Two-Month High on Car Demand; Gold Is Steady
  • Corn Gains for Second Day as Europe Seen Moving to Stem Crisis
  • Robusta Coffee Climbs on Warehouse Deliveries; Cocoa Advances
  • Nickel Surplus to Soar as Supply Outpaces Demand, Eramet Says
  • Supervalu Joins Farmers Behind U.S. Food Stamps at $71.8 Billion
  • China’s Zhengzhou Exchange Halts Trading on Technical Issue
  • BP, Shell Plan to Resume Exploration, Boost Production in Libya
  • Lithium, Cobalt Among Minerals Facing Chronic Shortage, PwC Says
  • Shanghai Futures Exchange to Widen Successive Daily Limits
  • Oil-Tanker Survivor Sees Biggest Returns in Coal Ships: Freight
  • Oil Near Three-Week High on Supply Concern
  • Carbon Credits Turning ‘Junk’ as Ban Shuts Door: Energy Markets
  • Bets Against Commodity Stocks Rise Fastest in 23 Months: Options

THE HEDGEYE DAILY OUTLOOK - daily commodity view





EURO – Le Geithner et La Sarkozy have le central plan completely figured out, right? Someone better tell whatever that means to the currency market because it’s not getting the message. Euro isn’t yet even testing its 1st line of resistance (1.35-1.36) never mind holding it. The Correlation Risk to stocks, commodities, etc. cometh on a move back down to 1.32.


THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





CHINA – the Chinese don’t seem to be cooperating with the short-term suspension of economic gravity thing. Last night the PBOC called the global export slowdown “under severe pressure.” We know they make things up – but that’s probably not one of those things. Shanghai Comp bounced 30bps after selling off hard in the last week. Stay tuned for bad Chinese data Thursday.


THE HEDGEYE DAILY OUTLOOK - asia performance









The Hedgeye Macro Team

Howard Penney

Managing Director






Commodities are going to be a major factor in the upcoming earnings season.  Darden’s press release from yesterday morning is testament to that.  On a week-over-week basis, there were more decliners than advancers among the commodities we monitor. 




Chicken Wings – BWLD


It is telling that in a week where corn, wheat, beef, pork and dairy prices all declined, chicken wing prices still marched 4.2% higher.  Per our notes published yesterday morning, BWLD is our favorite short idea in the casual dining space as supply and demand dynamics point to higher wing prices in 2012.  If prices are up 50-60% year-over-year in the first quarter, we believe that BWLD will find it difficult to drive trends through promotion as it did in 3Q.  Please see our notes from yesterday on DRI and BWLD for more details on this thesis. 


Chicken prices are set to go higher in 2012 as QSR names are set to place a renewed focus on chicken, according to TSN CEO Donnie Smith.   The hen flock on November 1st was 50.2 million, according to the USDA - the smallest since 1996.





While the supply side of the beef equation points to a continuation of elevated beef prices, speculators are decreasing their net-long position according to CFTC data.  For the week ended November 29th, net-long positions fell by 482 contracts, or 1%, from the week prior.  From a demand perspective, many analysts are attributing the sell off over the last week to the Eurozone credit downgrade impacting the demand outlook.  WEN, JACK, CMG, and TXRH are likely to face significant beef inflation through at least the first quarter of 2012.  If the food service industry does shift its focus from beef to chicken, as TSN expects, it could hasten the decline in beef prices.



Dairy – CAKE, TXRH


Dairy moved sharply lower over the last week.  Despite this move, prices remain up +12% year-over-year and will likely remain above 2010 prices for the remainder of the year.  While the recent decline in dairy prices is good news, on the margin, for CAKE, we still believe that dairy prices will have a negative impact on gross margins during the fourth quarter.   Earlier in the year, management guided to favorable dairy price comparisons, year-over-year, in the fourth quarter.  We disagreed with that view from the beginning. 
































Chicken – Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast



Chicken Wings















Howard Penney

Managing Director


Rory Green









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.