ECB Press Conference Substantiates That The “Bazooka” Is Off The Table

The ECB’s governing council decided to cut key interest rates by 25bps today. It’s main outlook on the economy, inflation, and monetary expansion, largely remained in line with last month’s report.


For more specifics, see this ECB press release:


The council also decided to add additional non-standard (and temporary) measures to better support credit to households and corporation by issuing 2 longer-term refinancing operations (with a maturity of 36 months) and lessening collateral requirements.


For more specifics, see this ECB press release:


However, more interesting than Draghi’s prepared comments, especially as it related to the likely outcome of tomorrow’s EU Summit, were his responses to the Q&A. Here he very definitively rejected any talk that the ECB may revert from its mandate of price stability, meaning monetary financing is off the table, outlining that neither the ECB nor the National Central Banks (NSBs) are in a position to print money to leverage/expand the EFSF or lend to the IMF to have funds redirected to member countries given “the spirit of the EU treaty”. These answers further confirm our stance that tomorrow’s announcements will mainly focus on a fiscal union, which will disappoint investors’ expectations (For more see today’s Early Look titled “Incredibly Hobbled”).  European equity indices and the EUR/USD fell alongside the announcement.   


Top 3 Q&A Responses:

- Why can’t the ECB act like the Fed or BOE to print money and directly aid countries?    MD: WE have a treaty that states the primary mandate is maintaining price stability, not monetary financing.  When the treaty was written in early 90s there were some countries suggesting financing governments by money printing. Our treaty embodies the best traditions of Bundesbank, where monetary financing is prohibited.


-Will the ECB aid countries through third parties like the IMF or EFSF? What about NSB lending to the IMF, would the ECB block? Is it legally allowed to?    MD: The ECB is not an IMF member. Legally complex, but given the spirit of treaty, the ECB can’t channel money to circumvent the treaty. If NSBs want to lend to the IMF, which would then lend to say China, that is fine. But if the IMF uses the money to buy bonds in Euroarea, this is not compatible with the treaty.


-Can you clarify your recent comments that “other elements will follow” about a Fiscal Compact?   MD: A compact = an agreement, or community pact. There are three pillars: 1.) national economic policies for stability, growth, and job creations; 2.) Rules at the EU level—that is fiscal rules enshrined in laws that place limits on deficits and debt. They would be automatic. 3.) Stabilization mechanism- we know the effects from lack of credibility and confidence, therefore pillars 1 and 2 are essential.   


Additional Q&A:

- Any call for a 50bps cut?  MD: No, discussed 25bps, some in favor, some not.


-How do you envisage the EFSF and ESM working together?   MD: EFSF first, ESM later, and fully operational as soon as possible.


-Thoughts on last Italian budget plans?  MD: Developments encouraging. It is a critical budget that will strengthen confidence.  Essential is in the delivery.


-Fear of deflation?   MD: Don’t see high probability of deflation.


-Is there a limit to bonds purchased by the SMP?   MD:  It is still a temporary program.


-Has the governing council discussed a cap on bond yields or spreads?   MD: No never discussed.


-Will slowing growth require more adjustment?   MD: Fiscal consolidation is unavoidable. What can be done to offset contraction?  Confidence Enhancing Effects - - structural reforms to enhance competitiveness and job growth… so [countries] can count on external demand, exports, [to grow].


-When you follow the headlines there are more breakup talks. Are they self-fulfilling prophesy?   MD:  What matters are facts, not psychology. If we make progress on a new EU contract, I think confidence will return.


-The money market is clogged up, and feels like post Lehman, true?   MD: We have a deposit facility at levels similar to the Lehman period. Despite ECB measures for liquidity, much of it is re-deposited with the ECB, so it’s not re-circulated. We’re also seeing deleveraging by banks which are significance. We see funding pressures as banks need to raise capital ratios. So to some extent, the measures today are to address these funding pressures.  Wider use of collateral and lengthening of term should give confidence to banking profiles, especially as a number of bonds come to maturity next year. I believe 230 Billion EUR of bank bonds are coming to maturity in Q1 alone. 



Matthew Hedrick

Senior Analyst


Investors may have trouble seeing the sun through the cloud of a weak FQ1 replacement quarter and a looming market share reversal.



And we’re not just talking about the weather which was cloudy and rainy all day for IGT’s investor day in New York.  Aside from talking about “Cloud,” which is a way to recoup some of their investment on a bad bet on sbX, there wasn’t a whole lot of new stuff at IGT’s investor day.  Much of the discussion was a recap of IGT’s recent achievement of “right-sizing the ship”.  The rest focused on new growth initiatives – two of which have been a mainstay at investor presentations for at least a year.


Our near-term issue with IGT is two-fold:  we think the company takes a large sequential ship share loss in F1Q12 since IGT pulled forward some sales into its fiscal year end quarter - especially in regards to replacements.  We expect that replacements will have a 3 handle vs. a 4 or 5 handle.  New opening share should also drop since IGT recognized both Kansas shipments while BYI and Konami did not.  We would caution that new opening and expansion ship share can shift if Revel and Cleveland units end up shipping at the end of this month instead of early calendar 1Q.  


We actually think calendar 2012 will be a great year for the suppliers, IGT included.  While we like the sector over the long-term, IGT will have to improve the economics of its gaming operations business to keep pace with the competition in terms of ROIC and free cash flow growth.  We estimate IGT spends about 15% of gaming operations revenue on maintenance capex, just to keep revenues stable.  By way of comparison, the average casino spends around 5%.  Unless IGT can spark growth, this is not an attractive business for them long term.




The big financial discussion centered on a revenue growth target of $500 million on top of the current $2 billion.  The company expects to generate an incremental $250MM from new business initiatives over the next 3-5 years on top of $250MM of growth from a recovery in replacement demand and the new domestic market openings.  Here are the three buckets of new business growth that IGT identified:  increased international penetration, Interactive, and Cloud.

  • While incremental revenue growth from new businesses will likely come in at lower margin channels, as long as IGT can leverage fixed costs or their “scale”, gross margins should increase.  This shouldn’t be a stretch:
    •  IGT continues to prudently deploy R&D dollars
    • SG&A has a variable component tied to sales and staff/infrastructure for new initiatives which don’t currently generate sales or profits are already in place
    • Product sale margins should improve as the number of units produced/sold increases as IGT will be able to leverage fixed costs over a larger base. The reduction in the number of platforms should also help margins.
  • Increasing international penetration
    • Bulls will point to Australia as an example.  IGT’s international strategy is twofold:
      • Global best practices and leverage scale by consolidating a lot of functionality across regions
      • Localize existing content by adopting a WMS-like strategy of more market research/customer focus sessions.  Importantly, IGT’s strategy is NOT to develop new content for local markets but rather to simply tweak their existing game library and math models to local tastes (this is part and parcel of Patti’s vision of increasing distribution of existing content and lengthening the “tail”).
  • Interactive growth
    • IGT’s strategy is to continue to grow the interactive division as more markets in Europe legalize gaming and leverage their recent Entraction acquisition by expanding their product portfolio into poker, bingo and sports betting.
    • Our take is that the growth in online gaming is very real, but it’s hard to evaluate the opportunity for IGT without any financial disclosure on their part. 
  • Systems
    • They’re doing their best to squeeze the most juice out of what was a bad investment.  Generally, IGT’s strategy for systems is one of a loss leader to gain floor share and potentially create a distribution channel for the content on some sort of recurring revenue basis.  This is especially true to sbX, which utilizes cloud technology to remove some of the largest feedback hurdles that casino operators face when presented with the sbX proposition – namely:
      • They don’t want to make that upfront investment
      • They don’t have the time, expertise, and in many instances space to run the servers necessary to deploy SB
    • Since IGT has already invested a lot of money into SB, Cloud allows them to deploy their technology at a minimal incremental cost to them and gives operators “easy access” to their content – whether that be game content or yield management analytics.  The hope is that this easy access will create a sticky “pay as you go” revenue stream for IGT. 
      • It’s really too early to tell whether this strategy will be successful or not since Cloud isn’t on schedule to become commercial for another year.  Our two cents is that as long as the cost to IGT is truly “minimal,” this could be a cheap option for the company to take a shot at recouping some of their investment. 


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Initial Claims Drop on Seasonal Factors

Initial claims dropped 23k last week to 381k, one of the best improvements in months.  Unfortunately, like the last eye-popping decline in claims (the week ended September 23rd), this one also looks too good to be true.  The Labor Department noted that seasonality is generally problematic this week of the year.  A typical seasonal increase is 182k, and claims actually increased only 151k.  Because the seasonal adjustment factor drives such a large piece of the data this week, it's difficult to take today's print at face value.  We would require several more weeks of confirming data to get more positive. 


We’ve previously identified 375k – 400k as the claims range where unemployment can begin to improve.  A sustained period below 400k would be meaningful for unemployment.  












2-10 Spread

The 2-10 spread tightened 3bps versus last week to 179 bps as of yesterday.  The ten-year bond yield decreased 4 bps to 204 bps.






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 




Joshua Steiner, CFA


Allison Kaptur


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Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%








Initial jobless claims came in at 381k versus 395k consensus and revised 404k in the week higher.


THE HBM: KNAPP, MCD, YUM, DPZ - initial claims 128





THE HBM: KNAPP, MCD, YUM, DPZ - subsector fbr





MCD: McDonald’s blew the doors off again in November with global comps of +7.4% versus StreetAccount consensus of +5.1%.  The US comps came in at +6.5% versus +4.3% consensus.  Europe’s print was +6.5% versus +4.3% consensus and APMEA posted +8.1% comparable restaurant sales growth versus +6.3% consensus.


MCD:  MCD Japan reported November comps of +8.7%.


YUM: Yum! Brands’ Analyst Day in New York yesterday showcased the impressive progress the company made in 2011.  CEO David Novak said that Yum plans to more than double its restaurants in China by 2020, when it hopes to have 9,000 across the country.


DPZ: Domino’s Pizza CEO Patrick Doyle told CNBC yesterday that the company is beginning a national online sales push.  Doyle also revealed that online orders have eclipsed phone orders.  Commodity prices for the company are also easing.





KNAPP: The Knapp Track casual dining same-store sales index gained +0.2% in November while comparable guest counts decreased -2.2%.


CBRL: Institutional Shareholder Services has recommended that Cracker Barrel shareholder vote for all of the individuals

nominated by the company’s Board of Directors for election to the Board at the company’s 12/20 AGM.  By this action, ISS rejected Biglari Holding’s nomination of Sardar Biglari.


THE HBM: KNAPP, MCD, YUM, DPZ - stocks 128



Howard Penney

Managing Director


Rory Green




TODAY’S S&P 500 SET-UP - December 8, 2011


As we look at today’s set up for the S&P 500, the range is 38 points or -2.30% downside to 1233 and 0.71% upside to 1270. 





THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE:  +172 (+155) 
  • VOLUME: NYSE 968.11 (+20.72%)
  • VIX:  28.67 +1.92% YTD PERFORMANCE: +61.52%
  • SPX PUT/CALL RATIO: 1.17 from 1.40 (-16.37%)



  • TED SPREAD: 53.49
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.02 from 2.08   
  • YIELD CURVE: 1.78 from 1.82


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Jobless claims, est. 395k (prior 402k)
  • 9:45 a.m.: Bloomberg consumer comfort, est. -49.3, (prior -50.2)
  • 10:00 a.m: Wholesale inventories, est. 0.3% (prior -0.1%)
  • 10:00 a.m: Freddie Mac mortgage
  • 10:30 a.m: EIA Natural Gas storage
  • 12:00 p.m: Flow of funds 3Q 



  • Fed Chairman Bernanke is rated favorably by 71% of investors, traders and analysts, according to a Bloomberg poll
  • European Central Bank probably will cut its base rate 25bp to 1%
  • SEC sometimes allows large investors to not play on level field – WSJ
  • SEC sometimes allows large investors to not play on level field - WSJ



  • Oil at $150 Becomes Biggest Options Bet on Iran: Energy Markets
  • Rib-Eye Beef to Tumble as Holiday Demand Peaks: Chart of the Day
  • Wheat Shredded as Near-Record Crop Boosts Reserves: Commodities
  • Japan Expands Rice-Shipment Ban as Contamination Spreads
  • Crude Oil Rises From One-Week Low Before European Debt Summit
  • Japan Gold Export Most Since ’85 as Individuals Sell Jewelry
  • Commodity Index Rebound May Be Almost Over: Technical Analysis
  • Gold May Decline as European Leaders Meet, ETP Holdings Drop
  • Petrobras’s Oil Seen Abundant With Gigantic Helicopters: Freight
  • Sino-Forest May Go Private as Martin Seeks Way Out of ‘Morass’
  • ABN Amro May Expand Commodity Loans Where BNP Sees 30% Drop
  • Policy Shift Shows China Favors Unbalanced Recovery to Slump
  • Barclays See Australian ‘Champions’ Restoring Deal Balance
  • China’s Pork Prices May Have Reached Bottom, New Hope Group Says
  • Stocks Rise Amid Optimism Over Europe Summit; Treasuries Advance
  • Vale Negotiating Price Reductions in Iron-Ore Contracts
  • Shanghai to Add Dry-Bulk, Tanker Indexes in Baltic Challenge
  • Wheat Drops as U.S. May Increase Estimate for Global Stockpiles
  • World Food Prices Fall a Fifth Month, May Be ‘Bottoming Out’

THE HEDGEYE DAILY OUTLOOK - daily commodity view





THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





THE HEDGEYE DAILY OUTLOOK - asia performance




  • Oil at $150 Becomes Biggest Options Bet on Iran: Energy Markets
  • Dana Gas Drops to Two-Year Low on Debt Concern: Islamic Finance
  • Egypt’s ‘Orderly’ FX Market Is Hostage to IMF, Aid: Arab Credit
  • Dubai Denies Report on Restructuring State Company Debt
  • MIDEAST DAYBOOK: Dubai Debt; Emirates NBD Pulls Sukuk; Agility
  • Abu Dhabi Commercial Files Prospectus for $7.5 Billion Bond Plan
  • Emirates NBD May Need $2.2 Billion Provisions, Goldman Says
  • Saudi Arabia Is in No Rush to Get New OPEC Quota, Naimi Says
  • Bahrain Says Device Found After Flight From U.K. Via Dubai
  • ADIA Names Benjamin Weston as Head of Alternative Investments
  • Gulf International Bank Prices $300 Million Islamic Bond
  • Eni Unconcerned About Possible Iran Sanctions, Scaroni Says
  • Eni Can Meet Refinery Needs Without Iran Oil in Case of Ban
  • Dubai Shares Retreat Ahead of Europe Meet; Dubai Financial Drops
  • Eni Pumping 200,000 Barrels a Day Oil in Libya, CEO Scaroni Says
  • Agility Unit Sues U.S. to Lift Freeze on Military Contracts




The Hedgeye Macro Team

Howard Penney

Managing Director





Salvaging The Wreck

This note was originally published at 8am on December 05, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The world will seek the greatest possible salvage out of the wreck.”

-Irving Fisher, 1918


That’s a famous Irving Fisher quote Silvia Nasar uses to introduce Act II “Fear” in her wonderfully written economic history book – Grand Pursuit.  She starts the Act with a chapter titled “War of the Worlds” where a young John Maynard Keynes obtained a critical WWI post at the British Treasury where he became the “go to-official for inter-Allied (read American) loans.”


“The Treasury’s task was not to only achieve “maximum slaughter for minimum expense” but also to finance the war without debauching the world’s safest currency or jeopardizing Britain’s supremacy as the world’s banker.” (page 198)


This week, as Keynesian bailout politicians attempt to make history through another currency debauchery, I thought I’d use the pre and post WWI period as a reminder of how The People used to think about a currency’s credibility and purchasing power.


After the Treaty of Versaille (1919) when the Germans, Austrians, and Hungarians were saddled with reparations debt, money printing became their only option – a political Policy To Inflate (sound familiar?). The economic stagflation (then hyperinflation) that ensued throughout Europe during the 1920s may rarely be discussed by Ben Bernanke and Tim Geithner, but it will never be forgotten.


As stock market futures hope for European resolve this morning, do not forget what the Germans will never forget. Hope is not a risk management process.


Back to the Global Macro Grind


After the worst Thanksgiving week for stocks since 1932, followed by one of the best weeks for stocks in the last 3 years, this week’s “full employment and price stability” Act III by central planners should be exhilarating.


Here’s how the Global Macro calendar of catalysts looks so far:

  1. Monday: US Federal Reserve President from Chicago, Charles Evans, will speak on his short-term politicking for QE3
  2. Tuesday: my brother Ryan’s birthday
  3. Wednesday: whispers of the ECB Rate Cut decision (Thursday) should be all over the tape, weakening the Euro (again)
  4. Thursday: The Chinese report all of their economic data for November (should be weak, sequentially, across the board)
  5. Thursday/Friday: The EU Summit where central planners will struggle to explain who, precisely, is going to backstop more bailouts

To review hope/expectations: there is hope of a $100-200B bank bailout fund from the IMF that is effectively backstopped by Americans more so than it would be Germans (USA’s IMF quota is 17% and Germany’s 6%). There’s also hope that we see an Italian Job by Super Mario Draghi to backstop the EFSF bailout facility by the ECB.


Hope is not a…


Right, right, Keith. But the futures are up, so how are we supposed to chase and/or beat beta when we don’t know what these European central planners are going to do?


Good question.


As most of you know, this Globally Interconnected Game of Risk is changing. In Hedge Fund Industry 1.0 some of us could “get the call” on a big market catalyst like this, whereas today Wall Street 2.0 is struggling with a flatter playing field of who gets to know what and when.


Rather than looking for some Orange Jumpsuit Risk, I look to the currency and bond market Correlation Signals before I look to equity markets. Why? Primarily because both FX levels and bond yields have had it right for the better part of 2011.


Effectively, currencies and bond yields have been front-running stocks.

  1. FX: the EUR/USD’s TRADE and TAIL lines of resistance are $1.36 and $1.40, respectively.
  2. BONDS: the UST and European 10-year yield TRADE and TREND lines continue to confirm the same I see in the EUR/USD FX pair.

For US Treasury yields to signal that Growth Slowing is no longer going to be perpetuated by Piling-Debt-Upon-Debt, I’d need to see 10 and 30-year UST yields trade, sustainably, north of 2.12% and 3.22%, respectively.


For European Sovereign Bond yields to signal that we’re all free and clear from European bank insolvency on the order of magnitude that the likes of Lehman have never seen, I’d need to see Italian bond yields trade, sustainably south of 6%.


Salvaging The Wreck is going to take a very long-time. The greatest possible salvation we can all hope for this week is that stock markets don’t run-up too high ahead of another failed expectation on Friday.


My immediate-term support and resistance ranges for Gold, Brent Oil, France (CAC40), Italy (MIB Index), EUR/USD, and the SP500 are now $1743-1769, $109.34-111.89, 3074-3303, 14589-15769, $1.32-1.35, and 1233-1267, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Salvaging The Wreck - Chart of the Day


Salvaging The Wreck - Virtual Portfolio

Early Look

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