We’ve got a pretty good look into 1H 2009 slot sales and it’s not pretty. See the first chart for the ugly truth. I’ve also posted the painstaking detail of all new casinos and expansions in North America through 2010. If anything these projections will prove aggressive. Some openings and expansions will slip, maybe indefinitely. Enjoy!


“What human beings can be, they must be.” -Maslow

The broad stock market is down over 50% year-to-date and the economy is weak and getting weaker. We’ve been on the right side of the Trend, but still have friends, family, and clients who have lost a good deal of their personal net worth this year and that can be depressing. Years like this, though, teach us important lessons about personal motivation and happiness. The bottom line, it is not all about money.

Keith and I had been talking about the idea of the company that is now Research Edge well over a year ago. I ultimately opted to not join him from the outset because the risk of the unknown scared me. As did the idea of leaving a good salary and job in a great city, Miami, but as the year wore on and on I realized that I wasn’t happy. I really enjoy investment research, but my motivation for staying in the job I was in was purely money and social prestige, i.e. it was a good firm, rather than any sense of passion.

I had been mulling over leaving for months, for a number of personal and professional reasons, and the inability to make a decision was making me personally unhappy and closed off. And then on September 16th Keith’s Early Look note hit my inbox and the following quote screamed at me:

“So, let's start this morning by getting things right. If your boss or bank has zero credibility - leave. Go somewhere where you can rebuild the wealth that they took from you. Take control of your own destiny. Otherwise, the principles of transparency, accountability, and trust are nothing but words we are giving lip service to . . .”

Now we should get a few things straight, Keith and have I known each other for 15+ years, played hockey together, worked together, I was in his wedding, he will be in mine (if that day ever comes!), so I certainly don’t always take the man all that seriously. But that quote was a catalyst for me. I decided I was quitting and started an intensive interview process with Keith and the rest of the team at Research Edge and two weeks later I was up and running in New Haven.

So Daryl . . . what is your point? Good question. Simply that we need to put ourselves in positions that maximize our happiness and focus on goals along that path. When I read Keith’s quote, the clarity dawned on me. I’m not the most successful guy in the world, but I’ve come a long way from what are fairly humble roots and any success I’ve ever had was based on my being passionate about something. In hindsight, it is now laughable to think that either a generous paycheck or a “good” firm were adequate motivators for me. In fact, they both detracted from my happiness and my motivation. My motivation has always been about being part of a successful team, improving every day, and enabling people around me to be successful. In my new role, I have all of that and I am confident that monetary success will follow.

Finding satisfaction in our careers and creating a satisfying workplace for employees is critical to living and enabling others to live happy lives at work. Psychologist Frederick Herzberg developed a model that framed up the foundation for a rewarding career. His Two Factor Theory (also known as Herzberg’s Motivation Hygiene Theory) was based on interviews with 200+ accountants and engineers in the Pittsburgh area. The gist of the interview analysis was that Herzberg asked the respondents to relate times when they felt exceptionally good or bad about a current or previous job.

The results were interesting and somewhat nuanced. The Two Factor Theory distinguished between motivators and hygiene factors. Motivators are attributes of the job that provide positive satisfaction and arise from achievement, recognition, and personal growth. Hygiene factors, on the other hand, do not give satisfaction, although dissatisfactions results from their absence. These factors include such things as benefits, salary, job security, and a comfortable work environment.

Herzberg theorizes, based on his study, that hygiene factors are required to make sure an employee is not dissatisfied, but they do not necessarily promote satisfaction. Motivators, on the other hand, drive satisfaction and happiness beyond the basic level of hygiene (i.e. that it is a palatable job). Herzberg also classified actions in the workplace as either movements, you perform an action because you have to, or motivations, you perform an action because you want to perform the action. In this context, the goal of any employer should be to create a highly “motivated” workplace in which employees perform actions on their own volition.

To be fair, there are many criticisms of Herzberg theories and many of them focus on the simplicity of the model. Intuitively, though, I think we can all agree a workplace and job must satisfy basic requirements or we will be dissatisfied, and unhappy. On the other hand, for a job to be truly satisfying and rewarding it does require more. I outlined my key attributes for a satisfying work environment above and my requirements are not atypical.

Motivating our employees and ourselves is critical to the success of any company. Motivated employees will do a better job, will produce higher quality work, and are typically more productive. In knowledge based industries, the productivity of employees is critical and will reflect directly on the bottom line.

While money is many times seen as the key motivator for employees, especially in the finance industry, money is actually a relatively low level motivator. In fact, it is more supportive of hygienic needs, so staving off dissatisfaction, rather than promoting satisfaction. As Abraham Maslow suggests in his “Theory of Motivation”, money “tends to have a motivating impact on staff that lasts only a short period of time.”

Abraham Maslow wrote his paper “A Theory of Human Motivation” in 1943 and many of its key points are still incredibly relevant today. Maslow studied what he termed exemplary people, which included Frederick Douglass, Eleanor Roosevelt, Albert Einstein, and more broadly the top 1% of students in certain colleges. Based on these studies he created a hierarchy of needs and as humans moved up the hierarchy the more satisfied and, thus, motivated they become.

As employers and employees we need to focus on the fourth level of Maslow’s hierarchy of needs. This is the esteem level and has as its requirements: self esteem, confidence, achievement, respect of others, and respect by others. We need to both put ourselves in an environment where we can fulfill these needs and create environments so that those that work for us can fulfill these needs. The point of fulfilling the fourth level of esteem is to reach the self-actualization stage - the stage in which we motivate ourselves. Maslow summed up motivation and the idea of being personally content best himself when he said:

“Musicians must make music, artists must paint, poets must write if they are to be ultimately at peace with themselves. What human beings can be, they must be. They must be true to their own nature. This need we may call self-actualization.”

I couldn’t agree more.


Last week I walked through the volatility environment and our view that, despite signals that VIX might be starting to decline somewhat, it would still remain at nosebleed levels on a historical basis through the coming months.

This week vol. levels again ripped with Thursday’s spike pushing the VIX to close above 80 to a level of 80.86, actually higher than the close on October 28th. Thursday also marked the first time that the VIX has closed higher than the realized 30 day volatility for the cash S&P 500 since Oct. 27th. VIX futures maturing in December and January continued to trail spot levels, hovering near the 50 day moving average. The key takeaways from this market action were changing liquidity patterns and put/call divergence.

Although the aggregate, Index and Equity Put/Call ratios rose sharply in late week sessions, the Index PCR has continued to make lower highs since early October as buyers continue to pay inflated prices for insurance.

Along with a general decline in volume from last month’s historic levels, many market observers noted that a lot of players seemed to be sitting on the sidelines.

Hedge fund redemptions are a large factor in declining volume, but so too are rising yields in the corporate bond market. For the past 5 years, the credit default swap market has been a primary source of trading activity for out-of-the-money equity put options as dealers sought to hedge tails risk on the default insurance they were selling (and arbitrageurs sought to capture spreads between the two markets). With the new reality starting to hammer the bond markets and volume drying up in CDS for names that are in clear danger of default such as auto makers and financials, there is a an asymmetrical impact on liquidity as those players leave the market.

In the thinner market for options on futures the spike had a more pronounced impact as the class of funds known as “premium sellers” found it impossible to get out of the way of runaway trains without causing price spikes late this week. The premium sellers as a class will likely be extinct after this month –one well capitalized manager who is a personal friend of mine (although we are odds intellectually on risk and investment) already registered a draw-down of over 59% in Oct. and will likely be busted out if he remained short volatility into Thursday. Their departure from the scene as cheap sellers of insurance on the S&P and other major indices to market makers will have a direct impact on liquidity in the equity options market.

Taken all together, this creates tremendous opportunities for investors that normally shy away from the options market to capture outsized returns, provided they have the correct investment duration, fundamental conviction and do their homework.

The leveraged matador speculators and arbs are gone, the only providers of liquidity in this market will be people that actually understand the fundamentals of the underlying companies and can properly assess the risk. Those investors will be rewarded handsomely.

As always feel free to contact me with any question about strategies at

Andrew Barber

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.

’09 Theme: License Stability

Some apparel licenses will prove massively unstable in ’09 as licensees pull back on investing in content. Some will miss minimums, and will lose business that some currently think is a lock.

Here’s an issue that people are not focusing on, but should be – the risk associated with stability in cash flows from licensing streams. The apparel industry is riddled with examples whereby content owners license out their brand to others that have more expertise in a specific product area or consumer segment. Standard royalty agreements are usually in the 6-10% range, net of costs allocated by corporate. In other words, what is a smallish revenue event translates to a meaningful EBIT event given 100% incremental margin. With zero capital at risk, such arrangements are almost always ROIC-enhancing.

I have a high degree of confidence that we are entering a phase of the cycle where these licensing relationships will be strained meaningfully. We’d all be irresponsible not to consider the strategic implications.

Think about it like this… Let’s say you are a mid-size company whose EBIT is derived evenly between your own content and content you license from other companies. For the past 7 years, the industry has had every bit of wind at its back (import quota changes, FX, input cost deflation, strong consumer) such that everyone made money – even the marginal players. Now we’re in a multi-year period where the opposite is a reality, and many mid-tier brands will go away. So now your top line is rolling, you’ve underinvested in your brands, flowed through too much FX and sourcing benefit to your bottom line instead of plowing back into your model. So now what? You’re probably cutting costs reactively and irresponsibly to keep your head above water. Do you cut costs out of your own content? Or from what you were allocating toward another company’s content that you licensed and ultimately will return to them? I’d challenge anyone to find me a company that would opt to damage its own content over another’s.

CEOs of companies that license a meaningful proportion of their EBIT (PVH, GES, ICON, to name a few) will argue that there are fixed amounts that partners need to contractually invest each year, which is controlled in part by the company owning the brand. Yes, there are usually fixed dollar amounts or percentages that are required for reinvestment, but that ALL leave plenty of room for unhealthy behavior on the part of the licensee. Remember when Jones Apparel Group said that its Lauren, Ralph, and Polo Jeans business was fine and was ‘locked up’ for years? ‘Nuff said. DCFs don't matter when a business segment you have in your model suddenly ceases to exist.

All it takes is some bad investments (or lack thereof) and a couple of quarters of missed minimums, and the content owners could usually take back the business at will.

The table below shows the percent of EBIT for some major brands derived from licensing. Part two of this analysis will be to drill down which companies have the biggest risk of having business taken away from them for reasons noted. There will be some big winners and big losers beginning in ’09 folks…

Interesting 4Q Comp Diversion

Interesting to see the varied trajectory of comp trends and guidance into 4Q for FL, DKS and HIBB. FL looking washed out, tho I’m starting to like HIBB a lot.

With Dick’s, Hibbett, and Foot Locker all reporting within 24 hours of one another, it was interesting to see the varied trajectory of com trends and guidance into 4Q. Let’s look through 4Q comp guidance on a 1-year basis for a minute. The implied 2-year trend for each company’s 4Q guidance shows that both DKS and HIBB are spot-on with their respective trajectories of -2%. My concern there is that both forecasts suggest a 100-200bp acceleration. FL, on the other hand, is looking for a 300bp deceleration. Yes, it will see a negative FX hit, but not enough to account for such a wide delta from its peers. One thing worth pointing out is that FL’s inventory position remains clean, as it is proactively managing inventories for the first time in at least 3 years from my vantage point.

If you asked me to put on my ‘gaming expectations’ hat, I’m probably going to look toward FL in the upcoming quarter – especially in the face of a 28% decline in the stock on Friday – a disproportionate move in the stock relative to the fundamentals.

Looking out over the next year, however, I’m starting to like HIBB – a lot. Stay tuned for more on that one…

Quote Of The Week: Captain Jack Sparrow

"Have you not. It's very kind of you. But it would seem that as I possess a ship and you don't you're the ones in need of rescuing and I'm not sure that I'm in the mood."
-Captain Jack Sparrow

This quote from Disney’s ‘Pirates Of The Caribbean’ provides a metaphor for “The New Reality.” At a few points in time this week, the S&P500 was down -52% from its 2007 peak, Somali Pirates were holding the Saudi's for ransom, the “Pandit Bandit” was pleading for Citigroup’s mercy, and Big Auto was begging for a government bailout.

“The New Reality” of global trade is quite simply that he with the cash (and the ship) will take what he wants, on his terms, and at his price. Argh!