- Part of the explanation is that slots to new casinos and casino expansions comprised a bigger share of total slot sales. IGT’s market share into the replacement market always lags because, as the industry’s largest supplier, the company offers volume discounts and ancillary products and services if operators guarantee a target share for a new casino. As can be seen in the second chart, new unit sales jumped to 75% of total units in Q2 2008, although it dropped off dramatically in Q3 while IGT still maintained its market share.
- IGT also tends to do well in locals markets due to the popularity of video poker, a category which it dominates There were a number of new locals oriented casinos that opened in Q3. Quarterly market shares can fluctuate significantly. However, it is somewhat encouraging that IGT’s market share seems to have stabilized at around 40%, about where it was from Q4 2006 to Q3 2007.
- Overall, Q4 sales to new casinos and expansions are likely to be up around 40% year over year. No wonder there was so much optimism at G2E last week. The suppliers are generally having a good quarter. I’m a lot less optimistic about 2009, particularly the first half.
We started following the Spanish market actively this spring as the real estate market there began to decelerate at a rapid pace. The collapse was preceded by years of massive speculation with new home construction hitting an annualized 700,000 by Q3 2007. The housing boom helped Spanish household debt balloon -in December 2002, total mortgage loans equaled 52% of GDP but by Q2 of this year it exceeded 99.5%. The bursting bubble and subsequent fall-off in new construction has predictably spurred higher unemployment with a decade record rise in Q3 to over 11%.
We are revisiting our work on Spain this week as part of our continuing work to explore relative value opportunities with the EU.
Obviously the Clinton tone begins with Senator Hilary Clinton and her likely appointment as Secretary of State, but actually resonates in almost every purported appointment, including Bill Richards as Secretary of Commerce (Energy Secretary and Ambassador to the UN under President Clinton), Timothy Geithner as Secretary of Treasury (Assistant Secretary of the Treasury for International Affairs under President Clinton), Rahm Emanuel as Chief of Staff (Senior Advisor to President Clinton for Policy and Strategy), Larry Summers as Special Economic Advisor to the White House (Secretary of the Treasury under President Clinton), and Eric Holder as Attorney General (Deputy Attorney General under President Clinton).
While on one hand these nominations are hardly inspiring as representatives of change, they do, admittedly, represent competent and broadly respected appointees. The economic appointees are most interesting in the context of the country’s current economic ills and while on the margin any semblance of change is probably good, it is hard not to accept some of these appointees with an air of caution, in particular the most relevant position of Secretary of the Treasury, Timothy Geithner. In particular, when we see headlines such as “Timothy Geithner: Obama's Pick for Treasury a 'Great Man for the Job”, we get concerned that expectations are becoming elevated for his performance.
Following Senator Obama’s victory, we had posted on the potential choices for Secretary of the Treasury and we had suggested that Geithner was one of the top three choices, although we preferred Larry Summers as a more experienced and economically rational choice. We are not willing to say that Geithner is a bad choice, as he is not even on the job yet, but as we wrote on November 5th, 2008 in a piece we titled “Obama Treasury Secretary: The Top Contenders”, we wondered “whether he has the experience to manage the current crisis.”
Current Secretary of the Treasury Paulson, at least on paper, appeared to have strong experience, but clearly he has been a disappointing Secretary to say the least and has mismanaged this crisis due to very ineffective communication and a lack of a cohesive plan. While we were early in criticizing Paulson, and actually calling for his resignation, it is now a consensus view, so we won’t dwell on it. Our three most noteworthy red flags on Geithner are based on experience, association with Bob Rubin, and his involvement in trying to “solve” the current crisis.
Until recently, former Treasury Secretary Robert Rubin had an incredibly austere reputation. He was a very successful Secretary of the Treasury and considered an elder statesman and consigliore of sorts in the finance industry. Both Geithner and Summers are reputed to be followers of Rubinomics, which as the New York Times noted today is a combination of “balanced budgets, free trade and financial deregulation”. Obviously, the deregulation pursued under Rubin / Clinton is coming under criticism, due to the current economic crisis, which has as a root cause financial deregulation. Additionally, Rubin’s role as a Directory and Senior Counselor to Citigroup, the most recent of the nation’s banks to be ostensibly taken over by the government, is rightfully being closely scrutinized. So what was once a positive attribute, that is a long association with Robert Rubin, must now be viewed with caution.
At 47, Geithner is youngish for a Treasury Secretary, but age is hardly a fair arbiter of potential success especially given that the President Elect is the same age. Our primary issue with Geithner’s experience relates to the fact that he has had literally no real world business experience or deep academic economic experience. He is a career civil servant, with a Masters in International Economics, and while has been adept at handling his role as President of the New York Federal Reserve, his real notable accomplishment is his leadership role in this current crisis, a solution whose resolution is far from clear.
Geithner’s elevation to Secretary of the Treasury is largely a function of this role in helping to manage and implement a plan in the current economic crisis. As Secretary Paulson stated in a news release following word of Geithner’s nomination:
“I have the highest regard for Tim – his judgment and creativity have been critical to designing and implementing the necessary actions we’ve taken to protect and strengthen our financial system.”
Geithner obviously did not solicit the comments from Secretary Paulson, but to the extent that he did play a critical role in the half baked, ad hoc plan that has been implemented by Paulson, we remain wary.
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What's even sadder (if that's a word) was that few of these talking heads could recommend buying stocks last week. They opted to run from their own shadow instead. With the SP500 having rallied 12% in the last 3 hours of trading, I guess it's ok for the clowns to run around tooting their perpetually bullish horns again!
Back to the proactive process... here are our SP500 lines to manage risk around (see chart). We got very long last week looking for a +14% squeeze, and we are now staring right at it. The next move is to make sales, not chase bozo the clown.
BUY "Trade" = 751
SELL "Trade" = 839
Let's relax and keep it real out there,
Have commodities deflated? Well, I'll save you the debate and show you the chart below. Alongside this, the US government has opted to bring out "Heli Ben" and drop moneys from the heavens. This morning US 10 Year yields we're trading at 3.23%. They are bailing out Citigroup, again… and devaluing our American currency alongside the credibility of her banking system’s handshake.
This deflation “Trend” is setting up to turn higher for a “Trade” into the December Fed rate cut. Much like Greenspan opted to re-flate his way out of problems in 2001-2003, cutting rates to negative (on a real basis) is going to re-stoke the inflation "Trade". This is why we are short the US$ via the UUP, and long OIL.
“Invest at the point of maximum pessimism.”
On Friday, there were plenty of opportunities to invest at Sir John Templeton’s point of max gut check. The VIX was at 80 and capitulation volume was at hand. The S&P500 ending up closing +6.3% on the day, after having a +7.4% rally from its intraday lows. If you can’t buy them when they are on fire sale, managing money in a bear market is probably not for you. Bear market rallies are more powerful than those in bull markets.
Not too long ago, a lot of people thought that all investing required was other people’s money. After all, one of the men who I learned from in this business told me once, “you see Keith, the art of managing money, is having money to manage.” Some of the best lessons in life come when people teach you how not to think. That fee hoarding approach doesn’t do the client a whole heck of a lot of good if all you do is freak-out at market lows and lever up long at market tops. If the vaunted Portfolio Manager doesn’t get that, guess what? His or her client will remind them of as much come redemption day. They wear the pants in this relationship.
Admonishing the do whatever it takes to “make money” mantra is what this country needs. We need the return of principles based leadership. Plenty of capital will be made if we do this right. This is going to take time, but this is America… and if I trust in one thing out there in this country, that’s it. Alongside the change in economic leadership that Obama is going to instill, we are going to see the same in the asset management business. Both are long overdue.
We’ve been pointing to firing Hank “The Market Tank” Paulson as one of the major pending catalysts for a short squeeze. With Tim Geithner and Larry Summers respective appointments to “The New Reality”, I was smiling on Friday. No matter what your politics, you have to be proactively preparing for structural change in the leadership of this country. Whether a $500B two year stimulus plan will work or not is not the point. The point is that change matters. Particularly when the media will have you believe that pirates and the apocalypse cometh…
Getting Hank and Mark Cuban out of the game isn’t going to hurt anyone. That much I can say with a high degree of certainty. Turning Citigroup into a government office is probably the right thing to do so that America can get the “Pandit Bandit” on shore, under supervision. Citigroup’s stock is down 86% year-to-date, and while that still may rival Pandit’s Old Lane hedge fund performance, we’ll never know. “Investment Banking Inc.” has a creative way of instituting narrative fallacies into the market’s daily dialogue, so that we simpleton folks forget such non-trivial issues like facts.
The facts are on the scoreboard and it’s time for the compromised to walk the plank. Goldman’s stock broke its 1999 IPO price of $53/share. The Big Mack’s Morgan Stanley, which we remain short in the ‘Hedgeye Portfolio’ trades at $10/share… and according to the analytical savants of yesteryear, both are “trading well below book value.” Ah, right… and what exactly is on those books these days anyway? Now that the Fed is levering up to almost 60x with a capital ratio nose-diving under 2%, will there be enough cash in the pirate ship’s hull to get to the Black Pearls of GS and MS? Or will they too surrender to becoming dry docked government museums?
Citigroup reminds us this morning that the “Pandit Bandit” has no idea what his book value is. You see, that’s a shareholder equity thing… and he gets paid out of the income statement. Pandit also reminded us that he was comfortable buying insider stock ahead of the most certain investment thesis on Wall Street – that Hank Paulson will give $20’s of billions of dollars to his banking cronies in the form of “preferred stock” investments. “Preferred” … Hank and the boys love that, and they will do whatever it takes to “have money to manage.”
With 3-month US Treasuries at 0.01% this morning, money is free. BUT… only if you are in the “Investment Banking Inc.” club… so don’t get all excited and stuff… if you’re like me, flying coach out to California and staying in a Residence Marriot, being a capitalist, you’re not getting any of it. And you know what, you shouldn’t – it’s un-American.
The good news is that if you have proactively prepared for this mess, you are liquid long cash, and have nothing but the blue deflationary skies of opportunity created out of crisis to look forward to. I am looking at office space in San Diego, CA today that’s going to run us a buck a foot. Remember how hard your grandparents had to grind to earn a buck? Maybe someone should fire that memo over to that Target “activist” who is still running around putting leverage on top of leverage with other people’s money.
If you want to manage other people’s money, start by respecting that it’s not yours to lose.
Best of luck out there today,
OIL iPath ETN Crude Oil –Crude futures rose above $51 per barrel this morning on a weakening US dollar.
EWA –iShares Australia – In a speech in Melbourne today Rio Tinto (EWA: 3.1%) Chairman Skinner predicted the slowdown in Chinese demand for base metals will be short, forecasting a rebound within 2009.
EWG – iShares Germany – IFO institute business confidence survey fell to its lowest level in over 15 years at 85.8 in November, down from 90.2 in October. Moody’s maintained German sovereign debt at Aaa: Stable.
FXI –iShares China –The CSI 300 Index, declined 83.09 points (4.3%) in a broad based sell-off.
VYM – Vanguard High Dividend Yield ETF --Shares of JPMorgan Chase (VYM:2.33%) and Bank of America (VYM:2.14%) each rose over 5% in trading in London after the Citi announcement.
UUP – U.S. Dollar Index –Currency Trading was dominated by the Citi announcement with the Dollar declining against the JPY and EUR.
FXY – CurrencyShares Japanese Yen Trust – The Yen rose to 95.25 USD on news of the Citigroup bailout.
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