• Price was based on comps, growth rates, management expertise, etc.  They will include Double Down in their interactive division which is incorporated in their gaming operation revenue.  Unclear how accretive the acquisition will be at this time.
  • Rumor floating around of a $140k a day in revenue attributed to Double Down
  • Allows them to reach a younger demographic with their core products.  Also allows them to add a social media layer to their casino games.
  • Zynga is the most recent comparable transaction 
  • How do you use the metric of DoubleDown's active users?  Are those actual paying users?
    • They need to look at their revenues net of what they pay to Facebook
    • Double Down generates revenues to FB and FB then remits 70% of the revenue to DoubleDown
  • Why not build the business organically?
    • Issue of time to market of at least 2 years and they believe that time to market is important for first mover advantage.  Land grab for liquidity = product performance over time
    • Worried about the distraction from their core business if they were to build from scratch - hard to do within the core business
    • From a cost standpoint, it would cost them roughly the same
  • How do their clients feel about this acquisition - i.e. IGT competing with them?
    • Thinks that this is positive for their existing customers since it's another service that they can offer 
  • Double Down has every intent to move into mobile applications.  The lion's share of their expenses is R&D.
  • They may break out interactive going forward
  • They would think about the price paid on an EBITDA multiple basis
  • Interactive is currently less than 5% of their revenues... if they fold in Double Down into their revenues they will be north of 5% but they don't need to disclose until revenues reach 10%. 
    • Sounds like it won't be 10% but they are still debating whether to break it out
  • Think that liquidity is the number one barrier to entry.  They can also quickly provide a pipeline of products into this distribution channel since they already have the games. Since it's a B to B model they rely on Facebook for customer acquisitions.
  • Wouldn't necessarily think of this acquisition as the hub of their interactive division but rather a spoke in the wheel... like Entraction. This one allows them to access the social media channel. 
  • Retention bonuses are widely distributed - paid out over 2 years based on a number of factors. 
  • There is nothing that prevents DoubleDown from expanding outside of Facebook
  • IGT's unbranded (unlicensed) products can move online in short order, but they are reviewing their license agreements to see if they can go online as well or if they require additional payments.
  • There is also a 3rd year performance based earn out. 
  • Entraction is their real money wagering product. 
  • Unclear if online gaming becomes legal and whether that will cannibilize their virtual business.
  • Monetization rate for DoubleDown is a little better than Zynga's since their gaming experience is more volatile. 
  • Expect their next 12 months of growth to be similar to what they have experienced so far



  • IGT reached an agreement to acquire DoubleDown Casino for "$250MM in cash, $85MM in retention payments over the next 2 years and up to $165MM million in cash payable over the next 3 years subject to Double Down meeting certain financial performance targets.  IGT expects to fund the transaction from cash on hand."
  • "The addition of Double Down provides IGT instant size and scale in the fast growing world of casino-style social gaming and is expected to broaden IGT's popular gaming titles beyond the physical casino to Facebook, the world's largest social network with over 800 million global users." 
  • "The transaction is estimated to be accretive to IGT's fiscal 2012 adjusted earnings and is projected to close within the second quarter of its current fiscal year.  Greg Enell will continue to lead Double Down and the company's operations will remain inSeattle, WA after the acquisition is complete.  Through the integration, IGT will operate Double Down with the appropriate level of independence needed to continue to foster exceptional growth."
  • Double Down Interactive LLC:
    • "Launched in April 2010, the DoubleDown Casino is the world's largest virtual casino and one of the top 4 social media games in 2011 as rated by Facebook.  "
      • "Currently has 4.7 million monthly active users, up from 3.3 million in October 2011." 
      • "Offers blackjack, slots, slot tournaments, video poker, and roulette to social gamers all around the world."


TODAY’S S&P 500 SET-UP – January 13, 2012


As we look at today’s set up for the S&P 500, the range is 21 points or -1.12% downside to 1281 and 0.50% upside to 1302. 












  • ADVANCE/DECLINE LINE: 699 (+410) 
  • VOLUME: NYSE 770.06 (1.44%)
  • VIX:  20.47 -2.76% YTD PERFORMANCE: -12.52%
  • SPX PUT/CALL RATIO: 1.55 from 2.18 (-28.90%)



  • TED SPREAD: 55.12
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 1.90 from 1.92
  • YIELD CURVE: 1.68 from 1.69


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Import Price Index, M/m, Dec., est. -0.1% (prior 0.7%)
  • 8:30am: Trade Balance, Nov., est. -$45.0b (prior -$43.5b)
  • 9:55am: UMich Confidence, Jan. P, est. 71.5 (prior 69.9)
  • 11:10am: Fed’s Duke speaks on regulation in Santa Barbara, Calif.
  • 12:45pm: Fed’s Lacker speaks on economy in Richmond
  • 1pm: Fed’s Evans speaks in Indianapolis
  • 1pm: Baker Hughes Rig Count
  • 1:15pm: Fed’s Bullard Speaks on Monetary Policy in St. Louis



  • Trade deficit may have widened in Nov. to $45b as oil imports rose, economists est.
  • J.P. Morgan is first of the large banks to release earnings; watch commentary on capital/regulatory outlook
  • Google, LG said to be in talks to collaborate on new TV service
  • Nestle, Danone said to make first-round bids for Pfizer’s baby-formula unit
  • Eastman Kodak said to be in advanced discussions with Citigroup to provide bankruptcy financing
  • Dow Chemical CEO Andrew Liveris, Alcoa CEO Klaus Kleinfeld speak on job creation, innovation at Brookings, 8:30am
  • Lufthansa, Boeing officials to speak at National Press Club on how use of biofuels will impact transportation industry, 9am
  • No IPOs scheduled: Bloomberg data



  • China Gold Hoarding Turns More Traders Into Bulls: Commodities
  • Oil Heads for Weekly Decline on Plans to Delay Iranian Embargo
  • Cocoa Falls After European Bean Processing Report; Coffee Climbs
  • Gold Drops as Some Investors Sell After Rally to One-Month High
  • Copper Advances on Optimism Euro-Area Economy Is Stabilizing
  • Copper, Oil, Gold May Drive Commodities Rally, Goldman Says
  • Gold May Gain to $1,670 as Average Breached: Technical Analysis
  • Soybeans Gain First Time in Four Days as USDA Trims Forecast
  • China’s Wen to Juggle Iran Oil Need With Saudi Ties on Gulf Trip
  • Evraz Debt Costs Diverge on Lowest U.S. Loan Rate: Russia Credit
  • Copper Tax Pushing KGHM to Debt to Keep Growing: Poland Credit
  • Rubber Drops, Paring Weekly Gain, as Oil Under $100 Cuts Appeal
  • Palm Oil Drops as USDA Forecasts Bigger U.S. Soybean Supplies
  • COMMODITIES DAYBOOK: Oil Trims Weekly Drop on Europe Optimism
  • Corn Drops After USDA Unexpectedly Lifts Global Supply Outlook
  • Uranium Returning From Brink on China Demand: Energy Markets
  • EU’s Iran Oil Embargo Said Likely to Be Delayed for Six Months
























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Multiplying Halves

This note was originally published at 8am on January 10, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Perpetual optimism is a force multiplier.”

-Colin Powell


Politicians have been trying to spin multiplication theories for generations. From time to time, within their own groupthink tanks, these theories have become particularly influential – especially with the large percentage of the political-class that doesn’t do math.


In 1936, when he wrote the General Theory, John Maynard Keynes focused on what he infamously coined “The Multiplier Effect.” The theory was that every dollar spent by government would have a multiplier effect (greater than 1) rippling throughout the economy. Unfortunately, when Keynesian governments tried that in the late 1920s it didn’t work – and it hasn’t worked since.


Despite being proved wrong throughout the 1929-1933 period, Keynes, ever the master Storyteller, found a way to re-frame his vision of the elixir of a government-stimulated life. Keynes preached “that it is a complete mistake to believe that there is a dilemma between schemes for increasing employment and schemes for balancing the budget.” (Keynes Hayek, page 135)


What does 1 scheme multiplied by 2 more failed schemes equal? But these guys have to do something!


Fortunately, President Bill Clinton figured this out and wanted nothing to do with being labeled a Keynesian. President Clinton, like President Reagan, oversaw one of the 2 largest decades of employment growth in US history (by decade, the 1980s and 1990s saw between 18-22 million jobs added (net), respectively – Obama/Bush decade = net zero).


And Clinton did it with a balanced budget mandate…


Fact Check: Clinton’s Balanced Budget Act of 1997 led to the following Federal Budget results:

  1. 1998 = +$69B surplus
  2. 1999 = +$124B surplus
  3. 2000 = +$230B surplus

“… the first surplus in three consecutive years since 1947-1949, when Harry Truman was President. The debt had been reduced by $360B in three years with $223B paid in 2000, the largest one-year debt reduction in American history.” (Keynes Hayek, page 274-275)


I’m not a Republican or a Democrat. I’m just a man who wants to get this right. And, setting aside all of the other angles on this Presidential Election, I think that if Obama or Romney get the economic policy messaging right, they’ll win the election.


So far, President Obama has a lot of Reagan in his economic policy legacy (ballooning national debt balance and Keynesian spending). Romney’s got plenty of baggage too, but maybe he has a bigger opportunity to be the change Americans want to see in our economics.


Last night on The Kudlow Report, Larry asked me what I’d suggest Romney be (economically). My answer: ½ Clinton ½ Reagan.


Back to the Global Macro Grind


I’m coming into this morning’s US market open hot. I don’t mean Alabama Crimson Tide hot – I mean locked and loaded with the most Global Equity exposure I’ve had in well over a year:

  1. Long US Consumer Discretionary(XLY)
  2. Long US Consumer Staples (XLP)
  3. Long US Utilities (XLU)
  4. Long Chinese Equities (CAF)
  5. Long Hong Kong Equities (EWH)

But how hot is hot? Well, get out the calculators and tell me what your money is up or down if you sold all of your Asian and US Equity exposure between February and April of last year, and you tell me.


We all invest from the vantage point of what’s in our own accounts. This cochamamy storytelling of the Old Wall that there is an optimal “asset allocation” is as broken as Keynes personal accounts were when they crashed in 1929.


Money compounds. Anyone who does math with their own money gets that. Money also gets evaporated during big draw-downs (i.e. if you’re still long SP500 1565 from October 2007, you’re still down -18.2% from there and need to be up over +22% to get back to breakeven). That’s math too – it’s called geometric.


For my money, moving to a 24% total Global Equity asset allocation in an environment like this actually makes me really nervous. Maybe that’s why it’s working for 2012 YTD (Chinese Equities are already up +3.9% for the year). Maybe it’s not. All I know is that what I don’t know is what makes me nervous about being long anything tied to government decision making.


Maybe Powell was right about the force-multiplier of optimism. Maybe I’ve been right on the trust-divider of fear-mongering. All I know is that, combined with a Strong Dollar, the best of ½ Clinton ½ Reagan is a winner for me.


My immediate-term support and resistance levels for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, and the SP500 are now $1592-1645, $111.89-115.61, $1.26-1.29, $80.41-81.61, 2178-2295, and 1269-1291, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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