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Comments from CEO Keith McCullough


Chasing fire engines in Europe is over. Back to capitalizing on a process that absorbs globally interconnected risk:


  1. JAPAN – been a while since Japan was #1 in my morning macro grind, but this country’s failed Keynesian Experiment doesn’t cease to exist – the Yen getting spanked this morning after the Japanese announced they’ll miss both their topline (growth) and bottom line (budget) goals, again. Don’t forget Japan has to roll over 31.2% of its sov debt in 2012. That’s a lot of yens (231T).
  2. GREECE – the Athex Index is down -2.6% to 724 after going parabolic to the upside for the YTD. What’s next? News-flow is setting this up for central planners to come say they saved the day again – we’re all saved if this thing just goes away – funny how the dudes in Davos said Greece was a “one-off” just about now at this time LY. Greece’s TREND line = 709 on the Athex, watching that.
  3. GOLD – both Gold and Silver backing off at their intermediate-term TREND lines of $1688 and $32.69 resistance this morning. We’re short Silver as of Friday’s rip and looking to get back on the short side of Gold (and Gold related stocks). The critical signal in our model is a breakout in 10yr UST yield > 2.03% (TREND line). Gold has to compete w/ absolute levels of “risk-free” yield.


SP500’s immediate-term range = 1. Managing gross and net exposure to Global Equities w/ that in mind.





THE HBM: MCD, EAT, CAKE - subsector fbr





MCD: McDonald’s reported 4Q11 EPS of $1.33 versus consensus of $1.29.  December comps came in strong, at +9.8%, +10.8%, and +6.5% for the U.S., Europe, and APMEA, respectively.






THE HBM: MCD, EAT, CAKE - mcd apmea dec





EAT: Brinker reported 2QFY12 EPS of $0.47 versus consensus $0.45.  Margins came in at +17.9% versus consensus +16.9%. Despite this beat, Chili’s comps came in lighter than we or the Street had expected and the stock is trading down on that data point.


Chili’s sales are losing momentum.  The $6 price point at lunch is no longer new news to most consumers.  We are on the conference call listening for any clues as to what could bring around a pickup in same-store sales trends.


THE HBM: MCD, EAT, CAKE - chili s pod1


THE HBM: MCD, EAT, CAKE - eat quadrant





CAKE:  The Cheesecake Factory traded down -2.1% on accelerating volume.  The company reports February 2010.



THE HBM: MCD, EAT, CAKE - stocks


Howard Penney

Managing Director


Rory Green




The Street should've known about the ugly slot sales and share loss. After today, we'll get more positive as the Sell Side gets more negative.


"We anticipate revenues and profit margins strengthening throughout the year and we remain on track to meet our fiscal year 2012 operating goals."

- Patti Hart, CEO of IGT




  • Continue to benefit from the improvements that they have made in their gaming operations business.  Continue to make placements in MegaJackpots and see higher yields.
  • Expect to gain momentum throughout the new year in NA sales due to more openings and a pickup in replacements
  • Inventory increase was due to a ramp up in production of new units in anticipation of new openings coming in the next few quarters
  • Anticipate coming back to their normal share buyback plan in the coming quarters
  • Double Down
    • Adds new distribution of their game content through Facebook
    • Will be in the gaming operations business with the rest of their interactive division
    • Will increase disclosure of interactive in the coming quarters
  • This quarter, they saw the largest sequential increase in their MegaJackpots install base in four years
    • Anticipate average revenue per day to increase for the remainder of 2012
  • Received sizable orders in Macau, Panama, and Argentina
  • Anticipate units and revenues to be up double digits for international for the rest of the year
  • Think that Cloud will be adding to their systems revenue early next year
  • Anticipating improving NA volume and pricing over the next few quarters.  Ship share is improving. 
  • While we are off to an "expected measured start," we remain on track for the year
  • Their reiterated guidance doesn't include any impact from the Double Down acquistion



  • Return of capital to shareholders?
    • Their plan is to buy back $100MM/year of stock.  They were restricted for most of the quarter due to the Double Down acquisition.
  • Gaming operations
    • Lower yields sequentially was driven by normal seasonality.  Expect a lift in the coming quarters with September being the strongest.
  • Expect that they will give more visibility of Double Down when they consolidate the business in April
  • Continue to have confidence that they will maintain and grow share over the coming quarters. They will grow with the market. 45-50% for new openings ship share (driven by their poker platform) and mid 30's for replacement share.
    • Part of the shortfall they saw in the quarter was the recognition of Cosmo last year
    • Last year they had 27% share of NA replacements and expect to be 30% this year
      • If that's true, then every supplier will miss the quarter because that would imply a very large YoY increase
  • They are comfortable based on their backlog and customer feedback that their for sale units will increase
  • Macau's sales were to LVS's Sands Cotai Central. All of the uptick in Asia Pacific was due to the order in Macau. Their market share is still low - sub 20%.
  • March replacement units will be 'headed North" from December - question of how far North and how fast
    • Expect a nice step up in the March quarter, then a steady increase in the June with the best quarter in September
  • Expect more convergence in technology in the gaming space. Their core business is being redefined as a result. Game content development is and will continue to be their core business.
  • They saw weakness generally in the NA replacement market in December
  • Margins in gaming operations
    • All about impact of interest rate on jackpot expenses
  • Assumptions for Double Down DCF approach
    • More aggressive discount rate but high growth rates
    • Paid a higher multiple too
    • Think that they got a good deal compared to the comps - aka Zygna
    • Transaction was evaluated assuming no I-poker in the US
  • R&D: they have been very focused on R&D efficiency
  • SG&A was up primarily due to purchase of the Entraction platform - although they lost a lot of revenue in jurisdictions that they didn't want to serve
  • R&D is flat at about $200MM and the split of it among their products is due to the needs of the businesses each quarter
  • Which new openings did they ship to this quarter?
    • Miami Jai Lai
    • Northern Edge Navajo casino in NM
    • Sands Cotai Central
    • Panama, Argentina, Uruguay
    • Small increase to Europe YoY
  • Gross Margin on product sales
    • Universal Slant has lower margins despite higher pricing because it's a new product for them
    • Lower parts and conversion sales which are higher margin
    • Last year IGT benefited from a significant sale into Mexico in a 90% margin range 
      • Sold low price depreciated units into that market
  • Think that they will come in below $200MM for R&D for the year. 



  • EPS outlook of $0.93 to $1.03 was reiterated
  • Gaming Operations revenues of $265MM, gross margin of 61% and 55.6k install base
    • Increase in install base due to Resorts World NYC units and international lease operations in Latin America (CAGE)
    • Revenue growth due to interactive, NA Megajackpots, and international lease operations
  • Product sales of $181MM and gross margin of 51%
    • Increase in NA ASP due to higher mix of Universal Slant and G23 MLD sales
    • International ASP increase due to lower mix of Mexican units and "due to the prior year's conversion of lower-priced Mexico lease units to for-sale units."
    • Lower gross profit "primarily due to lower North America machine, part, and conversion sales" and lower margins primarily from product mix
  • Higher SG&A due to Entraction acquisition
  • "During the first quarter, the company repurchased 0.3 million shares of common stock at an average price of $16.74 per share for a total cost of $4 million."



TODAY’S S&P 500 SET-UP – January 24, 2012

As we look at today’s set up for the S&P 500, the range is 22 points or -1.14% downside to 1301 and 0.53% upside to 1323. 











  • VOLUME: NYSE 722.90 (-22.04%)
  • VIX:  18.67 2.13% YTD PERFORMANCE: -20.21%
  • SPX PUT/CALL RATIO: 2.35 from 2.54 (-7.48)


  • TED SPREAD: 52.45
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 2.04 from 2.05
  • YIELD CURVE: 1.81 from 1.82

MACRO DATA POINTS (Bloomberg Estimates):

  • 9am: FOMC begins 2-day meeting on interest rates
  • 10:00am: Richmond Fed, Jan., est. 6 (prior 3)
  • 11:30am: U.S. to sell 4-week bills
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 1:00pm: U.S. to sell $35b 2-yr notes


  • State of the Union speech
  • Romney attacked Newt Gingrich as an “influence peddler in Washington” and a failed leader whose party ousted him as U.S. House speaker in Florida debate
  • Mitt Romney paid effective tax rate of 13.9% on income of $21.6m in 2010, according to a tax return his campaign showed reporters last night and will release today
  • House, Senate in session:
    • 1:30pm: Republicans on House Oversight panel to question Consumer Financial Protection Bureau Director Richard Cordray
    • 10am: House Judiciary Committee marks up H.R. 1433, the “Private Property Rights Protection Act of 2011”
    • 10am: Congressional Services Caucus holds discussion on Census employment data, broken down by congressional district
    • 2:30pm: House-Senate Conference Committee meets on H.R.3630, the “Temporary Payroll Tax Cut Continuation Act of 2011”


  • President Obama to give 3rd State of the Union Speech, focusing on economic concerns
  • Oil traded near $100/barrel in New York on concern that Iran may respond to European crude-export embargo by disrupting shipping in Persian Gulf
  • FOMC begins two-day meeting
  • Apple reports earnings
  • William Ackman says he will shield his choice to run Canadian Pacific Railway against possible loss of benefits after the retired executive’s former employer suspended pension and other payments
  • Blackstone Group said to secure more than $6b of pledged capital for a new real estate fund that will buy mainly distressed-property assets
  • The Earth will be bombarded today by strongest solar radiation storm in six years, with limited potential to affect satellites and power grids
  • Oscar nominations to be announced ~8.30am


      • Ashland (ASH) 6am, $1.00
      • EI du Pont de Nemours & Co (DD) 6am, $0.33
      • Baker Hughes (BHI) 6am, $1.32
      • Air Products & Chemicals (APD) 6am, $1.36
      • Key (KEY) 6:20am, $0.21
      • Travelers Cos (TRV) 6:30am, $1.52
      • Quest Diagnostics (DGX) 6:45am, $1.06
      • EMC (EMC) 7am, $0.46
      • Coach (COH) 7am, $1.15
      • MGIC (MTG) 7am, $(0.89)
      • Regions Financial (RF) 7am, $0.06
      • Waters (WAT) 7am, $1.50
      • Harley-Davidson (HOG) 7am, $0.22
      • Kimberly-Clark (KMB) 7:30am, $1.30
      • Verizon Communications (VZ) 7:30am, $0.52
      • Johnson & Johnson (JNJ) 7:45am, $1.09
      • Brinker International (EAT) 7:45am, $0.45
      • McDonald’s (MCD) 7:58am, $1.30
      • Rayonier (RYN) 8am, $0.49
      • Peabody Energy (BTU) 8am, $1.30
      • Cooper Industries PLC (CBE) 8am, $0.95
      • AK Steel Holding (AKS) 8:30am, $(0.39)
      • Commerce Bancshares (CBSH) 9am, $0.70
      • RF Micro Devices (RFMD) 4pm, $0.03
      • Stryker (SYK) 4pm, $1.02
      • Total System Services (TSS) 4pm, $0.31
      • Norfolk Southern (NSC) 4:01pm, $1.40
      • Canadian National Railway Co (CNR CN) 4:01pm, $1.25
      • CA (CA) 4:02pm, $0.54
      • Fusion-io (FIO) 4:05pm, $0.04
      • Yahoo! (YHOO) 4:05pm, $0.24
      • Altera (ALTR) 4:15pm, $0.42
      • Advanced Micro Devices (AMD) 4:15pm, $0.16
      • International Game Technology (IGT) 4:15pm, $0.22
      • Apple (AAPL) 4:30pm, $10.12



GOLD – both Gold and Silver backing off at their intermediate-term TREND lines of $1688 and $32.69 resistance this morning. We’re short Silver as of Friday’s rip and looking to get back on the short side of Gold (and Gold related stocks). The critical signal in our model is a breakout in 10yr UST yield > 2.03% (TREND line). Gold has to compete w/ absolute levels of “risk-free” yield.

  • Record U.S. Beef Sales Seen as Japan Reviews Curbs: Commodities
  • Oil Fluctuates as Iran Responds to European Crude Import Embargo
  • Gold Declines as Rally to Six-Week High Spurs Investor Sales
  • Copper Declines as Prices Near Four-Month High Prompt Selling
  • Sugar Climbs a 13th Session as Mexico Output Falls; Cocoa Falls
  • Soybeans Decline as Biggest Gain in Two Weeks Prompts Selling
  • India Cuts Cotton Production Estimate as Disease Hurts Crop
  • Natural Gas Rises a Third Day on Chesapeake Plans to Cut Output
  • Oil-Embargo Rally Muted by Saudi Pledge, Libya: Energy Markets
  • JBS Sale Shows Rising Demand for High-Yield Debt: Brazil Credit
  • Sieminski to Leave Deutsche Bank to Head U.S. Energy Agency
  • Cabot Production Growth Seen Cut as Gas Hits 10-Year-Low: Energy
  • Detroit Aluminum Use Means New Muscle for Cars: Chart of the Day
  • COMMODITIES DAYBOOK: Record U.S. Beef Sales Seen on Japan Review
  • LME Copper Stockpiles at Two-Year Low Signal Falling Supplies
  • West Europe Aluminum Output May Fall 500,000 Tons, Goldman Says










GREECE – the Athex Index is down -2.6% to 724 after going parabolic to the upside for the YTD. What’s next? News-flow is setting this up for central planners to come say they saved the day again – we’re all saved if this thing just goes away – funny how the dudes in Davos said Greece was a “one-off” just about now at this time LY. Greece’s TREND line = 709 on the Athex, watching that.




JAPAN – been a while since Japan was #1 in our morning macro grind, but this country’s failed Keynesian Experiment doesn’t cease to exist – the Yen getting spanked this morning after the Japanese announced they’ll miss both their topline (growth) and bottom line (budget) goals, again. Don’t forget Japan has to roll over 31.2% of its sovereign debt in 2012. That’s a lot of yens (231T).










The Hedgeye Macro Team

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Perpetually Reverting

This note was originally published at 8am on January 19, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The only thing that’s gone up for the last 12 years is my weight.”

-Keith McCullough


Two nights ago Keith and I hosted a dinner for a number of our subscribers at the beautiful Patroon restaurant in midtown Manhattan.   Keith’s quote above was in reference to asset classes generally.  Now, truth be told, Keith and I snuck away to play noon hour hockey earlier this week and he’s actually staying in pretty good shape.  Nonetheless, his analogy was an apt one.  Asset class returns are not perpetual, nor are global macro investment views.


On the latter point, the big surprise we heard at the dinner and feedback from our Q1 Themes call last week is the shock that we are getting more constructive on equities and the U.S. economy.  Yes, we are less bearish.  Not raging bulls, per se, but on the margin less bearish.  As a result we’ve upped the equity allocation in our asset allocation model to its highest level since mid-September ’11.  So, what’s driving our more constructive outlook?


First, we believe the rally in the U.S. dollar will continue to gain momentum.  The strength in the dollar is likely to be driven by a fiscal outlook in the United States that is improving, on the margin, due to automatic budget cuts via sequestration and the winding down of the Iraq war.  In addition, both political parties have signaled, at least rhetorically, the importance of getting government spending under control, an issue that will be front and center in the 2012 election, and will likely lead to further budget cuts, or the perception of such.


The other key tailwind for the U.S. dollar is monetary policy.  Since the financial crisis in 2008, the United States has led the world in accommodative monetary policy.  This is changing and will continue to change.  We believe the Fed is in a box related to its ability to implement additional quantitative easing due to an improving employment and economic growth situation.  Conversely, central banks globally have plenty of room to ease, which naturally narrows the differential between U.S. interest rates and global rates.  The most recent example of this is from China, where this morning reports suggest Chinese officials are weighing plans to relax capital requirements for the major Chinese banks.  Add to this Brazil, which cut interest rates by 50 basis points overnight and the Philippines, which cut rates for the first time since 2009. 


The primary benefit of a strong dollar is that it boosts the purchasing power of the U.S. consumer by deflating those commodities that are priced in U.S. dollars and by making global goods cheaper on a relative basis.   This is important when considering the outlook for GDP since 71% of U.S. GDP is driven by consumption.  Conversely, Eurozone government spending is almost 50% of GDP, which makes the outlook for European growth relatively bleak in comparison given the dramatic austerity being implemented in 2012.  (Incidentally, a weak European economy and euro are also positive for the U.S. dollar.)


Last year at this time, consensus U.S. GDP estimates for 2011 were at 3.2% and came down steadily all year.  It is likely that full year 2011 U.S. GDP comes in at, or under, 2%, which implies an almost 38% miss by the consensus Wall Street prognosticators.   Call it process or luck, but we started last year with a much more pessimistic view of economic growth.  Thus, for most of last year we were underweight equities and overweight fixed income, with a focus on FLAT and TLT.


This year the scenario is basically reversed.  U.S. GDP consensus growth estimates are now just above 2% for 2012.  Our models suggest a reasonable high end range of GDP growth in the U.S. could be 2.8%.  This is almost 40% above the consensus number and an economic scenario in which growth is accelerating versus last year.  Not surprisingly then, we have exited our fixed-income positions and have a much higher allocation to equities, both U.S. and global.


Currently, one of our key global equity positions is long Chinese equities via the closed end fund CAF.  As of this morning, the position has already returned more than 15% for us in the Virtual Portfolio.  Are we surprised? Well, perhaps by the rapid price appreciation, but it was a game of expectations in China.  The Chinese bears have been perpetuating an end of the world scenario for China and the Chinese benchmark equity index was down more than -20% last year.  Thus, when economic growth from China came in better than bad a couple of days ago at +8.9%, Chinese equities reacted favorably.  This is not dissimilar to the economic setup we see in the United States.


In the Chart of the Day today we’ve highlighted gold versus the U.S. dollar going back twelve years.  The key take away from the chart is that bull markets in gold have been perpetuated by bear markets in the U.S. dollar.  After gold has gone straight up for the last decade plus, it might not seem to be a contrarian call to suggest there is bubble in gold and it is potentially primed for a potential major correction, but there is major complacency related to gold.  Unfortunately for the gold bugs, nothing goes up forever, not even gold.  But if you don’t believe us, ask India, the world’s largest consumer of gold, who is set to import 54% less gold in Q4 2011 on a year-over-year basis.


If there is one truism of investing, it is that prices revert to the mean.  As Jeremy Grantham once said:


“I got wiped out personally in 1968, which was the last really crazy, silly stock market before the Internet era….After 1968, I became a great reader of history books. I was shocked and horrified to discover that I had just learned a lesson that was freely available all the way back to the South Sea Bubble.”


No asset class goes up, or down, in perpetuity.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, and the SP500 are now $1636-1675, $109.02-111.91, $1.26-1.29, $80.31-81.61, 2220-2354, and 1290-1310, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


Perpetually Reverting - Chart of the Day


Perpetually Reverting - Virtual Portfolio

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

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