We’re 2c below the Street for FQ2 but 3c above for FQ3.  Focus should be on international.



Fiscal 2Q is likely to be a quarter of record deferrals for IGT.  We already knew that IGT would not be able to recognize their shipment to Revel and now are pretty sure that Ohio will also be deferred.  With over 2,300 units deferred, our F2Q estimate is $0.24 but our FQ3 estimate is $0.30, 3c above the Street.


While the deferral of the Ohio and Revel units have been well telegraphed, most sellside analysts have yet to lower their numbers.  Consensus still reflects over 6k units being shipped to NA in the F2Q.  We don’t think that investors will really care about a quarter of deferrals especially if the rest of the business is humming along. 


We think that will be the case, especially on the international side where 11% top line growth should provide some visibility on IGT’s positive long-term outlook for the market and market share growth.  We’re still skeptical that IGT can reach its 30% market share goal but 25% or even 20% share does not appear to be discounted in the stock at this level.  Any progress in the international arena should outweigh the slippage issue.



F2Q Detail


We estimate that IGT will report F2Q results of $504MM of revenue and $0.24 of EPS.  At $215MM of product sale revenue, we’re 9% below the Street.  Our game operations estimate of $289MM is in-line with sell-side estimates.


Domestic product sale revenue of $120.7MM and gross margin of $68.5MM

  • Box sales of $68MM
    • $14.5k ASP
    • Recognized units 4.7k
      • We project that replacements should be up YoY, at 4,000
      • New unit sales of approximately 700
  • Lots of deferred unit sales:
    • IGT shipped ~950 games to Revel, but won’t get recognized until the June Q.  The server based component in the games makes it difficult to separate the system from the unit sales.
    • Approximately 1,425 units were shipped to Penn and CZR in Ohio but will not be recognized until the June quarter.  While the operators have “provisional licenses”/ “letters of acceptance” which give them authorization to receive slot machines, IGT is taking a conservative approach to revenue recognition.  One of the revenue recognition rules requires all consequential obligations to have been fulfilled at the time of recognition.  The way various operators interpret “consequential” will determine whether they recognize the units in the March or June quarter.  Having a license to open can be determined as consequential by IGT.
  • ASP’s will be down QoQ given the lower mix of MLDs this quarter compared to last, but margins should be up
  • Non-box sales of $54MM, down 5% YoY, due to lower conversion kit sales

International product sale revenue of $94.4MM at a 50% margin

  • $72.4MM of box sales
    • 4,050 unit sales (up 24% YoY)
    • $16.3k ASP
  • We believe that most of the unit growth will be driven by share gains in Macau and placements at SCC opening on April 11th
  • While we expect a decline QoQ in ASPs, margins on box sales should be up sequentially
  • We project international non-box sales of $22MM up YoY and QoQ

Gaming operations revenue of $289MM at a 60% gross margin

  • We estimate and ending install base of just 55.9k units.
  • The March quarter should benefit from a full quarter of a fully open and ramped Resorts World NY and some contribution from Double Down.
  • The strong regional results this quarter should benefit IGT’s largely variable average win per day


The Macau Metro Monitor, April 4, 2012




Among the planned developments in Cambodia is the Thansur Bokor Highland Resort, two hours south of the Cambodian capital of Phnom Penh.  The resort held a soft opening last week and is expected to open officially by midyear, with 418 rooms, a convention center, spa facilities, scenic trails and an "edutainment center" for children, with a library and board games.  Some gambling experts are skeptical it will succeed, in part because of Thansur Bokor's distance from Phnom Penh. It also is unclear whether Cambodia will be able to attract the kind of family-oriented crowds that have boosted revenue at casino developments in Singapore.


Cambodia's best-known casino, NagaWorld in Phnom Penh, is adding 220 rooms to its current total of about 500. It is adding as many as 30 new gambling tables to its total of 131 and around 275 new slot machines.  Several other additions for the resort at a cost of $369 million include a "NagaCity Walk", a tourist park and luxury retailers.


Developers also are looking to expand gambling in other parts of Cambodia, including near the southern beach resort of Sihanoukville and near what could be the biggest prize: Siem Reap, home to the Angkor Wat temple, Cambodia's most-renowned tourist attraction.

Pivot Points

This note was originally published at 8am on March 21, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Simple question: are we making sufficient progress to believe that our original strategic hypothesis is correct?”

-Eric Ries


I’ve been on the road for the last three days in Canada and Minnesota and had an opportunity to finish reading a book that our engineering team recommended by Eric Ries’, “The Lean Startup.” That quote comes from Chapter 8 which is titled Pivot (Or Persevere). Solid risk management read.


Solid is as solid does. Whether you are building your own company, nurturing a family, or serving as a fiduciary of other people’s money, you constantly have to Re-think, Re-work, and Re-build what isn’t working. If you are challenging yourself to evolve, you are going to break things.


What do you do when fundamental operating principles like trust break? Do you get out there and earn it back? Or do you sit there and make excuses? I thought UBS Chairman Kaspar Villager nailed it yesterday when he said this about trust:


it cannot be tied to a far-dated founding year; trust has to be constantly won anew… reputation is the most important capital for a bank. It takes just a thoughtless action to lose it and the sweat of thousands to rebuilt it.”


If that doesn’t resonate with you, try playing on a Championship Team that sits facing one another in a 4-walled dressing room.


Back to the Global Macro Grind


I’m not going to apologize for using sports analogies and/or team building concepts. That’s who I am – and I take great pride in working alongside teammates who think about the name on the front of their jersey before the one on their backs.


The leadership concept of Pivot (or Persevere) is a critical one in Global Macro Risk Management inasmuch as it is one in building a business. You really need to be Duration Agnostic when considering whether or not your strategic hypothesis is correct. Markets wait for no one and you’re constantly getting real-time feedback on the validity of your research views.


That’s why we’ve separated our process into two really big components:

  1. The Fundamental Research Process (Growth, Inflation, Policy, etc.)
  2. The Quantitative Risk Management Process (Price, Volume, Volatility, etc.)

Quite frequently these 2 components disagree with each-other. Usually that’s because they aren’t both speaking to you on the same duration. That’s why, contrary to popular efficient market hypothesis belief, Timing Matters.


As of 6AM EST today, here are our summary Fundamental Research Process updates:

  1. GROWTH: on our intermediate-term TREND duration, both globally and domestically, it’s slowing
  2. INFLATION: on our intermediate-term TREND duration, it’s rising
  3. POLICY: with the exception of very few countries (Iceland raised rates this morning), the Keynesian Bubble remains

From a Quantitative Processing perspective:

  1. PRICE: US and German Equities remain in Bullish Formations whereas China, India, and Hong Kong have broken TRADE lines
  2. VOLUME: Asian Equity volumes are ok, whereas US Equity Volumes continue to hit generational lows
  3. VOLATILITY: everything big beta (Inflation Policy stocks, commodities, etc.) is pseudo normal; SP500 VIX is bombed out

So what do I do with that?


Like I did in Q1 of 2008, 2010, and 2011, I sell beta (anything that’s eventually going to fall hostage to Growth Slowing, globally, in the intermediate-term). That doesn’t mean I wasn’t early in any of those prior Q1 Selling Opportunity periods. That doesn’t mean I’m not wrong right now being short the SP500 either (the position is -0.37% against me).


It just means I have plenty of room to improve my timing process.


Pivot Points (like intermediate-term tops and bottoms), are processes, not points. Every hour of every day we are offered more Fundamental Research points that can help proactively predict the changing slopes of the lines embedded in market expectations.


Market expectations, unfortunately, aren’t wrapped up in a pretty baby blue fundamental research box with a white bow. They fully factor in greed, fear, and performance chasing. They can be jubilant; they can be abrupt. And they have a not so funny way of surprising the most amount of people at the most unexpected times.


Who would have thunk that the SP500 would be down -10.2% from those topping process days of 2007 (you still need to be up over 12% from here to break-even by the way)? Are they the same people who nailed the SP500 being up +11.7% for 2012 YTD?


I don’t know. And I think that if you really want to capture the big intermediate-term Pivot Points of market prices, you really need to embrace the uncertainty of that three word statement.


My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, and the SP500 are now $1627-1679, $105.70-108.91, $79.33-79.87, and 1391-1411, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Pivot Points - India


Pivot Points - vp 3 21

Early Look

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Bernanke's Bubbles

“Early triumph can promote future failure.”

-Nassir Ghaemi


Last week I wrote a pointed Early Look note titled Bernanke’s War. When my Global Macro Process sees Growth Slowing like this (like it did in Q1 of 2008, Q1 of 2010, and Q1 of 2011), I am not shy making a call that’s counter to consensus. We have fought the Fed before, and won.


Fighting The Fed’s conflicted and compromised 0% Policy To Inflate means that, at some point, the man runs out of either political room or the ability to ban Global Macro-economic gravity. If either or both happen, I think I can win.


Bernanke’s Bubbles are vast. That’s why I have a 0% allocation in the Hedgeye Asset Allocation Model to both Commodities and Fixed Income right now. If these bubbles are in the process of popping, why stay in them?


Back to the Global Macro Grind


Dollar up = Correlation Risk On, eh. All it took yesterday was the US Dollar Index arresting its most recent 4 consecutive-week debauchery for US stocks to stop going up. At one point in the day, the SP500 was down almost 1%. That’s only happened 1 other time in 2012 (no, that’s not normal).


Another way to say what happened yesterday, and what’s happening across asset classes in Global Macro this morning for that matter, is what we have coined Deflating The Inflation. Functionally, whether Romney or Obama figures this out or not is left to be seen, but popping Bernanke’s Bubbles at the pump would be most easily achieved by raising interest rates.


What other long-term bubbles are popping this morning?


1.  GOLD (we’re short GLD): down another -2.4% this morning to $1632/oz and finally snapping my long-term TAIL support line of $1652. Over the longest of long terms, no matter what your religion on the subject matter of Gold, it does not act well when Treasury Yields are rising. People look at “risk free” rates of return relative to absolutes; particularly when 0% was the absolute comparison.


2.   US TREASURIES (we’re short TIP): Treasuries are down with 10yr bond yields rising to 2.25%, taking the rip in 10yr yields to +22% from 1.84% (immediately after Bernanke tried his best to ban economic gravity during his January 25th speech, pushing easy money to 2014, sort of).


3.   JAPANESE YEN (we’re short FXY): yes, during a Currency War where the Americans, Europeans, and Japanese are in a race to the bottom to de-value their respective fiat currencies, the US and European Keynesian Policy Makers perpetuated a bubble in the Japanese Yen up until February of 2012. Then kaboom – Yen down -9% in a straight line as the Euro and USD stopped going down.


The popping is a process, not a point. Unless you think that there is political inertia, from here (i.e. throughout the US Election), that allows Bernanke to keep this 0% Policy To Inflate ball under water, you won’t have to take my word for it on hearing the popping.


“Pop, pop, bang!”


Remember that line from Cinderella Man’s Jimmy Braddock (played by Russell Crowe in 2005)? That was one of the many metaphors I used when Fighting The Fed during Q1 of 2008. Braddock was an Irish-American boxer from New Jersey. I am a Canadian-American Fed fighter from Connecticut. And, Mr. Bernanke, I am not going away.


Back to the ring. I have a 73% position in Cash and am in no hurry to add to my 9% asset allocation to US Equities this morning. Why? Well, because US Equities are bubbly too. Not as bubbled up as Bonds and Gold were, but they’re certainly worthy of wearing a bobble head.


The most interesting thing about Equities, globally, is that with the exception of the USA and Venezuela (ran by 2 serial currency debauchers in Chief who think stock market inflations reflect economic prosperity), equity markets around the world stopped going up a month ago. Check out the corrections in markets that have stopped making higher YTD highs:

  1. Greece = down -15.2%
  2. Spain = down -12.4%
  3. Italy = down -9.5%
  4. China = down -8.0%
  5. Brazil = down -6.0%
  6. India = down -5.1%
  7. Japan = down -4.2%
  8. Germany = down -4.1%
  9. Hong Kong = down -4.1%
  10. USA = down -0.4%

The most obvious point here is that the SP500 is only down -0.4% from its YTD peak. It has only had 1 down-day greater than 0.7% in 2012, and is now subject to the only risk management strategy that has held true for the last 40 years – mean reversion.


It’s a good thing we have Apple. Or is it?


Maybe that’s a bubble too. Who knows until it starts popping. But the storytelling about this stock is hilarious. Next to a story that “Home Prices Seen Dropping 10%”, the 2ndMost Read story on Bloomberg is titled “Apple Fever, $1 Trillion Valuation.” Nice.


The thing about bubbles (centrally planned ones and all others) is that they need a darn good story. Apple’s is fantabulous at this point, and so was that of The Ben Bernank.


That said, don’t forget where I started this morning – if that quote from Nassir Ghaemi’s “A First-Rate Madness” comes home to roost, the “early triumphs” of Keynesian Economics could very well lead to Bernanke losing this war.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen, and the SP500 are now $1, $121.98-126.12, $79.19-79.64, 81.91-83.78, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's Bubbles - Chart of the Day


Bernanke's Bubbles - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 4, 2012

As we look at today’s set up for the S&P 500, the range is 25 points or -1.80% downside to 1388 and -0.03% upside to 1413. 












  • ADVANCE/DECLINE LINE: -889 (-2415) 
  • VOLUME: NYSE 817.21 (7.05%)
  • VIX:  15.66 0.13% YTD PERFORMANCE: -33.08%
  • SPX PUT/CALL RATIO: 1.67 from 1.86 (-10.22%) 


  • TED SPREAD: 39.28
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.24 from 2.30
  • YIELD CURVE: 1.90 from 1.93

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week of Mar. 30 (prior - 2.7%)
  • 7:45am: ECB rate decision, press conference 8:30am
  • 8:15am: ADP Employment Change, March, est. 206k (prior 216k)
  • 10:00am: ISM Non-Manf. Comp, March, est. 56.8 (prior 57.3)
  • 10:30am: DoE inventories
  • 11:00am: Fed’s Williams speaks in San Francisco


    • President Obama hosts Easter prayer breakfast
    • Rick Santorum holds press conference with Rep. Tim Murphy, R-Pa., in Irwin, Pa. 11am
    • Mitt Romney speaks at American Society of Newspaper Editors conference in Washington, 11:30am
    • Obama signs “Stop Trading on Congressional Knowledge (STOCK) Act.” 11:50am
    • Treasury Secretary Geithner speaks at Economic Club of Chicago at 8am breakfast meeting, later tours Ford’s Chicago Stamping Plant at 12:15pm     


  • Burger King, taken private in 2010, to go public again after merging with a co. owned by William Ackman
  • European Central Bank will keep interest rates at record low 1%: Bloomberg survey
  • Mitt Romney won Republican primaries in Wisconsin, Maryland, Washington D.C.
  • JP Morgan may settle CFTC case this week over role in collapse of Lehman Brothers, pay fine $20m, NYT says
  • Spain sells EU2.59b in bonds, maximum tgt EU3.5b
  • New York International Auto Show begins; Nissan to introduce new Altima
  • Fiat shareholders meet to discuss share conversion, making it easier for Fiat to fully merge with Chrysler
  • Major League Baseball opening night
  • Amylin should pursue a sale process to let shareholders decide the co.’s fate, said Carl Icahn, its 3rd-largest investor
  • Service industries probably expanded in March, economists est.
  • Facebook accused Yahoo of infringing 10 patents; Yahoo had sued Facebook last month
  • GE debt rating cut as Moody’s to Aa3, cites finance unit’s funding risks
  • WellCare to pay $137.5m to settle false claims lawsuits
  • Sears Chairman Edward Lampert appears on CNBC, 7am; also watch AZO 


    • MSC Industrial Direct Co (MSM) 7:30 a.m., $0.95
    • Monsanto (MON) 8 a.m., $2.12
    • Acuity Brands (AYI) 8:19 a.m., $0.62
    • Schulman (SHLM) 4:01 p.m., $0.44
    • Ruby Tuesday (RT) 4:02 p.m., $0.16
    • AngioDynamics (ANGO) 4:04 p.m., $0.08
    • Bed Bath & Beyond (BBBY) 4:15 p.m., $1.32
    • Harry Winston Diamond (HW CN) Post-Mkt, $0.18
    • Pricesmart (PSMT) Post-Mkt, $0.68


  • England Challenges China by Reviving Strategic Mine: Commodities
  • Gold Falls for Second Day as Fed Stimulus Stance Lifts Dollar
  • Copper Falls for Second Day on Reduced Stimulus Expectations
  • Monsoon Rain in India Seen More Than Normal for Third Year
  • Oil Falls a Second Day on Supplies, Signs Fed May Halt Stimulus
  • Wheat Declines as Rains in U.S., Russia Improve Crop Prospects
  • JPMorgan Dealmaker Hannam in Eye of Storm Again With FSA Fine
  • LME May Get Up to $54 Million in Sale of LCH.Clearnet Stake
  • Silver Wheaton Seeks to Quadruple Output: Corporate Canada
  • Palm Oil Rallies to One-Year High as Demand May Gain From China
  • Gasoline Tops Commodities as Iran Spurs Oil Gain: Energy Markets
  • KGHM Seen Joining Mine Debt Boom With Debut Bonds: Poland Credit
  • Rare Earth Supplies in U.S. to Meet Defense Needs, Pentagon Says
  • Oil Falls on Signs Fed May Halt Stimulus
  • Rubber Declines for Second Day as Expectations for Stimulus Fade
  • Trash Worth $40 Billion When Saved From Waste Landfill: Energy
  • BHP, Rio Combined Diamond Asset Might Be Attractive, Nomura Says 





US DOLLARBernanke’s Bubbles are vast. All we need to see is the confluence of UST yields rising alongside the USD and Gold will come down in a hurry. Intense selling in the last 48hrs in Gold and Silver. Bernanke’s War is on. Remember, we’re explicitly fighting the Fed having a 0% asset allocation to Commodities and Treasuries right now.






GERMANY – first immediate-term TRADE line break in the DAX too (line was 6998), and the correction in German Equities is now -3.8% from the YTD peak (so keep that in mind with the SP500 only -0.4% from its YTD no-volume high). German economic data, like the rest of the world’s, has slowed sequentially in the last 6 weeks.






JAPAN – top question from clients is when does the sovereign debt crisis in Japan find its way into equities. Answer: after currencies. The Nikkei finally snapped its immediate-term TRADE line of 10,105 support last night, trading down a stiff -2.3%, taking its correction to -4% from its March high (to put the asymmetry of the SP500 in context, the US has only had 1 down day of more than -0.7% YTD).










The Hedgeye Macro Team


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