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Short Covering Opportunity: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)

 

Our fundamental research call for Global Growth Slowing has not changed. Neither has our risk management process. Prices have.

 

For now, this correction in the SP500 from its YTD high is just that – a correction. A 25 point drop in the SP500 from its YTD closing high of 1419 = -1.8%. That’s only 50% of the YTD drop from the next closest major equity market in the world, so there is plenty of mean reversion risk that remains.

 

Across my core risk management durations (TRADE, TREND, and TAIL), here are the lines that matter to me most: 

  1. Immediate-term TRADE resistance (was support) = 1407
  2. Immediate-term TRADE support = 1392
  3. Intermediate-term TREND support = 1324 

In other words (and I said the same thing yesterday), if 1407 snaps, 1324 is in play over the intermediate-term TREND duration. That’s a big problem for the bulls because the smallest drawdown we saw from the Q1 YTD high in 2008, 2010, and 2011 was just north of 15%.

 

Every draw-down is different, but with this level of dependence on the Fed and easy money inflation policies, they have all certainly rhymed.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Short Covering Opportunity: SP500 Levels, Refreshed - SPX


THE HBM: MCD, SBUX, BKC, THI, WEN, PFCB

THE HEDGEYE BREAKFAST MONITOR

 

Hedgeye Restaurants Alpha – our best fundamental ideas

 

LONGS: SBUX, PFCB, EAT, YUM

 

SHORTS: DNKN, BWLD, WEN

 

RESTAURANT STOCKS IN THE HEDGEYE VIRTUAL PORTFOLIO

 

LONGS: PFCB, EAT, JACK, SBUX

 

SHORTS: MCD

 

MACRO NOTES

 

Commentary from CEO Keith McCullough

 

Oh how quickly the game changes when economic gravity is introduced:

  1. JAPAN – top question from clients is when does the sov 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).
  2. 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 w/ 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.
  3. 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.

 

Watch 1407 on the SPX. That line breaks and 1388 is next support.

KM

 

SUBSECTOR PERFORMANCE

 

THE HBM: MCD, SBUX, BKC, THI, WEN, PFCB - subsector

 

 

QUICK SERVICE

 

MCD: McDonald’s was removed from the Conviction Buy list at Goldman Sachs.  It remains rated Buy.

 

BUX: Starbucks was added to the Conviction Buy list at Goldman Sachs.

 

BKC: Burger King is coming public again.  Burger King will sell a 29% or $1.4 billion stake to Ackman via Justice Holdings, a UK investment vehicle.  The company says its international growth plans will benefit from better visibility as a public company.  It expects its shares to be relisted on the NYSE within 3 months.

 

THI: Tim Hortons was downgraded to Neutral from Buy at Goldman Sachs.

 

WEN: Wendy’s is meeting with lenders in New York tomorrow to discuss $1.325 billion in loans the company is seeking to refinance debt.  The financing will include a $1.125 billion term loan B maturing in seven years and a $200 million revolving line of credit due in five years.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

GMCR: Green Mountain declined 2.2% on accelerating volume.

 

 

CASUAL DINING

 

PFCB: P.F. Chang’s on Monday revealed its faster service, lower-priced Pei Wei Asian Market, a fast-casual spin-off of its 173-unit Pei Wei Asian Diner concept.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

KONA: Kona Grill gained 7.1% on accelerating volume.

 

PFCB: P.F. Chang’s gained 2% on accelerating volume.

 

 

THE HBM: MCD, SBUX, BKC, THI, WEN, PFCB - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


(CORRECTED) TODD JORDAN: IGT: OHIO SLIPS BUT WHO CARES?

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
    • 4,450 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

Daily Trading Ranges

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IGT: OHIO SLIPS BUT WHO CARES?

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 M3: CAMBODIA GAMING EXPANSION

The Macau Metro Monitor, April 4, 2012

 

 

CAMBODIA BETS CASINOS CAN BOOST TOURISM WSJ

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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Pivot Points - India

 

Pivot Points - vp 3 21


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