In-line should be good enough.



We’re not as bullish on the stock as we were in mid-March when the whisper was that WMS was going to miss another Q.  The stock was trading at sub-$22 then so expectations for the quarter have probably risen.  However, we think there are still quite a few people expecting a FQ3 punt yet there is a decent chance they make the number.  Our EPS and revenue projections of $0.44 and $193MM, respectively, are in-line with consensus.


We estimate product sales of $121.5MM and $62MM of gross profit, boosted by recognition of the Ohio units that were deferred last quarter.

  • 6.3k new units sales at $16.4k
    • 4.1k domestic units
    • WMS will likely recognize Ohio shipments in the March quarter.  We believe IGT will defer recognition of their Ohio shipments until the casinos are licensed and ready to open.  The operators have “provisional licenses”/“letters of acceptance” which give them authorization to receive slot machines but are not fully licensed so there is some room for interpretation on whether manufacturers can recognize the revenue this quarter.  Of the 957 deferred units shipped by WMS in December, we are fairly confident all of them were to the PENN and CZR’s Ohio casinos; implying a low 20’s share which should be viewed positively by investors. 
    • 2.2k international shipments, up QoQ but down 6% YoY
  • $18MM of parts, used machines and conversion kit sales
    • 4.4k conversion kit sales
    • 2k used machine sales

Gaming operations revenue and gross margin of $65.5MM and $51.8MM, respectively

  • Flattish sequential EOP install base of 9.3k but a sequential decrease in the average install base
  • A small sequential improvement in win per day, mostly benefiting from seasonality
  • Incremental revenue growth from portal application and the UK casino
  • Their approvals of titles and game rollout are proceeding on schedule - Clue has been featured in several of the CZR’s properties for over a month now.

Other stuff:

  • R&D of $24MM
  • SG&A of $33MM
  • D&A of $21MM
  • $2MM of interest and other income
  • 36.5% tax rate
  • 55.8MM diluted shares 


TODAY’S S&P 500 SET-UP – April 5, 2012

As we look at today’s set up for the S&P 500, the range is 15 points or -0.43% downside to 1393 and 0.65% upside to 1408. 












SENTIMENT – whether it was our go to move (selling gross Equity/Commodity/Beta exposure at VIX 14-15) or the II Bull/Bear Spread survey which hit a fresh 3yr high before yesterday’s fall (+3,150bps Bull Spread = 53% Bulls; 21.5% Bears), it was all out there. Plenty Hedge Funds got squeezed out of their short positions right at another intermediate-term top. 

  • ADVANCE/DECLINE LINE: -1838 (-949) 
  • VOLUME: NYSE 832.49 (1.87%)
  • VIX:  16.44 4.98% YTD PERFORMANCE: -29.74%
  • SPX PUT/CALL RATIO: 1.89 from 1.67 (13.17%) 


  • TED SPREAD: 39.79
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 2.18 from 2.22
  • YIELD CURVE: 1.84 from 1.88

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: Challenger Job Cuts (Y/y), Mar.
  • 8:30am: Jobless Claims, week of Mar. 31, est. 355k (prior 359k)
  • 9:10am: Fed’s Bullard speaks in St. Louis
  • 9:45am: Bloomberg Consumer Comfort, week of Apr. 1
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas
  • NOTE: Friday: U.S. unemployment/payrolls report, 8:30am 


    • Mitt Romney, Rick Santorum hold campaign events in Pennsylvania, site of Republican primary on April 24
    • President Obama signs “Jumpstart Our Business Startups” Act, 2pm 


  • Gap, Macy’s among U.S. retailers reporting March comp sales, Retail Metrics est. +3.3% gain; Zumiez beat est., Costco missed
  • U.S. sales of Nokia Lumia 900, which debuts this weekend, seen at below 1m in 1st 3 mos: analysts
  • U.S. said to be near settlement with Simon & Schuster, HarperCollins, Hachette on e-book price contracts with Apple
  • Phil Falcone said he may consider voluntary bankruptcy for LightSquared
  • AT&T faces strike this weekend from 40,000 workers
  • IBM bought 20% stake in the technology unit of Brazilian billionaire Eike Batista
  • Blackstone agreed to buy 69 warehouses valued at about $800m from Dexus Property Group
  • Dick’s Sporting to make GBP20m investment in U.K.’s JJB Sports, entitled to nominate up to 2 non-exec. directors to JJB board
  • Toshiba, Hynix considering joint bid for Elpida, Nikkei says; Micron Technology seen as preferred bidder
  • JPMorgan CEO Jamie Dimon used his annual letter to shareholders to rail against “contrived” and confusing financial rules that he said may stymie lending
  • Rambus appeals $3.95b California antitrust trial loss to Hynix, Micron
  • Great Wolf gets $6.25/shr cash offer from KSL Capital, topping Apollo’s bid
  • DirectTV reaches agreement to carry Tribune television stations, ending 4-day blackout of 23 local outlets
  • 3D Systems to replace Taleo in S&P Smallcap 600 effective at end of day
  • FRIDAY: U.S. may report tomorrow that employers added 205k jobs, unemployment rate remains at 8.3% 


    • Pier 1 Imports (PIR) 6 a.m., $0.48
    • CarMax (KMX) 7:30 a.m., $0.40
    • Constellation Brands (STZ) 7:30 a.m., $0.39
    • RPM International (RPM) 7:30 a.m., $0.01
    • Schnitzer Steel Industries (SCHN) 8:30 a.m., $0.32
    • WD-40 (WDFC) 4 p.m., $0.54    


COMMODITIES – kaboom! USD + UST Yields up = Gold down. That we know. What we don’t know is how quickly Deflating The Inflation will help Global Consumption. We’ve seen this big beta Commodity crash 3x coming out of Q1 in the last 4yrs. We call it the Correlation Risk, and it matters. Energy stocks (XLE) = down -7.8% for April to date! 

  • Gold Traders Bearish for First Time in 2012 on Fed: Commodities
  • Oil Trades Near Seven-Week Low on Renewed European Debt Concern
  • Cocoa Extends Drop as Ivory Coast Rains Return; Sugar Retreats
  • World Food Prices Climb for Third Month as Oilseed Costs Rise
  • Soybeans Rise, Set for Second Weekly Gain on Brazil Crop Concern
  • Gold May Gain as Drop to Near Three-Month Low Spurs Purchases
  • Palm-Oil Stockpiles in Malaysia May Reach Seven-Month Low
  • Cooking-Oil Imports by India Surge on Local Prices, Tax Risk
  • Copper May Advance as Economists Project Firm U.S. Employment
  • India Billions Secure Afghan Mines in Challenge to China Drive
  • China May Approve Vale Vessels to Stop in Ports: Daily
  • World Cotton Output to Fall After Prices Plunged, Ecom Says
  • BP Pursues Namibia Crude Amid No Known Discovery of Oil: Energy
  • Gold Traders Bearish for First Time in 2012
  • Palm Oil Heads for Fifth Weekly Advance on Soybean Crop Concerns
  • Rubber May Decline 8% as Rally Loses Steam: Technical Analysis
  • Ship Smog Seen as Next Target to Clear Hong Kong Skies: Freight 










GERMANY – one of the most critical leading indicators for Global Growth Slowing is the DAX and the correction there is instructive (-5.7% from the March high) given that Germany’s fiscal and employment situation is much better than the USA’s right now. The immediate-term TRADE line for the DAX is now broken (6978); for the USA, the equiv SP500 line = 1390.















The Hedgeye Macro Team



Roped In

This note was originally published at 8am on March 22, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“In the contest between inflation and deflation, the rope is the dollar.”

-James Rickards


I’ve finally jumped into a book I’ve been really excited about, James Rickards’ “Currency Wars”, and the preface does not disappoint. From a risk management perspective, I couldn’t agree more with the aforementioned quote.


Rickards takes the currency debate right up the middle on the Chairman of the Federal Reserve reminding us that “by printing money on an unprecedented scale, Bernanke has become a twenty-first century Pangloss, hoping for the best and quite unprepared for the worst.”


As a reminder to The Ben Bernank and his central planning followers, hope is not a risk management process.


Back to the Global Macro Grind


On Tuesday, I bought back my Strong Dollar position via the UUP. Yesterday, I sold my only remaining long Commodity position (Oil), taking my asset allocation to Commodities back down to ZERO percent.


Even though he’s never traded a Global Macro market with his own capital at risk in his life, Bernanke would probably smile when considering my 0% strategy move. The man likes zeroes.


The Zero Bound, or a 0% “risk-free” rate of return, concept is littered with unintended consequences. If you don’t believe that, ask the Japanese. They’ve had 20 years of anemic economic growth and will have 25% less people living in Japan come 2050.


If you do believe in the globally interconnected risk associated with the world’s reserve currency, you probably get why this entire “contest between inflation and deflation” comes down to what Bernanke/Geithner do to US Dollar policy (monetary and fiscal). When it comes to commodities inflating/deflating the CRB Index (19 commodities) has a 60-day correlation to the US Dollar of -0.64%.


Correlation? Yes Keynesians of the academic gridiron, unite! Correlation Risk in markets doesn’t always imply causality. But sometimes it does.


So why get long the US Dollar right here?

  1. It’s going up today, and we know performance chasers just love a good chase
  2. It is breaking out above our intermediate-term TREND support line of $79.33 again
  3. It has fortified its base, holding our longer-term TAIL support line of $76.11
  4. The Japanese Yen has moved into crash/crisis mode (bullish USD/YEN)
  5. The Euro continues to fail at $1.33 resistance as European Growth Slowing continues

Got Growth Slowing?


Apparently consensus doesn’t want to agree with us on this yet. In a note earlier this week I highlighted the Credit Suisse call to action that “economic momentum indicators suggest global and US growth is still well above consensus” – and while the people I used to work with there are good people, that call on growth is simply just wrong this morning.


1.   ASIA: China and India, in particular, are showing glaring signs of Growth Slowing sequentially here in March. Whether it was India’s stock market down another -1.8% overnight (down -6.1% since the Feb YTD top) on a mounting deficit problem or both the Shanghai Composite and Hang Seng snapping their respective immediate-term TRADE lines of support in the last week as China’s PMI (HSBC) was printed overnight at a fresh 4-month low – it’s all there. #GrowthSlowing


2.   EUROPE: Inflation Slows Growth; particularly when Europeans have to deal with Brent Oil prices of $122-127/barrel – never mind being bent over a barrel by that sneaky little Keynesian critter called debt (which structurally impairs long-term growth). Looking at Europe’s PMI numbers for March, here’s what the river cards look like:



A)     France 47.6 MAR (exp. 50.2) vs 50 FEB

B)      Germany 48.1 MAR (exp. 51) vs 50.2 FEB

C)      Eurozone 47.7 MAR (exp. 49.5) vs 49 FEB



D)     France 50 MAR (exp. 50.3) vs 50 FEB

E)      Germany 51.8 MAR (exp. 53.1) vs 52.8 FEB

F)      Eurozone 48.7 MAR (exp. 49.2) vs 48.8 FEB


Now we all know that Swiss turned American bankers can get creative in their accounting, but by our Canadian-American math, this morning’s Global Growth data is well below consensus.


How about US Growth?

  1. It has never NOT slowed with oil prices over $100/barrel (that’s why the FEB ISM number dropped 3% from JAN)
  2. Since 71% of US GDP = Consumption, real (inflation adjusted) growth slows, big time, when inflation accelerates
  3. Q4’s US GDP print of 3.0% carried a 0.86% Deflator; that deflator should double or triple in Q1

In other words, our Global Macro Model will not be surprised if US GDP growth gets cut in 1/2 , sequentially, from Q4 of 2011 to Q1/Q2 of 2012. If we don’t see a Strong Dollar (like we did in Q4) soon, you’ll see weakening US Consumption.


So that brings me to a comma, instead of a full stop. If you are staying one step ahead of me, you’re going to ask if Strong Dollar would get me more bullish on both US Economic Growth and US Equities. The answer to that (as it was every day in January 2012 up until Ben Shalom Bernanke decided to debauch the Dollar on January 25th), is yes.


Whether our almighty central planners like to admit it or not, we’ve all been Roped In. This “contest between inflation and deflation” has been called “risk on and risk off.” But risk is always on – especially the globally interconnected stuff. Risk never sleeps.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1623-1671, $122.12-124.89, $79.33-80.58, and 1395-1409, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Roped In - Chart of the Day


Roped In - Virtual Portfolio

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Leaders Ask Questions

“They answered questions nobody had yet asked.”

-Nassir Ghaemi


In August of 2011, The New York Times reviewed a fascinating psychology book I am reading right now – A First-Rate Madness, by Nassir Ghaemi. The title of the NYT article was well timed, “What Befits a Leader In Hard Times?” Good question.


As most of you who follow Global Macro country, currency, and commodity markets will recall, by September of last year, most things that were down hard yesterday were crashing. If it was your money that someone else put at risk in Q1 of 2011, they were hard times.


Leaders ask hard questions. You don’t have to be in the business of Risk Managing other people’s money to get that. Neither do you have to go to business school. All you need to do is be held accountable to every penny in your company’s account or point on the scoreboard.


Back to the Global Macro Grind


“For leaders in any realm, creativity is not just about solving old problems with new solutions, it’s about finding new problems to solve.” (A First-Rate Madness, page 38).

  1. Old Problems: housing, unemployment, fraud.
  2. New Problems: growth, inflation, policy.

That’s right, it’s The Policy, Stupid. I don’t have to be in bed with Bill Clinton to understand a simple marketing message like that. Away from his shady extra-curricular activities, there’s a lot the man was able to accomplish from both a leadership and growth perspective. Raging Republican fans will agree that Ronald Reagan was a leader who asked the right basic economic questions too.


Being a Canadian-American who will vote for neither of these conflicted and compromised US political parties (both Bush and Obama were Keynesians in their economics; that’s why the net jobs added in America in the last decade = ZERO and GDP has averaged 1.7%), I think there is a tremendous opportunity in this country to simplify a solution to our New Problems:


Strong Dollar = Strong America. Period.


Now before Keynesian Export geeks go haywire (fyi, devaluing your currency to “boost” exports is a broken solution to an Old Problem – no country in world history has devalued its way to long-term economic prosperity), check out my Chart of The Day again. Then look at it again  - and again, and “Again!” (channeling my Herb Brooks to Bernanke and Geithner):

  1. 1 (Reagan): US Dollar Index average = $115.18; Oil price average = $22.16/barrel; US GDP average = 4.31%
  2. 1 (Clinton): US Dollar Index average = $92.93; Oil price average = $18.63/barrel; US GDP average = 3.84%

The US Economy (and, increasingly, the Global Economy) runs on Consumption Growth. In terms of US GDP, that’s 71% of the number. If you Deflate The Inflation (via Strong Dollar), you’ll ramp real (inflation adjusted) Consumption Growth.


Don’t be afraid of this idea because it’s new – the US Dollar Index is currently at $79.81, so you have no idea (neither do I) how well this idea could actually work.


Embrace it. And Try it. Because I can guarantee you that if Oil goes to $22, $42, or even $62 tomorrow, Americans, Canadians, and Europeans alike are going to have one hell of a summer party.


Who will this upset? Let’s ask some simple questions:

  1. If the American, Canadian, and European Saver and Consumer get paid via Strong Dollar, who doesn’t?
  2. If the Chinese, German, and Brazilian cost of goods sold (raw commodities) go down via Strong Dollar, what goes up?
  3. If the stock, bond, currency, and commodity markets of the world stop trading on what the Fed does, who loses?

I could take a full year off from waking up at 4AM to write you these morning missives and write a pretty snazzy Ph.D thesis on this. But, if I do that, this opportunity to lead and change the world will have passed me by. I’m a critic of Dollar Debauchery, but I also have a solution.


Yesterday was the 2ndlargest down day (-1.02%) for the US stock market in 2012. US Equity Volatility (VIX) is up almost +20% in a straight line from where the VIX has bottomed, multiple times, since the US debt, leverage, and fraud peak of 2007.


If you look at the US stock market Sector Studies for April to-date, all that glitters is no longer Gold:

  1. Energy (XLE) = down -7.8%!
  2. Basic Materials (XLB) = down -3.2%
  3. Industrials (XLI) = down -2.7%

In other words, as Growth Slows Globally, the Old Solution (Easy Money) to Old Problems (Housing, Unemployment, Fraud) isn’t a long-term solution at all. The New Solution (Strong Dollar) to New Problems (Growth, Inflation, Policy) may be tough for many of the conflicted, compromised, and constrained (answers to questions 1-3) to accept. But that is precisely the point.


Asking 90% of those people (Presidents, Prime Ministers, CEOs, etc.) why getting them paid by short-term Policies To Inflate is good for long-term growth and economic prosperity remains The Question that no leader in this country has yet had the courage to ask.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $121.67-124.76, $79.21-80.06, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Leaders Ask Questions - daily


Leaders Ask Questions - VP 4 5


The Macau Metro Monitor, April 5, 2012




The major daily newspaper, Asahi Shimbun, reported that Sega had purchased the Sea Gaia resort in the Miyazaki prefecture.  The 700-hectare property, which houses a major hotel, tennis courts, spa and golf course, was owned by a foreign consortium but has operated at a loss.  Sega has bought the property for 40 billion yen and there were questions on the casino prospects to which representatives of Sega responded that the deal had not been conditional on casinos becoming legal in Japan or that the resort would obtain a licence.  However, they said that when casinos are legalized, they would consider it carefully.


Meanwhile, according to the newspaper, Sega continues to build on its casino investments in other countries where they are permitted.  The publication also noted that Konami had approval for the manufacture of casino slots as far back as 1996 and will therefore be ready to supply machines once casinos are permitted in Japan.


On March 31, the chief secretary to the Ministry of Tourism in Japan said casinos would help to stabilise the Japanese economy after the natural disaster of last year and help create a fund for special relief measure.  An all-party bill is expected to be presented to the Japanese National Assembly before April 2013, which will demand the approval of a resort casino "as an exception."


Many of the less wealthy Japanese cities and prefectures have cited an interest in such a project, although the National Assembly is likely to choose initially between Tokyo and Osaka as a location.  Other cities and prefectures that have indicated interest in the project include Kanagawa, Wakayama and Okinawa.

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