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Back To Bed

“We are in bed too much.”

-Franklin D. Roosevelt


That classic FDR quote comes from a dramatic excerpt in Ian Toll’s latest book about WWII, The Pacific Crucible. If you are a history buff, I highly recommend it. The book is very well researched and provides a unique Japanese perspective on how they forced Americans to think differently about globally interconnected risks.


The context of the quote is important. FDR said it in the immediate aftermath of Pearl Harbor when being grilled by Senator Tom Connolly of Texas, “How did it happen that our warships were caught like tame ducks… How did they catch us with our pants down? Where were the patrols.” Roosevelt replied, “I don’t know, Tom. I don’t know.” (page 31)


Unlike most modern day Republican and Democrat “leaders”, Roosevelt didn’t point fingers. He went on to explain that it wasn’t enough not to know. It was time to take the time to re-think US strategy and understand. “They are doing things and saying things during the daytime out there, while we are all in bed.” (page 31)


Back to the Global Macro Grind


If you want to pretend it’s the 1990s or 2003-2007 bull markets, that’s cool. All you have to do is know where the 50-day moving average is and you won’t miss a thing. Just look at the US Equity futures every morning and go back to bed.


With the US Dollar being debauched (down now for 7 of the last 8 weeks), Risk Managers are starting to pick up on the idea that more QE would only inspire a weaker World Reserve Currency and higher oil prices. That, in turn, will slow growth further.


QE1 may have worked. But QE2 didn’t, and QE3 definitely won’t. Why? Because as the USA gets a short-term “pop” in stock prices, the rest of the world gets asset price inflation (i.e. in their cost of living and/or cost of goods sold) right when they need that the least. Policies To Inflate (from these prices) slows growth and compresses margins.


Global Equity markets have obviously figured this out. With the exception of Venezuela and Egypt, Global Equity prices have been making lower- highs since February-March. The slowdown in US Equities (which somehow were last to figure this out) was much more pronounced in April than it was in that February-March performance period.


Performance period? Qu’est-ce que c’est le performance chasing period? It’s been glaringly obvious that seasonal Institutional performance chasing has called the top in US Equities in Q1 of 4 of the last 5 years. Notwithstanding the no-volume rally in 4 of the last 5 days of the month, here’s how US Equities finished in April:

  1. SP500 -0.8%
  2. Nasdaq -1.5%
  3. Russell2000 -1.6%

From a S&P Sector performance perspective, the complexion of the SP500’s -0.8% loss is interesting:

  1. Top 3 Sectors = Utilities +1.8%, Consumer Discretionary +1.2%, Consumer Staples +0.3%
  2. Bottom 3 Sectors = Financials -2.3%, Industrials -1.1%, Tech -1.1%

With our only Global Equity asset allocations being US Utilities and Chinese Equities (up +1.8% and +5.9% for the month, respectively), we were quite pleased with being positioned for US Growth Slowing. The question now is what will please the monthly performance chasers for May?


Can the SP500 make higher-highs for the YTD if Financials and Tech continue to pull back? What happens to the Industrials if Growth Slowing continues? The Sector Studies tell me that the most bullish outcome for May could be Deflating The Inflation. That would be good for American Consumers (good for US Consumer and Healthcare longs).


Deflating The Inflation is already in motion, but you’ll only be able to take it out of market expectations if we stop waking up late every morning begging for Ben Bernanke to bail us out with another QE experiment.


Politicians hate the idea of Deflating The Inflation via a Strong Dollar because that would be bad (in the very short-term) for the stock market. Our Hedgeye Election Indicator has already picked this up (see Chart of The Day). President Obama just had his 1st bullish week in the last 5 (up +130bps week-over-week), primarily because the stock market was up +1.8% last week.


It’s perverse, but it’s real. That’s a big reason why neither Bush or Obama have been advised to back a Strong Dollar Policy.


Causality? Policies To Inflate cause “speculators” to bet on the inflation policies they expect from conflicted and compromised politicians at the Fed and Treasury. From an immediate-term correlation risk perspective, the writing is on the wall too:


Immediate-term TRADE correlations between the US Dollar and:

  1. SP500 = -0.83
  2. WTIC Oil = -0.86
  3. Equity Volatility = +0.93

In other words, as Colonel Jessep would have said, “You want the truth? you can’t handle the truth!” (YouTube video from A Few Good Men http://www.youtube.com/watch?v=5j2F4VcBmeo&noredirect=1). It’s the US Dollar, Stupid.


There should be no politics associated with the Purchasing Power of America’s Currency. Every American who championed the Strong Dollar Periods of 1 (US Dollar Index Averaged $115.18) and 1 (US Dollar Index Averaged $92.93), gets this.


At $78.69 this morning, the US Dollar Index is -32% and -15% below those 1980s and 1990s averages. The price of oil is +377% and +465% higher than those 1980s and 1990s Strong Dollar, Strong American GDP Growth Peiods of 4.3% and 3.8%, respectively.


We have a Crisis of Credibility in this country because no one wants to talk about the truth. Our currency is what we buy things with. It’s not something we can borrow respect with. Fighting for it is what should be getting you out of bed.


My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, and the SP500 are now $1, $103.96-105.23, $78.69-79.22, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Back To Bed - Chart of the Day


Back To Bed - Virtual Portfolio

President Obama’s Chances of Reelection Climb Back Above 60% -- Hedgeye Election Indicator


For the first time in more than a month, President Obama’s chances of reelection this November climbed from the previous week’s level, according to the Hedgeye Election Indicator (HEI). If the election were held today, the HEI calculates that the President would stand a 60.6% chance of winning reelection, up from last week’s reading of 59.3%. President Obama’s chances improved, according to the HEI, because of a strong performance in the US stock market last week.



President Obama’s Chances of Reelection Climb Back Above 60% -- Hedgeye Election Indicator  - HEI



Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.



In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.

OVERALL:  WORSE - ASPs were awful and while there was some progress made domestically, international was disapointing.  Revenue guidance was reduced as the company will not generate YoY growth in the 2nd half of fiscal 2012.


Here is the report card evaluating actual results against management's previous assertions.  

    • WORSE:  On its previous call, WMS had expected YoY growth in revenues and operating margins for the 2nd half of 2012.  For FQ3, revenues were down by 9% YoY.  For operating margins, it was a mixed picture, as gaming operations margins were unchanged YoY while product sales margins gained 320bps YoY.  For FQ4, WMS expects revenues to be modestly lower YoY but better operating margins YoY.
    • SAME:  still does not expect revenue in FY 2012 from the Illinois and Italy VLT market
  • ASP
    • WORSE:  WMS had mentioned previously that they're not known to reduce prices significantly but ASPs fell 8% YoY, missing Street expectations by a wide margin.  Clearly, WMS is feeling the heat from the competition.  Both IGT and BYI reported around 10% increases in ASPs.
    • SAME:  even though sentiment seems to be modestly better, the market is still somewhat challenged with a slight improvement in capital budgets
    • SAME:  as a result of new participation products, FQ3 gaming operations installed base and average revenue per day both increased by 1% sequentially to $9,389 and $68.06, respectively.  
    • SAME:  still on track for R&D and SG&A savings
    • SAME:  continue to expect recapturing ship share over time
    • SAME:  floor share for new casino openings for FY 2012 is expected to be in the high-teens.
    • SAME:  no change in outlook on replacing and upgrading their installed base of 7,000 VLTs
    • BETTER:  2,100 open orders were higher than previous guidance of 1,900 games
    • SAME:  continues to expect lower capital spend YoY in FY 2013

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Low ASPs and international struggles ruin what could've been an ok quarter.


“Our product realignment efforts are focused on addressing customers’ near-term demand for player-appealing, high-earning new products and, importantly, the flow of new product development, regulatory approvals and commercialization has returned to normal historic rates. We are executing in-line with our plan and are driving significant improvement across the company.”


- Brian R. Gamache, Chairman and Chief Executive Officer




  • Product sale margins increased due to cost containment initiatives
  • Lower ASPs reflected a more competitive pricing environment, higher discounts due to larger size orders and higher # of lower-priced VLT units
  • Launching mypoker video poker platform at the end of 2012.
  • Product sales:  Includes shipments to MD Live and Ohio casinos
  • Recently received approved of their BBxD cabinet in New South Wales
  • Gaming operations:  Higher other revenues were due to growing contribution from network applications and online casino 
  • D&A was higher due to the investment / refreshment in their install base and investment in network and online gaming
  • Anticipate placements of VLTs in Italy and IL will require more capital outlays since those will likely be leased units
  • Economic conditions and sentiment seem marginally better but don't expect a large increase in the replacement market. 
  • Larger portion of new shipments in 2013 will be to VLT markets (Italy, IL, Canada)
  • Focus in the quarter was stopping the erosion in their install base
  • Have 2,100 open orders for participation games
  • In Canada, they expect to see additional opportunities in other jurisdiction in addition to Alberta
  • Going through technology inter-operability in IL and expect their first shipments to occur by year end 


  • ASPs were down because of a mix issue - larger orders generally have a heavier discount.  You should use a 3 quarter average ASP rate for a run rate going forward.  So $16K range is a more normalized going forward rate. They are definitely feeling competitive pressures.
  • Issue with international shipments: 
    • Mexico has stabilized. Australia, Singapore and Switzerland are undergoing national standards. Europe is economically challenged. 
    • strange that no one else is seeing these issues
  • Average installed base shrank from the the 1H of the Q and then saw growth in the 2H of the install base
  • Q4 is their most prolific gaming operations product quarter from an availability/ new product point of view
  • Tax rate: should be more normal (36-37%) going forward
  • Why is June guidance lower than before?
    • They were expecting a quicker uptick on their new products. They have had good success with conversion kits.  However, it's taking longer for new product purchases. 
    • They thought it would be a 3 quarter turnaround but it's going to take longer
    • WMS is blaming the longer turnaround on the capital constraints on their clients but I think that it's just a much more competitive environment. WMS's competitors seem to be firing on all cylinders.
  • Capex on game operations will be at or a little higher than where they were in Q3 going forward
  • PP&E is likely going to be at or above March Q levels as they are getting close to finishing 2 large projects that they are working on
  • As their gaming operation install base gets refreshed, yields should improve.  They are having more success in their fixed lease products recently which also impacted reported yields. 
  • Not worried about ASP when their content is performing well. They will continue to be competitive on pricing but not "aggressive". They do not believe that ASP will keep ticking down.  Think that for the next few Qs they will be able to maintain a $16k handle on pricing.
  • Doesn't think that the commentary surrounding VLTs in 2013 is a soft way of guiding to lower ASPs
  • Think that they can get to 53-54% margins but it really depends on the product mix each quarter
  • They shipped to both Ohio properties in the quarter
  • Video poker expectations?  If they garnered 5-10% of the installed base over the next 3 years, that would be a home run for them.  Not looking for a grand slam, just a single or double. 
  • Will give more guidance on Interactive between now and Q4.  Believe that this is a very important part of their business going forward. 
  • 100 units installed per week is a good velocity and they averaged higher than that in Q3
  • Q4 should have a dramatic reset of expectations going forward (for game ops)
  • Q4 is usually their seasonally busiest quarter of the year.  April is slightly slower than they hoped it would be.  All their approvals though are on time. 
  • VLT sales in the quarter: They recognized the Maryland sale.  Expect to get back to mid-20's ship share in fiscal 2013.
  • Clue drove the WAP sales in March.  Epic Monopoly was the second biggest driver.  They also came out with a mechanical spinning reel version in March which also helped. 
  • Should be able to recognize the balance of the deferred units next quarter 



  • Outlook: 
    • WMS expects quarterly sequential growth in revenue and operating margin in the June 2012 quarter. 
    • Expects revenues in the June 2012 quarter to be modestly lower than the June 2011 quarter, while operating margin is expected to improve on a year-over-year basis (adjusting out the net restructuring, impairment and other charges in the prior year period). 
    • Does not expect revenue in fiscal 2012 from the opening of the Illinois VLT market or from the VLT market in Italy. 
    • WMS believes that the challenged economic and industry environment will continue resulting in only limited improvement in the industry replacement cycle in calendar 2012. 
    • In fiscal 2013, the Company expects to benefit from further new unit shipments for casino openings, including two additional casino openings in Ohio; but a bigger portion of new unit shipments are expected to be to VLT markets in Illinois and Ohio, and replacement VLT shipments to Canadian provincial VLT operators.
  • Product sales: 
    • New unit: 5,993
      • Includes recognition of 759 deferred units 
      • US & Canada units: 4,598 (2,800 replacements)
      • International: 1,395 down from 2,338 last year.  "The decline primarily reflects lower shipments to customers in Europe, Mexico and Australia."
    • ASP: $15,233
      • Decline "primarily reflecting product mix as WMS shipped a greater percentage of lower-priced VLTs, the impact from a higher discount related to larger-volume orders and a lower number of premium games in the quarter compared with the same period a year ago, coupled with the impact of the competitive marketplace. WMS’ Bluebird xD units represented 24% of total global new unit shipments and the new Bluebird2e cabinet with emotive lighting...represented approx. 26% of new unit sales."
    • Other product sales... declined... reflecting lower revenue from sales of parts and used gaming machines, partially offset by higher conversion kit revenue.
      • 1,300 used gaming machines....  at lower average selling prices YoY
      • 3,900 conversion kits
      • The gross margin benefit from higher-margin conversion kit revenue was partially offset by lower parts sales and the lower margin on used gaming machine sales. 
  • Other gaming operations revenue increased... primarily reflecting higher royalties from licensing proprietary intellectual property and technologies, continued growth in the United Kingdom online gaming business and incremental revenue from networked gaming solutions.
  • First two jurisdictional approvals received in the March quarter for the new CLUE wide area progressive participation game and several other anticipated participation products, as well as additional jurisdictional approvals for earlier participation products including the Epic MONOPOLY theme. As a result, the quarter-end participation installed base increased 107 units on a quarterly sequential basis
  • Initial regulatory approvals for more new for-sale games in the March 2012 quarter, with more than 90% of these games having new, distinct math models. New game approvals and additional jurisdictional approvals for earlier for-sale games are helping drive improvement in new unit sales, particularly in game conversion revenue
  • Launched new Bluebird2e gaming cabinet with emotive lighting as an enhancement to the original Bluebird2 gaming cabinet, and approximately 26% of new unit sales in the quarter wereBluebird2e cabinets.
  • WMS’ networked gaming products installed on approximately 1,280 gaming machines at 64 casino properties globally, including the first cloud-based application of Remote Configuration and Download functionality for WAGE-NET system by a European multi-site casino operator.
  • Signed agreement with Group Partouche to provide Business-to-Business managed services for online gaming in Belgium using WMS’ Jackpotparty.com platform.
  • “We now have open orders for more than 2,000 units of our latest engaging participation products, including the CLUE and EPIC MONOPOLY games, two new games for our popular THE LORD OF THE RINGS series and a new THE WIZARD OF OZ game, which received initial approval at the end of the March quarter, earlier than anticipated. Our solid open orders, coupled with the expected initial jurisdictional approvals in the June 2012 quarter for theAladdin and the Magic QuestMonster Jackpots and GONE WITH THE WIND games and several other participation games, are expected to further increase our gaming operations installed base and contribute to ongoing quarterly sequential revenue per day growth in the June quarter."
  • "We expect to achieve another quarter of sequential growth in new unit shipments in product sales in the June 2012 quarter."
  • Repurchased 261k shares for $6.1MM 


In preparation for CZR's FQ1 2012 earnings release Tuesday afternoon, we’ve put together the recent pertinent forward looking company commentary.



Telsey Advisory Group Spring Consumer Conference (March 27)

  • [Octavius Tower] "The three villas are still under construction, and they're going to open in the third quarter of this year. The Octavius Tower, 662 rooms, are very high demand. It's at our best property in Las Vegas, which I mentioned was our best market, so we're very confident about the returns associated with that."
  •  [Thistledown]  "We have a pavilion that can support a temporary spot facility, we would expect to get up and running in a few months after the [Ohio Roundtable] legislation is cleared. And then, the question would be where do we put a permanent facility. But we would expect that to be operational as well in the latter part of this year."
  • "Additionally, at Baltimore, we have submitted the only remaining eligible bid for the downtown Baltimore license.  The project is currently under bid, as I mentioned, and we're waiting to hear back regarding the award of the license once that happens. It will be a relatively short bid and we would expect to be operational about 18 months after that."
  • [Nevada online gaming] "The regulations are more or less drafted. They're being finalized. They're under the process of licensing applicants, and we would expect to be up and operational probably in the fourth quarter, maybe in the first quarter, depending. We're investing in servers. We're building out our call centers. So it's well underway, and Nevada is going to be the first state that legalizes online gaming."
  • "Gaming online will happen, and it's going to either come in a state-by-state by format or by federally legislated bill."
  • "The primary one is the regional market, where we have a number of guests that visit us many times a month. And so those guests, let's say, they drive 30 miles and they visit us five or six times a month, will be impacted by the fuel. And it's really, as we've seen historically, it's the change in fuel price, not so much the absolute fuel price. So, to the extent that the fuel price is a slow increase, that really doesn't appear to impact our customers as much as it does a slow change in the fuel price....a change in fuel price does impact us but it's not as significant as it could be otherwise, if the trips were just eliminated."
  • "What we're seeing is a return in general in terms of trips. So, customers are starting to make more trips but they're really not spending a lot more on those trips."
  • [Revel impact on AC] "We believe they will grow the market because they're going to create a lot of excitement, but also they won't grow it sufficiently to offset the revenues that they're going to consume, so there will be same-store sale declines."

Youtube from Q4 Conference Call

  • "I'll begin by noting like my colleagues in the industry that we're bullish on the Las Vegas market. International business there has been primary driver of gaming growth for Caesars in Las Vegas recently, and an exceptionally strong Chinese New Year result suggests that this strength should continue in 2012 and beyond."
  • "Spending by core gaming customers has not yet returned to previous recession levels, but with Las Vegas visitation increasing and several important U.S. economic indicators trending positively recently, we're cautiously optimistic that these customers will spend more with us in Vegas in the remainder of the year."
  • "Horseshoe Cincinnati, is slated for a second quarter 2013 opening."
  • "We anticipate the Linq will open in phases from mid to late next year."
  • "Trends for group bookings continue to prove strong in 2012 and as we approach our theoretical capacity for group business in our hotels, we expect this strength to continue to translate into an improved rate environment."
  • [LA/MS region] "This region is still affected by relatively weak demand dynamics in most of its local market, with revenues mainly being affected by a decline in trips."
  • "Our contribution margin from hotel revenues is 80% to 90% generally and we've proven that for several quarters now, though in other quarters we've had more gaming revenue growth as well. So, in terms of its sustainability, I would expect that with – on hotel revenue growth in the future that we'll be able to deliver similar contribution margins. Gaming revenue growth of course would have a contribution margin more in the range of 50% to 60% but I also continue – I expect it will continue to drive down cost in Las Vegas as well as across the business."

What’s Asia Signaling About Trends in the Tech Sector?

Conclusion: The relevant growth data emanating from Asia suggests the tech sector is at risk of deteriorating operating metrics over the intermediate term.


If you’ve been following our research for the past 2-3 months, you’re likely well aware of our bearish intermediate-term outlook for the slope of Asian growth – which we typically view as a leading indicator for economic trends in the developed world, given Asia’s place in the global supply chain.


One supply chain that has had consensus a’buzzing in recent months is the tech sector (second-best S&P 500 performer YTD at +17.3%) – particularly at the consumer-facing end. While it can be strongly argued that the trend of stellar operating results out of AAPL are strong justification for its price performance, we’d be remiss to dismiss Apple’s tempered guidance in the context of the manufacturing, export, and headline growth trends coming out of what we view as they key tech-focused countries in Asia. Consider the following metrics:


Real GDP:

  • S. Korea: +2.8% YoY in 1Q12 vs. +3.3% in 4Q11; slowest rate of growth since 3Q09
  • Taiwan: +0.4% YoY in 1Q12 vs. +1.9% in 4Q11; slowest rate of growth since 3Q09
  • Thailand: reports 1Q12 GDP on MAY 20; likely to continue rebounding from the 2H12 flooding

What’s Asia Signaling About Trends in the Tech Sector? - 1


Manufacturing Production:

  • S. Korea: +0.4% YoY in MAR vs. +4.2% in JAN-FEB (combined to smooth out Lunar New Year distortions)
  • Taiwan: -3.8% YoY in MAR vs. -5.7% in JAN-FEB
  • Thailand: -3.7% YoY in MAR vs. -9.1% in JAN-FEB (Capacity Utilization has since rebounded; in fact, it’s at a 4yr high)

What’s Asia Signaling About Trends in the Tech Sector? - 2


What’s Asia Signaling About Trends in the Tech Sector? - 3



  • S. Korea: -1.4% YoY in MAR vs. +5.6% in JAN-FEB
  • Taiwan: -3.3% YoY in MAR vs. -4.5% in JAN-FEB
  • Thailand: -6.5% YoY in MAR vs. -2.4% in JAN-FEB

What’s Asia Signaling About Trends in the Tech Sector? - 4


Absent a marked-acceleration in production orders and developed-world consumer demand (occurrences we’d classify as “improbable”), we would expect the aforementioned sour trends in Asian growth data to negatively impact corporate operating metrics to varying degrees throughout the tech supply chain over the intermediate term. For example, AAPL, even if it has its own secular story independent of the broader technology supply chain, attributes 70% of its COGS to companies in Taiwan (50.9%) and S. Korea (19.1%) – not inconsequential in the context of heightening expectations.


What’s Asia Signaling About Trends in the Tech Sector? - 5


The caveat is that this is but one of many read-throughs into Apple’s and other tech companies’ operating trends and we seldom make calls on a stock without a thorough analysis of all of the puts and takes in a company’s business model. Still, the data is what it is and we see risk in ignoring it – an activity (i.e. ignoring bad data) consensus tends to do repeatedly when making valuation calls near cyclical market peaks. Another caveat is the potential for sour Asian economic data to be bifurcated at the micro level (particularly U.S. vs. the Eurozone) – a trend we’ve seen highlighted recently by Chinese export figures.


What’s Asia Signaling About Trends in the Tech Sector? - 6


All told, it is our view that this data should force tech-focused investors to, at a bare minimum, exercise caution over the intermediate term. AAPL is currently flirting with a quantitative breakdown on our immediate-term TRADE duration. Further, the quantitative setup (bearish TRADE & TREND) in both Korea’s KOSPI Index and Taiwan’s TAIEX Index are in support of our fundamental view. Thailand’s SET Index, which is bullish TRADE & TREND, continues to benefit from an idiosyncratic tailwind (flood recovery). All of these proprietary risk management levels are included in the charts below.


Darius Dale

Senior Analyst


What’s Asia Signaling About Trends in the Tech Sector? - 7


What’s Asia Signaling About Trends in the Tech Sector? - 8


What’s Asia Signaling About Trends in the Tech Sector? - 9


What’s Asia Signaling About Trends in the Tech Sector? - 10

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