Four Percent

“Without continual growth and progress, such words as improvement, achievement, and success have no meaning.”

-Benjamin Franklin


Last night I attended a launch party for the first book to be released from the Bush Institute, which is the non-for-profit that President George W. Bush started after leaving office.  The launch was held at the Canadian Consulate in Manhattan, so I felt right at home.  The book, for those of you who haven’t read the news clippings, is called, “The 4% Solution: How Can America Regain Its Economic Strength?”


In the Chart of the Day, we show real year-over-year GDP growth going back to 1945.  The moral of the story is that four percent GDP growth is no small task.  Since World War II, the average year-over-year GDP growth in the U.S. has been right around 3%. Over the last decade, of course, it has been significantly lower.


In the forward to the book, the former President Bush makes no bones about the fact that growth began to slow under his tenure.  In fact, he writes:


“While the causes of the 2008 crisis will be debated by scholars for decades to come, we can all agree that excessive risk taking by financial institutions, irresponsible decisions by lenders and borrowers and market-distorting policies all played a role.  The question now is which policies should we adopt to fix the problems, speed the recovery, and lay the foundation for another long, steady recovery.”


Obviously, it is a worthy question, especially in the short term as we wake up to even more incremental data points that growth is and will slow both in the U.S. and globally.  Some of these include:


1.   Company specific reports – I’d like to include Apple in this since the company “disappointed” the consensus estimates of the Old Wall, but the reality is that Apple still sold 26 million iPhones (good for 28% year-over-year growth) and iPad sales grew more than 80% year-over-year.  In aggregate, though, corporate earnings, especially on the top line where it matters, have been validating a slowing global economy.


2.   European yields – Over the past couple of weeks, European sovereign debt yields in the periphery have gone to new highs.  Specifically, Spanish 10-year yields, even if marginally off their highs of the morning, are north of the 7.5% line.  The implication of this signal is that European governments need to do two things, both of which will slow growth in the short term, cut more spending and likely add more debt to their balance sheets to stay solvent.


3.   Consumer confidence – The global economy is driven by consumer spending.  The latest negative data point comes from South Korea.  This morning South Korean consumer confidence fell to the lowest level in five months.  Unless consumers globally have confidence, they won’t spend and economic growth will remain anemic.


Despite the global economic malaise that is being reinforced every morning, President Obama’s re-election chances remain relatively positive.  In fact, a NBC News / Wall Street Journal poll out this morning shows that President Obama holds a 10-point lead on the question: who would make a better Commander in Chief? At the same point four years ago, a Pew poll showed that McCain led Obama on the same question by 15 points.


This perspective is confirmed by our Hedgeye Election Indicator that shows Obama’s re-election chances are at 57%.  This corresponds with the Presidential predictive market at InTrade that shows a similar reading with Obama having a 57.3% re-election probability.  So, what does Romney have to do to narrow this race?  According to the partisan crowd last night, he has to move the discussion away from Bain Capital, focus entirely on the economy, and introduce a differentiated economic plan to get the U.S. economy back on a growth trajectory.


A consensus view of many of the economists last night, albeit they were more conservative leaning, is that economic policy will fail if it is thought of as a welfare policy.  On some level, it is hard not to disagree with this point.  While we harp on it daily, relying on government to be the solution is, in fact, the problem.  To wit, I received a morning note today from a friend that runs a large institutional trading firm.  His note led off by saying that European markets and U.S. futures are “holding on” in hopes of government / central bank action.  How sad is that?


I’ll answer my own question: it is very sad.  Nonetheless, we have to play the game in front of us.  So for those of you who are looking for a government related catalyst of one kind or another, there are few dates to keep in mind:

  1. Aug 1st – Federal Reserve meetings in the U.S.;
  2. Aug 23rd – 25th – The annual central bankers confab in Jackson Hole; and/or
  3. September 13th – Federal Reserve meets again.

You want catalysts? We got catalysts!


Unfortunately, government induced catalysts don’t do much for inducing real and sustainable growth, even if they do at times arrest economic gravity.  Although according to some recent analysis from our own Josh Steiner, even that point is questionable.


The most recent round of short selling bans in Europe made Josh look back at the last times governments intervened in the free markets to ban short selling.  On August 8th, 2011, France, Italy, Spain, and Belgium banned short selling.  The Euro Stoxx Bank Index went on to lose 21% over the next month.  Even more noteworthy was the SEC short selling ban on September 8th, 2008 of the financial sector, which led to subsequent 76% decline in financials over the next six months.


So, what’s my plan for growth? For the central banks and central planning governments to do one thing: stop.


Our immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $99.45-103.98, $83.36-84.17, $1.20-1.22, and 1,


Best of luck out there today,


Daryl G. Jones

Director of Research


Four Percent	 - Chart of the Day


Four Percent	 - Virtual Portfolio


Even the areas we thought IGT would deliver fell short.



We had concerns going into the quarter but we’re still baffled by IGT’s FQ3 performance.  We thought international would be a bright spot and we were wrong.  Possibly even more confusing was management’s almost complete denial that there are any issues.  Maybe that denial explains why they would buy back a whopping 21 million shares ahead of a major punt.  While some for-sale units may have slipped out of this quarter and into the next, management must have known that this was not going to be a “good” quarter.  Maybe they felt they needed the 2c quarterly accretion to maintain their guidance and it was worth overpaying for the stock to get it.


Either way, the unchanged guidance – even with the additional 2c – means that the pressure is on for FQ4.  At this point, the mid-point of their guidance looks like a big stretch.  Our 31c implies the low end of the range and even on that we feel like there is limited visibility.



The Details:


There was so much that was wrong with the quarter, that we’ll start with the only 2 things that weren’t bad


The Good:

  • North American Unit sales were 1,000 better than we expected
    • 900 of the beat was due to shipments of Canadian replacement units that we didn’t expect until the September quarter
    • There were also some used units in there so it’s unclear what “new” units shipped were.  We suspect that the used unit sales may have been participation or lease units converting to sale rather than true “used” unit sales.
    • Interactive revenues were $3MM ahead of our expectations
      • We estimate that Double Down revenues were $32MM this quarter, just slightly better than the quarterized result of $24MM in F2Q for 72 days of consolidation
      • Other interactive revenue of $11MM

The Bad (and The Ugly):

  • Core gaming operations business (excluding interactive):
    • Despite growing their install base by 3,600 units YoY, core gaming operations revenue declined 2% YoY and we estimate that gross margin declined 3% YoY
    • Yields on participation declined 7% YoY and 4% QoQ (June is usually seasonally stronger for yields)
    • Margins on the core business were down about 70bps YoY
  • International game shipments grew 3% YoY and box sales declined by $15MM YoY
    • So much for double digit growth in international and growing market share.
    • We were wrong here as we thought this would be a quarter of progress. 
  • Mix/schmix… Product ASPs were terrible 
    • NA ASPs declined 8.5% YoY
    • International ASPs were down 9% YoY
  • Non-box sales in NA were down 20% YoY
    • What happened to the Revel system deal?
  • SG&A came in at the high end of guidance despite revenues coming in at the low end 
  • Double Down
    • Memories of Server Based gaming?
    • Despite IGT telling us about how accretive this acquisition has been and how well it’s performing, the math says otherwise. 


Big Mac

This note was originally published at 8am on July 11, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I am the literary equivalent of a Big Mac and fries.”

-Stephen King


I’m not going to admit this because my brother is a McDonald’s franchisee. I am going to put it out there because this is really the key to what you really need to know this morning – I love the Big Mac!


As are all things here in the Haven, that’s a multi-factor, risk managed, statement. Not only do I eat Big Macs (weekly), but I wear the Big Macro jersey for Hedgeye with pride.


I am right fired up for our Big Macro Quarterly Themes Call this morning. We’ll be hosting it (49 slides in 40 mins) with the customary anonymous client Q&A at 11AM EST.


As a reminder, last quarter my team nailed the #GrowthSlowing and #BernankeBubbles popping (Gold, Oil, etc.) calls. I’d be lying to you if I said we weren’t looking to land a few fat TAIL risked whales this morning too.


Our Top 3 Themes are going to be as follows:

  1. Growth Slowing’s Slope – what our GDP models see in Q3 for USA, China, and Germany vs consensus.
  2. The Cliff – as in the 112th Congress kind; will #GrowthSlowing pull forward the Debt Ceiling Debate?
  3. Obama vs Romney – pickles or no pickles? You do need a risk management plan under either scenario.

Back to the Global Macro Grind


After 4 consecutive down days (another 33 point draw-down), the SP500 storytellers who have been telling you to buy stocks “because they are cheap” at VIX 15-16 are going to get one of the many opportunities to buy’em cheaper again this week.


Growth Slowing matters. Most people get that by now. But the narrative of #EarningsExpectations becoming a big market liability has finally perforated the almighty media’s top headlines.


We’ve been saying short pro-cyclical Sectors (Industrials, Basic Materials, Energy) since we made our #GrowthSlowing call in March. That’s not a victory lap – that’s just the score. These S&P Sectors are getting pounded on #EarningsExpectations in July.


Only 10 days in, here’s the S&P Sector scoreboard for Q3 to-date:

  1. Industrials (XLI) = down -2.94%
  2. Basic Materials (XLB) = down -2.49%
  3. Energy (XLE) = down -2.12%

But, but, the Dow is “up for the YTD.” So everything is just fine, right?


Right. Right.


There’s a reason why Canadian McDonald’s franchisees refuse to launch anything that resembles eating a yellow snow cone too. Whether you think the average human being on this earth is “smart” or not, there are some things people just get.


The world’s economic growth is not fine. Neither is the perma contention of the Q1 bulls that “people are too bearish.” Maybe at 27 VIX in May (when the II Bull/Bear Spread pancaked to flat) consensus was bearish enough. Not here.


If you bought stocks at 1374 SPX and VIX 16 last week, you certainly didn’t get that call from us. Anything in the area code of 14-16 VIX has been the closest sell signal you can find to a layup as there has been in US Equities since 2008.


Back to the II Bull/Bear Survey, check this thing out (reported this morning):

  1. Bulls rise from 42.5% to 44.7%
  2. Bears are unchanged at 24.5%
  3. Bull/Bear Spread = 2020 basis points wide!

Away from what I am watching and eating, that’s the super little secret of my risk management morning. The general population of investors who are telling themselves consensus is Bearish Enough are simply lying to themselves inasmuch as I would be if I told you I don’t also love the Filet O’ Fish.


If you’d like access to this morning’s Q3 Big Macro Themes call, please email


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, German DAX, and the SP500 are now $1550-1587, $97.56-103.01, 82.61-83.81, $1.21-1.24, 6267-6687, and 1331-1353, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer




Big Mac - Virtual Portfolio

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The Macau Metro Monitor, July 25, 2012




According to a revised land concession contract in today's Official Gazette, MPEL's Macau Studio City will not include a casino.  The plot, with an area of 130,789 square metres, is earmarked for the development of a five-star hotel, plus movie industry-related facilities, the contract states.


Melco Crown’s chief executive Lawrence Ho Yau Lung accepted the contract terms in a written statement presented to the government on June 13, it is said.
It's possible the government could give the green-light on a casino later, but the uncertainty could complicate the company's efforts to finance the project.



Junket operator Neptune Group Ltd “is currently in the discussion of possible investment in gaming promotion business in casinos in Macau which may require to be disclosed under the requirements of the listing rules” in Hong Kong’s stock exchange.  Last week, Neptune’s share price and trading volume posted an unusual increase, leading the VIP room promoter to issue a filing saying there were no negotiations or agreements relating to intended acquisitions that were of compulsive disclosure under Hong Kong Stock Exchange’s rules.


Over 200 workers of Sands Cotai Central called the police for help early yesterday morning in a dispute with management over the overtime working arrangements during the typhoon conditions.  In a press release last night, Sands said “early this morning, there was a misunderstanding among a group of gaming team members at Sands Cotai Central, regarding the company’s overtime compensation policies during typhoons. After representatives from the Labor Affairs Bureau arrived on site to assist in answering the concerns of the involved team members, all concerned team members returned home.”


It’s difficult to reconcile McDonald’s recent commentary with a recent survey on British eating habits.


A Horizons consumer survey has indicated that frequency of eating out in Britain is at its highest for two years.  While Brits are eating out more often, according to the survey, spend for those who had eaten out in the two weeks prior to the survey had declined to £12.30 versus £12.69 a year ago.


Horizons’ director of services Paul Backman said: “It is surprising, given the difficult economy and the fact that retail spending remains low, that the respondents to our survey are still eating out on a regular basis, and in fact more regularly. Pub restaurants and takeaways are the most popular choices, perhaps as diners downgrade from more expensive establishments. “We expect the quick service and takeaway sector to receive a significant boost over the next few weeks with the start of the London Olympics”. 



Why does this matter for McDonald’s?


CFO Peter Bensen noted that McDonald’s is seeing “constrained consumer behavior” in global markets, but particularly in Europe where the downturn has persisted for so long.  While Bensen did not single out the U.K., he did say that in “several of the markets” in Europe, “the eating out market is simply declining.  People are staying at home.”  It can be a red flag when companies blame macroeconomic factors for sluggish performance and don’t offer any other company-specific factors as possible reasons. 


We continue to struggle with what is behind the recent results from McDonald’s.  A company of this size should have better intelligence than what was offered on the conference call on Monday.  If frequency of consumers in the U.K. eating out is up, but McDonald’s is not seeing a proportionate boost in its traffic, then perhaps there is a value perception issue for McDonald’s to address in the U.K.  We don’t know for sure, but we would appreciate more color from management.



Howard Penney

Managing Director


Rory Green




TODAY’S S&P 500 SET-UP – July 25, 2012

As we look at today’s set up for the S&P 500, the range is 20 points or -0.70% downside to 1329 and 0.80% upside to 1349. 











  • ADVANCE/DECLINE LINE: on 07/24 NYSE -1477
    • Up versus the prior day’s trading of -1601
  • VOLUME: on 07/24 NYSE 808.38
    • Increase versus prior day’s trading of 8.81%
  • VIX:  as of 07/24 was at 20.47
    • Increase versus most recent day’s trading of 9.94%
    • Year-to-date decrease of -12.52%
  • SPX PUT/CALL RATIO: as of 07/24 closed at 2.08
    • Up from the day prior at 1.23 


  • TED SPREAD: as of this morning 35
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.43%
  • Increase from prior day’s trading at 1.39%
  • YIELD CURVE: as of this morning 1.22
    • Up from prior day’s trading at 1.17 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, July 20 (prior 16.9%)
  • 10am: New Home Sales, June, est. 372k (prior 369k)
  • 10am: New Home Sales M/m, June, est. 0.8% (prior 7.6%)
  • 10:30am: DOE inventories
  • 11am: Fed to purchase $4.5b-$5.5b notes due 8/15/20-5/15/22
  • 11am: U.S. to sell $35b 5-yr notes 


    • House, Senate in session
    • Senate Finance holds hearing on education tax Incentives, 10am
    • Senate Commerce holds hearing on short-supply prescription drugs, 2:30pm
    • House Education and Workforce Committee holds hearing on proposals to strengthen National Labor Relations Act, 10am
    • Senate Appropriations hears from Education Secretary Arne Duncan on effects of budget cuts on education, 10am
    • Senate Foreign Relations holds hearing on increasing trade with Africa, 3pm
    • House Armed Services panel holds hearing on military capabilities for cyber operations, 3:30pm
    • Treasury Secretary Tim Geithner presents annual report of FSOB at House Financial Services hearing, 9:30am
    • Peregrine Financial’s collapse amid shortfall in customer funds will be examined at House Agriculture hearing on oversight of swaps,, with CFTC Chairman Gary Gensler, 10am
    • Sen. Richard Shelby, R-Ala., speaks at U.S. Chamber of Commerce event on financial regulatory reform, 1pm 


  • Apple shrs tumble as earnings, forecasts miss analyst ests.
  • Netflix plunges on guarded outlook for new 2012 subscribers
  • said to discuss buyout with Providence
  • New U.S. home purchases may have risen to 371k annual rate in June, most since April 2010
  • C.R. Bard told by jury to pay $5.5m over vaginal-mesh implant
  • Food inflation may rise 4.5% in 2013 on worst drought since ’50s
  • Wells Fargo ranks No. 1 in hardest-to-value securities: S&P
  • Perella said to be hired in Morgan Stanley, Citigroup price rift
  • U.K. GDP falls most in 3+ yrs; 2Q GDP falls 0.7%, median forecast 0.2% decline
  • German business confidence fell 3rd straight month in July to lowest since March 2010
  • Spanish, Italian notes rise on bets ECB may boost rescue fund
  • IMF says China downside risks significant as growth slows
  • Japan June exports fall 2.3% Y/y vs. est. 3% drop
  • Nintendo 1Q net loss 17.23b yen, analyst est. 16.4b yen loss
  • ECB’s Nowotny sees arguments for giving ESM banking license 


    • TE Connectivity (TEL) 6am, $0.78
    • WellPoint (WLP) 6am, $2.08; Preview
    • Encana (ECA CN) 6am, $0.19; Preview
    • Thermo Fisher Scientific (TMO) 6am, $1.16
    • Cenovus Energy (CVE CN) 6am, C$0.53
    • Praxair (PX) 6:02am, $1.42
    • Regeneron Pharmaceuticals (REGN) 6:30am, $0.50
    • Wyndham Worldwide (WYN) 6:30am, $0.84
    • Eli Lilly & Co (LLY) 6:30am, $0.77
    • Alexion Pharmaceuticals (ALXN) 6:30am, $0.36
    • Tupperware Brands (TUP) 7am, $1.27
    • General Dynamics (GD) 7am, $1.74
    • Motorola Solutions (MSI) 7am, $0.69
    • US Airways Group (LCC) 7am, $1.55; Preview
    • AOL (AOL) 7am, $0.23
    • PepsiCo (PEP) 7am, $1.10
    • Northrop Grumman (NOC) 7am, $1.61
    • Rockwell Automation (ROK) 7am, $1.31
    • Lorillard (LO) 7am, $2.32
    • Nasdaq OMX Group (NDAQ) 7am, $0.60
    • Ford Motor Co (F) 7am, $0.29; Preview
    • Corning (GLW) 7am, $0.31
    • Nielsen Holdings NV (NLSN) 7am, $0.41
    • RadioShack (RSH) 7am, $0.04
    • MeadWestvaco (MWV) 7:05am, $0.39
    • Canadian Pacific Railway Ltd (CP CN) 7:30am, C$0.85
    • Caterpillar (CAT) 7:30am, $2.29
    • Hess (HES) 7:30am, $1.38
    • IAC/InterActiveCorp (IACI) 7:30am, $0.71
    • Bristol-Myers Squibb Co (BMY) 7:30am, $0.48; Preview
    • Southern Co (SO) 7:30am, $0.68
    • JetBlue Airways (JBLU) 7:30am, $0.16
    • Airgas (ARG) 7:30am, $1.15
    • T Rowe Price Group (TROW) 7:30am, $0.81
    • Delta Air Lines (DAL) 7:30am, $0.68
    • Boeing Co (BA) 7:30am, $1.13; Preview
    • Omnicare (OCR) N , 7:31am, $0.79
    • ConocoPhillips (COP) 8am, $1.19; Preview
    • Level 3 Communications (LVLT) 8am, $(0.23)
    • Cooper Industries PLC (CBE) 8am, $1.12
    • Loblaw Ltd (L CN) 8am, $0.60
    • Canadian National Railway Co (CNR CN) 8am, C$1.47
    • Akamai Technologies (AKAM) 4pm, $0.37
    • Las Vegas Sands (LVS) 4pm, $0.60
    • Torchmark (TMK) 4pm, $1.30
    • LSI (LSI) 4:01pm, $0.17
    • Varian Medical Systems (VAR) 4:01pm, $0.93
    • AvalonBay Communities (AVB) 4:01pm, $1.34
    • Owens-Illinois (OI) 4:02pm, $0.76
    • Stericycle (SRCL) 4:02pm, $0.80
    • Whole Foods Market (WFM) 4:03pm, $0.61
    • Symantec (SYMC) 4:04pm, $0.38
    • Everest Re Group Ltd (RE) 4:05pm, $3.83
    • Zynga (ZNGA) 4:05pm, $0.06
    • Citrix Systems (CTXS) 4:05pm, $0.60
    • Angie’s List (ANGI) 4:05pm, $(0.39)
    • Lam Research (LRCX) 4:05pm, $0.65
    • Visa (V) 4:05pm, $1.45
    • Ameriprise Financial (AMP) 4:05pm, $1.34
    • Tesla Motors (TSLA), 4:06pm, $(0.94)
    • Western Digital (WDC) 4:15pm, $2.45
    • Cheesecake Factory (CAKE) 4:15pm, $0.49
    • Assurant (AIZ) 4:15pm, $1.41
    • Equity Residential (EQR) 4:25pm, $0.68
    • Community Health Systems (CYH), 4:30pm, $0.89 


  • China to Flood Steel Market Hurting ArcelorMittal: Commodities
  • Exxon Seen Leading Drop in Oil Earnings on Lower Prices: Energy
  • Oil Near Lowest in a Week on U.S. Stockpile Gain, China Concern
  • LME Shareholders Approve HKEx’s $2.2 Billion Takeover Offer
  • Midwest Drought Impact Reaches Indonesia as Soybean Levy Ends
  • Corn Rises, Erasing Drop, as Rains May Fail to Reverse Losses
  • Gold Advances for Second Day on European Debt Crisis Concerns
  • Germany Lowers Gold Holdings for First Time in Eight Months
  • Copper Seen Falling as IMF Warns of Risks to China’s Economy
  • East Iowa Corn, Soy Yields Plunge From 2011, Doane Tour Shows
  • South Korea Considering Stockpiling Corn, Wheat, Soybeans
  • Oil Import Peak in China Set to Curb Brent Rally: Energy Markets
  • Fertilizer Maker Seeks Canadian Potash Mines: Corporate India
  • Chinese Steel Exports Rise to Two-Year High
  • Sugar Rises on Speculation of a Surplus Cut; Coffee Declines
  • Food Inflation Seen Rising 4.5% in 2013 as Drought Sears Crops
  • North Dakota Spring Wheat Yields Seen Climbing on Early Planting 

























The Hedgeye Macro Team