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Brave Bears

“Your father doesn’t believe in magic.”



This weekend I took my son Jack to Pixar’s latest animation, “Brave.” The original story, set in the 10th century Scottish highlands, was called “The Bear and The Bow.” Since the McCullough Clan genuinely loves bears, we thoroughly enjoyed the movie.


Brave’s King Fergus doesn’t like bears anymore than modern day Eurocrats do. In fact, the King’s entire life is centered around fighting one demon bear in particular by the name of “Mor’du.”  


I won’t ruin this European short squeeze (or the rest of the movie for you), but having gone to French Canadian school until the 5th grade, I must give you a hint – “mordu”, en Francais, is the past participle of “death.”


Back to the Global Macro Grind


No worries, no short sellers from New Haven, CT actually died in Friday’s latest no-volume squeeze (we cut the SHORTS in the Hedgeye Portfolio to only 5 by Friday morning). Evidently, neither did as many people perish in the government’s now infamous “birth/death adjustment” for US payrolls.


In today’s Chart of the Day, Darius Dale contextualizes the July 2012 Jobs Report with a picture that nets out the effects of the NSA’s “birth/death adjustment” from the NSA Non-Farm Payroll month-over-month figure.


In addition to that picture telling you 1,000 words, here are some other quick hits on the jobs report:

  1. For June (last month’s report), the government revised non-farm payrolls down to 64,000 vs 80,000 prior
  2. For July, the “birth/death adjustment” of +52,000 jobs was the highest “adjustment” on record (since July 2000)
  3. For July, the actual unemployment rate ticked up +10bps (month-over-month) vs June to a very elevated 8.3%

But, but… provided that you believe in magic during an Election Year, America’s jobs crisis is over and it’s time to buy stocks with both hands at VIX 15, again. *Note, every time you’ve bought US Equities at VIX 14-15, in the last 5 years, you’ve been killed.


Killing the shorts is cool, until it isn’t. Don’t forget that short covering is one of the only ways left for these markets to go up. Inflows into US Equities remain dead. So is trust.


While it was funny to see the perma-bulls of the manic media blame Europe for the April-June US stock market declines, I don’t see too many of these cats championing Europe as the reason for a US stock market rally. #weird


Looking at the short squeezes we’ve seen off the June 2012 lows, here are some noteworthy ones:

  1. Oil (Brent) = +23%
  2. EuroStoxx50 Index = +15%
  3. SP500 = +8.7%

Centrally planned black magic or not, Americans of the 30th Olympiad better be thanking Europe for hosting one mother of a short squeeze in commodity and stock prices, even if the volume of fans is low.


The commodity side of this Reflation Rally to lower-highs is worth wasting a few more bullets on:

  1. CFTC (US Commodities Futures Trading Commission) contracts ripped another +5% wk-over-wk to 1.22 million contracts
  2. Agricultural bets (net long contracts) were up another +3% wk-over-wk at a new high of 884,477 contracts
  3. Gold bets put on their biggest wk-over-wk move (+36%) since November of 2008 (96,200 contracts)

Got Inflation Expectations? Brooksley Born, do you hear her now?


How about causality (central planning policies) and correlation (US Dollar Correlation Risk to stock and commodity prices)? Yep, Obama and Axelrod understand this full well. So did Bush and Bernanke. If you want commodity and stock market inflations to re-flate those political chances, you just need to spend like mad and debauch that US Dollar.


With the US Dollar down another -0.4% last week (down for 2 consecutive weeks), this keeps Oil (and Energy stocks) leading the latest charge. Oh, wait. The US stock market is down 8 of the last 11 days,  and the Russell2000 was down another 1% last week…  


So you better be either a Brave Bear when covering those shorts on Thursdays, or just get right loaded to the gills in commodity leverage and, at the same time, say there’s no inflation at the pump. Jack’s Dad tells him magical fairy tales at bedtime too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and the SP500 are now $1, $106.05-110.84, $82.06-82.95, $1.20-1.23, 779-791, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Brave Bears - Chart of the Day


Brave Bears - Virtual Portfolio


In preparation for WMS's FQ4 earnings release Monday, we’ve put together the recent pertinent forward looking company commentary






  • “We believe that WMS has turned the corner on our efforts to restore growth in our gaming operations business. Looking out over the next few quarters, we expect our normalized flow of innovative new products for our product sales and participation operations scheduled to launch during the next 12 to 24 months.”
  • “I am excited by the prospects to reenergize our customer slot floors with the innovation and potential that will come with the launch of our first games, our next-generation CPU-NXT3 operating system…We are on track to commercialize this new operating system on the Sensory Immersion 2.0 platform, with initial approvals and the launch of the Aladdin & Magic Quest game in the latter part of the June quarter.”
  • “Another driver of revenue by the end of calendar 2012 will come from the expected launch of My Poker video poker platform.”
  • “We anticipate the placements of VLTs in Illinois and Italy, which we expect to begin in fiscal 2013, may result in a greater amount of operating leases, which will require gaming operations capital.”
  • “We also will have several exciting opportunities in fiscal 2013 provided by VLT markets. In addition to Alberta, where the lottery authorities expect to replace and ultimately upgrade the entire installed base of 7,000 VLTs, we also expect favorable opportunities from replacement VLT initiatives planned by other Western Canada Provincial Authorities.”
  • “Looking to fiscal 2013, we expect capital expenditures for property plant and equipment to decline as we'll complete two significant projects over the next few months.”
  • “In the June 2012 quarter, we expect to continue to demonstrate ongoing progress with a quarterly sequential improvement in revenues and operating margin over the March 2012 quarter.  Our rate of revenue improvement is less than what we expected earlier in the year. As a result, we expect total revenues in the June 2012 quarter to be modestly below year-ago June quarterly revenues, while our operating margin is expected to improve on a year-over-year basis, adjusting out the net impact of restructuring, impairment and other charges in the prior year.”
  • “We now have our wage net system connecting 1,280 gaming machines at 64 casinos worldwide generating a continued strong play performance.
  • “June quarter… it's likely that CapEx in gaming operations is going to be at or a little above what it was in Q3 as we now get to the point of – as we're incrementing the installed base:”
  • “Typically we see our Q4 ramping up to be our seasonally busiest quarter of the year. It goes Q4, Q3, Q2, Q1. And so I think April was a little bit softer than we would like in our gaming operations business. But our order book is building dramatically, so that offsets that.”


  • “Ongoing benefits from our cost containment and continuous improvement initiatives more than offset the roughly $1,100 decrease in average selling prices that primarily reflected a greater mix of lower priced VLT sales, the impact from higher discounts given on larger volume orders, fewer premium for sale units, and the continued impact of a competitive marketplace.”
  • “Our floor share for new casino openings this year is expected to be in the high teens”
  • “We expect over time to recapture ship share and reestablish our fair share of the market.”
  • “I would expect us to get back to more the mid-20%s here in fiscal 2013 based on the performance of our content and we're very excited”
  • “I would think that from a modeling standpoint, you'd probably want to use the last three quarters or so as a more typical ASP price going forward. I think given the competitive pressures, you're not going see us have great pricing leverage in the next two to three quarters, but I think it will be a more normalized run rate going forward, call it the $16,000 range.”
  • "We've had great success in getting game conversions out on the floor and by having those game conversions out and the high performance of those games, that's always a good metric and indicator for future game sales”
  • “I think that going forward, you're going to continue to see us be competitive with pricing. I wouldn't use the word aggressive but we're going to be competitive.”
  • “We have several premium for sale products coming out in fiscal 2013 that we hope will drive ASP. “
  • Q: “You shipped 759 of the 957 previously shipped games last quarter that you didn't recognize revenue on. Do you expect to recognize the balance of that in 4Q?
    • A: “Related to Maryland, we shipped the preponderance of the games for that opening in the March quarter and relative to the units that we still have yet to recognize revenue on, our belief is we will be able to recognize revenue on those in the fourth quarter.”


  • “With current open orders for now over 2,100 units and five new participation games expected to receive their regulatory approvals this quarter. and with our improving product performance, we expect further growth in the installed participation base and revenue per day in the June quarter and beyond.”
  • “We're confident that the unusually high number of refreshes in the last several quarters will moderate over the next several quarters and slowly return to more historical rates, which would lead to more incremental placements to increase the installed base.”
  • “This is the most prolific stable of products we've ever launched in any one quarter, this is fQ4. And I think, heading into Q1 of fiscal 2013, we're going to be back in business here and that's going to – we're going to have some tailwind for once.”
  • “We've had great success in some of our more fixed lease products in the last year. And so it's really a mix of business issue there as well.”


In preparation for CZR's 2Q earnings release Monday, we’ve put together the recent pertinent forward looking company commentary



Caesars, Rock Gaming Consortium Granted License to Operate Downtown Baltimore VLT Facility 

  • Harrah's Baltimore: $300MM investment, up to 3,750 VLTs  
  • Construction is expected to begin in the second quarter of 2013, with an opening targeted in the second quarter of 2014.



  • "We still had a healthy FIT customer base, but the channel that they're booking is more direct as opposed to through the OTAs and that's helpful in terms of the economics."
  • "What we hope to achieve is improving mix over time and that was like I said less of a reliance on wholesale operators which for us right now stands at 10% or less of our room nights, continuing to shift that mix into FIT and gaming customers and that's where we will drive RevPAR growth, not really through occupancy growth."
  • "In terms of thinking about RevPAR growth....  low to mid-single digit RevPAR growth and we'd be comfortable with that number."
  • [Midwest/South/International regions] "There is certainly room to increase those margins....Our margins should be able to grow even in the phase of flat revenues because of the delivery of the savings from our Project Renewal program."
    • "One element which drove improvement in Atlantic City was the elimination or severe reduction of our property taxes in that market and that will continue to deliver the benefit throughout the year and into next year as well."
    • "In managed international and other... our online business which is growing nicely is in that category, although London Clubs and Punta del Este as well as our managed properties are growing nicely."
  • "The environment in Atlantic City... continues to be challenging and we remain focused on modifying our cost structure there to realize appropriate returns."
  • [Revel impact]  "Our hypothesis is that it will marginally help the Showboat. It will hurt Bally's because Bally's is burdened by that much higher cost structure and then it will be a bit neutral on Harrah's Resort and Caesars Atlantic City, but we're not drawing any conclusions until we get into August and can kind of take stock about the way it performed in the summertime."
  • "We certainly may sell other assets in the future. I would not suggest that we would sell a business as large as Harrah's St. Louis."
  • "There will be online gaming here in Nevada by the end of the year and potentially some other states as well, and we're getting ready for that."
  • [Octavius Tower] "We expect to complete construction of the three additional ultra luxury villas later this year."
  • "The Linq will open in phases beginning in mid to late 2013. We'll begin to announce some of the tenants for this project in the next several months. O'Shea's will reopen with a prominent new space when the Linq is completed."
  • "In the second quarter, the Cleveland operation management fees will begin to flow into our managed regions. So over time, we expect the managed fees of our business to become a much more meaningful revenue source."



  • "We are optimistic is that we think that the rate environment in Las Vegas is  constructive and positive for the remainder of the year.
  • [Atlantic City taxes] "And the second was this refund of prior taxes paid, where we'll receive the cash in the future in the form of a reduced tax outlay."
  • "Nobu Tower will open at the end of 2012. Cost is $30 million with about 280 rooms"
  • [Online gaming] "I expect a favorable result in New Jersey, but probably not immediately. And in Nevada, of course, everything is in very good shape. We're in the process of licensure for our offering here in Nevada. So hopefully, that will be finished well before the end of the year."

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20 Proprietary Risk Ranges

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HedgeyeRetail: Not An 'Equal Opportunity' Week

What a week! If there's anything we can say about earnings season thus far, is that the only stocks that were rewarded are those that beat on revenue. With such a poor Macro backdrop and so many companies missing, simple margin upside (especially if SG&A) was not enough. What we find comical is that there are so many companies that took all the credit for their success when Macro was favorable. Now they are blaming the environment on the way down. We won't name names.


HedgeyeRetail: Not An 'Equal Opportunity' Week - Earnings price action HERV


CONCLUSION: Global GROWTH/INFLATION/POLICY dynamics are poised to incrementally deteriorate in 2H12, leaving bailout hopes or central planning speculation as the only factors in support of a bullish bias on “risky assets” from here. As we learned in late 2007/throughout 2008, those catalysts have the potential to leave a great deal of investors caught offsides.



With the inclusion of this morning’s ISM data, we’ve collected a broad swath of global PMI data for the month of JUL throughout this past week. Unfortunately for growth bulls, the data implies that the global growth outlook continues to deteriorate. In the chart below, we scatter plot the nominal PMI readings of various countries and economic blocs vs. the corresponding sequential delta. As the chart shows, global PMI readings generally slowed or showed outright contraction (or both) in the month of JUL. Moreover, weakness in the New Orders subcomponent in a handful of key surveys – including the US and China – lends credence to our view that global economic growth is poised to continue slowing over the intermediate term.





On the inflation front, we continue to view any incremental monetary easing out of the Federal Reserve (and incremental front-running of said easing in the commodities markets) as the key upside risk to global inflation figures over the intermediate term. One key point we highlight in the chart below is the fact that the global trend of reported disinflation is poised to come to a screeching halt in the JUL/AUG periods, largely due the waning trend of YoY commodity deflation, which peaked in JUN (generously holding current prices flat through year-end).




Looking ahead 3-6 months, incrementally less YoY deflation in the commodities markets will become a tailwind, on the margin, for rising CPI figures. While we do not necessarily see material upside to global inflation readings in 2H12, we are keen to flag this important change on the margin, which has dire policy implications as indicated in the next paragraph.



With global economic growth continuing to slow and reported inflation statistics poised to bottom and accelerate in 2H across many economies, the global economy is at risk of experiencing marginal stagflation (i.e. “Quad 3” in our proprietary G/I/P analysis) – an event that may serve to handcuff many central bankers globally.


Recall that heading into 2012, one of the predominant factors in the consensus bull thesis was a global trend of monetary easing – particularly in across the developing world. Arresting that trend or potentially pricing in tighter monetary policy on the margin will likely become a headwind to asset classes that rely on easy money and the associated speculation therein to appreciate. Look no further than the PBOC’s recent quarterly monetary policy report that suggested that “consumer inflation may rebound after August” for emerging confirmation of our view.


Additionally, we continue to anticipate that growing fear of the Fiscal Cliff and another Debt Ceiling showdown in the US has the potential to increasingly weigh on global financial markets as we get nearer to those catalysts. Refer to our 3Q12 Macro Theme titled, “The Cliff" for more details.


In the chart below, we run the Bloomberg-coagulated World Real GDP and CPI figures through our G/I/P screen and the outlook leaves much to be desired for bulls.




All told, global GROWTH/INFLATION/POLICY dynamics are poised to incrementally deteriorate in 2H12, leaving bailout hopes or central planning speculation as the only factors in support of a bullish bias on “risky assets” from here. As we learned in late 2007/throughout 2008, those catalysts have the potential to leave a great deal of investors caught offsides.


Darius Dale

Senior Analyst


The Economic Data calendar for the week of the 6th of August through the 10th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


THE WEEK AHEAD - weekahead

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