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More disclosure surrounding Accelerated Buyback yields higher than expected accretion.



In the back of IGT’s 10Q filed on August 8th, we found additional details surrounding their “Capped Accelerated Stock Buyback Agreement, dated as of June 13, 2012” with Goldman.  The mechanics of the agreement allowed IGT to reduce their share count by a minimum 21MM by the end of F3Q, but leave the ultimate number of shares delivered to the company to vary based on IGT’s arithmetic VWAP (volume-weighted average price per share) over the course of the following 3-6 months.  In layman’s terms, since the price dropped like a rock post its earnings release on July 10th, we’re pretty sure the ultimate share reduction will be a lot greater than the initial 21MM at the same $400MM price tag.


We calculate the buyback could be 5 cents MORE accretive annually than our original estimate.  


On June 13th, IGT entered into accelerated buyback agreement with Goldman Sachs under which they would repurchase $400MM of the $1BN share repurchase program authorized by their Board.  The mechanics of the agreement are actually fairly standard so we’re not sure why IGT didn’t explain it better on their earnings call.  Below is our understanding of how the accelerated buyback works:

  • On June 19th IGT paid GS $400MM and delivered 21MM shares over the course of several days. This allowed IGT to start F4Q with approximately 274MM shares.  $320MM of the $400MM paid to GS was classified as treasury stock purchase and the balance was recorded in APIC.
  • In July, an additional 1.8MM were delivered and thus far, 4MM share have been delivered in through August 6th.  On August 6th, IGT had 267MM shares outstanding.
  • The ultimate number of shares that get repurchased will be determined by what IGT’s arithmetic VWAP is through at least September 19th but no later than December 19th.  Goldman has the discretion over the exact date to settle the trade within that window.  Based the VWAP of where IGT’s traded over the last 37 days and assuming that the stock stays between $11.25 and $12.50, the number of shares delivered should be between 31-33MM.
  • Assuming our math is close to accurate, IGT’s share count at September 30th should be around 264MM with a weighted average diluted count of 268MM.
  • The agreement has a cap of $19.  Normally, companies need to pay for a cap (somewhere in the neighborhood of 3% for a stock with IGT's volatility). However, perhaps due to the deep out of the money nature of the cap, IGT did not have to pay any additional money for this option.
  • The accelerated buyback agreement only covers the initial $400MM
  • IGT is not restricted on additional buyback activity during the period of the Accelerated Buyback as long as the aggregate purchases stay below 25% of 4 week average trailing volume

As to the question of timing, IGT likely had to sign a MPI agreement prior to the execution of this agreement; which means that the deal had to be done several weeks prior to the quarter or after IGT reported.  While this clearly improves EPS, this doesn't translate into higher management bonus incentives, as we previously thought, given that performance-based compensation is solely tied to revenue and operating income.  Even if IGT knew or suspected that a miss was in the works, they had to weigh the option of a lower average share count in 4Q vs the ability to buy back a few million more shares.  The other issue was that if they announced the buyback after the call, it would have likely buffered the stock decline – so on a net-net basis they may not have gotten a much better price.  If their stock trades in the $11.25-$12.00 range for the next 57 days, the effective buyback price will likely be in the $12.13-12.57 range.

SPY: The Time And Price







This week we’ve discussed shorting the S&P 500 via SPY. What we were waiting for, particularly after hitting 1400, was time and price. At 10:21AM yesterday we shorted SPY at $140.78; it is timestamped in the Hedgeye Virtual Portfolio for your viewing pleasure. We think the market will continue to trend lower today but will manage the risk and the range and will cover if need be.


Keep in mind that it is Friday. The odds of Jon Hilsenrath from the Wall Street Journal running his mouth near the close (especially if the market is in the red) are high. Hopefully most people have gained some common sense by now to take those words at face value.




Corn continues to trend higher with the futures ripping higher this morning ahead of the 8:30AM crop report. Considering that the Midwest has been ravaged by hot heat, strong winds and a prolonged drought, it’s not going to be good. Throw in the falling US dollar, courtesy of your central planners, and commodity prices are going to keep going up. There’s nothing positive to come out of this. Corn is so interconnected to everything (fuel, feed for animals, etc.) that making a trip to the grocery store will likely make you wince.




It’s important to timestamp your trades. The reason is obvious: hold yourself accountable. When you timestamp your entry and exit points, you have nothing to hide. Your P&L says it all. If you’re up, you’re up and if you’re down, well, you’re down. It’s how this game works. We pride ourselves on holding a darn good batting average while providing totally transparent trades and will continue to do so. It’d be nice to say we were short JCP in the Virtual Portfolio going into today’s open but that’s OK. Going back to the first note in today’s Playbook, it’s all about time and price. When the markets and moons align for a trade, we’






Cash:                  UP


U.S. Equities:   DOWN


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  UP


Int'l Currencies: Flat   








This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TAIL:      LONG            



The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“$JCP discussing ‘gross margin ex markdowns’ is worse than a .com start-up I saw in ‘99 who touted ‘profit before costs’. That co is gone now” -@HedgeyeRetail




“Never express yourself more clearly than you are able to think.” – Niels Bohr




Tough day for Bill Ackman. JCPenney same-store sales fell 21.7 percent during the second quarter, steeper than the 17.4 percent drop analysts were expecting, according to Thomson Reuters. Revenue tumbled 22.6 percent to $3.02 billion, also below Wall Street's low expectations.


Battling Ideology

This note was originally published at 8am on July 27, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“His own men wanted more of the same, the enemy less.”

-Victor Davis Hanson


I am grinding through two books about leadership and war right now – and that probably puts me in a mood to fight. When it comes to going to battle with Fed and ECB ideologies that are perpetuating global #GrowthSlowing, someone has to do it.


In his epic classic “The Soul of Battle”, Victor Davis Hanson tells the story of the great Greek General of Thebes, Epaminondas, and his fight for democracy versus the Spartans. “Thebes now battled for neither money nor power, but for the idea of allowing all Greek states to be autonomous.” (page 87)


Theban farmers taking up arms for their economic freedom was ultimately instigated by the central planning Spartans themselves. “The Spartan takeover of the sacred Theban Cadmen (382BC) – the city’s spiritual and political center – was the most foolhardy foreign enterprise in the entire history of Spartan foreign policy.” (page 28)


It’s different now, but it’s the same.


Our Keynesian overlords are taking over the most pure temple of free market capitalism that remains – our public markets. And while I may get my short-term market calls right and wrong, I will not confuse that risk management duration with my principles. After listening to Draghi’s drivel yesterday, I will not provide him the cowardice of standing idle.


I am here on the front lines of this ideological debate. And I too will do whatever it takes.


Back to the Global Macro Grind


Undoubtedly, the toughest balance beam to traverse in my head is my absolute disgust for what I hear these people say every day and what it is I need to do in order to not violate Rule #1 (don’t lose money).


We need to keep getting our economic forecasts and risk managed positions right in order to crack these Keynesians right up the middle of their phalanx. Ideologies die on the vine of mediocrity and broken promises.


Whether they are coming at us from the ECB or Fed flanks, their ultimate impact can be measured. As you can see in Darius Dale’s Chart of the Day, this is their 2nd major centrally planned attack since June:

  1. Dollar Down
  2. Gold Up
  3. Stocks Up

If you’re going to step on the field with me and my boys, you better realize that winning a few battles doesn’t win you the war. Yesterday, the S&P Futures rallied 27 handles (2 full percentage points) at the stroke of Draghi’s “whatever” shot hitting the tape. Spanish and Italian stocks moved 6-7 full percentage points in less than 3 hours of trading.


That’s normal, right? Bull market.


If I have reminded you of this 100x in the last 5 years, it’s been 1000x. Get the US Dollar right, and you’ll get a lot of other things right. With the US Dollar Index down a full percentage point on the day yesterday, the #BailoutBulls of the 112th Correlation ran wild.


Here’s how our most immediate-term TRADE correlation scored on yesterday’s close (correlation to the USD):

  1. EuroStoxx 600 Index = -0.82
  2. SP500 Index = -0.75
  3. SPX Volatility Index (VIX) = +0.77

In other words, more central planning fire in your Purchasing Power hole continues to do the 2 very things we stand against for The People (24.6% unemployment in Spain this morning) who don’t get paid by food/energy/stock market inflations:

  1. Shortening Economic Cycles
  2. Amplifying Market Volatility

They know it. You know it. The People watching this market know it. No matter which side of this battle of ideologies you stand on, the short-term correlation (price action) is being drive by causality (short-term policy reactions).


Their world is built on broken promises. Their bailout policies are designed to inflate asset prices by debauching your hard earned dollars. And now these said leaders of Western Academia’s tallest ivory towers have shot arrows towards the heart of “whatever” they think will have us stand down. Ironically, this is precisely what will make us rise up.


Our men and women want more of the same, the enemy less – and that’s the free-market’s trust.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1586-1623, $101.91-107.86, $82.52-83.39, $1.20-1.23, 5846-6349, and 1349-1366, respectively.


Enjoy your weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Battling Ideology - Chart of the Day


Battling Ideology - Virtual Portfolio

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Timing Shorts

“Observe due measure, for right timing is in all things the most important factor.”



Efficient market folks say they can’t time markets. Take their word for it. It’s our job, not theirs.


Whether you practice the art of short selling in gnomic, hymnic, or genealogical form, at some point in the decision making process we all have to do the same thing – timestamp our position.


We waited, watched, and finally re-shorted the SP500 yesterday at 10:21AM EST (1405). Given all the perma-bullish narratives I’ve had to listen to for the last few weeks, I must say I enjoyed the experience quite thoroughly.


Back to the Global Macro Grind


To timestamp or not to timestamp, remains the question. All of you who do this with real money understand the concept obviously. Timing stares at you from your P&L every day. For the Old Wall’s finest strategists, the whole accountability exercise still appears to be quite foreign.


If you’re one of the many non-timestamping strategists who had a 3% US GDP growth forecast and 1 target for the SP500 back in March, you had the entire 2012 fundamental thesis wrong. In order to remain bullish, the best move from here is to beg for bailouts and just change your thesis entirely because the “market is up year-to-date.”


Since the March 26th YTD high for the Russell2000 (+5.5% higher at 846) and the April 2nd YTD high for the SP500 (+1.2% higher at 1419) if nothing else, we’ve been consistent with both our research call (#GrowthSlowing) and our risk management process (#timestamps).


Looking back at the tapes, since February 15th this will be the 9th time we have made a risk management call on the SP500 itself without violating Rule #1 (don’t lose money). We’ve shorted it 8 times and bought it once (bought SPY on May 17th when plenty a March Perma-Bull was in the fetal position).


I’m not trying to evangelize or puff out my chest here. We haven’t killed it with all these calls. They haven’t been the worst timed calls to land in your inbox either. They aren’t meant to be anything other than immediate-term risk signals (which go both ways).


I’m just reminding you that there are some firms in this industry that have at least attempted to evolve the research and risk management process while many haven’t changed a darn thing.


Maybe this time we’ll be wrong. Maybe we’ll be right. The only thing I can tell you is that there will be no maybe when the position is closed.


Timing Matters. In some parts of this country, so does winning and losing – and being held accountable to both.


My immediate-term risk ranges (support and resistance) for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $108.96-114.11, $81.95-83.01, $1.20-1.23, and 1, respectively.


Best of luck out there today and have a great weekend,



Keith R. McCullough
Chief Executive Officer


Timing Shorts - Chart of the Day


Timing Shorts - Virtual Portfolio


TODAY’S S&P 500 SET-UP – August 10, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -1.06% downside to 1388 and 0.16% upside to 1405. 











    • Up versus the prior day’s trading of 62
  • VOLUME: on 08/09 NYSE 575.75
    • Decrease versus prior day’s trading of -9.56%
  • VIX:  as of 08/09 was at 15.28
    • Decrease versus most recent day’s trading of -0.26%
    • Year-to-date decrease of -34.70%
  • SPX PUT/CALL RATIO: as of 08/09 closed at 1.82
    • Up from the day prior at 1.52 


  • TED SPREAD: as of this morning 34
  • 3-MONTH T-BILL YIELD: as of this morning 0.11%
  • 10-Year: as of this morning 1.64%
    • Decrease from prior day’s trading of 1.69%
  • YIELD CURVE: as of this morning 1.38
    • Down from prior day’s trading at 1.42 

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Import Price Index (M/m), July, est. 0.2% (prior -2.7%)
  • 8:30am: USDA crop forecast
  • 11am: U.S. Fed to sell $7b-$8b notes in 7/15/2013 to 1/31/2014 range
  • 1pm: Baker Hughes rig count
  • 2pm: Monthly Budget Statement, July, est. -$93b 


    • House, Senate not in session
    • CFTC holds closed meeting on enforcement matters, 10am
    • NOAA Acting Deputy Director Tracy Dunn, Greenpeace campaigner Phil Kline discuss U.S. ocean, coastal law enforcement at Environmental Law Institute, 12pm 


  • U.S. won’t prosecute Goldman Sachs, employees over CDO deals
  • Yahoo strategy review may result in changes to cash plans
  • RIM said to draw interest from IBM on enterprise-svcs unit
  • Corn near record as USDA to report on drought damage
  • Manchester United raises $233m as IPO prices below range
  • RBA highlights currency risk as 2012 growth forecast raised
  • Standard Chartered’s fitness is key grounds on shutdown decision in N.Y. law, not laundering
  • Knight says it may suffer more losses from trading error
  • Knight Investors face funding options with Hotspot, Direct Edge
  • WellPoint CEO faces ire of investor who says she must go
  • Citigroup offers to buy back bonds in plan to use “excess cash”
  • China export growth collapses as World recovery slows
  • Hong Kong economy grows at close to slowest pace in 3 years
  • Gold bulls strengthen on outlook for more stimulus    


    • Calfrac Well Services (CFW CN) 6am, C$(0.046)
    • Enerplus (ERF CN) 6am, C$(0.02)
    • J.C. Penney (JCP) 6am
    • ioCan REIT (REI-U CN) 7am, C$0.37
    • Rentech Nitrogen Partners (RNF) 7am, $0.98
    • Brookfield Asset Management (BAM/A CN) 7:06am
    • Harman International (HAR) 7:30am, $0.64
    • Celtic Exploration (CLT CN) 8am, C$(0.14)
    • Emera (EMA CN) 12:30pm, C$0.27
    • Pengrowth Energy (PGF CN) Post-Mkt, C$(0.04) 



COPPER – the Doctor sees this Chinese slowdown for what it is – too big to bail. Copper fails fast at 3.43 TRADE resistance, down -1.2% this morning; CRB Index fails at my TAIL risk line of 307. 

  • Rig Shortage Means Record $4.5 Billion Blowout Binge: Energy
  • Sugar Poised for Two-Year Low After Rains Ease: Chart of the Day
  • Cocoa Poised for Rally as Investor Bets Climb: Chart of the Day
  • Gold Bulls Strengthen on Outlook for More Stimulus: Commodities
  • Corn Advances to Record as USDA Set to Report on Drought Damage
  • Oil Pares Weekly Gain on China, IEA Sees Demand Growth Slowing
  • Gold Declines With Stocks, Euro as China Data Tempers Risk Mood
  • Copper Drops as China Export Collapse Adds to Slowdown Signs
  • Sugar Rises as India’s Set to Import From Brazil; Cocoa Advances
  • Oil May Rise on Refinery Runs, Middle East Tension, Survey Shows
  • Sugar Output in India Set to Fall on Dry Weather, Kingsman Says
  • China Soybean Imports Gain for Fifth Month Even as Prices Soar
  • China’s Iron Ore Imports Drop to 3-Month Low on Falling Prices
  • India’s Green-Energy Providers May Struggle After Power Blackout
  • Rises to Record on U.S. Drought Damage
  • Oil-Equities Link Nears Record as Stimulus Looms: Energy Markets
  • India to Import Sugar From Brazil on Dryness, White Premium 





EURO – snapping my 1.23 TRADE line again; that puts a boat load of correlation risk back in play, at lower-highs, for a lot of big beta trades (stocks and commodities).










CHINA – exports falling like hot knife through butter, but do not worry – bailouts coming, allegedly. No stimuli announced overnight; both Chinese and Japanese stocks fail at big TRADE and TREND lines of resistance, respectively.











The Hedgeye Macro Team





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