The Tipping Point


Hedgeye CEO Keith McCullough appeared on The Kudlow Report tonight to discuss currency devaluation and the election.


As it stands, currency devaluation reaches a tipping point where people lose it. You've seen it in Argentina and now you're seeing it in Iran. When people can't feed their families and put gas in their car, they get angry. The US has been busy devaluing the dollar for four years - how much longer can they take it?

Hyperinflation !

Takeaway: We don’t see hyperinflation as imminent, but historical context is telling.

Below we’ve highlighted the tables from a recent academic paper from the Cato Institute that outlines examples of hyperinflation that have occurred over the past couple of centuries.  The paper was written by Professor Steve Hanke from Johns Hopkins.  He found 56 examples of hyperinflation. 


In the paper, hyperinflation is defined as a price-level increase of at least 50% per month.  The most extreme case of hyperinflation on record was in Hungary in 1946.  In July of that year, Hungary had a monthly inflation rate of 4.19 x 10^6.  (As far as we know, Chairman Bernanke was still in diapers then!)


Even as we’ve been sounding the inflation risk horn due to the aggressive monetary easing that is occurring around the globe, we certainly aren’t predicting prices to increase at more than 50% per month.  But as Mark Twain famously said:


“History does not repeat itself, but it does rhyme.”





Daryl G. Jones

Director of Research


Hyperinflation ! - 1

Hyperinflation ! - 2

Hyperinflation ! - 3


Some detailed notes from meetings with WMS at G2E


  • The new product is performing at a better level than their old product.  Have more new products.  Over 100 new titles.  80 of them are on the new platform.
  • When will they produce cash?  They took the time to invest in their business.  This year, they are investing in interactive.  Have an opportunity to provide more transparency and milestones on how much they will invest in interactive on the call.
  • Five cabinet configurations now and launching five new ones on their new operating systems.  5th cabinet is their poker platform launching at STN's and CZR's.
  • How do they fill the gap between now and when the new cabinet comes out?  Pricing discounts - G2E specials targeted at bridging the gap.  Took four quarters after BB2's launch to reach 50% of sales.  In theory, ASPs will go up after the launch of the new cabinet.
  • No product sales guidance for FY13': "could be lumpy" because of IL and Canada which have lower price points
  • Where is WMS in IL?  Gaming control board going through beta test phase.  Once that's over, operators can place games at approved locations.  Have an agreement with Betsson and going direct with others.  Betsson units will be for sale.  Others will be operating leases.  Thinks that they can get upper teens/ low 20s share when it's all said and done.  
  • Canada:  Alberta - ordered 2000 units - WMS got 500 of those - will be in the September Q
  • Manitoba and BCLC (got an award) 
  • Oregon state lottery - will be at the proposal stage soon
  • Class II:  teamed up with Blueberry technologies initially to service class 2.  They now have integrated that system with their CPU Next system. 
  • Consolidation?  Unidesa is selling their slot ops to Novamatica.  Doesn't think that there is anything imminent among the Big 5.
  • Blade I - March 2013 release initially - will have 15 titles
  • Aladdin is doing well for them.  Super Team hasn't done as well.  New Lord of the Rings is doing well.  New Wizard of Oz is doing well.  
  • The Kiss games get approved this Q 
  • Spiderman in March and Willy Wonka in June Q. 
  • Thinks that participation yields have stabilized 
  • Wizard of Oz was performing very well, though not where it was 
  • Macro view on WAP/Participation market:  % of their install base that's remained WAP is still 36-38%.  Have turned the tide on the declining install base.  Have more participation titles in their booth than IGT at this year.  They are making some headway.  Doesn't think that they have hired anyone from IGT.  At this show, IGT did more internal vs external development.
  • CPU 2 strategy:  will still create content for the next 3 years.  If you buy a BB2 now, then you get a free upgrade to the CPU3 in a year.  They stripped down their games to bring them back to the basics that worked before.  Stripped out the noise from the games.  Took out the "bank" strategy with a new look so every game has a new look.  These games are targeted towards the gamer.  The WAP games are for the more casual player that wants to enjoy time on device.
  • Have double money burst (similar to IGT's DUO).  Very volatile experience. 
  • Colossal Reels did well out of the gate.  Now when they have a hit, they "fast track" new content for those boxes.
  • Spiderman is a follow up to Aladdin.  Hoping to capture a younger player with Spiderman
  • Willy Wonka - hope that this will be the next Wizard of Oz 
  • Monopoly refresh on the the xD.  Not too many original Reel 'Em Ins! on the floor - relaunching the brand.
  • Wheel on the Cheers game and Monopoly money.  Game of Life is doing really well - Craps-like features.
  • BBxD for their poker game.
  • How big will the poker launch be at CZR and STN?  Licensed names from Double Double Poker (IGT) and Deuces Wild.  Launching in September with Stations.  Stations is committed to keeping them on the floor for a year.
  • The new game field cabinet.  Looks like a pinball machine.  First games are progressives.  No buttons.  Available in FY4- May 2013 and Wizard will come out on this platform in February.
  • Blade:  looks like the Veridian cabinet.  Addressed some customer complaints:  wager saver (when customers are down to small change- they can get one last spin- win or lose or just cash in).  When there is petty cash left on a ticket, it's a pain for customers.
  • Bonus Guarantee:  guaranteed to give players a 10x on their win.  Giving players a small win even if they lose.
  • The participation stuff looks good but are very back end loaded (Q4)
  • Everything on the floor is ready to go this fiscal year
  • Have a 25% increase in mathematical product that is unique.  Only a handful of clones for the fast track games that are hot (can get out in 4-6 months).
  • Gamefield xD (pinball game):  can do more with the game because there is more within the players' line of vision
  • Sensory immersion 2.0 cabinet/chair:  Willy Wonka and Spiderman
  • MyPoker:  working on it for 3 years.  Comfort of the game is really unique.  Players can also save their configuration.  When the player puts their card in, they are automatically logged into Player's Life.
  • Blade:  aside from a new look; the fluidity of play is second to none.  Had multiple repeat visits from their customers to see the product again, which is a good sign.

WMS Product Details from the G2E Booth

  • All of the Blade stuff is CPU NXD 3 system
  • KISS game:  can change songs while playing.  They are trying to do more music themes in general since Michael Jackson is such a hit. 
  • Yahtzee: Q1 2014
  • New Lord of the Rings:  42" top screen.  Very successful license for them.  These are entertainment products - i.e. more time on device.
  • Gamefield xD: everything on the machine in players peripheral view.  32". Thinks that this is the key differentiator for WMS. Also really comfortable. First games come out March time frame. Wheel bonus feature
  • Cheers: new franchise for them. Also a wheel topper. 80/20 pricing.
  • Monopoly Legends:  integrated 4 themes of Zeus, Reel 'em In!, Jackpot Party, and Goldfish for the bonus round.  Also has a wheel.  Q4 release.
  • Willy Wonka:  thinks that this is the best game they've made in a long time.  Should appeal to the Wizard of Oz crowd.  Lots of motion on the chair.  Graphics were really great.  WAP game.  Q4 release.
  • Spiderman:  brand new license for them.  For any spin, you can get up to 8 wheel arrays.  Q3 release.  WAP game.
  • Price is Right:  they learned that they put too much into the first 2 versions.  Just focus on the singular game in Price is Right.  In each bonus, you are guaranteed to win one of the progressive bonuses.  Plinko is doing well - out the last few months.  This is the follow up to Plinko.  Q4 release.
  • Godfather:  second product in this line.  3 reel mechanical:  can also go as a video.  Clone of Lord of the Rings-The Fellowship.  Lord of the Rings that is out on the floor is one of their better participation WAP titles.  Original didn't do well.
  • MyPoker:  multi-game video product.  One of the reasons that IGT players stop playing is because they get tired of sitting - games not comfortable. 
  • For sale:  Colossal Reels:  this one has been a big hit.  Have five more versions out.  The math is just good.  High volume game.  8 total titles.
  • Portal applications:  still supporting it.  Not doing well.
  • Networked gaming: 
    • Remote configuration and download /portal app
    • They have 60 installs in NA and some international ones too
    • Sent companies a DVD with all the titles.  Allows customers to pay a subscription plan to their library.
  • Williams Interactive:
    • Partouche, Jadestone, Phantom EFX, and 888/Dragonfish alliance
    • Phanton has the #3rd best monetization and 5th largest Facebook play for fun game

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


Takeaway: $JACK is one of our better long-term TAIL ideas. The stock corrected, but held its TREND line, and our thesis is still intact.

We just added Jack in the Box (JACK) to our Real-Time Positions as the share price is at the low end of Keith’s immediate term TRADE risk range.  We like the stock from a fundamental perspective and stand by our Sum of the Parts analysis which suggests long term upside of 50%. For our most recent note on JACK, click here.


Fundamental View


Jack in the Box has been a strong performer within QSR over the past year, outperforming the S&P 500 by over 10%.  We believe that there is more to come from this stock.

  • Jack in the Box continues to perform well.  Management raised guidance on the last earnings release and we expect the refranchised and remodeled concept to continue to generate strong cash flows for the company. 
  • Qdoba is taking time to win over the naysayers.  It is difficult to know, but our take is that recent softness in the stock is likely related, at least in part, to David Einhorn of Greenlight Capital making comments on the new Taco Bell “Cantina Bell” menu and how the initiative is set to take share from Chipotle.  Clearly, the implication is that this new menu at Taco Bell will have a similarly negative impact on Qdoba.  Given the AUV’s and restaurant-operating margins Qdoba stores have achieved during Chipotle’s incredible same-restaurant sales growth over the last couple of years, we are confident that Qdoba still represents a compelling growth play for investors, even with Taco Bell becoming more competitive.
  • The stock is valued at 7.2x EV/EBITDA, lower than WEN and SONC and higher only than GMCR.  Given the growth prospects, future cash flow generation, and asset base behind company, we believe that JACK should be valued more richly.  At 7.2x EV/EBITDA, with EBITDA growth accelerating ahead of expectations, we believe that JACK could see two-to-three turns of multiple expansion.  On this basis alone, Jack in the Box has $10-15 in upside from the current stock price.

Quantitative View


Keith added JACK to our Real-Time Positions at $27.33.  The immediate-term TRADE range is $27.31-$28.33.


IDEA ALERT: LONG JACK - jack levels




IDEA ALERT: LONG JACK - qsr ev to ebitda


Howard Penney

Managing Director


Rory Green




ALL management excited about the product at the Show and what's in the pipeline. 


  • 4 years ago, they had virtually no recurring revenue.  Not a big focus on NA.  Systems customers unsatisfied.
  • During the last year, they grew their participation base by 10-11% vs the market growing 6%
  • Depth of their for sale offering increased their productivity.  Australia:  ship share from mid-20s to mid-30s.  Have some work to do in NA for the for sale product where they hold a constant 12% ship share. 
  • ALL is good at penny, high volume games (aka gambling games) and repeat customers.  Their brands have 6-7 years of staying power.
  • They are starting to think about participating more in markets where they don't participate today e.g. the casual/entertainment gamer.  Repacking their old brands works well for them too - "legends strategy".  Feedback from operators is good.  Evolving strategy in the US.
  • Historically never used 3rd party developers.  By next year, they will have at least three major 3rd parties.  Will announce some deals soon.
  • Rich Schneider just joined them from IGT
  • IL isn't a core market for them - low margin jurisdiction.  Plan on being a low cost provider.  They will be selling games in that market with financing.
  • Seeing good growth in their replacement business in Macau
  • NA:  not seeing any change in the market
  • BYI and WMS have not made much traction in Australia - it's a gambling market.  Market grew 15% in the first half.  Ainsworth is #2 in Australia, IGT/SHFL #3, Konami/Aruze #4.
  • Just delivered 250 games to Alberta
  • I-gaming:  ALL has been more cautious on getting to the market.  Their systems customers are interested in getting into the online space.  Want to provide content for that space.  Their strategy will be around an operating partnership.  Launched two of their clients online already to help them market.  An opportunity to gather more data, market their product and their customer.  Pricing like a system now.  IGT giving away their I-gaming stuff to get floor share.  Have their content on European sites.
  • They have 285 casinos on their system.  They are the largest provider by number of casinos.
  • They had a record year in gaming operations this year.  Record install base and record revenue.
  • They have a very balanced portfolio.  They have an arsenal of proprietary database of games. Don't need to do all licensed titles.
  • WAP strategy:  their jackpots hit frequently.  Tarzan on Verve base.  Tarzan had 1300 games originally.  They brought Tarzan and Jane out three weeks ago and it's doing great.  Wheels round- their players always win. 
  • Superman:  positioned as a VIP game/high limit.  Getting approved in December.
  • Cash Express - flat fee or 80/20.  Jackpot driven off coin-in.  Still have 1,200 original Cashman on the floor.
  • Jaws and Mummy are both performing great 
  • For sale games:
    • Wonder4 is the #1 performing game in NA right now.  Sold over 1000 games.  Doing 2-5x house average.  4 Multi-games.  Have a bunch of follow up games as well.
    • Legends:  redeploying the oldie goodies.  Original game and the new game in the same cabinet.  90% of the play came from the new versions.  Launched in Australia and launching in the US - just approved first 2 games this past week.  Still have MAV 500 games out on the floor creating a good replacement cycle for them.
    • Moved Cashman onto the Stepper.  It's their best brand.  Biggest mistake is that when they failed, they had video game designers make steppers. They then hired stepper guys.  Superman is also a participation game on Stepper.  Original Cashman has sold 8,000 units since 2002.  Hired their stepper guys from WMS 2-3 years ago.
    • MAV 500 was released 12 years ago.  
  • Customers telling them this is the best show in 5 years
  • IGT gives away their systems to get recurring revenue and floor share and get master agreements


Obamanomics: The US Dollar

It should come as no surprise that while the S&P 500, Crude Oil and Gold all have stellar performance records under Obama's first term as President of the United States of America, the US dollar doesn't quite make the cut. The US Dollar Index has dropped -7.3% since January of 2009, due in part to the Fed's insistance on devaluing the currency in support of quantitative easing. We think that Romney should focus more on removing Bernanke as Chairman of the Fed and strengthening the dollar, but to do that, he has to win the election in November. Tonight's the night for him to prove he can do it.


In honor of tonight's presidential debate, we've examined the performance of several different asset classes and their performance from January 20, 2009 to today to see just how well President Obama has done during his first term.



Obamanomics: The US Dollar - USDChart