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Takeaway: No recovery in slot volume in the near-term

  • Las Vegas Strip slot volume could continue to decline through Q1 2013.  2012 slot volume is expected to fall 2.5% YoY.
  • Slot revenue has outpaced slot volume growth for years as the player payout continues to decline 
  • We blame demographics – younger generations are just not interested in slot machines.  Unfortunately, those baby boomer gamblers won’t live forever.



CAT, Sany and Chinese Land Sales

Takeaway: Executive shake-ups at $CAT & Sany not a positive sign. China land sales off ~50% by value. $CAT 2013 sales guidance likely below street.

CAT, Sany and Chinese Land Sales

  • CAT Management Changes: While it is hard to read the tea leaves in CAT’s management shake-up, it is unlikely that business unit heads would seek (or be encouraged) to retire if results were coming in above goals.
  • Sany Heavy Management Changes:  In a late Friday night regulatory filing, Sany Heavy appears to have announced significant changes at the top, with Mao Zhongwu leaving the Chairman role to work in the mining truck unit, which is not a promotion.  CEO Zhou Wanchun is leaving the CEO role, another demotion.
  • Two Management Shake-ups?  Turnover at two major heavy equipment producers in as many days is not a positive sign.  Boards and corporate owners tend not to fire managers that are producing excellent results and encourage top performing executives to stay on. 
  • Chinese Land SalesMunicipal land sales in China are off roughly 50% in Yuan terms in the top 4 cities and nearly 20% in square meters in recent months country-wide (see chart below from Darius Dale on our Macro team).  That should impact Chinese demand for construction commodities, like iron ore, and construction equipment.  Lower land purchases suggest less development activity on the commercial and residential side, while lower municipal revenues from land sales may impact local infrastructure spending.  Weak construction activity in China is a driver of lower expectations for CAT and Sany.

CAT, Sany and Chinese Land Sales - land



  • CAT Guidance:  We should get CAT’s guidance for 2013 top line when the company reports a week from this Monday.  We may see consensus for 2013 trend lower into the report as we suspect management may guide to a 2013 revenue decline. 


Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012



Weekly European Monitor: The IMF Is All In!

Takeaway: The IMF and ECB hold hands to manipulate markets; investors must weigh global CB intervention versus challenged fundamentals.

-- For specific questions on anything Europe, please contact me at to set up a call.


Positions in Europe: Long German Bonds (BUNL)


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -1.7% week-over-week vs +2.1% last week. Bottom performers: Cyprus -8.7%; Ukraine -4.4%; Spain -3.8%; Sweden -3.2%; Ireland -2.9%; Belgium -2.9%; Denmark -2.8%; Italy -2.3%; Germany -2.3%; Russia (MICEX) -2.2%.  Top performers: Turkey +3.3%; Hungary +0.1%. [Other: France -2.0%; UK -1.3%; Greece -0.6%].
  • FX:  The EUR/USD is down -0.74% week-over-week vs +1.33% last week.  W/W Divergences:  HUF/EUR +1.01%; RUB/EUR +0.35%; GBP/EUR +0.35%; CHF/EUR +0.31%; NOK/EUR +0.15%; RON/EUR +0.08%; CZK/EUR -0.44%; ISK/EUR -0.47%; PLN/EUR -0.52%; SEK/EUR -0.68%.
  • Fixed Income:  The 10YR yield for sovereigns were mostly lower on the week.   Greece declined the most week-over-week at -79bps to 18.21%, followed by Portugal -27bps to 8.05%, Spain -10bps to 5.68% and France -10bps to 2.18%. Italy fell -9bps to 4.97% and Germany was UNCH at 1.48%.  

Weekly European Monitor: The IMF Is All In! - 22. yields


Weekly European Monitor: The IMF Is All In! - 22. EUR


Weekly European Monitor: The IMF Is All In! - 22. cftc data



The IMF Is All In!

The IMF was heavily in the headlines this week:

  • It cut global growth forecast for 2013 from 3.9% to 3.6% assuming the U.S. will avoid the fiscal cliff and Eurozone governments will follow the ECB’s plan to buy sovereign debt by committing to reforms
  • It said several Eurozone governments will not hit the budget deficit targets agreed to with the European Commission (EC), specifically:
    • Expects France's deficit to be 4.7% of GDP in 2012 and 3.5% in 2013. (France has vowed to cut its deficit to the EU-mandated 3% in 2013).
    • Expects Spain's deficit to hit reach 7% of GDP in 2012 (vs EC target of 6.3%) and 5.7% of GDP in 2013, well above the 4.5% target recently maintained by Madrid and the EC.
  • It warned of Eurozone capital flight from periphery to the core and said that European banks may need to sell as much as $4.5 trillion in assets through 2013 (+18% above April estimate) if the crisis is not contained, and
  • IMF Managing Director Christine Lagarde urged countries to put a brake on austerity measures due to concerns about the impact of government spending cuts on growth. She stressed that it no longer makes sense for governments in Europe to stick to budget deficit targets if growth disappoints. She also noted that struggling Eurozone countries should be given more time to close their budget gaps, specifically Greece should be given two more years before facing its fiscal consolidation program, and concessions should be made in Spain.

While our read through is that Lagarde is further joining hands with global central bankers and is attempting to add confidence to the market alongside Draghi’s “unlimited” put in September, comments late Thursday and early Friday from Germany (namely Chancellor Merkel and her Finance Minister Schaeuble) showed the lack of a united voice across Europe. Schaeuble backlashed at Lagarde’s words saying they are contradictory to her recent statements in which she said that high debt levels threatened economic growth.  In short, the fiscally conservative Germans holding the reins in the Eurozone are not comfortable giving peripherals carte blanche on fiscal concessions. Surprised by their response?  We’re not.


All in, we think this further demonstrates the lack of a united voice from Eurocrats on the back of a highly compromised framework. Add to that a sterner voice from the UK this week that it wants no part in a Banking Union (overseen by the ECB) and the powder keg of risk across the Eurozone is further revealed – there is surely a long a rough road ahead to crafting a path forward on such issues as bank recapitalizations, a banking union, and a fiscal union.


So all chips in? 


We remain of the opinion that while the ECB and Fed are supporting asset prices, we’re not jumping head first into equities in Europe. Our main focus is the numerous tail risks that exist across Europe. Here’s what gives us pause:

  • There is no historical precedence for what the ECB or Eurocrats will propose
  • The ECB can change the rules mid-way through, like for example shifting bond seniority status
  • Debt and deficit targets, to judge risk and fiscal health, have become less meaningful as concession are reached at every corner
  • Ball under water risk: given the loop of risk between the sovereign and its banks and the cross border asset ownership links, domino risk remains a clear and present danger

Further Juxtapositions


This week the S&P downgraded Spain by 2 notches to BBB- (one notch above junk) with a negative outlook (which is now in-line with Moody’s rating).  This comes following reporting from the London Times that U.S. hedge funds took down about 25% of the Spanish paper issued in September. Given both announcements we have some unanswered questions:

  • Will Spanish bonds face a selloff by investors worried that the country's credit rating will be cut to junk? (Moody’s still has Spain on review for a potential downgrade and is scheduled to conclude its review by the end of the month). 
  • How will bond pricing be influenced given the wildcard on when Spain requests a formal bailout? Will it not be until after regional elections on Oct 21 (in Basque Country and Galicia) or Catalan elections on November 25th?

We don’t have an answer on when Spain will ask for a bailout, but believe it is no longer a question of “if”. Next week on Oct 18-19 EU leaders will join for a summit. We are less than optimistic that leaders will agree on the scope of the ESM (for recapitalization) and sure nothing besides discussion will govern such key topics as a banking and fiscal union.



The European Week Ahead:


Sunday: Oct. UK Oct. Rightmove House Prices


Monday: Aug. Italy General Government Debt


Tuesday: Oct. Eurozone Zew Survey; Sep. Eurozone EU27 New Car Registrations, CPI; Aug. Eurozone Trade Balance; Oct. Germany Zew Survey; Sep. UK PPI Input, PPI Output, CPI, Retail Price Index; Aug. UK ONS House Price; Aug. Bank of Italy Releases, Trade Balance


Wednesday: Aug. Eurozone Construction Output; Germany Government Releases New Macro-Economic Forecasts


Thursday: EU leaders' summit begins (Oct 18-19); Sep. UK Retail Sales; 3Q Spain House Price Index, Trade Balance; Aug. Italy Current Account


Friday: Aug. Eurozone Current Account; Sep. UK Public Finances, Public Sector Net Borrowing; Aug. Italy Industrial Orders, Industrial Sales



Call Outs:


Financial transactions tax (FTT) - in a somewhat surprising development, eleven Eurozone countries agreed on Tuesday to push forward with a financial transactions tax (the minimum threshold was nine countries). Spain and Italy decided to support the measure following heavy pressure from Berlin. Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain will present a model for how the tax would work by the end of the year, and it’s probably realistic to expect the tax to be implemented by 2014.


Italy - former Prime Minister Berlusconi has begun to signal that he may be ready to scrap his attempt at a political comeback. Berlusconi told the daily Libero that “I want unity of the moderates and I am ready to give up my candidacy, if needed, to achieve a united front." Elections are scheduled for the spring 2013.


Italy - Italian government approved a Stability Law for the 2013-2015 period. It is a package of stimulus measures and spending cuts worth ~€11.6B. The package included an income tax cut of 1% in the two lowest tax brackets that is expected to cost €5B. It also reduced a planned 2% increase in the VAT due to come into effect next June to 1%. Savings from a new financial transactions tax and unspecified fiscal interventions on banks and insurance companies were estimated to eventually amount to €3.5B a year.


ESM Launch – The fund was finally opened on Tuesday and can now lend as much as €200B, while its capacity will increase to €500B over the next 18 months. Until then, ~€192B of leftover EFSF funds will still be available. Recall that the ESM can provide bailout loans to governments, buy bonds in primary and secondary markets and lend money to facilitate bank recapitalizations. However, it cannot directly recapitalize troubled banks until the establishment of a single supervisory mechanism.

  • Fitch was the first ratings agency to assign a rating to the permanent bailout mechanism on Monday. It rated the ESM AAA with a stable outlook.

Ireland - Irish central bank lowers 2012 growth forecast to +0.5% vs prior forecast +0.7%. And lowered its 2013 forecast for GDP to +1.7% from +1.9%



Data Dump:


Eurozone Sentix Investor Confidence -22.2 OCT vs -23.2 SEPT

Eurozone Industrial Production -2.9% AUG Y/Y (exp. -4.1%) vs -2.8% JUL   [0.6% AUG M/M (exp. -0.4%) vs 0.6% JUL]


Germany Industrial Production -1.4% AUG Y/Y vs -1.3% JUL   [-0.5% AUG M/M (exp. -0.6%) vs 1.2% JUL]

Germany Exports 2.4% AUG M/M (exp. -0.6%) vs 0.4% JUL [rose for a second month]

Germany Imports 0.3% AUG M/M (exp. 0.2%) vs 0.3% JUL

Germany Wholesale Price Index 4.2% SEPT Y/Y vs 3.1% AUG

Germany CPI Final 2.1% SEPT Y/Y [unch]


France CPI 2.2% SEPT Y/Y vs 2.4% AUG

France Industrial Production -0.9% AUG Y/Y vs -2.8% JUL

France Manufacturing Production -0.4% AUG Y/Y vs -2.6% JUL

France Bank of France Business Sentiment 92 SEPT vs 93 AUG


UK Industrial Production -1.2% AUG Y/Y vs -0.8% JUL

UK Manufacturing Production -1.2% AUG Y/Y vs -0.7% JUL


Italy Deficit To GDP (YTD) 5.0% in Q2 vs 7.3% in Q1

Italy CPI 2.9% SEPT Y/Y vs 3.2% AUG

Italy Industrial Production WDA -5.2% AUG Y/Y vs -7.2% JUL


Spain CPI Final 3.5% SEPT Y/Y [unch]


Switzerland Unemployment Rate 2.9% SEPT vs 2.9% AUG

Switzerland CPI -0.3% SEPT Y/Y vs -0.5% AUG


Portugal CPI 2.9% SEPT Y/Y vs 3.2% AUG

Portugal Industrial Sales -1.6% AUG Y/Y vs -4.0% JUL

Ireland Construction PMI 41.9 SEPT vs 40.7AUG

Ireland CPI 2.4% SEPT Y/Y vs 2.6% AUG

Netherland Industrial Production -0.6% AUG Y/Y vs -0.3% JUL


Greece CPI 0.3% SEPT Y/Y vs 1.2% AUG

Greece Unemployment Rate 25.1% JUL vs 24.8% JUN

Greece Industrial Production 2.5% AUG Y/Y vs -5.0% JUL


Sweden Industrial Production 3.2% AUG Y/Y vs -0.9% JUL

Sweden Industrial Orders -6.5% AUG Y/Y vs -5.4% JUL

Sweden CPI 0.4% SEPT Y/Y vs 0.7% AUG

Norway CPI 0.5% SEPT Y/Y vs 0.5% AUG

Norway PPI including Oil Prices 1.4% SEPT Y/Y vs 4.4% AUG


Finland Industrial Production -1.4% AUG Y/Y vs 2% JUL

Denmark CPI 2.5% SEPT Y/Y vs 2.6% AUG


Czech Republic CPI 3.4% SEPT Y/Y vs 3.3% AUG

Czech Republic Unemployment Rate 8.4% SEPT vs 8.3% AUG

Czech Republic Industrial Output -3.1% AUG Y/Y vs 4.2% JUL

Russia Light Vehicle and Car Sales 10% SEPT Y/Y vs 15% AUG


Hungary Industrial Production Final 1.4% AUG Y/Y [unch] vs  -2.2% JUL

Hungary CPI 6.6% SEPT Y/Y vs 6.0% AUG

Romania CPI 5.3% SEPT Y/Y vs 3.9% AUG


Turkey Industrial Production -1.5% AUG Y/Y vs 3.3% JUL



Interest Rate Decisions:


(10/9) Serbia Repo Rate HIKED 25bps to 10.75%


Matthew Hedrick

Senior Analyst


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CRI Black Book Invite


Next Monday, October 15th at 1:30pm EST we will be hosting our CRI Black Book Conference Call.

Hedgeye Black Books are deep dive research projects, exposing all details of a company, examining past present and future, they are a tool to be saved. This presentation will discuss how the current macro environment and company specific data points are influencing CRI and the best way to play this stock moving forward. 

Topics of discussion will include:

  1. Product Differentiation: CRI is at a point where it is selling like product in very dissimilar channels. How much longer can it go before there is an impact to the P&L?
  2. The company is going from harvesting mode to investing mode. What are the margin and growth implications?
  3. A detailed look at demographics, and how shifting growth rate in different parts of the birth rate curve should impact CRI.
  4. The evolution of the competitive landscape - both at retail and wholesale. How closely is it tracking the change in demand?
  5. Ultimately, what do you do with the stock here?  

Please dial into the call 5-10 minutes prior to the start time using the information below:

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Not Funny: SP500 Levels, Refreshed

Takeaway: Whatever Biden was laughing at last night, the market didn’t find it funny.

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)


As time, prices, and now politics change, we do. Whatever Biden was laughing at last night, the market didn’t find it funny.


Across the core risk management durations in our model, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1446
  2. Intermediate-term TREND support = 1419


In other words, this market is finally broken from an immediate-term TRADE perspective – and it’s happening on fundamentals = #EarningsSlowing. What was immediate-term TRADE support (1) is now resistance, and there’s nothing but net all the way down to TREND support of 1419.


If/when we test 1419, the question remains – with Bernanke wasting all his bullets ahead of the Election, and Earnings Season in full swing, what is the next catalyst for the bulls who chased The Bernanke Top (SPX 1474 on September 14)?


Enjoy the weekend – and keep moving out there,



Keith R. McCullough
Chief Executive Officer


Not Funny: SP500 Levels, Refreshed - SPX

Can China And Japan Reconcile?

Takeaway: The dispute may come to a close if all goes according to plan, but there's plenty of work to be done on both sides.

The ongoing protests and disputes between China and Japan over a territorial dispute may be coming to a close if all goes according to plan. Japanese Prime Minister Yoshihiko Noda has called for discussions between the two countries in order to hammer out some sort of resolution. Noda noted that without talks, both economies would continue to suffer. Last week’s Chinese auto sales numbers highlighted the problems with China-Japan tensions with September sales figures declining for large Japanese automakers. 


That being said, the respective populations of each country won’t tolerate weakness from their governments and Senior Analyst Darius Dale emphasizes that both countries will display accelerated levels of protectionism going forward, sans military intervention:


“The dispute is playing out exactly as we had anticipated in our SEP 19 note tiled: “ARE CHINA AND JAPAN HEADING FOR WAR?”, specifically in that the spat has caused a severe amount of economic hardship – mostly shared by Japan, which we outlined as having more to lose on that front (the SEP China sales figures from the large Japanese auto manufacturers were all down roughly 35-45% YoY; Japan’s Cabinet Office downgraded its assessment of the economy for the third-consecutive months – the longest streak since 2009). Moreover, the uncertainty over the future leadership of both countries (upcoming Japanese elections; Chinese leadership transitions) is contributing to what we’d highlight as a delayed response to diplomacy (i.e. “vice-ministerial discussions at an unspecified date” are probably not going to cut it). We continue to envision accelerating protectionism (either de facto or de jure – same result) and further economic pain as leaders from both nations are in a bind both culturally and politically.”

–Darius Dale, OCT 12, 2012


There’s a long way to go before this situation comes to a close, but Japan and China are taking a step in the right direction – at least for the sake of both economies.

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