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IL approvals decelerate in November



Following its board meeting, the Illinois Gaming Board (“IGB”) released a list of all licensees as of November 16th.  The list included 605 licensed establishments, implying approval of an incremental 108 establishments in November.  This marks a big deceleration over the 164 granted in October.  To date, there have been no establishment licenses revoked and 25 establishments have been denied licensure. There has been one terminal operator who had its license revoked along with one manufacturer and 22 terminal operators that have been denied licensure.  Currently, there are 2,659 establishments pending approval, up 6% from October.




Each location can have a maximum of 5 machines so 605 approved locations imply a current maximum market size of 3,025.  On October 10th, after 3 weeks of testing, the IGB allowed 65 establishments to go live with VGT gaming.  In the September quarter, BYI and WMS recognized several hundred game sales into IL.  In the December quarter, most suppliers should be able to recognize revenues associated with placements in this market. 


Our best guess is that 3,000 VGTs will be shipped to IL in 2H2012, and by the end of 2013, the market should comprise of about 10,000 units.  Given that we are just in the 6th month of establishment approvals, it’s too early to say whether these estimates will come to fruition.  We expect that most of the VGT sales (upwards of 75%) will come with some sort of financing, but most will be accounted for as for-sale machines.


Our understanding is that ASPs should be around $12k range.  The consensus is that VGTs will win about $100 on average per day, with a large range depending on the location.  We believe that distributors receive a 10-15% cut of the purchase price as their commission, with the big suppliers paying on the low end of that range and some of the smaller guys paying at the higher end of that range.  Typically, distributors take the machines on a consignment basis, meaning that suppliers cannot recognize revenues until the machines are placed in the establishments.



Distributor:  2

Manufacturer:  2 (including Speilo)

Supplier:  6

Technicians:  46

Terminal handlers:  191

Terminal operators:  14

Establishments:  2,659 pending

1364, Now What: SP500 Levels, Refreshed...

Takeaway: In other words, your new Risk Range is 1 of 2: 1364-1398 (if TAIL holds) or 1335-1364 (if TAIL breaks).

POSITIONS: Long Utilities (XLU)


As we broke-out above my long-term TAIL line of 1364 this morning:


  1. 1st two moves were to cover shorts (we only have 4 left)
  2. 2nd move is to wait and watch.


Because A) 1380 = an intraday price, not a closing price and B) closing prices need to confirm for consecutive days.


Fortuitously, we don’t have any index shorts on right now (covered 10 short positions last week), so what I’ll do now is wait for the fire to breathe here and give us higher prices. If it doesn’t, I know what to do then as well.


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


  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE resistance = 1398
  3. Long-term TAIL support = 1364


In other words, your new Risk Range is 1 of 2:


  1. 1 (if TAIL holds)
  2. 1 (if TAIL breaks)


That doesn’t make this easy. It just outlines my decision making tree. Risk managing based on conditional probabilities supports this process, however dynamically prices change.



Keith R. McCullough
Chief Executive Officer


1364, Now What: SP500 Levels, Refreshed... - SPX

Energy: Decline In Capex

Exploration & Production (E&P) capital expenditures are negative on a year-over-year basis for the first time since 2009. The decline comes at a time where producers have exhausted their 2012 budgets due to a cost inflation, poor budgeting and a desire for faster drill/completion times. Street consensus for 2013 capex aims for a decline of -0.4% year-over-year but we believe that’s a bit optimistic after several companies have suggested that budgets will be lower. 


One thing to remember is the sensitivity of commodity prices in the E&P sector. With the dollar rallying for 8 of the last 9 weeks, the price of crude oil is certainly poised to fluctuate quite a bit.


Energy: Decline In Capex  - EP 2

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Macau average daily table revenue (ADTR) grew 17% YoY last week, in-line with our expectations.  For the full month, we are projecting YoY growth in GGR of 5-10%, above October’s 4% growth.  We continue to believe that December growth will be even better than November’s.  However, we would caution that there is likely to be some investor consternation surrounding the smoking restrictions which may go into effect either January 1 or 14.




Relative to trend, SJM and MGM seem to be outperforming in terms of market share while Galaxy and MPEL lag behind. 



Yields In The Eurozone

As GDP growth slows throughout the Eurozone (-0.1% for Q3), bond yields remain elevated for at-risk countries like Greece and Spain. The 10-year yield for sovereigns ticked slightly lower week-over-week, with Greece falling -49 basis points (bps) to 17.38%, Italy falling -12 bps to 4.88%, Portugal falling -8bps to 8.78% and France falling -6bps to 2.07%. Spain actually saw its yield increase by +6 basis points to 5.89% while Germany gained +2bps to 1.35%.


Yields In The Eurozone - 10yr

What's In The Dollar?

Client Talking Points

Dollars and Commodities

The US dollar is driver of many economic events, hence why it’s important to keep an eye on it at all times. If you get the dollar right, you’ll get a lot of other things right. The US dollar is now up for 8 of the last 9 weeks. If this continues, along with the S&P 500 recapturing our TAIL line of support at 1364, we’ll see food inflation come down and the commodity bubble exploding. Institutional bets on commodities cannot withstand these strong dollar gains and they will be forced to fold their hand eventually. 


Wheat, Soybeans and Coffee have been big losers on a week-over-week basis. Eventually you’ll see some products coming down in price at the supermarket but it will take time. This is also a positive for stocks like Starbucks (SBUX), Walmart (WMT) and others who are reliant on the price of commodities. Net long contracts at the CFTC continue to drop; it’s easy to see what’s happening in commodity-world right now and it ain’t pretty.


Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“Haldane: ‘As UK banks increased leverage, they managed to maintain constant capital ratios by seeking out assets with lower risk weights’” -@edwardnh


“It is by the goodness of God that in our country we have those three unspeakably precious things: freedom of speech, freedom of conscience, and the prudence never to practice either of them.” -Mark Twain


Bad debt at Spanish banks hit new highs as debts that are mostly related to home buyers and property developers reached 182 billion euros or 10.7% of bank assets.