Following Bernanke's Lead

Since the Federal Reserve first initiated quantitative easing back in November of 2008, the US stock market has shot upward in tandem with each subsequent announcement. However, the law of diminishing returns seems to kick in with each new round of easing as the gains following an announcement quickly become short-lived. Keep in mind that the S&P 500 is down -6% since the September 14 high (aka the Bernanke Top).


Following the Keynesian route of printing money over and over again is clearly unsustainable. Moreover, GDP growth is no longer keeping pace with the equity market as growth and earnings continue to slow. A fix is needed and one thing remains certain: another round of easing is not the solution. Some traders may be set on thanking the Fed for quick pops in the market, but over time, all good things come to an end.


Following Bernanke's Lead - fedgdp

Solid Growth In Macau

Macau average daily table revenue (ADTR) grew 17% year-over-year last week, in line with our expectations and a solid week nonetheless. For the month, we’re predicting year-over-year growth of gross gaming revenue (GGR) of around 5-10%, well above October’s 4% growth. We think that December will improve to the point where it exceeds November; the only reservations we have at the moment are smoking restrictions that may go into effect in early-to-mid January. 


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Takeaway: No need to panic now but the small players need to be watched

The little slot guys trying to play with the big boys


We've been waiting years for this but could the small guys finally be making their move?  Ok, we're not ready to call the end of the big boy dominance of the slot market.  Outside the top 5, the small guys will still only comprise 7% of North American ship share (excluding Canadian replacements).  However, that's more than double what it was in 2008.  The product is much better coming out of MGAM, Aruze, et al.  So while there is no need to begin cutting estimates on IGT, BYI, WMS, Aristocrat, and Konami, this is a trend that needs to be monitored.  We continue to believe that IGT, at least over the near and intermediate term, is the least likely to bear a material (to them) share impact from the new competition because of their product depth.

  • In 2008, we estimate that the top 5 suppliers had North American ship share of 97%
  • In 2012, we estimate that the top 5 suppliers will only have 87% ship share in North America
    • 6% of the decline is due to Spielo’s large share of the currently ongoing replacement cycle in Canada
    • However, even without the Canadian replacement cycle, we estimate that the top 5 share would still decline to 93%
  • Some of the small players that are slowly but surely gaining traction in the for-sale market include:
    • MGAM
      • 2009:  entered the market with 132 units
      • 2012:  on track to ship over 2,000 units to NA
      • Continuing to get licensed in many state jurisdictions, including Nevada in 2013, which should almost guarantee MGAM above market growth
    • Aruze
      • We estimate that Aruze had approximately 300 units “sold” in 2010 and are currently on track to sell about 750 units this year.
      • They are still predominantly focused on participation / leases
    • Spielo - They are a player in VLT/VGT markets and are beginning to develop better content for Class III.  Through Wells-Gardner, they have already secured over 1,800 IL VGT contracts.
    • Ainsworth
      • In 2010, Ainsworth sold approximately 475 machines into NA. 
      • In 2012, they are on track to sell around 1,700 units



Early Look

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IGT: Simply The Best


Last week, we held our bi-annual Best Ideas call for institutional clients. The call focuses on our best actionable ideas from each sector head and today, we’re pleased to bring you Gaming, Leisure and Lodging Sector Head Todd Jordan’s idea: International Game Technology (IGT). After being negative on IGT for years, Jordan is now bullish on the stock due to improving EPS growth, a low P/E ratio of 11x and the company’s ability to grow market share through quality content. 


Another positive for IGT is that it has accelerating cash flow; returning cash to shareholders is now a priority and increases the possibility for stock buybacks. Jordan is long on the immediate-term TRADE (3 days) duration and the intermediate-term TREND duration (3 months).


Watch the video we’ve posted for Jordan’s full rundown on IGT. You’ll easily see why it’s one of our best ideas.

Improvements In Housing

One of the most important metrics for the housing market is existing inventory of homes for sale. Existing inventory recently moved lower (a positive for the market) by 7.8% on a month-over-month basis for October and 21.9% on a year-over-year basis. Levels continue to tighten which helps improve price and rid the market of excess housing. The charts below showcase the current state of the housing market over various metrics.


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Improvements In Housing - image002


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Time To Regroup

Client Talking Points

The No Volume Rally

Despite volume being down -21% yesterday versus the November average, stocks decided it was time to load up on steroids and rip to the upside with the S&P 500 blowing past our TAIL line of support at 1364 and closing at 1386. A reminder that our risk range  is 1364-1401 with the latter number being a real test of confidence for the market. We’re still down -6% from the Bernanke Top (aka September 14 YTD high) so you could consider yesterday to be a short squeeze or whatever buzzword floats your boat. The truth of the matter is that our three top macro themes remain intact: Earnings are slowing, the commodity bubble is popping and the Keynesian Cliff remains a problem that has yet to be addressed properly.

Major Meltdown

Our #EarningsSlowing theme has really been a focal point for the market over the last month. We’ve seen big boys like FedEx (FDX) and Caterpillar (CAT) guide down and plenty of misses versus Street consensus. #OldWall thinks that things really aren’t all that bad and yet each day, we get bad news or data that you think would make them change their mind. After last week’s selling, you can’t help but wonder what the people who said that stocks were “cheap” were thinking.

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


“I like how Meg Whitman is blaming "fraud" on the disastrous Autonomy acquisition. More like complete $HPQ board & management incompetence” -@Contrahour


“Skeptical scrutiny is the means, in both science and religion, by which deep insights can be winnowed from deep nonsense.” -Carl Sagan


China Foreign Direct Investment (FDI) remains down -3.5% year-over-year through October.

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