“Losing on the other hand, really does say something about who you are. Among other things it measures: do you blame others, or do you own the loss? Do you analyze your failure, or just complain about bad luck?”

-Lance Armstrong


Yesterday, I started off the Early Look with the title #Winning and today I chose its antonym as the title.  It is rarely enjoyable to lose, or think about losing, especially in investing and business, but the reality is that we probably learn more from our mistakes than we do from our victories.


 Lance Armstrong is now considered by many to be one of the biggest losers of our generation after being one of the biggest winners with his unprecedented string of Tour de France victories.  In the most recent news, the Justice Department has filed a suit for $100MM against Armstrong and Tailwind Sports under the False Claims Act on behalf of the U.S. Postal Service (yes, it does beg the questions as to why the USPS was sponsoring cycling!). Time will tell what, if anything, Armstrong has learned from his failures and mistakes.


To be fair, it is natural to over react to mistakes (although I don’t think Armstrong is guilty of this) and I’ve certainly noticed this with myself and my colleagues at times.  The immediate reaction to a loss is often a willingness to quit a strategy. In reality, the reaction to a loss should be to analyze it, learn from it, and focus on improving the results.


The more interesting point on not learning and moving on from mistakes is that we basically inhibit ourselves from creating new ideas and opportunities.  As Po Bronson and Ashley Merriman write in “Top Dog: The Science of Winning and Losing”:


“By definition, new ideas can’t come from a playing-not-to-lose mindset, where the inhibition system is hyperactive. Creativity requires disinhibition: it requires turning off the internal censors in order to allow brainstorming and idea generation. Neuroscience has shown that in the very moment when a new idea sparks to life in the brain, the prevention system is turned off.”


So, in effect, if you can’t actually forget about your past mistakes and become uninhibited, you will chemically impair your ability to generate new and innovative ideas.


Forgetting about mistakes is certainly not easy, especially when the reminders are very present.  In the Chart of the Day, we’ve highlighted the three worst performing major global asset classes in the year-to-date: Peruvian equities, the Japanese Yen, and gold.  The irony of the last two is that when central bankers are aggressively printing money, like the Japanese central bank is, gold is not supposed to go down.  Of course, if unilateral money printing leads to U.S. dollar strength, the case for gold obviously becomes less compelling.  It should be no surprise that in U.S dollar terms the Yen is down almost the same percentage as gold this year.


The larger risk to gold is that we actually get to a place in which the U.S. Federal Reserve begins to tighten policy.  Certainly some slackness remains in the U.S. economy and inflation appears largely in check, but as my colleague and our U.S. economist Christian Drake pointed out yesterday in a note, we are starting to see potential that economic growth in the U.S. may accelerate based on:


1)      Housing – The housing recovery continues on the parabolic recovery that we outlined at the start of the year. Specifically, mortgage purchase applications recently registered a YTD high, median home prices of existing homes for existing home sales rose 11.8% (the highest level since November 2005), and inventory of existing home remains basically at its trough (down 17% in the last 12 months); and


2)      Employment -This week’s Initial Jobless Claims data was again positive with both the SA and NSA series showing sharp sequential improvement.   We consider the 4-week rolling average in NSA claims to be the more accurate representation of the underlying labor market trend and on that metric, the trend improved 250bps week-over-week as the year-over-year change in 4-wk rolling claims went to -6.3% Y/Y from -3.8% Y/Y the week prior.  So, despite initial sequester related impacts beginning in April and the seasonal distortion in the seasonally adjusted data shifting to a headwind, labor market trends continue to show steady improvement.


Despite what some of the talking heads might have you believe, in an economy that is 70% consumption, a strong U.S. dollar (the currency with which we consume), an improving housing market (the consumer’s balance sheet), and stabilizing employment, are all very supportive factors of improving economic growth.


I’m going to end this morning in the winner category.  If you haven’t been watching European sovereign yields, you should be focused on them as a measure of global tail risk.  Since the freak-out highs in yields perpetuated by the Cyprus dysfunction, yields in the 10-year sovereign bonds of Italy, Spain, and Portugal have recovered to some of the lowest levels we’ve seen since the beginning of the European sovereign debt crisis began.  In fact, it won’t be long before Italian 10-year yields starts with a three handle . . . I mean, who would’ve thunk!


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $97.31-103.34, $82.55-83.44, 97.45-101.36, 1.70-1.76%, 11.33-14.89, and 1, respectively.


Keep your head up and stick on the ice,               


Daryl G. Jones

Director of Research


#Losing - Chart of the Day


#Losing - Virtual Portfolio


FY2013 guidance raised after a terrific quarter – but not enough.



We don’t have a problem with conservative guidance but it doesn’t mean we have to adhere.  Even through a conservative but realistic lens, $1.35 looks like the right number for FY2013.  Interactive is tracking better - much better actually - tax rate and share count are lower, and video poker sales may accelerate.  Dare we say that the Double Down acquisition is looking more and more attractive?


A nice run of quarterly announcements and aggressive share repurchases has us still scratching our heads with regards to IGT’s valuation.  Yes, the stock has done well but so has the market.  Stock is trading at under 12x next year’s EPS with new orders from Oregon and South Dakota likely to take earnings higher in 2014.  Is management really that bad? 


We don’t think we need Private Equity to get involved to make this stock work but remember that 4 PE firms were interested in WMS per the SEC filings and 1 actually made it to the final round.  We would argue that IGT is more interesting from a PE perspective in that, unlike WMS, it actually generates substantial free cash flow.


Here are some takeaways from the earnings release, conference call, and our number crunching: 

  • Guidance range is conservative. We don’t think our assumptions are aggressive.  Part of the improvement is the assumption of a lower tax rate – 34% vs. 37%.  Part of it is assuming that they can continue to build, albeit at a more measured pace off of a very strong Interactive number.  Of course, there’s the lower share count base, too.
  • It was surprising that IGT said video poker shipments weren’t material in light of BYI’s comments and the promotions offered on the product, coupled with the fact that they no longer support the old boxes with parts.  We think IGT did not procure any large video poker orders THIS quarter…that could mean that BYI’s intelligence was bad or that they got some big orders but they won’t show up until next quarter.  The latter scenario is more probable.
  • NA product sales product sales came in a little ahead of our expectations with higher unit sales, partly offset by lower ASPs.  We think that their strategy of making a promotional grab at market share was smart given the weak GGR trends we’ve seen in the market and the fact that there is more capital available in the beginning of the year.  The ASP weakness and corresponding margin weakness aren’t surprising given the strategy even though the margin impact was more than we expected.
    • They shipped 900 more units than we expected (500 more on the replacement front and 400 more on the new & expansion side)
    • About 125 more units shipped to Canada than we estimated
    • IL was a few hundred lighter than we modeled, some of that can just be timing though
  • International product sales were disappointing, but what else is new? Non-box sales were better than we thought though. Last time we spoke with the company they insisted that they would see a lift in the 2H13 for international sales.  We remain skeptical.  Below is the breakout of international shipments by region:
    • Asia: 100
    • Australia: 1,100
    • Europe: 500
    • South Africa: 100
    • Mexico:  200
    • Latin America:  1,200
  • Gaming operations was better than we estimated. The yield declines weren’t as severe as we had modeled.  We suspect the same is true in the models of the Bears who have been overly negative on yield trends.
  • Interactive was better than anyone really modeled.  There’s not much to add here aside from the company’s commentary that growth will likely moderate off of this awesome quarter. We’re modeling 35 cents of booking per using in 2H13 and a moderating of the pace of QoQ growth in DAUs
  • Bad debt expense:  Higher than we expected at $4.1MM, partly contributing to the elevated SG&A

Don’t Freak Out About the Eurozone

This note was originally published at 8am on April 12, 2013 for Hedgeye subscribers.

“Great events make me quiet and calm; it is only trifles that irritate my nerves.”

-Queen Victoria


It is seemingly hard to not freak out just a little about the Eurozone’s economic, financial, and political woes, often labeled The Eurozone Crisis, especially if you have money at work in the capital markets.  In the interconnected global world we live in with a 24/7 news cycle, crises boost air, print, and electronic media revenues, and it’s this news flow that also influences investor behaviors. Interestingly enough, the crises throughout Europe have lasted for months and years, far from the limited, “turning point” definition of the word, with the loudest headlines of fear coming from the region’s smallest economies.


While this state of developments come as no surprise to even a casual observer, below we’ll reinforce numerous points that suggest there’s no need to freak out about the future bailout needs from such smaller countries as Cyprus, Portugal, and Slovenia (as they’ll be easily covered), and while larger countries like Italy, Spain, and France (in particular) show material systemic risks, we ultimately see the ECB providing a full backstop to keep the Union of uneven economies together at all costs.



A Broken System with Political Resolve

To refresh, we believe the Eurozone is in no better of a structural state today than it was in May 2010 when Greece received its first bailout, with little exception. Yes, the European Commission has crafted a banking system 101, but it’s far from encompassing or focused enough to materially erode the sovereign-banking feedback loop on its own.


What continues to lie at the heart of the mismatch is that these uneven economies are joined by one monetary policy, therein preventing any one nation from independently debasing its currency to spur competition, or help inflate its way out of debt, which is further compounded by the ECB 2% inflation target mandate.  And even hypothetically if (say way down the line) one monetary policy equitably governed the Eurozone states, you’d still need a fiscal union (say from Brussels or Frankfurt) to oversee the budgets of the member countries to ensure (witnessed magnificently through this crisis) that countries don’t overstep their fiscal boundaries.


But here too you run into problems:

  • Countries don’t want to give up their fiscal sovereignty to a higher order
  • There will remain structural imbalances trying to mandate deficit quotas, especially for example with countries that historically run trade deficits and have limited economic breadth to diversify

Yet, despite the structural juxtapositions described above, and while it’s not empirical, one cannot rule out the resolve of the ECB and Eurocrats to keep the Union together. It’s a belief grounded in their desire for job security, and supported by a belief in trade benefits, freedom of borders, as a force against superpowers like the USA and China, and a post WWII desire for a peaceful collective.



It’s Not All So Bad And the Germans Are All-In

At every weak fiscal point in the Eurozone, Troika (the European Commission, ECB, and IMF) has answered the call to throw good money at bad and sweep the fears under the rug. Here we expect more of the same since it’s our intention that Eurocrats greatest fear remains a tumble weed effect in which the exit of one country can dissolve the entire union.


From a market perspective, despite a protracted slow growth outlook, it has not paid to sell Eurozone capital markets since Draghi issued his famous OMT put to bail out any nation that requests it in SEPT 2012. We expect the Eurozone will remain grounded on Draghi’s word and below are a number of factors that support the view that now is also no time to freak out about this continuing crisis:

  • German Checkbooks – it’s clear the Eurozone playing field is tilted in Germany’s favor via a weaker EUR and easy access to trading partners.  Writing bailout checks is a much more profitable exercise than returning to the D-mark.
  • ECB Leverage –the Bank has taken down its balance sheet -14% since SEPT 2012 due in part to the repayment of the LTROs, so it has room to lever it up.
  • ECB Rate Cut – Draghi has been tight lipped but continues to signal a weak economic outlook.  ECB executive board member Joerg Asmussen said this week that he sees more downside risks to a recovery in the Eurozone in the second half of the year, which may be an early indication of a 2H rate cut.
  • Still Liquid Credit Markets –Despite political concerns across the region, sovereign yields on the 10YR for Germany, France, and the Netherlands are low at 1.30%, 1.85%, and 1.73%, respectively.  As a promising sign, this Wednesday Italy sold €8B of 1YR bills at a yield of 0.92%, down significantly from the 1.28% it paid at the last auction in March. It also sold €3B of three-month bills at 0.24%.
  • Cyprus was a One-off Mistake – the deposit levy scheme in Cyprus was a misstep by the Eurocrats, which even Draghi admitted. It will be caged as a one-off and a similar scenario will not be carried out again.
  • Italy’s Saving Grace, its Deficit – despite a high debt, which this week was revised upward to 130.4% of GDP in 2013 vs 126.1%, and that we’re no closer to a coalition government today than we were when elections ended on February 25 (and we suspect new elections will have to be called), the country’s deficit should remain below -3% this year which may be one important saving grace in shielding against expedient rises in sovereign yields as politicians wrestle with budget promises.
  • Slovenia is a Peanut – certainly the risk signals are “on” with 5YR Slovenia CDS making a new YTD high of 369bps (vs a high of 511bps last summer) and 8YR sovereign yields at 6.36% (off a high of 7%), but the country’s economy at €35B (or 0.3% of the Eurozone) is only slightly larger than Cyprus, and nowhere near as levered to banking. If needed, a potential bailout package will likely be less than the figure Cyprus may get.  (Interestingly enough, Austria is the country with the most leverage to Slovenia according to Bank for International Settlements data.)


Risks Will Always Remain

IMF Head Lagarde said this week that a three speed global economy has emerged with the Eurozone being the weakest link with lots of distance to travel.  It’s clear that the Eurozone unemployment rate is ugly at an all-time high of 12% (with youth unemployment reaching 50% in many peripherals), that labor reforms on the country level are a huge uphill battle, that country resources and cultures will influence economic competitiveness, and that austerity’s bite is a significant tax on economies, but a necessary one in light of outsized fiscal positions.


These are not light issues, and the political scandals – from the French budget minister lying about a secret untaxed foreign bank account to Spanish PM Rajoy being accused of taking construction kick-backs, or even the head-scratcher that the most corrupt of them all in former Italian PM Berlusconi  has a chance of forming a coalition government – compound these economic ails.  That said, this “crisis” is being managed by the European Commission, which wants to extend debt and deficit reduction targets for most countries and lengthen bailout loan maturities (likely for Portugal and Ireland) so as to lessen the economic and political stresses.


Taken together we think there’s plenty of evidence to support a continued Eurozone capital markets rally and tactically trade the short side on time and price around catalysts; we believe that no country will be leaving the union due to the fear of contagion; and that there is plenty of powder tools to use should they be needed: the OMT, a rate cut, and possibly even the issuance of Eurobonds (which George Soros continues to be a big proponent of). We’d also say that while we don’t think the EUR is going away, or going to parity, we do think it carries some additional downside risk against our call for a strengthening US Dollar.


Stay calm and look to the hills for support.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, USD/EUR, UST10yr Yield, VIX and the SP500 are now $1540-1573, $101.72-106.71, $3.29-3.46, $82.22-83.28, 97.45-100.98, $1.28-1.31, 1.71-1.87%, 11.78-14.51, and 1569-1596, respectively.


Congratulations to the Yale Men’s Ice Hockey team on their big win last night and advancing to the NCAA Finals. Go Bulldogs!!



Matthew Hedrick

Senior Analyst


Don’t Freak Out About the Eurozone  - CC.  EUR USD


Don’t Freak Out About the Eurozone  - CC. VP

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The Macau Metro Monitor, April 26, 2013




Phase 3 and 4 of Galaxy Macau will be principally targeted at premium mass guests.  The two phases will span 1 million square metres.  The HK$50 billion (US$6.44 billion) to HK$60 billion project will include 5,500 hotel rooms, a multi-purpose 10,000-seat arena, as well as a 1,500-seat multi-purpose showroom, the company said.  It will also include a 50,000 square-metre convention centre and gaming capacity of up to 1,000 tables and 3,000 slots.


The plan is to start construction “by the end of 2013/in early 2014”.  Phase two, with 500 table games, 1,000 slots, and 1,300 hotel rooms are expected to open in mid-2015.


Macau CEO Chui said, “The lack of local talents, land plots and the economy’s reliance on gaming revenue are the hindrances” the city’s development faces.  Chui pledged to increase the non-gaming elements in new casino resorts and to put resources into developing other industries.  “The economy’s reliance on gaming will continue for a long time but this will not prevent [the development of] the non-gaming elements,” said Chui.

He pledges there will be “a closer ratio” between the gaming and non-gaming facilities within the new big Cotai casino resorts which are expected to be completed by 2015-16.  The official also said the resorts “will need a large number of employees, which will further tighten the number of workers available for the SMEs [small and medium enterprises].”  “So when there are not enough resident workers, can we absorb qualified talents from elsewhere… to serve the city and contribute to Macau’s economic development?” he questioned.  The public should discuss this possibility, he added. “We may not face this problem this year but it will become more conspicuous by 2016,” Chui said.



Unemployment rate for January-March 2013 held stable at 1.9% in comparison with the previous period (December 2012-February 2013).  Total labor force was 359,000 and the labor force participation rate stood at 71.9%. Total employment reached 352,000, an increase of 1,200 from the previous period. 



The total number of non-resident workers in Macau stood at 114,716 in March.  This is a new all-time high, up by 1,440 from February, the previous record. The majority – over 69,000 – came from the mainland.



Boxing star Manny Pacquiao’s promoter Bob Arum revealed that Manny will likely face either Brandon Rios or Mike Alvarado, both US fighters, during November in Macau.

ADM’s Lengthy Courtship of GrainCorp Nears an End

This evening, ADM announced that it had signed a “takeover bid implementation deed” with GrainCorp to acquire the company for A$12.20 per share.  Essentially, ADM will be conducting due diligence for a period of one week and at the end of that period, will make the determination as to whether or not to proceed with a bid.  ADM has moved its quarterly reporting date to May 1st to accomodate the due dilligence timetable.  GrainCorp has announced that any such bid would be unanimously supported by the Board.  The total transaction value is A$3.4 billion including the debt at GrainCorp.  For the fiscal year ended September 30, 2012, GrainCorp delivered adjusted EBITDA of A$413.9 million and $349.6 million in the year prior – so, approximately 8.2x trailing EV/EBITDA.  ADM suggested that the transaction would be “cash accretive” in its first full year (so, EPS dilutive).


ADM’s Lengthy Courtship of GrainCorp Nears an End - GrainCorp Activities

Our view is that this transaction makes a great deal of sense within the context of our long-term bullish call on global agricultural processing.  We believe that one of the best ways to play the increase in caloric consumption of the emerging middle class in developing markets is through companies such as ADM and BG.  ADM and BG are positioned to capitalize on the fundamental geographic mismatch that exists and will continue to grow between where crops are most efficiently produced and where the growth in consumption lies.

Further, we believe that ADM needs to expand beyond its core U.S. operations and the associated ethanol exposure.  ADM missed out on Viterra, the largest grain processor in Canada when those assets went to Glencore.  GrainCorp is the largest grain processor in Australia, a major wheat producer and exporter, well-positioned to feed the burgeoning middle classes of Asia and the Middle East.


ADM’s Lengthy Courtship of GrainCorp Nears an End - GrainCorp Description

These assets are unique and not easily replicated, if at all.  While it is a very capital intensive business, the investment thesis behind ADM and BG is expanding returns over time on a growing asset base.

Bottom line, we are seeing consolidation in global agricultural assets and once the train leaves the station (ability to acquire assets in a particular country), there isn’t another one coming along.  ADM hopped on a good train with GrainCorp – significant share in an attractive market that is well-positioned to exploit favorable trends in global consumption.

Call with questions,




In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance



OVERALL:  BETTER - IGT beat the Street and us pretty handily.  Interactive was a very nice positive surprise as was the number of shares repurchased.  Strong slot sales indicate higher market share and while discounting was implemented, it had a positive impact on the bottom line.  Guidance looks overally conservative.



  • WORSE:  1Q gaming yields fell 6% YoY to $49.26 on lower megajackpot revenue as US GGR remain pressured.  It will be difficult to achieve flat yields by year-end. However, yields did beat Street expectations
  • PREVIOUSLY: The biggest driver of gaming ops yield for us is improvement in gross gaming revenue, which we haven't had a lot of good news in that area lately… We're going to float very closely to gross gaming revenues. We are over-indexed in Nevada and in Native American, because that's where our wide area progressive concentration is and that is the highest yielding product for us…  We're expecting a bit of a lift up in our yield, I think, on a going forward basis, expect to see kind of flat yields year-over-year when you think about it on an annual basis.


  • MIXED:  Expect to see a decrease in game ops capex driven by a decrease in new installments
  • PREVIOUSLY: I think we're in steady state actually right now. When we look out over the next couple of years, we think that the game ops capital is kind of at a fixed number for us in our planning. 


  • BETTER:  DAU climbed 25% in F2Q.  IGT thinks that they can continue to grow DAU with the launch of new language sites but that may impact average bookings.  The pace of growth may not match that seen in F2Q. 
  • PREVIOUSLY: Revenue per user…[is] now at $0.31 per day. We've launched four of our traditional titles that you would see in casinos and those games outperform anything else in the slot content world. So we feel very good about it, top to bottom. We feel good about the margins. We feel good about the track we're on to make it GAAP accretive in 2014 and we're still committed to that.


  • BETTER:  Repurchased 4.4 million shares at an average price of $17.03/ share for a total cost of $75MM in F2Q.  We had $25MM in our model
  • PREVIOUSLY: We have $600 million left on our authorization for repurchasing shares. We have that kind of a window of two to four years, depending upon the valuation of the stock. We expect to resume normal open market repurchases during the remainder of 2013.


  • BETTER:  Believed they gained ship share in both new and replacement markets.  IGT also captured 40% share in the Canadian replacement cycle.
  • PREVIOUSLY: The domestic replacement market is kind of continuing to bump along… we would say cautiously optimistic with overall replacement, but increasingly optimistic with our opportunity to take more than our fair share of what comes in the market.


  • WORSE:  Overall F2Q product sales margins fell 3% points YoY to 52%, mainly due to targeted promotional activity and unfavorable mix shift.  IGT expects a low 51-53% range for the remainder of FY2013.
  • PREVIOUSLY: On the margin side, the uptick in Product Sales margin was really attributable to non-box, in particular intellectual property contributions in the quarter. So we would expect margins to be more comparable to prior year excluding that one-time effect.

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