America Grows

Client Talking Points

Strength In Housing

The housing market continues to impress investors with its recovery. We're seeing a combination of positive indicators that indicate demand is on the rise. Home prices are rising, volumes are up, mortgage demand has increased thanks to ultra-low rates (the 15-year fixed-rate is at an all-time low) and inventory isn't bloated. Put all these together and you have true economic recovery that makes the US housing market one of the most attractive investments out there.

Employment Stabilizing

Talking heads on news programs may indicate otherwise, but the employment situation in the United States is doing quite well. The latest initial jobless claims numbers prove that we're seeing sequential improvement on a month-over-month basis. Both seasonally adjusted and non-seasonally adjusted claims show an improving trend in the labor market. Jobs, along with housing, all fit into the consumption game. Consumers are working hard, buying homes and hitting the grocery store and gas pump and spending money. Consumption is the key to global growth and right now, things are looking up.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company. 


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road


"Whoa, Burger King a whopper (20%) of div increase. However... "comp sales growth was not up to our expectations..." Which trumps which? $BKW" -@herbgreenberg


"Instead of giving a politician the keys to the city, it might be better to change the locks." -Doug Larson


Economy in US expanded 2.5% in Q1 compared with 3% projected growth.


April 26, 2013                                                                                                  











  • YIELD CURVE: 1.46 from 1.48
  • VIX closed at 13.62 1 day percent change of 0.07%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP, 1Q, est. 3.0% (prior 0.4%)
  • 8:30am: Personal Consumption, 1Q, est. 2.8% (prior 1.8%)
  • 8:30am: GDP Price Index, 1Q, est. 1.3% (prior 1%)
  • 8:30am: Core PCE, 1Q, est. 1.1% (prior 1%)
  • 9:55am: U. of Mich Conf, April final, est. 73.5 (prior 72.3)
  • 11am: Fed to purchase $2.75b-$3.5b notes in 2020-2023 sector
  • 1pm: Baker Hughes rig count


    • President Obama hosts Jordan’s King Abdullah at White House
    • 9:30am: House Science, Space and Technology panel meets to review federal hydraulic fracturing research
    • 10:30am: House Foreign Affairs panel holds hearing on Islamist extremism in Chechnya


  • Archer-Daniels-Midland wins GrainCorp board approval for bid
  • Boeing 787 poised to resume flights in Japan after approval
  • UPS ends Teamsters strike risk w/new contract before deadline
  • Samsung sold a third of smartphones as iPhone growth slows
  • Economic growth in U.S. probably picked up in 1Q
  • Yahoo’s Amoroso resigns as chairman, plans to leave board
  • U.K. banks said to be rattled by regulator silence on capital
  • Schneiderman won’t seek damages from Ex-AIG CEO Greenberg
  • Google’s Motorola royalty demand to Microsoft cut by judge
  • EA must face fraud claim by man seeking “Madden” royalties
  • Dell gets Silver Lake investor cheers in rare feat w/PC talk
  • Empire State Building IPO plan nears pivotal test in court
  • Senate passes last-ditch bill to end controller furloughs
  • Online sales-tax measure advances to May 6 vote in Senate
  • Carlyle joins Pantheon with new offices in Colombia, Peru
  • ECB, Fed, Facebook, Buffett, Derby: Week Ahead April 27-May 4


    • Autolive (ALV) 6am, $1.21
    • Corporate Office Properties (OFC) 6am, $0.41
    • Covidien (COV) 6am, $1.09 - Preview
    • Tyco International (TYC) 6am, $0.39
    • Barnes Group (B) 6:30am, $0.44
    • Goodyear Tire & Rubber (GT) 6:30am, $0.30
    • ImmunoGen (IMGN) 6:30am, $(0.16)
    • Aon (AON) 6:30am, $1.10
    • American Electric Power (AEP) 6:57am, $0.81
    • Brookfield Office Properties (BPO CN) 7am, $0.26 - Preview
    • Simon Property Group (SPG) 7am, $2.01 - Preview
    • National Oilwell Varco (NOV) 7am, $1.36
    • LifePoint Hospitals (LPNT) 7am, $0.79
    • Alliance Resource Partners (ARLP) 7am, $1.34
    • DTE Energy (DTE) 7am, $1.07
    • Digital Realty Trust (DLR) 7am, $1.18
    • Alliance Holdings (AHGP) 7am, $0.83
    • Burger King Worldwide (BKW) 7am, $0.17
    • VF Corp (VFC) 7am, $2.19 - Preview
    • WisdomTree Investments (WETF) 7am, $0.06
    • DR Horton (DHI) 7am, $0.19 - Preview
    • LyondellBasell (LYB) 7am, $1.45
    • Ventas (VTR) 7:01am, $1.00
    • Chevron (CVX) 7:30am, $3.07 - Preview
    • HMS Holdings (HMSY) 7:30am, $0.18
    • FLIR Systems (FLIR) 7:30am, $0.36
    • FirstService (FSV CN) 7:30am, $(0.03)
    • Moog (MOG/A) 7:50am, $0.78
    • Lazard (LAZ) 8am, $0.31
    • GNC Holdings (GNC) 8am, $0.72
    • Itron (ITRI) 8am, $0.45
    • Medical Properties Trust (MPW) 8:30am, $0.26
    • Capital Power (CPX CN) 8:30am, C$0.40
    • TransCanada (TRP CN) 8:30am, C$0.54
    • Forum Energy Technologies (FET) Bef-mkt, $0.33
    • AbbVie (ABBV) Bef-mkt, $0.67 - Preview


  • Gold Buyers Throng Indian Stores for Second Week on Rally
  • Gold Traders Most Bullish in Month as Buying Surges: Commodities
  • Trafigura Said to Hire Former TNK-BP Trader Kollek in Moscow
  • Corn Traders Least Bullish Since September on Drier U.S. Outlook
  • Copper Falls as Stocks Keep Expanding Before Holiday in China
  • Coffee Falls to Lowest Since January on Supply View; Sugar Rises
  • Gold Extends Gains in New York on Signs of More Metal Purchases
  • Coal Slump Seen Ending on Deal at Four-Year Low: Energy Markets
  • Corn May Fall 36% on Record World Production: Chart of the Day
  • Boeing Supplier Says Aircraft ‘Brightest’ Market for Aluminum
  • Oil May Gain Next Week on Projected ECB Rate Cut, Survey Shows
  • Highest-Paid Workforce Driving Shell Offshore Australia: Energy
  • European Power Trading Falls a Second Year as Banks Drop Out
  • Gold Imports by China Seen Jumping as Price Slump Lures Buyers






















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“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

Daily Trading Ranges

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Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.