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Morning Reads From Our Sector Heads

Todd Jordan (GLL):


Survey shows visitors gamble less (via USA Today)


Rob Campagnino (Consumer Staples):


GrainCorp agrees to ADM’s sweetened A$3bn offer (via FT)


Josh Steiner (Financials):


US regulators urge quick Libor replacement (via FT)


Drop in Borrowing Squeezes Banks (via WSJ)


Bernanke Says Alternatives to Libor Being Considered (via Bloomberg)


Brian McGough (Retail):


George Soros Buys Into J.C. Penney (via WWD)


Matthew Hedrick (Europe):


Spain Slashes "Growth" Outlook, Projects Higher Deficit, Delays Deficit Reduction (via Zerohedge)


Kevin Kaiser (Energy):


Ras Tanura Oil-Tanker Capacity Seen Falling 13% in Latest Week (via Bloomberg)


Jay Van Sciver (Industrials):


KBR Announces First Quarter 2013 Results (via KBR)

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






















The Hedgeye Macro Team











Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%


“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

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