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The Doppelganger Fed

“One day everything will be well, that is our hope. Everything’s fine today, that is our illusion.”



In German folklore a doppelganger is literally a paranormal double of a living person. More contemporarily, the word doppelganger is used to identify a person that closely resembles someone else either physically or behaviorally. As an example, some people have suggested that my doppelganger is Russell Crowe.


As it relates to the Federal Reserve, the biggest question facing investors currently is whether Janet Yellen will be a doppelganger, in terms of policy and communication, of current Chairman Ben Bernanke (more commonly known as The Bernank).  Practically speaking, copying Bernanke’s behavior is likely to mean a continuation of QE Infinity.


Keith had some colorful comments on Fox Business last night as it relates this idea of QE Infinity. The video is attached in the link below and Keith’s comment begin at around the 3:00 mark. As Keith notes, the biggest issue is that the Fed is confusing the market which has dramatically heightened interest rate volatility this year.


Paul Singer from Elliott Management made a similar statement in his letter to investment partners yesterday where he wrote:


“QE Infinity” has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying.”


This is indeed the issue, namely that the economy and investors have become so accustomed to abnormal interest rate policy, that they have an incredibly difficult time determining what normal is anymore.  Sadly, the new normal appears to be to wait for the Fed’s next whisper to the Wall Street Journal’s Jon Hilsenrath.


To be fair, for those that are into reading Federal Reserve tea leaves, there was communication other than whispers to Hilsenrath yesterday. Specifically, in its statement the Federal Reserve made three changes:

  • This clause was removed, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market”;
  • They changed ”that economic activity has been expanding at a moderate pace” to “generally suggests that economic activity has continued to expand at a moderate pace”; and
  • They removed the “some” from this statement - “Some indicators of labor market conditions have shown further improvement”.

Maybe it is just me, but I’ve been reading English for a long time now and I have no idea what the implication is of those changes.


The fact is that the bogey that remains out there is 6.5% unemployment and if we take their word then the Fed will:


“. . . keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent.”


Although, even there, The Bernank has been quite dodgey as he has at times alluded to 7% being the bogey for altering monetary policy and other times suggesting he would lower the bogey to 6%. But if we accept the current 6.5% target, QE Infinity is likely to continue at the rate of $85 billion, give or take, for the for seeable future. 


In the Chart of the Day, we’ve highlighted the growth of the Federal Reserve balance sheet since 2008 as a result of QE Infinity.  In total, the Fed is almost at $4 trillion in assets on its balance sheet.  Not to be the alarmist, but another reason that we may be in the low interest time zone for a lot longer than we realize is because of interest rate risk associated with the Fed’s balance sheet.


Ironically, some pundits (we won’t name names) have commended the Fed under Chairman Bernanke for being transparent and great at communicating.  Sadly, it doesn’t take much more than the last 24 hours to understand that a) the Fed is as bad at communicating as ever and b) this is why investors are so confused. Frankly, we see no reason to believe that Yellen will be anything but Bernanke’s doppelganger on the communication front . . . and so the confusion will go on.


Sadly for stock operators, this confusion has led to an environment in which fundamentals for companies are, at times, ignored.  As an example, let’s look at both earnings and sales results for SP500 companies:

  • Sales: 60% of companies that beat sales estimates subsequently outperformed the market to the tune of 3.7% on average.  The other 40% of companies that beat sales estimates underperformed the market over the subsequent 3-days by an average of -3.8%.   Subsequent performance for companies missing Sales estimates was similarly mixed.  
  • EPS:   56% of companies beating EPS estimates subsequently outperformed the market by ~3% on average while 44% went on to underperform the market by an average of -4.1%.  Subsequent performance for companies missing EPS estimates was similarly mixed.

In a nutshell, stock performance has had very little relation to fundamental performance in 2013.  More simply, it has been a structurally tough year to isolate Alpha.  But even there no one should be surprised, because it is a macro driven market.  And if you don’t do macro, macro will do you.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.47-2.60%


VIX 12.85-14.92

USD 79.21-81.16

Brent 108.86-111.27

Gold 1


Keep your head up and stick on the ice,

Daryl G. Jones


The Doppelganger Fed - Chart of the Day


The Doppelganger Fed - Virtual Portfolio

October 31, 2013

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October 31, 2013 - Slide10




TODAY’S S&P 500 SET-UP – October 31, 2013

As we look at today's setup for the S&P 500, the range is 16 points or 0.47% downside to 1755 and 0.44% upside to 1771.         










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.21 from 2.22
  • VIX closed at 13.65 1 day percent change of 1.79%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: RBC Consumer Outlook Index, Nov. (prior 50.7)
  • 8:30am: Init. Jobless Claims, Oct. 26, est. 338k (prior 350k)
  • 9am: ISM Milwaukee, Oct., est. 53 (prior 55)
  • 9:45am: Chicago Purchasing Mgr, Oct., est. 55 (prior 55.7)
  • 9:45am: Bloomberg Consumer Comfort, Oct. 27
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change


    • President Obama to speak on private-sector jobs, new business investment at Commerce Dept.’s Select USA Investment Summit
    • NRC, FEMA meet to discuss preliminary draft changes to Emergency Preparedness Criteria
    • 10am: Sen. Banking Cmte hears from Fed-New York’s EVP on revising guarantee for mortgage-backed securities
    • 10:15am: Sen. Foreign Relations Cmte. holds hearing on Syria


  • Facebook to limit ads as younger teens using site less
  • Deficit in U.S. narrows to five-year low on record revenue
  • ECB makes crisis cash lines at central banks permanent backstop
  • Morgan Stanley said to take 30% stake in Mitsubishi UFJ firm
  • Bank of Japan sticks with campaign of record monetary easing
  • Starbucks forecast trails ests. as Asia gains slow
  • Goldman shrinking pay shows Wall Street poised for bonus gloom
  • Citigroup, JPMorgan said to put currency dealers on leave
  • Oracle pay under fire from pension funds before annual meeting
  • Twitter mum on profit has roadshow attendees questioning value
  • Visa profit matches estimates as $5b buyback plan is set
  • Allstate profit slides 57% on loss tied to sale of life unit
  • Metlife misses estimates as insurer incurs costs in Australia


    • Advance Auto Parts (AAP) 8:30am, $1.42
    • Alamos Gold (AGI CN) 6am, $0.07
    • Alpha Natural Resources (ANR) 7am, $(0.76) - Preview
    • AmerisourceBergen (ABC) 7am, $0.74 - Preview
    • Avon Products (AVP) 7:01am, $0.19 - Preview
    • Barrick Gold (ABX CN) 6:30am, $0.50 - Preview
    • Beam (BEAM) 7:30am, $0.58
    • Bell Aliant (BA CN) 6am, C$0.42
    • Belo (BLC) 6am, $0.12
    • Bombardier (BBD/B CN) 6am, $0.10
    • Boyd Gaming (BYD) 7am, $0.01
    • Cardinal Health (CAH) 7am, $0.85 - Preview
    • Catamaran (CCT CN) 6am, $0.48
    • Cigna (CI) 6am, $1.62
    • Clorox (CLX) 8:30am, $1.01 - Preview
    • ConocoPhillips (COP) 7am, $1.45 - Preview
    • Discovery Communications (DISCA) 7am, $0.73
    • Enterprise Products (EPD) 6am, $0.69
    • Estee Lauder (EL) 7:30am, $0.73 - Preview
    • Exxon Mobil (XOM) 8:02am, $1.77 - Preview
    • GrafTech International (GTI) 7:04am, $0.02
    • Harman International (HAR) 8am, $0.84
    • Hillshire Brands (HSH) 7:30am, $0.35 - Preview
    • Imperial Oil (IMO CN) 7:55am, C$0.99
    • Incyte (INCY) 7am, $(0.09) - Preview
    • Invesco (IVZ) 7:30am, $0.52
    • Iron Mountain (IRM) 6am, $0.30
    • LKQ (LKQ) 7am, $0.25
    • Magellan Midstream Partners (MMP) 8:02am, $0.59
    • Marathon Petroleum (MPC) 7:14am, $0.63
    • MasterCard (MA) 8am, $6.94
    • MGM Resorts (MGM) 8am, $(0.03) - Preview
    • Mylan (MYL) 7am, $0.79 - Preview
    • New York Times (NYT) 8:30am, $(0.03)
    • NII Holdings (NIHD) 6:30am, $(1.17)
    • NiSource (NI) 6:30am, $0.17
    • Ocwen Financial (OCN) 7:30am, $1.09
    • Perrigo (PRGO) 7:44am, $1.39
    • Pinnacle West (PNW) 8am, $2.17
    • PPL (PPL) 6:57am, $0.68
    • Quanta Services (PWR) 6:07am, $0.45
    • Realty Income (O) 9:15am, $0.61
    • SCANA (SCG) 7:30am, $0.92
    • TECO Energy (TE) 7:30am, $0.33
    • Teradata (TDC) 6:55am, $0.70
    • Teva (TEVA) 7:30am, $1.25
    • Time Warner Cable (TWC) 6am, $1.64 - Preview
    • TransAlta (TA CN) 7:45am, C$0.18
    • Valeant Pharmaceuticals (VRX CN) 6am, $1.41
    • ViroPharma (VPHM) 7:30am, $0.15
    • Western Refining (WNR) 6am, $0.50


    • American International Group (AIG) 4pm, $0.96
    • Apartment Investment & Management (AIV) 4:05pm, $0.50
    • Camden Property Trust (CPT) 4:17pm, $1.02
    • DCT Industrial Trust (DCT) 4:10pm, $0.11
    • Fairfax Financial (FFH CN) 5:02pm, $4.26
    • First Solar (FSLR) 4:02pm, $0.95 - Preview
    • Fluor (FLR) 4:05pm, $1.03
    • Kodiak Oil & Gas (KOG) 4:01pm, $0.23
    • Mohawk Industries (MHK) 4:01pm, $1.90
    • MRC Global (MRC) 4:01pm, $0.45
    • Newmont Mining (NEM) 4:43pm, $0.32 - Preview
    • Northeast Utilities (NU) 4:15pm, $0.73
    • Omega Healthcare  (OHI) 6pm, $0.62
    • ON Semiconductor (ONNN) 4:05pm, $0.16
    • Piedmont Office Realty Trust (PDM) 5:02pm, $0.35
    • Public Storage (PSA) 5:05pm, $1.89
    • Republic Services (RSG) 4:10pm, $0.49
    • Southwestern Energy (SWN) 4:30pm, $0.50
    • Standard Pacific (SPF) 4:02pm, $0.12
    • Trimble Navigation (TRMB) 4:05pm, $0.36
    • Western Forest Products (WEF CN) Aft-mkt, C$0.04


  • WTI Crude Trades Near Four-Month Low as U.S. Stockpiles Climb
  • Oil Gambit Helps India Mining Billionaire Lead Rio: Commodities
  • Palm Oil Has Biggest Monthly Gain in Three Years as Supply Drops
  • Gold Extends Decline as Fed Sees Growth While Keeping Stimulus
  • Copper Heads for First Monthly Drop in Four on Taper Speculation
  • Cocoa Pares Fourth Monthly Gain as Demand for Halloween Is Over
  • Rebar Posts Monthly Loss on China’s Weak Winter Demand Outlook
  • Wheat Declines to Four-Week Low as India Seen Boosting Shipments
  • Barrick to Stop Pascua-Lama Mine Construction to Conserve Cash
  • Exchange Failure Prompts Commodity Bourse Audit: Corporate India
  • West African Oil Surge to Asia Seen Threatened: Energy Markets
  • Singapore Challenged as LNG Hub by Trading Delay: Southeast Asia
  • Copper 2014 Forecasts Slump to Low on Supply Additions: BI Chart
  • Glencore Xstrata Says Third-Quarter Copper Output Gains 34%


























The Hedgeye Macro Team














Daily Trading Ranges

20 Proprietary Risk Ranges

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.


Solid quarter driven by systems (how much was recurring?) but cracks emerging in gaming ops and product sales.




  • Game sales: 3,213 in NA of which 2,182 units were replacements 
  • International sales were down partly due to importation restrictions into Argentina offset by increased sales in Mexico
  • ASP continued to be impacted by lower priced VGT units and mix to lower price jurisdictions internationally like Mexico
  • Gaming operations: NY lottery market was very strong 
  • Centrally determined system units declined due to removal of certain licensed fees in Mexico
  • Systems:  was slightly ahead of their expectations. 
  • Expect Systems margin of 75% for full year 2014
  • Effective income tax rate was lower due to a settlement with the IRS from an audit of their financials of 2006-2009
  • Received an additional 27k shares as part of their ABB program
  • MJ - want to be starting something and Jackpot Empire were released in the first Q
  • Based on their current release schedule, they do not expect their WAP install base to grow QoQ in 2Q but do expect growth to resume in 2H14
  • Lots of rave reviews around ProWAVE cabinet.  It will start shipping in early 2014. They believe that the fact that most of their game library will be available on day 1 will be huge for them.
  • Expect systems revenue to grow at least 10% YoY in FY14
  • Super Slot Line product drastically reduces the cost of upgrading casino floors. This will allow them to sell a lot more of their system applications.
  • Interactive - continue to expand their presence in Europe.  Both as a content and technology provider they are well positioned in the US. Expect to go live in NJ & NV.
  • They will be able to offer their customers a single view of their customer - which is a key point of differentiation for them
  • Have received gaming approvals in 14 of the 20 jurisdications needed for closing
  • Kevin's assumption of the acquisition integration frees up management to focus on running their business
  • 1Q results came in slightly ahead of their expectations. Now expect that quarterly diluted EPS will now be more equally weighted across the remaining Q's.
  • Their guidance does not include the 9 cent favorable tax settlement with the IRS in this first Q
  • They are confident that they will see meaningful growth resume in their gaming operations business in the 2H14


  • Customer feedback from the ProWAVE cabinet and they expect to see sales in F3Q.  They don't think that ASPs will increase greatly when they release the cabinet.  They don't expect margins to be impacted by the new cabinet - they are just charging a higher ASP so they don't expect a hit.
  • Flat to slow growth in gaming operations install base - not a decline
  • International game sales fell short of expectations. It's not where they want to be. They have been working hard to developing game content that appeals to international jurisdictions. Feel like that effort is beginning to bear fruit but they are not yet there...content is getting better so sales should follow. Hoped that they would be getting a few more games into Argentina but that didn't happen. Believe that SHFL will help them
  • Updates on synergy guidance - early close will save them about $18MM of expenses. Still think it will be at least $30MM.
  • Thinks that WAP yields will continue to improve. They are positive about the yield improvements in the future
  • Takeaway from G2E was that they need to stay on their toes with R&D and innovation
  • Haven't seen any real competitive pressures in the Q. Expect 2Q to be equal or greater than Q1. Still feel like they are getting more than their fair share of the IL market.
  • NASCAR took yields down a touch this Q
  • Game sale ASPs - domestically, prices are more or less holding up the same as before. Given that NA sales aren't a huge part of their business, they have been able to maintain price more so than competitors.  ASPs were hurt by more sales to Mexico in the Q.
  • Regulatory changes in Mexico - don't believe that that will have an impact on them. Most of the changes are really attacking grey area single machine locations and skill based games.
  • Biggest drop was more of conversion to sale of non-premium games. With regards to their premium footprint it remains quite healthy. 
  • They are investing a lot more R&D in the WAP and daily fee segment going forward. Pawn Stars is doing great. Have a lot of good content coming in the premium daily fee segment.



  • The Company increased its fiscal 2014 guidance for Diluted EPS to a range of $3.80 to $4.10 and now expects that quarterly Diluted EPS will be fairly equally weighted during fiscal 2014. This guidance does not reflect the impact of the planned acquisition of SHFL entertainment or any acquisition-related costs or savings or the effect of the favorable tax settlement realized during the first quarter of fiscal 2014.
  • The acquisition is expected to close prior to the end of this calendar year. The completion of the SHFL entertainment acquisition remains subject to SHFL shareholder approval, the approval of certain gaming regulatory authorities, and other customary closing conditions.
  • "We showcased seven new wide-area progressive (“WAP”) titles at last month’s Global Gaming Expo (“G2E”), up from three new titles shown last year, reflecting our escalating R&D commitment to our gaming operations footprint. Customer response to our new WAP, premium, and for-sale content, as well as to our new Pro Wave cabinet, which was one of the stars of the show, was very encouraging.”
  • “Operating margins increased to 25 percent when excluding costs related to the planned acquisition of SHFL entertainment, which marks our highest quarterly level in more than three years"
  • “Revenues that are recurring in nature were a quarterly record and represented 57 percent of total revenues driven by a first-quarter record in WAP revenue and quarterly records in systems maintenance and services revenues."
  • "During August, we amended our existing credit facility and successfully syndicated our new $1.1 billion Term Loan B with an all-in yield of 4.375 percent. The planned acquisition of SHFL entertainment will be funded with proceeds from the Term Loan B and excess capacity on our existing Revolving Credit Facility, which had $505 million undrawn as of September 30, 2013.”
  • Gaming equipment: 3,995 new units / ASP: $16,307
    • 20% international 
    • 456 IL VLTs
    • ASP of new gaming devices decreased 3 percent to $16,307 per unit from $16,853 last year, primarily as a result of lower ASP’s in certain international jurisdictions
    • Gross margin increased to 50% from 47% last year, due to continued cost reductions on the Pro Series line of cabinets and sales mix.
  • Gaming operations: Gross margin increased to 70% from 69% last year, primarily due to lower jackpot expense
  • Systems: 
    • Maintenance revenues of $25MM. 
    • Gross margin decreased to 75%, primarily as a result of the change in product mix. Specifically, hardware sales were 30% of systems revenues, and software and service sales were 37%, as compared to 26% for hardware and 34% for software and services in the same period last year.
  • SG&A increased to 29% of total revenues as compared with 27% last year, primarily driven by $5 million of costs associated with the planned acquisition of SHFL entertainment.
  • In connection with the pending acquisition of SHFL entertainment, the Company incurred professional and other fees totaling approximately $5.2 million during the first quarter of fiscal 2014, with additional acquisition-related fees and expenses anticipated to be incurred throughout the balance of fiscal 2014.


Takeaway: Current street estimates remain disconnected from reality.

Editor's note: Hedgeye Restaurants Sector Head Howard Penney continues to bang the "Dismantle Darden Drum." Here is a complimentary excerpt from his latest research note and a link to video interview.




We believe we’ve been very clear on how this will end for Darden (DRI), we just don’t know the timing.  As analysts, trying to advocate for significant change, the biggest issue we need to deal with in the immediate-term is business trends.  We can summarize the current trends in two words – not well!


The being said, the FY2Q114 earnings call will be the most important call of CEO Clarence Otis’ career.  His ability, or inability, to handle the current pressure should help shed light on the timing of future events.


On some level, we believe the case for significant change at Darden could be strengthened on December 20th, when the company reports FY2Q14 results.  In our view, current street estimates remain disconnected from reality.  The current estimate for DRI's FY2Q14 is $0.22 and we believe that $0.12 - $0.15 is a better number.  


Below, we share incremental thoughts on DRI’s fundamentals.

  • The 2nd quarter is traditionally the lowest for the company, seasonally.
  • Seafood inflation will accelerate meaningfully q/q and will continue for the balance of the year.
  • Same-restaurant sales trends have been disappointing so far.
  • DRI has not introduced any new promotional items and still has the promotional items that have not been working.
  • There is no cohesive plan to fix the crown jewel – Olive Garden.