Signs point to more Interaction.  iGT?



Very few new casinos to sell to, stagnating replacement demand, pressure on gaming ops yields – what’s a slot company to do?  We may start referring to IGT as iGT.  While it’s clear that more company focus will be on Interactive, our suspicion is that IGT could be looking at a significant ramp in investment.  That could have mixed reviews from investors depending on the path management chooses. 


Significant additional capital investment into Interactive could be seen as desperate, probably wouldn’t be accretive for awhile, and could signal to investors more trouble ahead for the core business.  However, an Interactive spin-off even if combined with an acquisition would probably be received favorably by investors.


“I saw the sign” – Ace of Base


So why do we believe something may be in the works?  Mostly, it comes from IGT’s own words:

  • CEO Patti Hart’s background and early comments suggest brick and mortar casinos won’t be IGT’s focus going forward
  • Company guidance for 2014 was sketchy and vague:  “GAAP earnings per share from continuing operations for fiscal year 2014 will include acquisition-related expenses, primarily related to DoubleDown, the amount of which is not determinable at this time.  The company may also recognize other items that are not currently determinable, but may be significant. For this reason, the company is unable to provide estimates for full-year GAAP earnings per share from continuing operations at this time.”
  • Expanding the role of the CFO to run the Interactive business indicates it is very important to IGT:  “Robert Melendres has been running that business for us on a global basis. He's done a great job of integrating IGT content into the DoubleDown environment. But we're entering a new chapter of taking this business from the run rate it is to a significantly greater run rate. And we're moving…from exercising the assets we acquired and the assets we already owned, which was our game content library, and into more of a strategic phase and a phase where we'll be redirecting investments from other part of our business into DoubleDown to continue to accelerate the growth.” – Patti Hart, CEO
  • “My view was that John [CFO] has earned the right to do that, and that financial oversight is something that I think is going to be critical in the coming years.  John today also manages our strategic planning and corporate development, and I wanted to have that more closely aligned.” - Hart

On the math, the investment and focus shift makes sense.  As can be seen in the next two charts, IGT’s core business is under pressure and should be through 2015.  Slot sales are likely to be down in 2014 and then again in 2015 while ASPs are now declining.  The 2nd chart details the important metrics driving the gaming ops business.  Yields continued to fall while IGT also lost unit share.  There aren’t many positive trends in IGT’s core business.






While it is certainly arguable whether IGT overpaid for DoubleDown, there is little doubt that Interactive has and should outperform the core business.  




What are IGT’s options with Interactive:

  • Materially increase the level of investment into Interactive – Patti already said on the earnings call that they will be redirecting capital spend from other parts of their business, presumably gaming operations. There was a taste of that in F4Q with elevated SG&A, partly driven by higher advertising expenditures.
  • Acquisition of a social gaming company.  Who’s out there:
    • Zynga (ZNGA) - $3b market cap
    • GLU Mobile (GLUU) $225m cap
    • MeetMe Inc (MEET) - $71m cap
    • CZR Interactive
    • Private companies:  Rovio, Wooga, King, Tetris Online, Halfquest, GSN, Happy Elements
  • Spin off to unlock value - IGT could spin off the Interactive and establish an agreement around content – give the new company an exclusive deal on their content library in exchange for a fee to IGT.  We’ve seen quite a few splits in gaming/lodging:  spin-off of CZR Interactive, the PENN transaction, the MAR timeshare spinoff, and lodging mgmt and real estate splits. 
  • IGT could also combine two of the above approaches such as buying Zynga and spinning its own interactive assets into an existing trading company


Takeaway: Please join us today at 11am. Call details below.

Please join us on our call titledCan McDonald’s Get The Coffee Consumer in 2014? today, November 12th at 11:00am EDT.


During the call, we will reveal the results of our proprietary Retail Coffee Consumer Survey.  Though the call is directly related to McDonald’s, the survey includes other top coffee retailers, such as Starbucks, Dunkin’ Donuts, Krispy Kreme, Tim Hortons and Peet’s.


Our research tells us that McDonald's (MCD) will make an aggressive push to sell more coffee in 2014.  We believe that capturing incremental market share in the coffee category will be one of management’s pillars for growth in 2014 and expect this to be a main topic at the analyst meeting on November 14, 2013.




  • How strong is the McCafé brand?
  • Who are the core McCafé consumers?
  • How will an aggressive McCafe campaign impact other parts of the business?
  • What happened the last time McDonald's went after the coffee consumer?
  • Who are the other key players in the coffee category segment and how will they be affected?


  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 934362#
  • Materials: CLICK HERE (slides will download one hour prior to the start of the call)




Howard Penney

Managing Director

What's New Today in Retail (11/12)

Takeaway: Retail sales show signs of life. JCP attacks LULU - hard. WMT/TGT jump on ‘open early on Thanksgiving’ train. HBI - caffeine in underpants?



M - Earnings Call: Wednesday 11/13 10:30 am




ICSC - Chain Store Sales Index


Takeaway: A rare show of strength by ICSC’s weekly chain store sales index of 80 retailers. We can’t make a call on holiday by one solitary week, but it’s exactly the kind of strength the retailers want to see headed in to the holidays.


What's New Today in Retail (11/12) - chart1 11 12

What's New Today in Retail (11/12) - chart2 11 12




JCP, LULU - JC Penney Burned Lululemon’s Snobby Fat-Shaming, And It’s Brilliant



  • "Lululemon‘s recent image problems are excellent news for other athletic brands, and JC Penney wants everyone to know that if Lululemon doesn’t want you in its pants, JC Penney is ready to hook you up."


What's New Today in Retail (11/12) - chart5 11 12


Takeaway: This marketing campaign by JCP is simply brilliant. The company continues to show a level of irreverence in its marketing that sets it apart from other national retailers. We’re not saying that the marketing approach fully works. But simply that JCP is on offense trying to find the right formula. We like offense.


JOSB - JoS. A. Bank Provides Earnings Update for Q3 of Fiscal Year 2013



  • "JoS. A. Bank Clothiers, Inc. today announced that adjusted earnings are projected to increase to approximately $.49 to $.51 per diluted share, excluding the expense of legal and other professional services related to the Company's acquisition proposal for The Men's Wearhouse, Inc. of approximately $.02 to $.03 per diluted share."
  • "The adjusted earnings per diluted share would represent a gain of approximately 4%-9% over the $.47 per diluted share reported in the year-ago third quarter."


Takeaway: The company obviously wants to show that it is as strong as possible as it goes about its takeover of Men’s Wearhouse. Earnings of $0.49-$0.51 compare to consensus of $0.43. What’s funny is that with all the chest-beating, comps were flat for the quarter.


TGT - Target Corp. to Open Earlier on Thanksgiving This Year 



  • "The Minneapolis-based discounter will open at 8 p.m. on the holiday — an hour earlier than last year. Stores will remain open throughout the night and close at 11 p.m. on the day after Thanksgiving known as Black Friday."
  • "Target also will offer hundreds of deals online on Thanksgiving morning that will include almost all deals that will be available in stores. In addition, Target said it will feature 15 online-only daily discounts for two weeks beginning on the Sunday before Thanksgiving."


What's New Today in Retail (11/12) - chart4 11 12


Takeaway: At first, the ‘open early on Thanksgiving’  (started by Macy’s, followed by JCP) approach was novel. Now it’s simply something that all retailers need to do to be competitive.


WMT - Holiday rumble: Wal-Mart sales to start two hours earlier on Thanksgiving



  • "Unveiling what it called its 'biggest Black Friday plans to date,'...Wal-Mart on Tuesday aimed to prove it was up to the challenge of a shortened shopping season, by bringing its big sale events two hours forward this year."
  • "Wal-Mart will hold Black Friday sales events at 6 p.m. and 8 p.m. on Thanksgiving Day and 8 a.m. on Friday, Nov. 29. Check out the Black Friday ad"


What's New Today in Retail (11/12) - chart3 11 12


Takeaway: Ditto as it relates to what we said regarding Target. But of course Wal-Mart took it a step further and is opening up when most of us are on the couch fighting off a ‘turkey tryptophan-induced’ nap.


HBI - Caffeine in women's underwear doesn't 'promote fat destruction' as advertised: suit 



  • "The class-action suit roasts Maidenform Brands Inc., which manufactures “shapewear” for women seeking to tame their curves with a fabric that has tiny caffeine capsules embedded in it “to promote fat destruction,” according to the complaint filed in Brooklyn Federal Court."
  • "New Yorkers Christine Caramore and Michelle Martin said they bought shapewear and did not get the advertised results. A call to Maidenform was not returned."


Takeaway: Hanesbrands was probably not expecting to inherit this lawsuit when it bought MFB. Seriously – who’s the mensa member that thought of this product? Let’s give consumers a little more credit. (Though we could also pick on the consumers that filed the lawsuit – did they really think that caffeine pills in their pants would shed pounds?). Through all of this noise – and it is noise – we continue to believe that MFB accretion will be far greater than what HBI is suggesting.


MKS - M&S aims to make India its second largest market



  • "Marks & Spencer is aiming to make India its second largest market by more than doubling its number of stores in the country to 80. M&S announced the expansion as it opened its largest store to date in the country, where it operates a joint venture with local player Reliance Retail."
  • "M&S's accelerated plans in India differ markedly from other international stores that have held back on expanding in the fast-growing market. The chain benefits from being an own-label retailer which means it faces fewer restrictions than supermarkets or other stores which sell a variety of brands."




Breaking News: Bangladesh Riots Turn Deadly



  • "... more than 100 factories have closed to avoid the throngs of embittered workers. At least one man died Sunday, bringing the death toll over the last two weeks amidst similar protests to at least nineteen."
  • "The demonstrations on Sunday were the first of four days of planned protest. Some reports indicate that an overwhelmed police force had to enlist the help of the military to control crowds that had become unmanageable. More than 200 vehicles have been destroyed by vandals.  Police officials attempted to downplay the mounting chaos."
  • "Opposition leaders are calling for the immediate resignation of Prime Minister Sheikh Hasina, demanding that a caretaker government be convened [in the] temporary absence of leadership. Authorities took five of the most prominent leaders of the Bangladesh Nationalist Party into custody this weekend."


IBM sees strong online holiday for retailers



  • "According to the latest IBM Digital Analytics Benchmark data, which analyzes online transactions from more than 800 retailers in the U.S., retail sales were up 16% in October and 11% in the first week of November (Nov. 1-Nov. 7) compared to the same period last year."
  • "Department stores have reason for optimism as online sales are up 110% year-over-year for the first week in November. In addition, mobile shopping continues to surge. The mobile percentage of online sales increased more than 43% year-over-year for the first week of November to 14% of all online sales."


Indonesia: Wage Hike Follows Labor Strike



  • After a nationwide wage strike across Indonesia early this month, 12 province governors agreed to increase monthly minimum wages for 2014 by an average of 19 percent, which falls short of the 50 percent hike workers and labor unions were seeking.
  • "Said Iqbal, chairman of the Confederation of Indonesian Workers Union (KSPI), said, 'Workers will challenge the administration’s decision in the State Administrative Court [PTUN] and they will continue to stage protests in front of the City Hall until their demand is met.'”

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.


TODAY’S S&P 500 SET-UP – November 12, 2013

As we look at today's setup for the S&P 500, the range is 30 points or 1.35% downside to 1748 and 0.34% upside to 1778.               










THE HEDGEYE DAILY OUTLOOK - 10A                                                                                                                                                                  



  • YIELD CURVE: 2.44 from 2.44
  • VIX closed at 12.53 1 day percent change of -2.87%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus Optimism, Oct., est. 93.5 (pr 93.9)
  • 7:45am: ICSC weekly sales
  • 8:30am: Chicago Fed Nat Activity Index, Sept., est. 0.15
  • 8:55am: Johnson/Redbook weekly sales
  • 11:30am: U.S. to sell $33b 3M bills, $29b 6M bills
  • 1pm: Fed’s Lockhart speaks on economy in Montgomery, Ala.
  • 1pm: Fed’s Kocherlakota speaks in St. Paul, Minn.
  • 1pm: U.S. to sell $30b 3Y notes


    • Senate Commerce, Science and Transportation Cmte votes on FTC nominee Terrell McSweeny
    • CFPB Director Richard Cordray reports to Congress
    • 1pm Transportation Sec. Anthony Foxx, HUD Sec. Shaun Donovan unveil Location Affordability Portal, which will help consumers calculate combined costs of housing, transportation
    • 1pm: Sen. Elizabeth Warren, D-Mass., delivers keynote speech at event co-sponsored by Roosevelt Institute, Americans for Financial Reform
    • 2pm: Bloomberg Government holds webinar on heath care exchanges
    • 2pm: Sec. of State John Kerry hosts swearing-in for U.S. Ambassador-designate to Japan Caroline Kennedy
    • 2:30pm: Senate Banking Cmte hears semi-annual report from CFPB Director Cordray
    • 4pm: Quinnipiac Univ. Polling Institute holds news conference on new poll on President Obama, Congress, health care


  • Liberty Global said to be in talks to buy Intel’s TV service
  • Apple may try to beat record $1b Samsung patent verdict
  • Citigroup, BNY Mellon records sought by IRS in ZKB probe
  • Sports agency IMG said to cut list of bidders as TPG out
  • Tyco said to be in talks to sell Korean security unit: WSJ
  • Apple says iPad mini w/high-definition screen can now ship
  • Boeing to weigh all options for 777X if union rejects deal
  • Indonesia unexpectedly raises key rate to shore up rupiah
  • U.K. inflation slows more than forecast to least in a year
  • U.K. RICS house-price index hits 11-yr high on Help to Buy
  • Debit cards end two-decade streak of U.S. gains against credit
  • Pentagon contracts fell 66% in Oct. as shutdown deepened cuts


    • DISH Network (DISH) 6am, $0.43 - Preview
    • DR Horton (DHI) 6am, $0.40 - Preview
    • EchoStar (SATS) 6am, $(0.06)
    • Gran Tierra Energy (GTE) 6am, $0.21
    • Lexicon Pharmaceuticals (LXRX) 6am, $(0.05)
    • Yingli Green (YGE) 6am, ($0.25)
    • Rockwood Holdings (ROC) 6:30am, $0.47
    • NRG Energy (NRG) 6:56am, $0.80
    • AECOM Technology (ACM) 7am, $0.79
    • Dean Foods (DF) 7am, $0.14
    • First Majestic Silver (FR CN) 7am, $0.14
    • Sarepta Therapeutics (SRPT) 7am, $(0.61)
    • Shoppers Drug Mart (SC CN) 7:30am, $0.81
    • Argonaut Gold (AR CN) 7:30am, $0.03
    • Dendreon (DNDN) 7:30am, $(0.34)
    • Ariad Pharmaceuticals (ARIA) 7:35am, $(0.44)
    • NuStar Energy (NS) 9:02am, $0.27
    • NuStar GP Holdings (NSH) 9:09am, $0.32


    • MarkWest Energy Partners (MWE) 4:01pm, $0.24
    • MBIA (MBI) 4:01pm, $0.15
    • NQ Mobile (NQ) 4:02pm, $0.27
    • Babcock & Wilcox (BWC) 4:09pm, $0.55
    • Medivation (MDVN) 4:10pm, $(0.25)
    • SINA/China (SINA) 4:30pm, $0.32
    • Taro Pharmaceutical Industries (TARO) 5:05pm


  • U.S. Demand to Export Crude Seen Soaring Amid Hydrocarbons Boom
  • Iron Ore Rallying as Cargoes to China Reach Record: Commodities
  • WTI Crude Declines From November High as Stockpiles Seen Rising
  • Gold Swings Near Three-Week Low on Outlook for U.S. Stimulus
  • Copper Drops as Investors Await China Policy Meeting’s Outcome
  • Corn Touches Two-Week High as Crop Forecast Less Than Estimated
  • Cocoa Rises on Buy Orders Amid Shortage Forecast; Robusta Falls
  • Iran’s Full Return to Oil Market Remains Perilous, Barclays Says
  • Orange Juice’s Double Bottom Signals Rally: Technical Analysis
  • Shanghai Rebar Little Changed as Investors Await Party Plenum
  • Gasoline Supplies Probably Fell for Fifth Week: Energy Markets
  • EON Qatari LNG Contract Seen as Trend for Shorter-Term Contracts
  • Blackstone to Billionaires Boost Ship Bets on U.S. Fuel: Freight
  • U.S. to Become Top Oil Producer by 2015 on Shale Boom, IEA Says


























The Hedgeye Macro Team














CHART OF THE DAY: Correlated Causations


CHART OF THE DAY: Correlated Causations - Chart of the Day

Correlated Causations

“Ignorance more frequently begets confidence than does knowledge; it is those who know little, not those who know much, who so positively assert that this or that…”

-Charles Darwin


Having fun out there yet?


If like us, your conviction on what an appropriate gross and/or net exposure should be has wavered in recent weeks, Darwin’s quote probably resonates with you. With respect to financial markets, I, for one, don’t understand how anyone could’ve had enough conviction to positively assert anything beyond a simple “I don’t know” in recent weeks, but that’s just me. What do I know?


Without speculating on the level of ignorance (or lack thereof) implied by the views of any market participant(s), we continue to tip our hat to the “QE is effective; see, I nailed it all along” community – if for nothing other than their unwavering confidence.


Does QE actually “work”, however? Moreover, how does one go about determining its effectiveness? This debate really centers on the question we asked in the video we published earlier last week:


“Does the price of money determine the pace of economic activity or does the pace of economic activity determine the price of money?”

Without getting all philosophical before breakfast, our answer to that question was simply, “It’s reflexive.”


Considering, it would seem that trying to determine the causality behind the demonstrable acceleration in economic growth we’ve witnessed in the YTD is little more than a fool’s errand. Was QE responsible for producing economic growth or were expectations of QE’s eventual demise the stimulus the economy needed?

Sourcing the data, the reflexive relationship between the US dollar, US interest rates and the slope & magnitude of real GDP growth is almost impossible to disregard without being completely subjective or grossly qualitative. Whether you’re looking at the current economic cycle or the past three decades of economic cycles, the data speaks for itself:

  • 2013: In calculating monthly averages for the DXY and UST 10Y Yields, we see that the USD and US rates were most strong (on a YTD percentile basis) in the JUL/AUG/SEP periods. Coincidentally, that’s precisely when the ISM Non-Manufacturing and Manufacturing surveys, Conference Board Conference Board Consumer Confidence Index readings and the NFIB Small Business Confidence Index readings were also recording their strongest levels in the YTD (on a percentile basis). Moreover, the slope of the DXY and UST 10Y has tracked the slope of the aforementioned high-frequency growth data nearly perfectly in the YTD.
  • 1 (trailing 30Y): In calculating quarterly averages for the DXY and UST 10Y Yields, we see that concomitant QoQ appreciations in both indicators are closely associated with both relatively rapid economic growth and periods of #GrowthAccelerating. Specifically, Real GDP growth has averaged +4.2% on a QoQ SAAR basis in #StrongDollar + #RatesRising periods; that compares to +2.4% for #WeakDollar + #RatesFalling periods. From a 2nd derivative perspective, GDP growth tends to accelerate +23bps on average in the former environment and decelerate -23bps on average in the latter environment.

To our knowledge, qualitative assertions have yet to trump basic arithmetic in any debate.


The more we reflect and debate internally as a team, the more we find ourselves squarely in the camp of: “Who cares about causality anyway?” As investors, all we really want to do is isolate the signals – be they quantitative or fundamental – that give us the best probability of being right on the slope of growth, inflation and/or policy.


From there, we can begin to speculate in financial markets using reasonably accurate assumptions for what we believe to be the three most important factors in determining asset prices.

With respect to financial markets, what matters most is what everyone thinks everyone else thinks about QE and the only way to record any consistency or accuracy in attempts to measure that is to set aside our own dogmas.


In short, we do not think it is helpful to engage in the debate surrounding the causal impact of QE upon the economy. In our view, it is impossible to determine causality without being qualitative or subjective because we don’t have accurate data about the expectations and intentions of all the agents that make up an economy.

As such, all we can really do as investors is interpret the signals as they come and play the ball as it lies. Focusing our attention on anything else is a clear deviation from the task at hand (i.e. making money).


Regarding the task at hand, we do know that QE and its associated expectations are causal to the prices of many assets globally. As such, the name of the game remains isolating the signals that give us the best forward-looking read on growth, inflation and/or policy – or the eventual tapering of said policy:

  • Quantitative: Solid comeback for the US Dollar Index right to our TREND line of 81.39 resistance this morning; will it hold? US Treasury rates (10Y Yields) – which are now trading demonstrably above their 2.63% TREND line – are suggesting a DXY breakout has become an increasingly probable event.
  • Fundamental: Analyzing economic data like a Fed Head would imply tapering is a spring of 2014 event at the earliest. Moreover, the lack of liquidity in the bond market should take a mid-to-late-DEC tapering squarely off of the table: primary dealer inventory is -73% off its 2007 highs and equivalent to a mere 0.8% of outstanding US corporate credit vs. a peak of ~4% in 2007. Please note our emphasis on the word “should”, as what we think the Fed should do and what the Fed does are quite often two very different things.
  • Correlation Risk: While three days does not a trend make, very immediate term correlations are signaling what may be a return to the pro-growth trade of #StrongDollar + #RatesRising = positive US equity beta amid decidedly negative EM beta that has: A) dominated much of the past year; and B) was interrupted by a return to the post-crisis playbook of “QE = short US dollars; buy everything else” in the weeks since SEP 18 (i.e. the day of the Fed’s “no taper” surprise). See the Chart of the Day for more details.

So what do investors do with all of these convoluted signals? In a phrase: #GetActive. If you’re not yet familiar with our call for active mangers to outperform over the both the intermediate term and long term, please ping us for a review of our 4Q13 Macro Themes.


Indeed, it would seem that stock-picking will become increasingly important as we start to move away from what has been an elongated period of minimal return dispersion at the sector level – likely due to the strong performance of typically low-beta, high-yielding sectors in an era of institutionalized yield chasing.


For those of you who are keen to add new techniques to your analytical toolkit, we’ve built a model that backtests exceptionally well in screening for prospective alpha at the single security level. For more on that, please CLICK HERE for the data and CLICK HERE for the accompanying manual. Email us if this is something you’d like to discuss further.


Our immediate-term Risk Ranges are now:


UST 10Y Yield 2.64-2.79% (bullish)

SPX 1 (bullish)

VIX 12.29-14.55 (bearish)

USD 80.93-81.53 (neutral)

Pound 1.58-1.60 (bullish)

Gold 1 (bearish)


Keep your head on a swivel,




Darius Dale

Associate: Macro Team


Correlated Causations - Chart of the Day


Correlated Causations - Virtual Portfolio

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