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Seen the $VIX Lately?

Takeaway: This equity market is as complacently positioned as I have seen it in six years.

Equity volatility starting to look primed to breakout into 2014.


After making a series of higher-lows since August, front month VIX (volatility) broke out above our Hedgeye TREND resistance of 14.91 yesterday.


Fed confusion is going to breed contempt.

Seen the $VIX Lately? - VIX

This equity market is as complacently positioned as I have seen it in six years. Yesterday’s II Bull/Bear survey hit a fresh year-to-date high of +4390 basis points to the Bull side!


Editor's note: This a complimentary excerpt from Hedgeye CEO Keith McCullough's research this morning. Click here for more information on you can subscribe to Hedgeye research.


Takeaway: We are getting increasingly negative on the slope of domestic economic growth.

Yesterday, Keith and I did a full slate of meetings with funds in NYC; without violating any confidentiality by getting bogged down in the details, here are the key takeaways we were effectively pounding the table on:


  1. We still like our #EuroBulls theme (CLICK HERE to launch our @HedgeyeTV video) and continue to see opportunities on the long side of European growth equities. We continue to like the UK and GBP then Germany and EUR in that order.
  2. Based on early warning signals, we think 3Q13 is a cycle-peak in the sequential rate of US economic growth. If we were mandated to allocate capital to US equities, it would be in high yield, slow growth, low short interest and/or commodity-linked stocks, at the margins – basically a return to the 2011-12 playbook. The UST 10Y yield has probable downside to 2.5% in this scenario.
  3. A potential 1H14 macro theme we see developing is inflation-hedge/consensus yield chasing plays continuing to make higher-lows alongside US equity volatility (CLICK HERE to launch today’s @HedgeyeTV video on a potential breakout in the VIX). That list would include gold, commodities, emerging markets, TIPS and REITs. The Abenomics trade (i.e. short JPY/long Japanese equities) would make lower-highs in this scenario.
  4. Fund flows have the opportunity to buoy the US equity market well into 1Q14, though we’d expect growth data to be decidedly cooler by then if the Fed does NOT taper. We are very differentiated from consensus in that we think that a return to prudent monetary policy is the only way to promote sustainably faster rates of domestic economic growth. We don’t buy into the consensus fear-based whining about deleveraging and the perceived risk of higher rates in the housing sector.
  5. If the Fed tapers or signals imminent tapering, we’d abandon each of the aforementioned views and would be buyers of any subsequent US equity pullback. If the Fed does NOT taper (as we expect), we’d be sellers of any subsequent US equity strength.


Today, we received a great follow-up question from a very sharp client in the fixed income space: “What is the data you’re looking at to support your view that GDP growth will slow down?”


As with any inflection-based call on growth and/or inflation, we start with the market’s risk management signals – which tend to lead the reported data. The USD is decidedly broken from a quantitative perspective and long-term interest rates are making lower-highs vs. the YTD peak in both growth data and #GrowthAccelerating expectations.






Moreover, both are declining on a QoQ average basis, which is historically something you’d see during periods of marginal stagflation (i.e. Quad #3 of our GIP model = Growth Slows as Inflation Accelerates).








That reflexive relationship is something we’ve seen throughout the YTD:




As it relates to early warning signals, the ISM data appears have materially inflected here, which confirms what we’ve already seen with respect to the respective trends in consumer and business confidence.








Recall that inventories juiced the 3Q GDP print – which we’ve argued is a healthy, pro-cyclical response to increased business confidence. Well, now said business confidence has inflected to the downside here in 4Q and we anticipate inventories will follow suit when 4Q13 GDP is reported.




Again, our call for an inflection in growth is in the very early innings so you won’t see it in the broad swath reported data just yet – much like you didn’t see a ton of data to support our #GrowthStabilizing and #GrowthAccelerating calls at the start of the year.




I’m guessing to the naked ear we sound about as crazy as we sounded roughly one year ago when we were pounding the table on long side of US equities and on the short side of anti-growth assets (e.g. gold, EMs, commodities, etc.) as the biggest US growth bulls on the street. For now, that’s a position we feel comfortable taking in the absence of a change of heart at the Fed.


Please feel free to email us with any follow-up questions or if you’d like us to forward you the analyses supporting the conclusions laid out at the start of this note.


Have a wonderful evening,




Darius Dale

Associate: Macro Team

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[video] Keith's Macro Notebook 12/12: VIX DAX GOLD


Our takeaways from the IGT Investor Day




  • Focus of presentation was on the online side of the business and on making mature business segments more profitable
  • Use DoubleDown to test content earlier on in the development cycle which should help them increase the number of hits that come onto the slot floor
  • Interstate jackpot - approved in NV but nowhere else so far.  It will be a state-by-state approval process.  It will take some time before they get any benefit from this. Interstate jackpot are already allowed between tribal gaming facilities.

 Patti S. Hart (CEO)

  • Patti's stock is vesting this week and she's not selling
  • Claim that they are the system of choice for new openings.  Not sure that that is true.
  • Focusing on equity accretion and returning money to shareholders is a priority.  Targeting a 2% dividend yield.
  • When they think about growth, they think share gains - not just new jurisdictions and finding new players
  • Claim that NA ship share was 40% in 2013, 36% in 2012, 32% in 2011, and 29% in 2010
  • Mentioned Novamatica as a top 4 global competitor
  • Should wrap up $200MM buyback by year end
  • They picked some select metrics to compare themselves to:  S&P 500, of course, for a favorable comparison
  • 3-5 year growth projection
    • +15% growth in online and social (mobile is where the growth is)
    • Real money gaming:  +10% (Canada, NJ, DE, Italy Spain)
    • International:  +7-9% (Philippines, Macau, Greece, Italy, Japan, Brazil) 
    • North America: +1-3%
  • Greece:  thinks that it could be like Canada / Illinois for them. Spending a lot of time there.
  • Really focused on growing their international share where they are under represented.  Was just in Panama.
  • Focused on harvesting the NA business for cash. (MA, NY, MD, TX, FL) 
  • Strategy:  Content focus and distributing across distribution platforms (i.e. multi channel content distribution (mobile)) and finally maximizing shareholder value. 

Eric Tom (VP Global Sales) with customer panel

  •  Tribal casinos are 1/3 of their customer base
  • Guest panel:
    • Rhonda Garvey:  VP of BcLC egaming
    • Matt Harkness:  COO of Four Winds Casino
    • Brian Hoeffner:  VP of Gaming at Casino del Sol.
    • Rob Miller (Miller Companies - also founder of gaming capital group, Oklahoma Financing); he's now the top operator in IL
    • Mohegan Sun COO : Ray Pineault
  • What needs to happen to accelerate replacement?
    • Economic improvement
    • Competition
    • Discount bundling helps
    • Proof of ROI
  • Thoughts on IGT's competition and how it's been impacting ASPs
    • Likes competition and the lower ASP.  Buying from small customers is always a little risky from a content standpoint.
    • More competition means more innovation and more pricing competition. Worried about longevity of small manufacturer machines and fresh content. Like being able to keep games on the floor longer with more conversions.
  • Thoughts on the amount of licensed brands to choose from
    • No such thing as too much choice
    • Like being able to swap out titles on the fly as performance wanes- especially if the slot manufacturers want to keep floor share
  • Thoughts on the next big trend in gaming
    • Mobile gaming and not just from a gaming standpoint but also from an account mgmt program and rewards program
    • Mobile wallet vs the current system of transferring money.  Lots of cost savings for operators if this happens.
  • Licensed and leased products vs owned
    • Looked at the net profit. Participation must perform at least 1.25-1.3x that of an owned game.
    • IRR based decision
  • What influences their buying decisions?
    • Sales force relationship and helping them navigate the product available
    • Knowing that they are buying a machine that a supplier can support for 7-10 years
  • Biggest competitive threat
    • In IL, they need to worry about BYI.  Lots of small players have failed. Spielo is a distant 4th. WMS is ok too.
    • BYI is a formidable competitor for them
  • What timeframe and metric do they evaluate their games on?
    • Net win but also looked at coin in and min / max bet, hold % etc to tweak those behind the scenes metric Usually takes about 3 months to evaluate a machine.
    • In IL, machines need to perform at a higher average bet since they have limited machines per location and limited hours of play.  Loves IGT minimum bet dynamics.
  • Player demographics for online
    • Challenged in getting a younger player and how to get that casual player.  Also using online as a theatre for the land-based casino.  For younger players, content is everything.  Velocity of change needs to be rapid. Having north of 30% growth in their online biz this year. Not seeing any cannibalization. Familiarity of content online also helps them in Iand casinos.
  • Feel like online will help grow the gaming market vs cannibalize it.  Players are already playing on illegal sites. Online social site are a customer acquisition strategy for them.
  • (BCLC) - Trying to have a common CRM/rewards program:  feel like when they have a player online and offline, that they can drive an incremental 20% from players.
  • Casinos differentiate themselves through superior guest service 


  • Gaming operations  
    • Recognize that this business is under duress.  Partly offset revenue losses with better margins and reduced capex dramatically over the last 3 years.  If you look at gross margin less capex, their modified FCF has grown.
    • They are really encouraged by their new products this year.  Unlockable content on games - think that this is a real opp to reduce costs and increase box longevity.  Power bucks jackpots- more frequent jackpots.  They can now do interstate jackpots for the first time and on/off line jackpots.  
    • Continue to focus on content for localized markets, i.e. locally attuned content. 
  • Online gaming
    • Social gaming can help them test games before going into market in land-based casinos. 
    • They have 1.7MM users.
    • NJ update:  9 sites have launched, 50k registered to play.  IGT's approach to NJ is like a cable channel for them.  20 slot games available; nearly 5MM wagers placed; IGT content viewed as superior to others;  So far in NJ, there are 3 sites that are outperforming materially.
  • Feel like it's all about eliminating friction points in gaming.  Social will let them get customer reviews earlier in the developmental cycle.
  • Now over 40% of IGTs workforce is tied to equity performance vs just a handful before.  75% of their employees now like working at IGT and would recommend working there.

Q & A

  • Think about products across silos like i-Gaming vs NA sales.  People are also really interested about play testing on Double Down. 
  • They are really bullish on international but timing is vague.  On Macau, they believe that they have a good shot of winning some systems and making slot sales.  Italy will come online in the tail end of 2014/ early 2015 (wasn't this supposed to have happened a few years ago?)
  • Player acquisition benefits on DoubleDown are a new area of business for them
  • In NJ, they will take a cut of the wagers
  • How will they make money in CA as they are legalizing online poker?  It's not really where you make money.  Rake based and no loyalty. Still thinks that CA has some hurdles to overcome.  Thinks customers want to have a poker option but want to play other games.  They will not participate in Poker-only markets. Don't think that you can really make money.
  • From a capex perspective, it will be back-ended this year with the introduction of a new cabinet.  Investors should be happy if they exceed capex because it means that they found a place to profitably invest it.  Capex will be roughly flat YoY and a little back-end weighted.
  • New market opportunities
    • Feel that Greece will be a Canadian like size opportunity in each tranch. Best guess it's a 2014/2015 event for IGT.
    • Macau: 6 new casinos are coming
    • Italy:  Step one is distributing content on their machines (60% of the install base is eligible) - daily fee model.  Will go live in June.  And the a year later, they have a chance to introduce their boxes.
  • MGM and Wynn have their systems in Macau
  • DoubleDown isn't "whale-like."  Clearly, a smaller number of the 1.7 million people that come to their site actually wager. The players by their nature are casual.  She avoided the 80/20 question.
  • DoubleDown's differentiating quality is the continuous addition of new content. Expect their competition to be stiff.
  • Interstate jackpots are a huge opportunity


Takeaway: A trifecta of positive domestic macro updates this morning. Retail sales, Confidence, and Initial Jobless Claims all solid.

Despite the volatility and persistent distortions in the Initial Jobless Claims data over the last few months, the underlying trend in the labor market remains one of steady improvement.  Our Financials team breaks down this morning’s claims data in further detail below.


Elsewhere in domestic macro today, advance Retail Sales and Bloomberg’s weekly read on Consumer Confidence both came in strong. 


RETAIL SALES:  This mornings advance estimate of Retail Sales out of the Census Bureau reflected a positive October revision and strong November sales data across the various index aggregates.  Headline and Core retail sales accelerated on a MoM, YoY, and 2Y basis with furniture and electronics driving strength in the control group.  No need to over analyze this one – a solid report for the ~20% of the economy that is retail sales.  A granular breakdown of the data in the table below. 




CONFIDENCE:  After acutely tanking into and through the government shutdown in October, consumer and business confidence remained universally depressed across survey readings through November.  Early December readings out of Bloomberg and the University of Michigan suggest that hangover is lifting. 


The preliminary December reading from the Univ. of Michigan saw confidence improve +7.4 to 82.5 with the current conditions index leaping back towards mid-year highs.   


Similarly, this morning's bloomberg consumer comfort reading improved again sequentially to -30.9, nearly back to pre-October levels.  Absent another ‘exogenous shock’ and with the labor market improving and fiscal policy uncertainty ebbing on the margin, the path of least resistance for confidence appears to be higher.




- Hedgeye Macro 



INITIAL CLAIMS:  The One Chart That Best Explains the Situation

The chart below sums up the dynamic in the labor market quite well. It's a raw chart of NSA 1-week claims and it shows the mismatch the labor department's data is currently reflecting.


In 2008, 2009, 2010, 2011 and 2013 this last week was one in which claims historically surge, reflecting the seasonal layoffs following black Friday. 2012 was offset by a week making the comparability poor.


Just by eyeballing the chart, however, it looks pretty clear to us that the trend of steady improvement remains very much in place. There's no change to our view based on this most recent labor market datapoint.




The Data

Prior to revision, initial jobless claims rose 70k to 368k from 298k WoW, as the prior week's number was revised up by 2k to 300k.


The headline (unrevised) number shows claims were higher by 68k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6k WoW to 328.75k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -13.1% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -21.2%






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


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