Data for Oil and Dr. Copper Continues to Send Mixed Signals

While oil and copper continue to compete for first place in the global commodity race for performance year-to-date (at least in US$ terms), the date points we have been following continue to suggest a mixed picture on the supply and demand side.  Ultimately, the US$ is as fundamental for these two commodities as any supply and demand data points.  That said, it is worth reviewing some recent data points for each commodity:


  • The DOE announced that oil supplies fell by 1.8MM barrels domestically, which was slightly less than the consensus estimate of 2.1MM barrels.  Currently, inventories in the U.S. are 7.3% higher than the five-year average;
  • In contrast to the DOE report from yesterday, the API signaled a much more bearish build of oil.  The American Petroleum Institute indicated that inventories had increased by 3.1MM barrels week-over-week;
  • On the demand side, U.S. daily fuel demand has average 18.6MM barrels over the past four weeks, which is down 4.8% year-over-year; and
  • In Nigeria, the Movement for the Emancipation of the Niger Delta declared a 60-day ceasefire in attacks on the oil and gas installations.


  • BHP Billiton reported a 21% decline in copper output last quarter, which is significant given its place as one of the world’s largest copper miners;
  • China in the first half of 2009 has consume 3.7MM tonnes of copper, up 12.4% from a year ago;
  • Nippon Mining and Metals recently indicated that they believe that they expect copper demand from China to ramp into October as a result of increased stimulus spending;
  • Copper inventories on the LME rose to a 1-month high on July 23rd to 271,725 tonnes.

Generally, both copper and oil data points seem to be suggesting a buildup on the inventory side, though both supply and demand for copper appear quite favorable versus oil.  The US$ seems likely to prevail as the key driving factor for the price of oil and copper.  As the dollar goes down, these commodities are inherently cheaper and, all else equal, will re-flate.  If and when the dollar stabilizes, global supply and demand points will likely become the primary fundamental drivers for price.

Daryl G. Jones
Managing Director

UA: This is BIG!

Brian is out, but he wanted me to pass along to our clients at least an initial take on the appointment of Gene McCarthy as the new SVP of Footwear at UA – this is an extremely positive event.

Gene was instrumental at Nike in developing Brand Jordan and was a key hire at Timberland, but was not given the latitude there that he was capable of. He gets brands and knows how to turn a $100 million brand into a $1Bn brand.

We’ll be back to add more meat on the bone on this one…


Casey Flavin


Ministry of Economic Affairs export order and production data for June continued to show signs of declining contraction as the new-found warm relations with the mainland have paved the way for expanded trade.   New orders declined by 10.9% Y/Y, a big sequential jump from last month’s -20.1%, while production decreased by 11.35% Y/Y.

As in May, the key drivers for the improvement were the consumer electronics and information/communication components, which account for almost about half of the total orders received. As the Chinese tax incentives for rural buyers have spurred on demand for televisions and computers, the newly expanded direct trade channels have also contributed to the improving picture.

Although the primary conclusion to draw from this data is that the improving demand from China continues to support the bullish case for expanding consumer spending, it also underscores the political reality that Taiwan now faces. With increasing dependence on trade with a foreign market that, by definition challenges its right to exist as an independent nation, Taiwan’s government must continue to strike a careful balance.

Andrew Barber


ORDER FLOW - taiwan

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.




Review of 2Q09 results:

Third quarter in a row where costs saved the day

Efforts to reduce costs have been pervasive

Expect to open towards the low range of their hotel pipeline guidance

  • See growth in Asia, Africa and ME

VOI aggressive cost cutting helped them realize profits that were only down 20MM

  • Hawaii is showing modest improvement
  • Visitation trends also look like they are stabilizing

Cost cutting details:

All about flow-through at the property level

Keep saying its “permanent” – sorry we don’t believe it

Majority of the savings are sustainable aside from some “small things”

  • Incentive comp for example

Look hard at capital projects

  • Bal Harbour – evaluating their options – sounds like a downsizing to me


I’m sorry but this whole part of the call was total fluff

  • “Growth begets growth”
  • “Creates a network effect”

Transforming W into a global powerhouse from its NY roots-plan to double the footprint

40 Alofts will be open by year end

Almost done retooling Sheraton… they say this every year, once they finish “retooling” the base they need to start all over again


He’s said Permanent cost reductions about 4x now….

Liquidity/Balance sheet:

Very well positioned from a liquidity standpoint

Good rate on timeshare note – of course the rate is good.  they have a 30% residual that they are holding providing support to the senior notes that were sold

Another securitization expected in 4Q09/1Q2010

Leverage ratio around 4.0x, post quarter total debt was $3.5BN, and expect to get to $3.2BN by year end

Expect year end leverage to be 4.3x and, even if 2010 EBITDA declines, still expect to be in compliance

Sale of the W – spoke about the how accretive the sale was and how big the multiple was… No need to comment here – you guys know what we think

In discussion on non-core assets, (some where they won’t keep their flag – capex issue I’m sure)

Claim that transaction market is improving

2Q Details:

Swine flu impact was $10MM roughly (50% in Mexico)

Occupancy stabilized in 2Q09, but rate continued to deteriorate accounting for over 60% of the RevPAR decrease

Mix is shifting to more rate sensitive leisure business

Early indications that group is coming back

  • Feels like a slow recovery though

Guidance implies that RevPAR declines continue to moderate

When they get to Q4, if rates stay constant the headwind from FX turns into a tailwind

Will continue to be impacted by Swine Flu in 3Q09, reducing revenues by $5MM or so

Things should return to normal in 4Q if there are no outbreak flare-ups

Political instability in the Asia/ ME have impacted RevPAR

Second half expectation for Asia have been lowered, but ME is performing relatively well


  • Tour flow has stabilized but consumers are gravitating to lower end products
  • Increased reserves for loan losses

SG&A will be down less in the back half as comps become difficult


 Asset sales – how many core/non –core?

  • Very advanced discussions on non-core assets – defined as hotels where they don’t care about keeping the flag (that helps sales price when assets are unencumbered)
  • Also mentioned selling non-hotel businesses

Pipeline – how many international/conversion/under construction /etc?

  • 2/3 is international
  • Conversions are a lot less than 10% but expect that number to rise
  • 50% is financed and under construction

American Express deal?

  • Rewards card in place for several years
  • Mutual desire to extend arrangement, in exchange for extension
  • AMEX bought $250MM worth of points to use over time and paid for them cash…
    • Ah… that makes sense… that’s how they back fill some rooms
    • Accounting: will be in other liabilities

Timeshare – haven’t reduced pricing like (MAR for example)

Broader economic commentary

  • Do feel like recovery from this downturn won’t be as quick and sharp as in the past, since the growth will occur at the same time as deleveraging

Owned hotel margins/ threat to fees

  • Don’t do performance guarantees – have almost none
  • Incentive fee mix in the US linked to preferred returns is pretty small as a % of mix
    • International contracts are based on % of GOP (gross margin dollars) get cut from day 1 or so… so its hurt by flow through – so will drop at 2x international revpar (on a constant dollar basis)
  • Haven’t rolled out lean operations across the entire system, but really need rate growth to help owned margins
    • Started in March/April last year on the cost cutting – and have been doing so ever since
    • Already implemented the big savings, but some savings take longer to implement and have the attitude that there is always more room to cut costs

They aren’t interested in buying any assets right now, would find a partner if anything – don’t want to use their own balance sheet

Group booking pace:

  • June has been better than the rest of the year, but the group pace is trending in line with competitor guidance, down high teens/ 20% range
  • Think that cancellation rates going forward will be less

Other management fees

  • Termination fees helped fees this quarter

How is the rate promotion going? (50% off, I believe)

  • Short term tactical effort to stimulate interest

Sheraton RevPAR declines

  • Blaming the underperformance on renovations

400 bps FX benefit in the 4Q if FX rates stay constant

Union contracted wage growth is 3-4% and roughly 1/3 is under collective bargaining agreements in the US

Initial Read on Amazon / Zappos

Last night announced its intent to purchase for $847m in an all stock deal.  This deal is worth looking at on many fronts.  On the surface this is another data point in the large volume of tech M&A.  However, this actually transcends both tech and retailing by the very nature of what Zappos does, and that is sell footwear, accessories, and apparel. 

We have said in the past that we expect strategic deal flow to continue and we believe this still holds true.  Direct-fulfillment infrastructure and assets are valuable to those that are:

  1. Late to the game of e-commerce.
  2. Saddled with third party arrangements that outsource fulfillment and hosting.
  3. Looking to leverage growth in what is now a well-defined, legitimate, and growing way to distribute products directly to consumers. 

One thing is clear (as judged by the simple fact that Zappos is doing $1bln in revs and most people on the Street had no idea), ecommerce is alive and may actually be nearing a point where profitability on a wider scale is no longer elusive.  Scale is the key here and the consumer has voted for the ease and transparency embedded in the online shopping experience.  

So what is this company with a silly name called Zappos?  Many of us know of it, perhaps ordered a pair of shoes from the site, and (very) occasionally have heard the company mentioned by a wholesaler.  In reality, there is little public information about the company except for few facts that we can piece together from interviews with the CEO or just by poking around the site.  It is widely thought that Zappos generates approximately $1bln in gross revenues, $625m in net revenues, and $40m in EBITA.  The company was founded in 1999 and has been primarily funded by Sequoia Capital, which has invested most of the $49mm the company raised since its inception.  We’re sure you know Sequoia from its other more prominent investments in Google, Yahoo, YouTube, and PayPal. 

Most eye opening is the size of Zappos, which in just over ten years has a revenue base nearly as large as Genesco ($1.6bln), DSW ($1.5bln), and The Finish Line ($1.2bln).  The selection is unprecedented with basically every footwear brand under the sun offered on the site along with more recent introductions in apparel and accessories.  Clearly this is a scalable and flexible platform for Amazon to leverage its current and future direct fulfillment verticals. 

Initial Read on Amazon / Zappos - ZapposComps 7 09

Traditional retailers cannot ignore this transaction.  Which leads to the question, what’s a retailer to do as it reads the press release valuing Zappos at $850mm?  It’s clear to us to be competitive in the space you can either build or buy.  Most companies have built, but with a brick and mortar mentality.  Assets born out of the .com era and not 7th Avenue are likely to be more flexible, innovative, and creative.  Moreover, online only operations are likely to have been built at a lower cost than companies that have built direct businesses as “add-ons” or “extensions” of core legacy operations. 

Now to the touchy, feely portion of this.  We’re not ones to bank solely on culture, but the word was mentioned 21 times in a letter to employees from the Zappos’ CEO explaining the rationale and logistics of the transaction.  Culture may in fact be one of the key reasons traditional retailers have generally lagged behind online only competitors.  There is almost always internal conflict between the ecommerce division and the rest of a retail company.   Should there be separate buying organizations?  Which merchandise should be online?  Should promotions be the same online as in the stores?  You get the picture and there is no simple solution to these questions.  

Perhaps this is why online only entities have a leg up.  Zappos provides some context, with CEO Tony Hsieh having no retail experience at all.  Instead he was a venture capitalist with a desire to dramatically improve the customer service between consumer and retailer.  This out of the box mentality is likely to jump to the forefront as traditional retailers observe this transaction and contemplate growth in a slower growth world. 

The next step is to identify unique online players who “get it” and may ultimately “get bought”.  We’ve mentioned Gilt Groupe a few times and whether an IPO is imminent or an outright sale, this is another great example of an old model (off-price), with a new twist (limited time sales, online only).  The private companies with prominent brands but little presence on the Street cannot be ignored.

Look for more on this topic as we collaborate with Rebecca Runkle to offer her perspective in addition to attempting to identify winners and losers, buyers and sellers, and how the landscape is changing.


Eric Levine



We changed our positive tune one day too early.  Lower guidance and SBG problems were our concerns and they came to fruition.  So why is the stock up?

  • Patti Hart – She did a fantastic job on the call outlining her process.  Given IGT’s reputation for being fat, lethargic, and inefficient, Hart said all the right things to comfort long-term investors.
  • Short interest – There were many more shorts in the stock than we thought.
  • New markets – Even though the stock was on a tear the last few weeks, there were more investors afraid of the quarter than we thought.  Absent those fears, the stock would’ve been up even more.  Removing the potential negative catalyst allows investors to focus on the new markets.

Ms. Hart probably bought the company a few more quarters.  However, we remain concerned with the SBG issues including the bugs, the lack of functionality, and the poor reception from casinos.


IGT 3Q09 Earnings call


Game ops:

Earned $52/unit per day, which has been consistent over the last few quarters

Install base was driven by international unit growth, but NA had lower unit count

  • Expect that as the economy recovers install base will resume growth

Gross margins benefited from reduced jackpot expenses, due to higher rates on agencies vs prime

Domestic Product Sales:

Revenues comparisons were difficult

Replacement units were up 500 sequentially, new and expansion were 4,700

Anticipate new unit shipments will decrease over the next few quarters, booked forward 1,700 units that they originally expected to be recognized in their 4th quarter

Deferred revenue increased to $50MM

Sales of AVP machines were 80% of NA sales

International Product Sales:

Markets continue to fell effects of the economic slowdown

About ½ of the units shipments were to UK & Japan

Deferred revenue increased by 10MM to $23MM

Product margins were down due to lower mix Japan units; expect 50% margins going forward

Other Expenses:

So far expense controls have resulted in 100MM of annual run rate savings ($60MM of material savings and 440 less employees in manufacturing, SG&A reductions as well)

Costs associated with PGIC and inflation will offset some cost savings

Hard to get better margins with low unit shipments

SG&A low 100, R&D in the 50MM range going forward. 

Q4 will benefit from full cost cut benefits


No meaningful decrease in delinquencies from customers

Expect future tax rate to be 39-40%, annual tax rate for ‘09 to be 38-39%

Balance sheet/Cash flow statement:

Capex is trending around 50MM per quarter

Anticipate drawing the line to take out the convert which will get put to them

Quarterly commentary:

  • Those operators that can are replacing more units at a measured passed
  • Shipped 920 MLD units
  • $52/win per day looks like a stabilized play level
  • Reached agreements to place 450 wheel of fortune and mega jackpot products above what’s already on the floor – not sure when those will be placed (next few q’s?)

Strategic priorities:

  • Focusing on what they do well – content in the video slot segment
    • Restructuring the development effort, which will help them drive accountability
    • Consumer research group to feed the R&D process
    • Eliminations of layers
    • Other changes will take time
      • Streamlining of international processes to improve time to market
      • Focusing on two keys efforts
        • Can do a better job of processing information of testing products, compensation metrics, to investment and capital allocation decisions
        • Hired new COO to aggregate and process data to maximize return on capital

2009 Outlook:

Despite improvements in certain metrics in 3Q09, replacements are still very weak

Recording 3 cents of earnings in the 3Q09 that were originally slated for 4Q09

Reduced guidance range to 75 to 80 cents


Will the 4Q09 quarter install base increase?

  • Stable… is what Pat guided to

Timing of new markets

  • In the US (OH & IL) too early to tell because the bills are WIP
  • Italy – complexity in getting product to market, think that their product is well suited though
    • 300k AWP now, 14% can be converted to VLTs (so that’s the addressable market)

Cost reduction programs

  • No sacred cows       

By G2E, should see some more clarity about product direction and see what will be on the front burner for IGT going forward

R&D: thinks about it as an investment – expect it to stay relatively flat going forward. Expect to see more efficiency, more delivery for same dollars

  • Will not think about allocation by product/ systems, but more along improving patron experience

What are breakage fees – debt breakage fees – to break the draw times (draws are typically 60-90 days)?

MLD – 920 units were MLD, also what’s driving ASP’s (3-4k premium to normal games)

On the design/R&D side, what are the changes?

  • Everyone was arranged in modules that have impeded speed to market, so now they have stand alone units that are going to be measured on financial contribution for their products vs. being disconnected before

Japan, any Reg 5 amendment coming?  – not seeing any clarity to Reg 5 adjustments.  Expects the Japanese market to stay unpredictable (hit driven). Shipped 1200 units

Firekeeper’s shipment was pulled forward (got 1,700 out of 2,500 units), thought they would have to defer it because they are also providing the system.

  • They weren’t involved in the financing

Replacement sales commentary:

  • Mostly coming from outside of LV & AC

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.