A takeout price much higher can still make PE (and current shareholders) a lot of money. Stay tuned for Hedgeye's 1pm EDT conference call.


IGT could be worth $18-22 to a private equity firm which would yield an IRR of 21%-33% by our estimation. The stock closed at $14.31, up 14% but considerable upside remains to our target valuation.  Of course, no deal has been announced, nor has IGT made any announcement – only a Reuters article citing a source that IGT has hired an investment banking firm to sell the company. 


Moreover, tragically low replacement demand could put near-term earnings slightly at risk with little relief in overall slot demand until 2016.  Finally, regulatory impediments would likely result in a year-long closing process.  Nevertheless, there is real cash flow and real value in the name, in our opinion, and private equity could make this a profitable deal for itself and current shareholders.





A Reuters article yesterday suggested IGT had hired Morgan Stanley to pursue the sale of the company.  There were enough details in the article to conclude that where there is smoke, there is fire.  It makes sense to us - Hedgeye had already planned a BlackBook report and conference call for later this week analyzing a potential LBO scenario. 


We’ve revisited the private equity option many times over the years.  IGT’s cash flow and low capital intensive business model always seemed to be a candidate for the private marketplace, especially at low points in the cycle similar to now.  The main hurdle has always been regulatory in nature.  As someone who has been through the licensing process in 200 jurisdictions through my Board affiliation with Shuffle Master, I can speak to the uphill battle private equity would face.


However, we have seen private equity more involved in the gaming space in the last 8 years:  HET and STN went private and Fortress pulled the plug, expensively, on a deal to bring PENN public in 2008.  More recently and more directly, at least 4 private equity firms bid on WMS with 1 making it to the final round.  


Other private equity/gaming relationships include Blackstone buying Cosmopolitan and the firm was involved in The Cromwell as well as Caesars; Fortress is the sponsor of GLPI; Icahn Enterprises sponsorship of Tropicana Entertainment; and, MacAndrew & Forbes has an ongoing interest in Scientific Games. 


So what’s the play for PE?  Buying a high cash flow generative company, despite secular and cyclical issues, at the low end of the slot cycle for a relatively cheap multiple.  Bring IGT public again in 4-5 years when international demand should be humming and more domestic jurisdictions should be open or in the process of opening.  Oh and there is a social gaming asset that may not be core and carries a multiple higher than the core business.  A coincident sale of Interactive could pay for much of the equity contribution for the LBO.


PE would likely affect a management change, improve employee morale, and stem the brain drain of the last few years.  We do not believe PE would value current CEO Patti Hart’s skill set.  However, John Vandemere, CFO, could be a candidate for the role to keep some continuity.  We have grown an appreciation for Mr. Vandemere’s cash flow focus and ability to cut costs – 2 skills necessary for an LBO CEO.


What’s the play for another manufacturer?  Well, it would almost have to be an international slot manufacturer such as Aristocrat or Lottomatica.  However, we believe this outcome is less likely than a private equity bid. 


I will be hosting a 1:00 pm EDT conference call today to discuss Hedgeye’s thoughts and analysis on IGT as a private equity play.  We will also discuss the near and long term issues facing IGT and look at potential catalysts should a sale not reach fruition. 


If you are interested in joining us, please contact your Hedgeye salesperson or email for more information.

VIX Bounces Oil Rips

Client Talking Points


Front month VIX has never stayed below 10, so yesterday’s bounce off 10.51 long-term support isn’t a surprise; at first volatility comes on slowly, then all at once – this is a very asymmetric point in the U.S. Equity market.


Played Jedi mind tricks with us yesterday getting back above our TREND line of 1169, but that A) didn’t happen on volume and B) needs to hold – stay tuned; no support to 1133 and remains our favorite U.S. Equity macro hedge.


Rips humanity a new one again yesterday and WTI charges to $104.63 this morning, finally signaling immediate-term TRADE overbought; adding oil #InflationAccelerating to a food basket that’s already +21% year-to-date should perpetuate more #ConsumerSlowing.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


#StrongPound = Strong UK; Industrial Production growth rips +3% y/y




“Mistakes are part of the game. It's how well you recover from them, that's the mark of a great player.”

-Alice Cooper


Last night in Game 3 of the Stanley Cup Finals L.A. King’s Jonathan Quick earned the first Stanley Cup Final shutout at Madison Square Garden since 1972.

CHART OF THE DAY: Consumption Growth In Long-Term Secular Decline


CHART OF THE DAY: Consumption Growth In Long-Term Secular Decline - Consumption Growth

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The Last 1%?

“The distribution of wealth is one of today’s most widely discussed controversial issues.”

-Thomas Piketty


Roger that Tommy. And thanks for giving the world’s big central planning bureaucrats some Marxist 2.0. They needed a French Keynesian economist to inspire them.


Who is Karl Marx? According to Picketty, “In 1848… he published the Communist Manifesto, a short, hard hitting text…” (Capital In The Twenty First Century, pg 8). “Hard hitting?” #cool


The Last 1%? - Karl Marx 007


Instead of calling this NY Times fan fav book “Capital”, it should have been titled “Class Warfare.” This is going to be a painful read for me, but I will endure. The last 1% of economists who think socialism is the best path to prosperity still need to be studied.


Back to the Global Macro Grind


What is the last 1%?


  1. The last 1% rally in the Russell 2000 (IWM) on no-volume to lower-highs?
  2. The last 1% rally in US Consumer Discretionary (XLY)  stocks to lower-highs?
  3. The last 1% of McDonald’s (MCD) customers slowing in May due to the February “weather”?


That last one was a beauty of a headline that the US government dudes perpetuating American Inequality via their Policy To Inflate had a tough time explaining yesterday. McDonald’s same-store US Sales for May were down -1% year-over-year with some of the best weather we’ve had in years.


After spending on primitive things like food and shelter (Food prices +21% YTD; US Rents at all-time highs), evidently America’s Median Consumer can’t afford to fill her car up with gas to go buy the new “family pack” (for $14.99) at Mickey D’s!


I was in Chicago seeing Institutional Investors all day yesterday and today I’ll be in Kansas City. The core of the bear case for US consumption growth is what is hitting the heart of America right now – it’s called #InflationAccellerating USA’s cost of living to all-time highs.


As you can see in today’s Chart of the Day, US Consumption Growth (1) is in what we call a long-term secular decline. That’s mainly because the 50yr chart overlaying that called cost of living (inflation) is in a secular bull market.


The Last 1%? - Consumption Growth


But whatever you do when debating people like Piketty on inequality, don’t talk about central planning policies that A) devalue the purchasing power of the people and B) inflate the cost of living.


In case you want to run against Hillary for President of the United States, just ask her the questions we answer in slides 12-15 in our current Hedgeye Macro Slide deck:


  1. Who Is The Median Consumer in this country?
  2. How Does the Consumer Make Money?
  3. Where Do They Spend it?


The answer for the Median Consumer in America on the spending side is this:


  1. Housing (34% of the country rents) = 29.2% of spending
  2. Transportation = 17.8% of spending
  3. Food = 12.5% of spending


“So”, if you tax that spending basket with an un-elected and un-legislated Policy To Inflate (read: print money), you get the answer to the inequality equation Krugmanites have been longing for:




Yep. The top quintile of Americans (read: us) gets paid 66.4% of the benefits of money printing (interest, dividends, property related income, etc.). The median quintile gets 1.4%.


Inequality is only a “controversial issue” because, like in the 1970s, both the Democrat and Republican parties (Nixon/Carter then Bush/Obama) have supported Policies to Inflate, without calling them that.


Our immediate-term risk ranges (with bullish or bearish intermediate-term TREND signals in brackets) are as follows:


UST 10yr Yield 2.41-2.64% (bearish)

SPX 1 (bullish)

RUT 1133-1177 (bearish)

Nikkei 141 (bearish)

VIX 10.77-13.35 (bearish)

USD 80.23-80.89 (bearish)

EUR/USD 1.35-1.37 (bullish)

Pound 1.67-1.69 (bullish)

WTIC Oil 102.62-105.27 (bullish)

NatGas 4.53-4.76 (bullish)

Gold 1 (bullish)

Copper 3.01-3.11 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

It Never Gets Old

This note was originally published at 8am on May 27, 2014 for Hedgeye subscribers.

“Although I’ve made this walk thousands of times, it never gets old.”

-Ed Catmull


That’s how the President of Pixar Animation Studios, Ed Catmull, describes his life in the introduction to an excellent book I started reading this weekend called Creativity Inc. Catmull is a computer scientist who was hired in the late 1970s by a 32 year old by the name of George Lucas.


Catmull went on to run Pixar alongside another American capitalist by the name of Steve Jobs. He is 69 now and his book isn’t as much a memoir as it is a lesson in learning how to be creatively destructive, as a team.


The book’s early chapters will sound quite familiar to those of you who embrace the principles of transparency and trust alongside practical applications of  #math and #behavioral economics: “Honesty and Candor”, “Fear and Failure”, and “Change and Randomness.” #Solid summer time read.


Back to the Global Macro Grind


Walking onto the independent research platform we built 6 years ago never gets old. It gets more interesting and exciting the more we empower new players on our team to be the change. All the while, as my hair gets greyer, I’m still banging out this Early Look note just trying to keep up!


Trying to keep up with no-volume rallies in the preferred hedging instrument of thousands of hedge funds (SPX and E-minis) never gets old either. “Why are we up?”, “Why can’t we go higher?”, “Why can’t I beat beta?” – the underlying whine to this whole thing can make a man want to go on vacation.


Setting aside that we have not been recommending short SPY (we’ve been making the call to short US Growth – i.e. the Russell 2000) here’s what’s going on with the emotion of it all:


  1. Friday’s no-volume-ramp to an all-time closing SPY high of 1900 came on one of the lowest volume days of the year
  2. Total US Equity Market Volume was -23% and -41%, respectively, versus its 1 and 3 month averages
  3. CFTC futures and options contracts in SPX (Index + E-mini) ended with a net SHORT position of -114,248 contracts


In other words, with almost 9,000 hedge funds trying to manage an all-time high in AUM (assets under management) of $2.7 TRILLION in a no-volume market that goes straight up after they shorted it in April-May, the short-term game gets tougher.


Putting the -114,248 net short contract position (SPX Index + E-mini) in context is critical:


  1. That’s -73,347 contracts week-over-week (almost 60% shorter)
  2. Versus the 6 month average of +9,810 net LONG position, that’s bearish positioning
  3. Versus the 1 year average of +62,224 net LONG position, that’s really really bearish

Where time, price, and positioning is relative to where it was, across multiple-durations, is how we analyze things here @Hedgeye. It’s all about the rate of change. And it changes, both fast and slow.


Why would consensus be getting bearish on US Growth?


  1. 10yr US Treasury Yield was only up 1 basis pt last wk to 2.53% = down -50bps YTD and signaling US #GrowthSlowing
  2. Despite its no-volume +2.1% bounce to lower-highs last wk, the Russell2000 is still -6.8% since March and -3.2% YTD
  3. US GDP for Q114 could be revised to NEGATIVE (from its preliminary +0.11%) when it’s reported this Thursday


I know. Everyone nailed it. Everyone you read every morning made the call that US GDP would be negative in the first quarter (it would have been -2% btw if the US government used MIT’s Billion Prices Project measurement of +3.9% inflation) and the 10yr yield would be -17% YTD.


But that doesn’t matter this morning, because the name of the game isn’t intermediate-term TREND investing – it’s short-term performance chasing, baby! So what would get me to saddle up and ride the spooo-hoo bull?


  1. US Dollar Up
  2. Interest Rates Up
  3. Commodity and Cost of Living Inflation Down


Ex #3 (US rents hit an all-time high last week and the CRB Commodities Index was up another +0.8% to +10% YTD), we actually got some of that last week:


  1. US Dollar Index +0.4% last week to back in the black (of +0.4%) YTD
  2. 10yr Yield up a beep (1 basis point) to 2.53%


Buying the all-time-high price in anything just isn’t how I roll. But if that’s the sort of thing you are into from a “long-term investing” perspective, here’s some short-term positivity that Mr. Macro Market looks like he might chase – on a 15-day duration, the SPX and USD have POSITIVE correlation of +0.60.


Yep, that was last year’s risk management call on being long growth (Dollar Up, Rates Up, Equity Growth Multiples Up – Bond Bulls smoked). The 2014 call is much more aligned with the 90-day INVERSE correlation between SPX and USD of -0.62.


Right now, USD is overbought and the bond market couldn’t care less about no-volume stock market rallies. Get USD and Rates right, and you’ll probably get the TREND calls in long growth vs slow-growth right. Although I feel like I have written about this on 1,000 macro mornings – it never gets old.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.47-2.61%
SPX 1878-1906

RUT 1089-1135

Nikkei 13885-14658

USD 79.99-80.49

WTIC Oil 102.67-104.77


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


It Never Gets Old - Chart of the Day

June 10, 2014

June 10, 2014 - Slide1



June 10, 2014 - Slide2

June 10, 2014 - Slide3

June 10, 2014 - Slide4

June 10, 2014 - Slide5

June 10, 2014 - Slide6

June 10, 2014 - Slide7




June 10, 2014 - Slide8

June 10, 2014 - Slide9

June 10, 2014 - Slide10

June 10, 2014 - Slide11
June 10, 2014 - Slide12

June 10, 2014 - Slide13

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