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China Slowdown, S&P Bull Catalyst or Danger Signal?


There are signs that WMS may be pulling forward earnings.

WMS will report earnings next week and while we don’t think the bottom line number will be as awful as recent quarters, quality should be low.  More importantly, beyond the quarter, we see cracks in the health of WMS’s underlying business.  It seems like WMS is continuing to pull earnings forward - never a good sign.  Some warning signs are:

  • WMS is booking Revel units in the December quarter – the only supplier to do so.  It seems strange to rush this booking since no cash will be received for several quarters, if not longer.
  • WMS is the only “Big 5” supplier to sell units to Maryland Live rather than lease them, thus boosting near-term profits at the expense of a long-term, steady cash flow stream
  • If our estimates are correct, WMS will be the only supplier to post a YoY decline in replacements
  • WMS was the only supplier to take a material charge in Mexico.  Either WMS was operating in some grey areas or everyone else’s accounting is that much more aggressive.

Turning to the December quarter, this quarter may mark the 5th straight quarter that WMS misses Street expectations.  Our best guess is that WMS reports $0.28, falling 2 cents short of consensus, although it’s possible they make the quarter through the cost side. 


FQ2 2012 Projections:

$103MM of product sales at a 51% margin

  • 5.3k new unit sales with 3.2k from NA
    • 680 new units and 2,500 replacements
    • WMS shipped just over 300 units to Revel in the December quarter. We believe that it may be the only large manufacturer recognizing revenue from Revel in that quarter. We’re pretty sure that WMS will also be booking receivables rather than collecting cash for their placement (as are all the other manufacturers shipping to cash poor Revel).  The only other opening/expansion of any size is the Northern Edge Navajo Casino in AZ.  WMS booked shipments to both Kansas facilities and Miami Jai Lai last quarter.
    • While replacements will be up sequentially, we’re pretty confident that they will be down YoY
  • ASP of $16.1k, down 3% YoY and QoQ.  With higher pricing than the other products, the xD platform contributed 32% of sales in the September quarter.
  • $17.5MM of other product sales
    • Conversion kit sales will be down materially QoQ as September was an ‘unusual’ quarter for WMS.  We assume that WMS sells 2,500 kits
    • WMS also noted that used game sales have plateaued.  We assume that 2k used games were sold in December – but at more ‘normal’ prices then what was realized in the September Q.
  • Despite realized cost reductions in the production of BB2 and xD cabinets, margins should be roughly flat sequentially.  September benefited from an outsized number of conversion kits sales which have over 90% margins.

Projecting $68MM of gaming operations revenue at a 79% gross margin:

  • We expect a small decline in the install base (45 units) and slightly lower yields due to seasonality

Other stuff:

  • R&D: $26MM
  • SG&A: $35MM
  • D&A: $23MM
  • Interest and other income: $2MM
  • Tax rate: 35.5%


No change to January projection


Average daily table revenue (ADTR) dropped from HK$782m per day in the first 8 days of January to HK$546m this past week.  However, volumes typically fall off dramatically prior to the Chinese New Year (CNY) celebration.  While the second week of January’s ADTR only increased 3% this year versus last year, ADTR was an estimated 30% higher than the corresponding lead-in week to CNY last year.  Our HK$23-24 billion (+32-40% YoY growth) January forecast remains unchanged.




Market shares were relatively consistent with last year with the exception of a shift of about 200bps back to SJM from LVS.



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Resenting Success

This note was originally published at 8am on January 11, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"America should be lifted up by our desire to succeed, not dragged down by the resentment of our success."

-Mitt Romney


In what I thought was the most progressive Strong Dollar, Strong America speech I’ve heard in the last 3 years last night, Mitt Romney hammered that Red, White, and Blue point home like maybe only Obama could. Strong.


Romney was alluding to crushing the “Most Popular” (most read) story on Bloomberg yesterday titled “Gingrich Attack Film Shows Romney As Ruthless Rich.” I don’t know one person (whose financial industry expertise I respect) who considered that Bain commercial anything short of a Michael Moore production. Apparently the State that says “Live Free, Or Die” agrees.


To be clear, I’m not a Republican or a Democrat. I simply want to get this country’s economics right. Clinton should have provided as much inspiration to President Obama to balance a budget as Reagan may have inspired Romney’s great hair. When it comes to the economic policy in America, Keynesian Academic Dogma failed both Bush and Obama. It’s time for change.


Can Obama be the change that Ron Paul is with the Youth/Change Vote in this country? Yes He Can. Will he? I have no idea. He’s certainly not going to get any non-groupthink ideas on economics from Tim Geithner. As of this Romney win in New Hampshire last night, this ½ Clinton ½ Reagan race to the US Presidency is officially on.


Back to the Global Macro Grind


Game on. I love this. I really do. I’m going to light up our 11AM EST conference call line like a Christmas tree this morning as Big Alberta and I officially roll out our Q1 Global Macro Themes for 2012.


Our clients already know what our Q1 Themes are, but if you’re new to this Canadian-American tire pumping game, here they are:


1.       Strong Dollar = Strong Consumption

2.       Deflating The Inflation, Part Deux

3.       Growth Slowing’s Bottom


Yesterday’s breakout in US Equities confirmed a lot of what we have been signaling for the last 3-4 weeks. We’ll go through this in depth (45 slides) on our call this morning, but the data doesn’t lie – perma-bulls forced to perma-change their bullish theses do. A Sustainably Strong and Stable US Dollar provides a coincident benefit to Employment, Confidence and Consumption.


That’s the fundamental research view – our quantitative risk management view supports this fundamental shift:

  1. SP500 closing above its October 29th, 2011 closing high of 1285 yesterday (1292 close) puts 1363 in play
  2. US Equity Volatility (VIX) is already down -11.6% for 2012 YTD (bearish TRADE and TREND)
  3. US Equity Volume studies are starting to change (up +31% day/day on yesterday’s up move, down on down moves)

Backcheck, Forecheck, Paycheck – that’s a PRICE, VOLATILITY, and VOLUME win in my model – and my model has not changed.


People who didn’t see our team make the shift from bearish to bullish on US Equities in early 2009 are still insecurely scrambling to put me on their Top 10 People Not To Listen To List of 2012 (some journalist from the Old Wall yesterday at Marketwatch). Why? They want to (or should I say need to) put me in the perma-bear box in which they need to think.


Thinking inside of a box is no way to live. Being perma bullish or bearish doesn’t work. What works is having a repeatable process that allows you to make money in both up and down markets.


What would make me go back to bearish on US Equities?

  1. President Obama not engaging in the ½ Clinton ½ Reagan strategy and imposing more of what didn’t work in 2011
  2. Ben Bernanke implementing a QE3, stoking inflation
  3. Geithner convincing his cronies of some socialized “mega refi” idea for US Housing (blowing up the MBS market)

Our desire to succeed in this country is based on having prior successes. If you’ve won a few games in your life, but have not yet won a Championship, you’re not thinking about the standard of success I am. America has an opportunity to be great again.


My economic strategy message should resonate as much with Democrats as it does Republicans. Both the US Currency and Equity markets are getting fired up about change in this country. That’s what real winners in real-life do. They don’t Resent Success.


My immediate-term support and resistance lines for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, and the SP500 are now $1596-1655, $111.91-116.01, $1.26-1.29, $80.55-81.53, 2239-2297, and 1273-1298, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Resenting Success - Chart of the Day


Resenting Success - Virtual Portfolio

The Week Ahead

The Economic Data calendar for the week of the 16th of January through the 20th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - 1. calendar

The Week Ahead - 2. calendar

Weekly European Monitor: France Downgraded and Draghi’s Strong LTRO Message

No Current Positions in Europe


European capital markets and the EUR-USD turned sharply this morning on rumors that Standard & Poor’s would downgrade numerous Eurozone countries today, including France.  We authored a note on 10/18/11 titled “France is Going to Get Downgraded”, so today’s action by S&P to cut France’s AAA sovereign credit rating one notch to AA+ didn’t come as a huge surprise, and was well anticipated by the market over the last weeks. S&P stated, "we believe that there is at least a one-in-three chance that we could lower the rating further in 2012 or 2013."


However, as Moody’s and Fitch join the downgrading club, Eurocrats will have to answer to the AAA-rating of the EFSF, a facility built on the collateral of its largest contributors, Germany and France, at 27% and 20%, respectively. This portends that yields should rise on EFSF bond issuance going forward, which of course runs squarely counter to the purpose of this funding facility issuing “cheap” debt to ailing sovereigns. In essence, the EFSF should be downgraded to AA as well. The French Finance Minister said today’s downgrade is not a catastrophe, yet stated plainly, downgrades will increase the debt servicing costs which will put pressure on already bloated deficit and debt levels of France, and many European sovereigns like them. France in particular is running against a 90% debt to GDP ratio. Further, expect France’s downgrade to increase the already loud calls that the size and strength of the EFSF is insufficient to handle sovereign and banking bailout needs.


Announced today at 4:30pm EST, S&P placed the ratings on all but 2 of the 16 Eurozone sovereigns of negative and all 16 have been removed from creditwatch.


Summary of downgrades:

Austria to AA+/Negative from AAA/Watch Negative

Cyprus to BB+/Negative from BBB/Watch Negative (now junk)

France to AA+/Negative from AAA/Watch Negative

Italy to BBB+/Negative from A/Watch Negative

Malta to A-/Negative from A/Watch Negative

Portugal to BB/Negative from BBB-/Watch Negative (now junk)

Slovak Republic to A/Stable from A+/Watch Negative

Slovenia Republic to A+/Negative from AA-/Watch Negative

Spain to A-/Negative from AA/Watch Negative


Summary of affirmations:

Belgium AA/Negative

Estonia Republic AA-/Negative

Finland AAA/Negative

Germany AAA/Stable

Ireland BBB+/Negative

Luxembourg AAA/Negative

Netherlands AAA/Negative 



Asset Class Performance:

  • Equities: European indices had a mixed week largely within a tight +/- range. Top performers: Hungary 7.7%; Italy 2.5%; Cyprus 2.2%; Spain 1.9%; France 1.9%. Bottom performers: Portugal -2.1%; Slovakia -1.0%; Ukraine -1.0%; Netherlands -0.6%; Greece -0.4%
  • FX: The EUR/USD -0.27% week-over-week. Divergences: PLN/EUR +1.9%, Hungarian Forint/EUR +1.31%%, Iceland Krona /EUR -0.72%
  • Fixed Income: 10YR sovereign yields broadly decreased w/w, led by Greece -107bps to 34.36%; Portugal -90bps to 12.46%; Italy -50bps to 6.64%; Spain -47bps to 5.22%. In context, Italy’s 10YR was as high as 7.14% (on 1/10) this week. 

Weekly European Monitor: France Downgraded and Draghi’s Strong LTRO Message  - 1. yields



Contextualizing Europe’s Standing:

What’s additive to this week’s discussion of Europe is Draghi’s positioning of the LTRO as a facility that’s helping banks buy time to improve their liquidity standing and his optimism that the credit markets are beginning to loosen on the margin. To the latter point and the naysayers, it’s suggested that the funds borrowed from the LTRO at 1.00% are simply being deposited at the ECB’s overnight facility at 0.25%, indicative of the defensive outlook of banks [to actually take a 75bps hit on the spread] and therefore the continuation of a frozen credit market. Draghi, however, stressed in the press conference following Thursday’s decision to leave main rates unchanged that the banks participating in the LTRO were not [all] the same banks that are re-depositing with the overnight facility. (For more on Draghi’s positioning see our note on 1/12 titled “ECB Press Conference Notes: Draghi Stands Strong Behind LTRO”). And in so many words he concluded that we’re beginning to see the initial signs of credit flowing. 


The key risks for European markets, however, remain in two channels: the banks and sovereigns. In the Q&A of the ECB’s press conference, Draghi made some important comments on both fronts. While the ECB is not the sole leader in sorting out Europe’s fiscal imbalances (we’d argue that German Chancellor Merkel plays one of the key roles), the ability of the ECB to take leverage/debt on its balance sheet is of critical concern, and again Draghi reiterated that the EFSF is its own independent facility. In essence, the ECB will not contribute to the facility in any form, or directly aid sovereign or banks, outside of its “temporary” SMP facility to buy secondary sovereign bond issuance. [Since May 2010, the SMP has purchased 213B EUR].

While sovereigns may have some relief from the SMP program, there’s no facility to directly aid/address Europe’s banks. A good preview of potential dark clouds for banks that need to raise capital is Italy’s Unicredit. Its equity shares fell -36% last week after the bank announced a €7.5B rights offer on January 4th, equating to a market cap drop of €8B, as new equity shares were deeply discounted. Along these lines, we want to highlight that Commerzbank has a January 20thdeadline to present a credible plan to fill €5.3B capital gap. For anyone who says that risk is fully priced in on European bank stocks, we’d reference Unicredit.


As we look out over the next weeks, we think the yield and demand of new sovereign debt issuance will continue to be held under a spotlight and markets will run off headline risk. Markets may well find comfort in the LTRO to provide the needed liquidity to banks, which has been reflected in decreases in the Euribor-OIS spread over the last 10 days. While the LTRO may prevent insolvency issues in the near term by boosting liquidity, it may only mask the issues, and surely does not offer insurance that equity holders don’t get wiped in the process. Between now and the mid-year, which is the deadline for banks to meet the 9% Tier 1 capital ratio, we may see dark clouds for banks that need to raise capital. From a policy perspective, it appears Draghi may well hold interest rates unchanged until at least March to gauge the progress of the LTRO program, and the second instalment on 2/29.



Call Outs:

  • Overnight deposits at the ECB continue to make higher highs (€489.9 billion).
  • Fitch says that 60% PSI won’t lead to sharp reduction of debt burden. Talks resume next week.
  • Germany to lower GDP outlook to 0.75% from 1.0% for 2012, according to Handelsblatt.
  • Commerzbank says it does not need more government money and will present its capital plan next Friday.
  • Italy sold €4.75B of debt today (€3B of 2014 bonds with an average yield of 4.83% vs 5.62% on Dec 29, but bid-to-cover was not good at 1.20 vs 1.36 prior). 
  • Switzerland - Thomas Jordan, 48, emerges as the frontrunner to replace Philipp Hildebrand at the SNB following a currency trading scandal with Hildebrand’s wife. Jordan must show that he can defend the 1.20 floor in the EUR-CHF, which intraday stood at 1.2081 CHF, or -0.6% w/w.


Germany (EWG) 

We’re getting more constructive on Germany on recent data, however are very aware that despite Germany’s strong fiscal position (budget deficit = 1% in 2011 vs -4.3% in 2010) and employment base (Unemployment Rate = 6.8%), the country’s capital markets are not immune to the region’s sovereign and banking contagion risk. After all, German equities were down last year -20% despite a similar strong fiscal and employment position.


The DAX, like the FTSE MIB, IBEX, and CAC, looks good from an immediate term TRADE perspective. We’d buy the DAX on a pullback.



Key Regional Data This Week:


Positives (+)

Eurozone Sentix Investor Confidence -21.1 JAN vs -24.0 DEC

Germany Exports 2.5% NOV M/M (exp. 0.5%) vs -2.9% OCT

Germany Trade Balance 16.2B EUR NOV (exp. 12B EUR) vs 11.5B EUR OCT

Germany Budget Deficit (as % GDP) for 2011 = -1% versus -4.3% in 2010

Russia Trade Balance $17.4B NOV vs $16.6B OCT

UK PPI Input 8.7% DEC Y/Y vs 13.6% NOV

UK PPI Output 4.8% DEC Y/Y vs 5.4% NOV


Negatives (-)

Russia CPI 6.1% DEC Y/Y vs 5.6% NOV

Greece Unemployment Rate 18.2% OCT vs 17.5%



Interest Rate Decisions:

(1/11) Poland Base Rate Announcement UNCH at 4.50% (expected UNCH)

(1/12) BoE UNCH at 0.50%; Asset Purchase Target UNCH at 275B GBP

(1/12) ECB UNCH at 1.00%



CDS Risk Monitor:

On a w/w basis, CDS was down across Europe, with a positive divergence from the periphery. Spain saw the largest decline at -40bps to 408bps; followed by Ireland -36bps to 675bps, and Portugal and Italy both down -25bps to 1088bps and 504bps, respectively. 


Weekly European Monitor: France Downgraded and Draghi’s Strong LTRO Message  - 1. cds a


Weekly European Monitor: France Downgraded and Draghi’s Strong LTRO Message  - 1. cds b




We’d short the cross at $1.28 for an immediate term TRADE. The EUR/USD remains broken long term TAIL ($1.40) and intermediate term TREND ($1.42) in our models and we think the lack of resolve from the newest proposals for a fiscal union will encourage greater downside. 



The European Week Ahead:


Monday:  Dec. Germany Whole Sale Price Index; Dec. UK Nationwide Consumer Confidence (Jan 16-20); Dec. Italy CPI – Final; Nov. Italy General Government Debt


Tuesday:  Jan. Eurozone ZEW Survey Economic Sentiment; Dec. Eurozone CPI; Dec. UK CPI and Retail Price Index


Wednesday:  Nov. Eurozone Construction Output; Dec. UK Jobless Claims Change and Claimant Count Rate; Nov. Italy Trade Balance and Current Account


Thursday:  Eurozone Publishes Monthly Report; Nov. Eurozone Current Account


Friday:  Germany Deadline for Commerzbank to Present Credible Plan to fill 5.3B EUR Capital Gap; Dec. Germany Producer Prices; Dec. UK Retail Sales; Nov. Italy Industrial Orders and Sales




Matthew Hedrick

Senior Analyst

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