Keith's Macro Notebook 5/13: USD | Oil | UST 10YR

Hedgeye CEO Keith McCullough calls in from the road to share the top three things in his macro notebook this morning.


Takeaway: GTECH results a snoozer but management was reluctant to discuss IGT's awful performance.


  • Will not talk about IGT standalone results. IGT's results are for informational purposes only.
  • Italy unfavorable sports betting by 10% points (which was in-line with industry average). This will normalize over time.
  • North America:  Same-store benefited from jackpot and instant ticket segments
  • IGT's (Stand-alone) March quarter not indicative of its future
  • Confident synergies remain on track
    • Have consolidated production/maintenance...closing plants in Vegas and Canada
  • FX did not have a meaningful impact on operating income 
  • Americas:  Instants ticket sales (Double-digit increases in California and North America)
  • MegaMillions declined in 1Q
  • Gaming shipments declined due to hard comps boosted by Canada last year
  • International: instant ticket sales led by UK growth
  • Expect Greek VLTs revenues in 2H 2015
  • Italy:  machine gaming revenues impacted by Stability Law implementation. Excluding that rule, revs would have been flat.
  • 2Q results will be on a consolidated entity basis and reported in US$


Q & A

  • IGT results below expectations
  • IGT: Reduction in receivables have improved its profitability
  • Will provide some guidance at end of Q2. Expect 2H 2015 will have better performance, particularly on IGT's product sales with the introduction of new products
  • Leverage target at closing:  4.5-4.9x ; longer-term, will be at 4x or below 4x
  • Synergies:  on time and on target
  • IGT: conversion of units in Mexico impacted results.  Weaker period in industry due to less newer openings.  
  • Installed base count will be more balanced as a combined entity
  • Pro forma balance sheet shouldn't change much when translated to US GAAP.
  • Italian Lottery contract: waiting for issue of tender. Expect 1st installment by end of year.
  • IGT:  conversion of 1,000 units in Maryland which fully explain the ASP difference. 
  • GTECH:  no units were converted
  • IGT/GTECH Oregon units: 300 IGT units. Basically concluded.
  • Cost of debt:  5.25%-5.50% (depending on currency and product)
  • Debt:  50% in euros, 50% in dollars
  • 2015 Maintenance capex: US$150-$170m
  • 2015 growth capex:  some capex related to VLT Greece
  • Do you need to borrow additional funds?  It depends.
  • IGT:  have some visibility in the new openings (mainly Massachusetts)
  • GTECH Italian taxes paid:  paid 40% ($38m).  Finalizing contracts and resolution before next payment is due. GTECH will only pay their portion of the 60% ($5m euros).
  • IGT product sales will improve in US and international going forward. Spielo leading the charge. 
  • IGT product sales in 1Q 2014 not in 1Q 2015:  1,000 units in Illinois
  • Synergies:  will execute 65% by 1Q 2016
  • Property sales: different mix sold resulted in lower intellectual property fees.  Inventory write down.

McCullough: 'Now I Don't Have a Catalyst, So Its Bear Time'

Editor’s Note: This is an edited amalgamation of tweets from Hedgeye CEO Keith McCullough’s Twitter feed yesterday. The 10-Year U.S. Treasury yield has dropped 14 basis points from 2.36% to 2.22% since.

*  *  *  *  *  *  *

McCullough: 'Now I Don't Have a Catalyst, So Its Bear Time' - z bear


Now that Fixed Income volatility has gone into phase transition mode, Equities look ripe to be next. In #timestamped terms (Real-Time Alerts), we'd be short the Russell (IWM) after being bullish on it in Q1 I'd also be net short US Equities for the first time for real in 2015. Timing matters.


On Bond Yields, this is the second day of loud and large scale sentiment capitulation. We were right on long-duration bonds for 16 months, then wrong for a month...But the truth is that you could have said I was wrong on long-term bond yields at every lower-high since Jan 2014 too.


This is a very interesting position to re-load and/or establish new positions in bonds - especially for those who missed the whole ride. If your outlook is for more Global #GrowthSlowing, there are very few ways to express that bullishly other than through lower-yields. That is, of course, unless "this time is different" and bonds go down as growth is slowing. Otherwise, the Bears on bonds have to hope to get lucky and see a sentiment (charts) reversal in bonds.


For the record, if the big bang theory on bonds is in motion, everything and anything you own is dead. And I wouldn't rule that out - that's why I like the Russell (IWM) short better than selling my long-term TLT idea. Incidentally, as you know, earnings are #LateCycle. Perma bulls learned this lesson the hard way buying the 2007 peak. (see chart below):


McCullough: 'Now I Don't Have a Catalyst, So Its Bear Time' - z west


Looking for SPX to test 2002-2013 zone at some pt this summer time, regardless - better way to be short than making up bond stories like some. Don’t forget, I was bullish on US equity beta into the last Fed meeting. 


Now I don't have a catalyst so its bear time.

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May 13, 2015

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2nd Big Capitulation Day

Client Talking Points


Meanwhile the U.S. Dollar continues to break down from an immediate-term TRADE perspective as the U.S. economic data continues to slow in rate of change terms. The EUR/USD risk range has tightened up as well (higher-low, which is new) to  1.09-1.13.


Oil loves Down Dollar; absolutely loves it – but does the consensus Consumer bull case on “lower gas prices”? WTI is up another +1.2% this morning to $61.53 and is also signaling higher-lows within its $55.06-62.36 risk range. 


Epic moves in the UST 10YR, almost daily, now – but the Bond Bears were backed off by another 13-14 basis points on the UST 10YR from around this time yesterday (2.36% drops to 2.22%). We would have to see a sustainable close > 2.39% to shake us out of Treasuries.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). The highly anticipated Non-Farm Payrolls report came and went Friday, and it was largely a non-event. The change in non-farm payrolls was +223K vs. consensus estimates of +228K for April. Considering last month’s report was a bomb (revised to 85K from 126K), April had an easy comp. Our thesis on interest rates remains lower-for-longer, but that view is being tested in the short-term.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. It was a relatively light data week for housing with weekly mortgage application data and the March employment report offering incremental updates on the current state of housing demand.  On the market side, interest rate volatility remained a concern for the public homebuilders but one we believe remains shorter-term in nature absent another expedited, step function increase in interest rates. We think the rate related pressure will be largely transient unless we see a further back-up in mortgage rates on the order of +50-100bps from here – a potentiality we would not view as probable at this point. On the fundamental side, the drumbeat of improvement remains ongoing.


The U.S. dollar has gone on a big reversal since the Fed’s March 18th meeting. Since the meeting, the dollar has moved lower and rates higher. This short-term move in rates has caused confusion with respect to our lower for longer call. Put simply, we have been wrong on the direction of our four macro tickers in the newsletter. A continuation of this trend will force us to re-evaluate the longer term call.

Three for the Road


NEW VIDEO | Will Rising #Rates Derail The #Housing Train?

via @HedgeyeUSA + @Hedgeye_Comdty

cc @KeithMcCullough



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CHART OF THE DAY: What Matters In Global Macro (Occurs On The Margin)

Editor's Note: The chart and excerpt below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. For information on how you can subscribe click here


CHART OF THE DAY: What Matters In Global Macro (Occurs On The Margin) - z 05.13.15 chart


While our #process is easier to understand by using today’s Chart of The Day (a sine curve), let me just make this macro Risk Manager point one more time in plain english:


  1. When #LateCycle macro indicators go from good to less good, that’s bad
  2. When #EarlyCycle macro indicators go from bad to less bad, that’s good



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