IGT’s overreliance on “Wheel” games presents a big risk in the face of a now wide open playing field. Indeed, BYI is positioning itself to flood the market with its own Wheel products.

“The internet, that thing still around?” – Homer Simpson


While not quite having the global impact of the internet, “Wheel of Fortune” is by far the most successful casino gaming machine ever produced.  It’s been around for so long and production has been so stable that it’s almost an afterthought; its dominance has been unchallenged.  That is, until now.  We think IGT’s reliance, or should we say overreliance, on the Wheel is disconcerting and underappreciated in the investment community.


Wheel games comprise approximately 35% of IGT’s total participation installed base, or around 21,500 of 61,400 games.  Moreover, Wheels perform above the average IGT participation game.  We estimate Wheel games alone will contribute 30% and 50% of company-wide revenues and operating income, respectively, in F2009.  Let me say that again:  one line of products provides 50% of IGT’s operating income.  Astonishing. 




On October 22 of this year, a court ruling essentially invalidated the “wheel patents” that had protected IGT’s Wheel of Fortune from competition.  Competitors are now free to introduce their own wheel games.  BYI will no doubt take the lead here.  Indeed, the company introduced a bevy of new wheel games at G2E and plans to “flood the market” with wheel products.  Hey, we are focused on reaccelerating replacement demand and new markets too, but this issue is too important to ignore.



 November 27, 2009





Dubai leverage trumps $9 Blu-Ray players on this Black Friday. A Bottoming Buck has implications for retail, folks.



Welcome to Black Friday. But unfortunately, this Black Friday is marked not be $3 toasters and $9 Blu-Ray players, but by the situation in Dubai – with Dubai World learning the hard way that leverage is bad.   Not surprisingly, we are also waking up to the U.S. Dollar Index up as much as 1% - now up for two straight days.  The implication for everything priced in dollars is obvious. What is happening to Dubai World really does not change much for the typical American – not now at least.  As Howard Penney put it this morning, it’s a reminder that leverage is bad, the BUCK is bottoming and that the FED needs to raises interest rates sooner rather than later.  With the BUCK bottoming, you should take particular note of those consumer names that have been soaring due (whether obvious or not) to a weakening dollar. For Staples, this is flat-out bad. In a perverse way, this could be good for some names in consumer discretionary to the extent that a stronger dollar deflates the price of oil and frees up share of wallet.  Stay tuned on that one.


A final consideration is that when looking through the consistent bidders on US retail assets over the past three years, we’ve had US private equity, Asian strategic buyers, and Oil money. PE might have reared its head recently, but that’s temporary. Asian strategic and financial buyers are probably here to stay, which is good given that Dubai is clearly headed the wrong way.




  • Tiffany’s is starting to see some positive trends just as the company is also beginning to realize the benefit of favorable compares. While currency is now a tailwind, November sales are tracking favorably, and the recent boost in guidance are all positive – it’s important to keep in mind that December is a truly a make or break month for Q4 results.
  • Yue Yuen quietly added to its roster of private placements and subsidiaries this week. The Chinese footwear giant now has over 60+ such interests after making three private investments in Chinese-based footwear companies. With the company noting that sales had turned negative for the first two months in Q3 when it reported results back in June, the frequency of these deals are likely to pick up in the 2H as a means to manufacture top-line performance in the absence of more robust fundamental demand.
  • In an effort to attract appeal to a younger demographic, KSWS is offering a $10 iTunes gift card with a purchase of $50 or more. This approach caught our eye among the many deals to have come across our screens this morning from the perspective that 1) it’s a cross branding offering with a highly relevant brand, and 2) the offer resonates with a younger demographic – which is a key initiative for KSWS.




Wal-Mart Suppliers in China Accused of Labor Abuses- Wal-Mart's insistence on low prices for customers harms Chinese workers when its suppliers cut corners on health and labor standards to make the bottom line, a labor-rights group charged in a new report issued this week. In a report that studied five of Wal-Mart's suppliers in China, New York-based China Labor Watch said the world's largest retailer places utmost importance on the cost of its products, which often hurts thousands workers in China who make those products.  In addition to its massive supply chain here, Wal-Mart operates 250 stores in China. "This is not about a single factory, but about Wal-Mart's inability to implement its standards," the group's executive director, Li Qiang, said in a news release that called Wal-Mart's pricing structures "unsustainable." "Wal-Mart leverages its massive product orders to purchase goods at low prices, and workers suffer the financial burden," China Labor Watch's news release said. <>


PPR Reconfigures Retail Operations - PPR S.A. is reconfiguring its operations as it prepares to divest its retail businesses. Conforama, the French retail-to-luxury group’s home-furnishings unit, is taking over home-wares mail order company La Maison de Valérie from Redcats, PPR’s mail order division.  Financial details weren’t disclosed. “The complementary nature of the Conforama and La Maison de Valérie brands… will allow us to be swiftly competitive in the various sales channels and to increase our market shares as of 2010,” stated Conforama’s chief executive, Thierry Guibert. The move comes as François-Henri Pinault, chief executive of PPR, is looking to divest the company’s European retail business to focus exclusively on consumer and luxury brands, which include Yves Saint Laurent, Gucci and Balenciaga.Among the retail operations Pinault plans to sell are Conforama and Fnac, a books and electronics retailer.  Analysts have estimated that the two units could fetch around 4 billion euros, or $6 billion at current exchange rates, which PPR is expected to use to shop for apparel and accessories brands in a move to create a new mass-market division mirroring the luxury goods unit, Gucci Group. PPR already owns a majority stake in German activewear firm Puma AG. <>


Brow Shoe Executives to Retire in 2010 - The new year will bring some big changes to Brown Shoe Co.’s senior management team. The St. Louis-based company announced last week that Gary Rich, president of wholesale for the Brown St. Louis division, and Joe Wood, president of retail and Famous Footwear, would retire in 2010. As a result of the departures, the company has shifted the roles of several of its executives.  Rick Ausick, currently president of wholesale for Brown Shoe’s New York division, will assume the job of division president of Famous Footwear. Ausick previously had worked with Wood at Famous, as SVP and chief merchandising officer. Mark Lardie will take over as division president of wholesale, with responsibility for the Naturalizer, Dr. Scholl’s and LifeStride brands, as well as the company’s specialty retail stores. Lardie was most recently SVP and GMM. In another wholesale president appointment, Dan Friedman will assume the role of division president of wholesale, product and sourcing, with oversight for women’s specialty, children’s and celebrity artist brands, including Carlos by Carlos Santana and Fergie. Friedman was most recently SVP of product development and <>


Peet's Acquisition Quest for Deidrich's Coffee Heats Up - Diedrich Coffee, Inc. (NASDAQ: DDRX) has determined that the recently revised offer from Green Mountain Coffee Roasters, Inc. (NASDAQ: GMCR) continues to be a Superior Proposal to the terms of the merger agreement with Peet's Coffee & Tea, Inc. (NASDAQ: PEET) and the exchange offer contemplated thereby, as amended by the subsequent offer received from Peet's. As previously announced, GMCR has offered to enter into a merger transaction in which GMCR would acquire all of the outstanding shares of common stock of Diedrich Coffee for $32.00 per share in cash, pursuant to a merger agreement that contains substantially the same terms (other than the amount and form of consideration) as the merger agreement with Peet's. On Tuesday, November 24, 2009, GMCR further revised its offer to provide that such merger agreement would include a reverse termination fee of $8,517,000 that would be payable to Diedrich Coffee if the GMCR <>


Adidas to trial non-profit footwear factory - Following the footsteps of Otto Group, Adidas is launching a non-profit footwear plant in Bangladesh next yearto offer more jobs to the local community. Adidas spokesman Jan Runau will work with Bangladesh's Nobel prize winner, Muhammad Yunus, the pioneer of micro-loans which help the poor start their own businesses. Without any further details announced, the media suggested the company to trainers priced at just EUR1 for the millions of people around the world who cannot afford to buy shoes. <>


Billabong to Acquire - Billabong International Limited announced it has entered into a conditional agreement to acquire the United States-based online boardsports retailer (Swell). Swell, founded in 1999, is a online retailer in the US boardsport sector and sells many of the industry’s leading brands. Financial details of the purchase remain confidential, but the transaction is not material to the Billabong Group. Paul Naude, President of Billabong USA, said the acquisition would allow Billabong to manage its brands in the growing online market. "We look forward to growing the Swell business and further developing it as a showcase online platform for the US boardsports industry," he said. "The internet plays a significant role in the recreational habits of the youth market so it is important for our Group to ensure we provide them with a premium brand experience when shopping online. <>


Best Buy Europe profits to be at top end of expectations - Carphone Warehouse expects its share of full-year net income from Best Buy Europe to be at the top end of expectations and said it is on track to open big box stores next spring. The retailer also said plans to demerge retail and broadband operations by the end of March 2010 are proceeding to plan and banking facilities have been agreed. Best Buy Europe, a 50/50 joint venture between Carphone and US electricals powerhouse Best Buy, reported sales up 4% to £1.67bn (on a 100% basis) in the six months to September 30, when EBITDA rose 7% to £79m. Like-for-likes rose 3.1% but fell 0.9% on a constant currency basis. Carphone Warehouse chief executive Charles Dunstone said Carphone’s share of earnings from best Buy Europe is likely to come in at the top end of its guidance of between £30m and £40m. <>


Study suggests consumers will spend more than $340 billion online by 2013 - The Forrester estimates cover all types of online spending including retail, travel and ticketing. Total e-commerce spending will grow 11.3 % from $243.7 billion in 2009 to $271.3 billion in 2010, Forrester says, then an additional 8.9% to $295.4 billion in 2011, 7.8% to $318.5 billion in 2012 and 7.3% to $341.8 billion in 2013. Retail makes up the largest piece of the online spending pie with 58.5% projected for 2009 and 62.3% by 2013. Travel comes in second with 35.9% in 2009 dropping to 32.9% by 2013. Ticketing, including event tickets and movie tickets, will account for 2.5% this year and 2.3% by 2013. Other spending will make up 3% in 2009 and 2.3% by 2013, Forrester predicts. Retail will be the fastest-growing spending category over the next four years, growing nearly 50%. <>


European Confidence Improves to Highest in 14 Months - European confidence in the economic outlook improved in November to the highest since the collapse of Lehman Brothers Holdings Inc., suggesting the recovery in the 16-member euro region is gathering strength. An index of executive and consumer sentiment rose for an eighth straight month to 88.8 from 86.1 in October, the European Commission in Brussels said today. That was the highest since September 2008 and above the 88 projected by economists, according to the median of 27 forecasts in a Bloomberg survey. The euro-area economy emerged from its worst recession in over six decades in the third quarter after governments spent billions of euros on stimulus programs and the European Central Bank lowered borrowing costs close to zero. HeidelbergCement AG, Germany’s largest cement maker, said this month that it is “very optimistic” about the outlook. Rising unemployment and a stronger euro are threatening to undermine the recovery.  <>


Japan Prices Fall 2.2%, Reinforcing Deflation Concern - Japan’s consumer prices fell at a near record pace in October, reinforcing the government’s concern that deflation will hamper the economy’s recovery from its worst postwar recession. Prices excluding fresh food slid 2.2 percent from a year earlier after dropping a 2.3 percent in September, the statistics bureau said today in Tokyo. That matched the median estimate of 26 economists surveyed by Bloomberg News. Eight months of falling prices may intensify political pressure on the Bank of Japan to take action to combat deflation, which the government last week singled out as a threat to the world’s second-largest economy. Economic ministers said monetary policy should be used to bolster prices while central bank Governor Masaaki Shirakawa said providing more money alone won’t stimulate demand.  <>


French Consumer Confidence Soars, Beating Economists’ Forecasts - French consumer confidence rose for a fourth month in November, beating economists’ forecasts, as concerns about jobs waned and households showed more willingness to make major purchases. A gauge of household sentiment rose to minus 30 from a revised minus 34 in October, Paris-based national statistics office Insee said in a statement today. Economists expected a reading of minus 35, a Bloomberg News survey showed. The October figure was revised up from minus 35. French consumers, helped by tax cuts, state incentives to buy cars and falling oil prices, have boosted the economy this year, lifting France out of its deepest recession since World War II. Consumer spending rose more than expected in October as purchases of manufactured goods increased by 1.1 percent, Insee said on Nov. 24. <>


Retailers that don’t embrace mobile may lose ground, says study - 63% of shoppers will spend less this holiday season because of concerns about the economy, according to the Yankee Group’s Consumer Survey, and that means consumers will shop differently than in previous years. Retailers can capture more of those scarce holiday dollars by effectively communicating with consumers through their mobile phones, says the research firm in a new report entitled “‘Tis the Season: Mobile Retailing Will Transform 2009 Holiday Shopping.” Yankee Group predicts two dramatic changes in holiday shopping behavior this year. The first is consumers more carefully considering each purchase as they try to maximize every penny they spend, writes study author Christopher Collins, senior analyst. The second change is the emergence of technology-enabled shopping, as increased access to more powerful, and increasingly mobile, consumer technologies empower consumers to make more deliberate and informed purchase decisions anytime and anywhere, he writes.  <>


Bing is getting retail marketers’ attention - Retailers have spent 47% more on search ads on Bing in the first half of the fourth quarter of 2009 than during the same period in 2008, with Bing now accounting for 8% of all U.S. retailer search spend, compared with only 6% in the first half of Q4 2008, new research shows. Compared with Google and Yahoo, Bing also saw better year-over-year click volume growth. Average order values on Bing are 21% higher than across all search engines, which could account for the spend growth, according to a study by SearchIgnite, a paid search optimization company. Despite retailers increased allocation of their paid search dollars to Bing, Google still captures the lion’s share of retail pay per click advertising with 75% of all spend in the first half of the fourth quarter, compared with only 16% on Yahoo and 8% on Bing, the study says. <>


The Macau Metro Monitor.  November 27th, 2009.




According to the Statistics and Census Service (DSEC), Macau’s unemployment rate was 3.5% for the August to October period, down from 3.7% in the preceding three month period.  On a year-over-year basis, unemployment during the period was up 40 bps from 3.1%.  The labor force participation rate declined from 72% to 71.7% during the August to October period.  By industry, the unemployment situation improved in hotels, restaurants and similar activities and wholesale and retail trade. 





Secretary for Economy and Finance Francis Tam Pak Yuen has predicted that next year’s monthly gaming revenues will be US$1 billion.  Tam was presenting the government’s 2010 budget bill to the legislature when he made his "prudent" prediction.  Official statistics show that the gaming sector's gross receipts ranged between a low of 7.9 billion in February and a high of 11.27 billion in August in the first nine months of this year.  Tam also said that next year’s direct gaming tax payments should reach MOP 33.8 billion.  For the first ten months of the year, this figure has been MOP 32.9 billion (72% of the government’s total receipts).  The Secretary also said that Macau's six gaming operators' contributions to urban development, tourism promotion and social security were expected to reach MOP 2 billion next year.





The number of MICE (meetings, incentives, conventions and exhibitions) events held in Macau during the third quarter was 310.  Compared to the second quarter, this was a decrease of 11%, according to the figures released by the Statistics and Census Service (DSEC).  Of these events, 289 were meetings/conferences while 21 were exhibitions, with the total number of participants increasing more than two times from the second quarter to 217,241.  

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Sand Castles

“Even Castles made of sand, fall into the sea, eventually.
-Jimi Hendrix


Dubai World is an investment company that manages and supervises a portfolio of businesses and projects for the Dubai Government across a wide range of industry segments.  Dubai World was established under a decree ratified on 2 March 2006 by Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of UAE and Ruler of Dubai.   He is the majority shareholder in Dubai World and we are about to find out if the Sheikh has any friends.   


The Sheikh has learned the valuable lesson that leverage is BAD.  There is not much you can do to manage risk around this level of arrogance but here we are.  On Wednesday, we went to 67% cash, zero exposure to international equities, and made an intraday call to sell ½ our gold position.


Is this an isolated incident?  The lesson from the financial crisis of 2008 suggests that Dubai World is probably not the only entity that binged on debt to buy overpriced, rapidly depreciating assets.  The doom and gloom scenario that we are waking up to is the reality that the global central bank coordinated rescue program is just another  sand castle that will be washed away in the sea.   


So what happens next?  What if creditors reject proposals to postpone near-term debt obligations until May 2010?  Default or the Dubai government could be forced to hold a fire sale of its international real estate and a series of global financial institutions will experience massive losses again.


Not surprisingly, we are also waking up to the U.S. Dollar Index up as much as 1% - now up for two straight days.  While there were a number of factors that I thought would contribute to the Bombed Out Buck theme, systematic risk was not one of them.   The implication for everything priced in dollars is obvious.


The other fact we are waking up to today is that the Federal Reserve’s free money punch bowl needs to be removed from the party.  How many other Dubai Worlds are binging at the trough of free money?


I for one did not know about the scale of Dubai's debt problems.  So will Dubai's debt problems plunge global equity markets to new lows?  I don’t think so, but uncertainty will prevail for some time.  A potential scenario we could see develop over the next few days is one that includes Dubai’s neighbor, Abu Dhabi, which could easily bail out Dubai.  Abu Dhabi's sovereign wealth fund has $600 billion in assets and can easily support Dubai's debt problems.


Today is definitely not a typical Black Friday; nor was it easy to get the Early Look written today.  What is happening to Dubai World really does not change much for the typical American.  It’s a reminder that leverage is bad, the BUCK is bottoming and that the FED needs to raises interest rates sooner rather than later.   


Howard W. Penney

Managing Director





VXX – iPath S&P500 VolatilityWith the market hitting its YTD high on 11/23 we bought volatility.


XLK – SPDR TechnologyWe bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).


XLU – SPDR UtilitiesWe bought low beta Utilities on discount on 10/20.


GLD – SPDR GoldWe bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.  


CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.


TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.




EWJ – iShares JapanWhile a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.


EWY – iShares South Korea South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.


XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   


EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.


XLY – SPDR Consumer DiscretionaryWe shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30.


SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

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