IGT is back supporting its old S2000 platform with new games after a year long hiatus



As we wrote about last year in our post entitled "BYE, BYE CONVERSIONS, HELLO...." (8/26/08), IGT ceased the development and installation of new games on its old platforms, including S2000.  The logic then was that casinos would be forced to buy new slot machines, rather than the cheaper conversions.  IGT would sell more of the new AVP platform games.  It looked to us like a pretty big bet on server based gaming.  We predicted that the company would lose share to BYI and WMS since there were almost 500k old platform IGT games in North America.  As a low cost alternative to a new slot machine, game conversions would've sustained market share for IGT.  Taking the conversion option away from a casino provided a jump ball for market share.  An IGT machine doesn't need to be replaced with an IGT machine.


Well, the strategy failed.  IGT is back in the conversion business.  The company is once again offering games for its S2000 platform.  Since it was the wrong decision to move away from S2000 conversions last year, it's probably the right move to get back in the game.  For this reason and a few others, IGT market share will likely stabilize although there is a possibility for lower box sales than some may be expecting.


2010 promises to be an interesting year for the slot suppliers and this just adds to uncertainty.  Will highly leveraged casino companies increase replacement buying enough to offset the significant drop off in new/expanded market opportunities?  Will server based gaming finally have an impact?  When will new markets begin to contribute?  Will the impressive content shown at G2E stimulate replacement demand?

It's The Savings Rate, Stupid

"Anything that we can do to raise personal savings is very much in the interest of this country.”
-Alan Greenspan
This Greenspan quote remains one of the great hypocrisies of modern day monetary policy. Issue your aging citizenry a rate of return on their hard earned savings of ZERO, and tell them to keep on saving…
If Bill Clinton was today’s President of the United States of America and he was staring at these abysmal political approval ratings he would smack He Who Sees No Bubbles (Bernanke) upside the head and say, ‘It’s the Savings Rate, Stupid.’

If Clinton was Japanese, he’d probably smack Shirakawa upside the head too. This morning we are seeing Japan’s latest Prime Minister, Hatoyama, sign off on Japan’s 4th government stimulus in a row while his approval rating hits a new low of 59% (decelerating ever since his election). People are numb to these TRILLION Yen government handouts that have negative economic multiplier effects. Aging populations want a rate of return on their fixed incomes. It’s The Savings Rate, Stupid.
Having been on the road seeing investors for the last few months, I can assure you that it’s not the American, Canadian, or Japanese people who are stupid. They get it. Governments cut rates to ZERO so that they can finance Piggy Banker bonuses. This is very simple. You steal from your citizenry’s savings on the short end of the curve. Then you issue preferred credit to banks that are too big to fail. Then the bankers lend long at higher rates to the citizenry.
Timmy Geithner will have you believe that he is “saving” America money as bankers pay back TARP. Right. First the bankers pay themselves. Then they pay Timmy back. Then he celebrates political victory by telling us he is paying us back what he gave them to pay themselves with? C’mon Man. We aren’t stupid.
The best measure of the Piggy Banker Spreads being financed by Timmy and He Who Sees No Bubbles has a formal name in finance. It’s called the Yield Spread. That’s the spread between the long and short end of US Treasury yields. The spread between 10-year and 2-year yields is +268 basis points (2.68%) wide this morning. To put that in context, the widest Piggy Banker spread EVER was +276 basis points wide. Ever, by my math, is a long time.
Never mind the piggies. A monkey who gets government financing on these terms and could make money doing this. Borrow short, lend long. Then tell everyone you are amongst the chosen ones of modern day financial wizardry. Or say you are doing God’s work. Or something like that…
This is why people are enraged. This is why the University of Michigan Consumer Confidence reading in America has dropped, sequentially, for 3 consecutive months from 73.5 in September, to 70 in October, to 67 in November. Geithner and Bernanke are paying the Piggy Bankers with your savings. Sorry President Obama. Rahm and the boys are going to be sending you this note after you accept the Nobel Prize this week. It’s the Savings Rate, Stupid.

Fortunately, the long end of bond markets and the prices of global equity and commodity markets are not as politicized as the short end of the American Piggy Banker Curve. Now that the economic data no longer supports the interpretation of the Three Willfully Blind Mice at the Federal Reserve (Bernanke, Kohn, and Dudley), marked-to-market prices are moving in the direction of that data.
People can argue that Bernanke pandered again in his comments yesterday at the Economics Club of Washington. I will be the first to agree with that. But markets are moving away from US policy leadership and pricing in where Bernanke is ultimately going to be in the next 3-months. He’ll be removing his unsustainable and unreasonable policy that remains “exceptional and extended.”
The US Dollar is the leading indicator on this front. After trading up +1.5% week-over-week on the heels of last week’s US employment report, the Bombed Out Buck has finally started to stabilize. As a result, most things that were REFLATED (in terms of devalued dollars) are starting to lose their upward price momentum. Here are some prices that have recently broken what we call the immediate-term TRADE line of support:
1.      Oil’s TRADE line = $78.11/barrel

2.      US Energy (XLE) TRADE line = $57.38

3.      US Financials (XLF) TRADE line = $14.69

4.      Russian stocks (RTSI) TRADE line = 1,411

5.      Middle Eastern debt and stock markets (UAE stocks down another -6% this morning and down -31% since mid-October)

6.      Vietnam, Greece, Japan, Korea, etc (Vietnam down -2% overnight and down -22% since mid-October; Greece down -21%)

I know. I know. Poor Timmy doesn’t do global macro, so how can we expect him to see anything other than a failed hedgie, turned CEO of Citi, Vikram Pandit chirping at him about getting him some more political TARP points? Unfortunately, the answer here is we can’t get the willfully blind to see. They never have.

Yesterday, on weakness, I bought back some of the Gold that I sold last Wednesday. I have a 7% position in the Asset Allocation Model in Gold again. With the US market down for 2 of the last 3 days, I have invested 6% of the Cash position in the model, taking Cash down to 61% from 67%. My immediate term support and resistance lines for the SP500 are currently 1088 and 1117, respectively.
Best of luck out there today,




XLK – SPDR Technology We 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).

GLD – SPDR Gold We 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 Japan While 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.

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 -0.3%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30 and 12/2.

– 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.


The Macau Metro Monitor.  December 8th, 2009



National flag carrier Air China has injected MOP19.84 million (US$19.84 million) into the share capital of Air Macau.  The investment brings Air China’s shareholding in the local airline to 80.86% from 51%.  Air Macau’s board approved and ratified the capital injection last Friday.  The global financial crisis and liberalized access to flights across the Taiwan Strait are said to be contributing to the carrier's lack of profitability.  However Air China remains confident in Macau's future, citing "fast economic growth" in the region and potential synergies between Macau International and Hong Kong International that will arise if the bridges connecting the two special administrative regions via Zhuhai are completed.


Following the completion of the capital injection, the shareholding structure of Air Macau – excluding its non-voting redeemable preference shares – is composed of two million ordinary shares, of which 80.86% is now owned by Air China, just 0.1% by SEAP, 14% by STDM, and the remainder by the government and other shareholders.

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US STRATEGY – Revisiting the “Bottomed Out” BUCK

On Monday there was no follow thru from the big move in the dollar on Friday.  Yesterday, the dollar index was down 0.2% to close at 75.76.  If the dollar index closes up today it will have been up three of the last five days.  Yesterday I started to make the case that if the dollar were a “stock” as an equity analyst I can make the case that the “fundamentals” are bullish.     Taken together - the labor market, the rising savings rate, the trade picture, corporate profitability and the Fed’s free money policy – do not support a weak dollar.       


Yesterday, the S&P 500 declined 0.2% and made a second outside reversal in as many days.  While there was not any BIG theme to drive yesterday’s performance, the S&P continues to show signs of breaking down.  Yesterday, comments from Fed Chairman Bernanke that the US economy faces "formidable headwinds" was a non event for the market.  The MACRO calendar is quiet today except for the ABC consumer confidence number due out after the market close today.   


Despite the Fed’s cautious comments, parts of the RECOVERY trade were alive and well yesterday.  The three best performing sectors were Utilities (XLU), Consumer Discretionary (XLY) and Materials (XLB).  Rising 6.8%, the XLU has been the best performing sector over the past week.  The XLY was the second best performing sector yesterday and for the past week, benefiting from the better labor markets.  Driving the XLB higher was OI (4.1%), DOW (2.0%) and BLL (1.8%). 


Driving the S&P lower was the Financials (XLF).  Within the XLF the REITs and regional banks were the biggest drag on performance; names such as KEY (4.4%), BBT (2.8%) and PNC (2.7%) were among the worst performers.  While there did not seem to be any specific news, it should be noted that the FDIC announced six more bank failures on Friday, bringing the year-to-date total to 130 from 25 in 2008 and 3 in 2007.


Helping to put some incremental pressure on the S&P 500 was the 4% move in the VIX.  In total seven of the nine sectors outperformed the S&P 500, but only three showed positive performance on the day.   The two sectors that did not outperform were the Industrials (XLI) and the Financials (XLF).  Energy (XLE), the other sector broken on TREND, was down 0.2% in line with the S&P 500.      


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 35 points or 1.5% upside and 1.5% downside.  At the time of writing the major market futures are trading slightly lower.


Crude oil is trading lower as the dollar is stronger in early trading today.  The Research Edge Quant models have the following levels for OIL – buy Trade (74.30) and Sell Trade (78.11).


Gold is basically trading unchanged on the day, but the trends are still bullish.    The Research Edge Quant models have the following levels for GOLD – buy Trade (1,150) and Sell Trade (1,186).


Copper is higher for the first time in four days on the back of the Fed’s comments.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.09) and Sell Trade (3.26). 


Howard Penney

Managing Director


US STRATEGY – Revisiting the “Bottomed Out” BUCK - sp1


US STRATEGY – Revisiting the “Bottomed Out” BUCK - usdx2


US STRATEGY – Revisiting the “Bottomed Out” BUCK - vix3


US STRATEGY – Revisiting the “Bottomed Out” BUCK - oil4


US STRATEGY – Revisiting the “Bottomed Out” BUCK - gold5


US STRATEGY – Revisiting the “Bottomed Out” BUCK - copper6


Alternative to cap-and-trade deserves a...

SKX: Wellness/Toning Category Has Legs

As we head into the key holiday selling season in the absence of real broad-based consumer-driven demand, it’s important to note the product trends that are helping to drive relative outperformance. One such trend has been women’s fashion boots as highlighted in our 11/09 post “The Boot Heat Map.” The other (though arguably less publicized) trend has been in what has been dubbed the “wellness/toning” category, comprised of product’s including SKX’s Shape-Ups and Reebok’s Easy Tones. With retailers beginning to recognize the contribution of wellness product in 3Q, it will play in increasingly more important role in 4Q performance and beyond for retailers and SKX alike.


Strong demand for wellness shoes was one of the keys to our view ahead of SKX’s 3Q results. Since then, the Street has increased FY10 estimates by 50% to $1.50. While we remain meaningfully above current expectations by nearly 25% at $1.85, we are mindful that the gap has narrowed considerably over the last month as expectations have clearly risen. So the question remains – is the Shape-Ups trend more Crocs-like, or Ugg-like in duration?


I’m leaning towards the latter given the view that “function” is less fickle than fashion. While SKX is busy at work trying to introduce some level of creativity into the category in the form of different uppers (boots, sandals, leather, shearling, etc..) for next year, the wellness benefits are not to be overlooked.  Whether you buy into the true technical benefits of the curved sole which is said to promote better posture, toned legs, and ease joint pressure the reality is that the perceived benefits are driving demand and product awareness.  The category is expected to see a substantial influx of marketing dollars being spent on the category across all brands and SKX is well positioned with its current market leading position.  Other brands in the category include the original MBT and Reebok.


In an effort to size the opportunity for wellness I incorporated DSW’s recent commentary that this category could represent 2%-3% of total revenues. Assuming that same share of revenue for other footwear retailers like SCVL and BWS (Famous Footwear) and then 1%-2% for others including  DKS, TSA, HIBB, FINL, and FL one can derive a $135-$215mm opportunity.  Add to that the sell-through at department stores like Macy’s and Nordstrom’s (SKX is back at JWN for the first time in three years) and you can add an additional 50% in revenues getting arriving at a market size of ~$200-$300mm domestically.  Note, that doesn’t include smaller chains and independent retailers. Given tests thus far, simply doubling the domestic opportunity to account for international market potential is likely to prove conservative. Taking this approach, we get to an estimated ~$400-$600mm global opportunity for wellness shoes.  Given Shape-Ups dominant position in the category, it is evident that not only is this trend at its early stages, but also that it also has legs.


For better perspective on the wellness category, we took at look at the commentary of several footwear retailers from Q3. Like boots, wellness/toning is one of the few product trends that is being called out and is still likely to drive upside in 4Q:


DSW: The position we've taken is we started with our key partner, Sketchers, and everybody has the Shape-ups program and we tested that late in Q2, early in Q3 and saw some very very promising results and positioned ourselves to be in a very strong position for 4Q going into 1Q so that is where we've taken the majority stake in the toning product. We are, however, testing product from other athletic resources in a good, better, best, price point so we'll test everything from a 39 all the way up to $79 price point in addition to the $100 Sketchers shape-up that's out there right now. Some of the early results from these test items have proved very promising…even having said that, I think you're really looking at two, maybe 3% of your total business, the total DSW business being in this toning product.


BWS: We anticipate consumer purchasing patterning will be similar to those that we saw in the third quarter…as such, we ramped up our 4Q receipts of key categories and brands, most notably boots and wellness product, which we think will be the key drivers through holiday and into spring lead by Sketcher Shapeups and Reeboks Easy Tone.


SCVL: We anticipate continued strength in the athletic category and are enthusiastic about the opportunity to have two new significant product lines in the wellness category with Skechers Shape-Ups and Reebok Easy Tone Shoes…to take full advantage of this hot selling category we have taken a strong inventory position in Wellness. Therefore, inventories are up 2.4% on a per door basis with boots and Wellness accounting for all of this increase. With the expected continued strength in boots and Wellness footwear, we currently expect our comparable store sales in Q4 to increase in the range of 3 to 5%.


We had a few stores with Wellness product in August. Actually we delivered that product early in the second quarter, and then as we saw the product selling through early in the second quarter and in August, we bought for additional stores for September. Then we bought for more stores in October and as we move through fourth quarter all stores actually within the next one week, all stores would have. So the inventory built during the quarter and as the inventory built product reap the benefits of the sale.


We have no way of telling whether or not we are bringing in a new customer. We do know, we have a unique   concept. As we get product in and refill of this product has been selling out and we've been filling it back in…so we actually believe that our customers are stepping up for this product, and they've been looking for it.


We saw the trend early, and we tested those shoes in about 25 stores in early spring as soon as we can get them. And when we saw the sell through, very aggressively went after it and as the sell through continues, the more stores we put them in, we got even more aggressive. So I'm feeling very confident that we are well covered in Wellness as we go through spring.


HIBB: We actually have the toning…and we'll see that grow into our next year as well and build upon it. As long as we see good marketing around, supporting the programs now, we'll be able to support it from our end as well.


GCO: We are not involved in the wellness business. We know it's very important for a lot of footwear guys. We don't think it hits our customer. We're really much more of a fashion retailer…It's an older demographic so we've chosen thus far not the play.



After meeting with COO/CFO David Weinberg last week at FFANY, we came away from the meeting with a few key takeaways: business is currently strong, Shape-Ups is still in its infancy, and that the opportunities to exceed earnings estimates in the near-term appear to be high. This sentiment is illustrated (and supported) in the follow charts. Note that while unit volume at retail declined in October according to NPD data, Shape-Ups as a % of SKX revenues continues to grow reflecting typical seasonality (see Figure 1).



Casey Flavin



Figure 1:

SKX: Wellness/Toning Category Has Legs - SKX ShapeUp PercentSales 12 09



Figure 2:

SKX: Wellness/Toning Category Has Legs - SKX ShapeUp Units 12 09



SKX: Wellness/Toning Category Has Legs - SKX S 12 09



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