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A head of “the super bowl of politics” today, all of the major indexes closed in the red yesterday.  The “super bowls of politics” is our term for today’s testimony of Tim Geithner, the Federal Reserve meeting and capping the day with President Obama’s State of the Union address. 


The Washington madness is keeping “government sponsored volatility” at elevated levels.  More importantly, the RECOVERY trade continues to feel the pressure on continued concerns about tighter credit conditions in China, as well as renewed sovereign concerns stemming from the S&P's move to cut its outlook on Japan's long-term sovereign debt rating. 


This dynamic helped fuel a bounce in the dollar, which was up 0.31% yesterday and 0.73% year-to-date.  The Hedgeye Risk Management models have the following levels for DXY – buy Trade (77.70) and Sell Trade (79.09). 


After a 52% move last week the VIX has seen a two day correction, declining 3.38% yesterday, following a nearly 6.96% decline on Monday.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (22.51) and Sell Trade (29.54). 


On the positive side of the ledger, there continues to be a favorable reaction to the better-than-expected earnings out of the Technology, Chemicals, Packaging, and Insurance and selected Energy names.  The MACRO calendar provided some support as consumer confidence continues to show some improvement and the Case/Shiller home-price index increased for a sixth consecutive month in November.


The worst performing sector yesterday was the Financials (XLF).  The banks were a standout underperformer with the BKX down 2.2% yesterday.  Financial regulatory reform is forcing the street to re-value the franchises of the nation’s largest financial institutions.  The regional names outperformed for the better part of the day before decline into the close.


While Technology closed down 0.3% it slightly outperformed the S&P 500.  The outperformance can be attributed to better-than-expected earnings from some high profile names like AAPL.  The Semis also outperformed on a relative basis with the SOX down 0.2% on the day. 


The RECOVERY trade got hammered yesterday, as Energy (XLE) and Materials (XLB) rounded out the three worst performing sectors after Financials (XLF).  The weakness in Asia and the bounce in the dollar are putting significant pressure on the RECOVERY trade.  However, parts of the Energy sector held up a bit better on the back of some early strength in the coal and oil services, underpinned by the strong earnings trends.  Steel stocks weighed on the materials sector in the wake of a wider-than-expected Q4 loss and disappointing Q1 guidance out of X. 


As we look at today’s set up the range for the S&P 500 narrowed significantly from 45 points to 19 points or 1.3% (1,077) downside and0.36% (1,096) upside.  At the time of writing the major market futures are trading flattish on the day.  


Copper is trading lower in London trading for the second day on speculation that China will curb lending.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (3.28) and Sell Trade (3.32).


In early trading today Gold is little changed but is headed lower on the outlook for a stronger dollar.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,076) and Sell Trade (1,105).


Crude oil is trading little changed ahead of the latest numbers on U.S. inventories.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (73.13) and Sell Trade (76.97).


Howard Penney

Managing Director















The Macau Metro Monitor. January 27th, 2010



The Statistics and Consensus Service reported that Macau's jobless rate was 3.1% for 3-month trailing period ended Dec 2009, down from the 3.3% rate reported for the 3-month period ended in Nov 2009. The underemployment rate was 1.9%. The labor participation rate stood at 71%. In the 4Q09 the unemployment rate of local residents was 3.7% with a labor participation rate of 66%. In 2009 overall unemployment rose 60 basis y-o-y to 3.6%.



It wasn’t a great quarter and FQ3 revenue guidance was disappointing. However, full year rev guidance was raised and long-term positive catalysts remain in place.



WMS revenue and gross profit missed Street projections in both gaming operations and product sales.  Similar to IGT, WMS was able to drive SG&A and R&D lower in the quarter as an offset.  At $0.44 in EPS we were a penny higher than the Street and right on with the actual.  International product sales were disappointing but they tend to be even more volatile than domestic product sales.


Despite slightly missing the Street’s gaming operations revenue and gross profit projections, that segment continues to impress us.  WMS’s WAP games are playing well, make more money for operators and therefore stay on the floor longer and yield higher dividends for WMS.  Depreciation per average installed device continues to decrease as the average life their install base lengthens.  We think that this “virtuous circle” of WMS growing its WAP footprint will continue as its games continue to produce.  If the portal application and Wagenet are a success we can see continued acceleration in gaming operations.


In terms of guidance, we are not surprised that FQ3 revenue guidance fell short of Street expectations.  The Street continues to miscalculate the impact of a dearth of new/expanded casino openings.  However, we are surprised that WMS raised its FY2010 revenue guidance by $5 million even as it lowered Street expectations for the near-term.  Visibility is not great in this sector so the prudent choice may have been to leave guidance unchanged.  However, the long-term positive catalysts for the sector remain in place so a revenue miss for a quarter or two may not matter. 

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In-line FQ2 EPS.  Lower SG&A and R&D offset by lower than expected revenues and gross profit margins. FQ3 revenue guidance below Street but F2010 in-line.



  • On track to achieve continued revenue growth. 
  • Believe that they have the leading ship share in replacement. 
  • Continue to generate growth in their participation business.
  • At quarter end they had less than $10MM of debt and cash of $159MM
  • Anticipate to be slightly above the high end of their operating margin guidance of 21%
  • When BlueBird xD comes out they believe that it will be very well received based on its performance in trails
  • Improved economic environment in Europe should lead to a pick up in replacement units
  • First technical testing with one concessionaire in Italy to share shortly.  Believe that the market will be levered towards lease vs for sale product, given the high upfront capital investment
  • Application for license approval in Australia on the docket now.  Expect to get approved.  Expect shipments to ramp in the June quarter and continue to ramp thereafter.
  • Italy, Australia, Mexico and Helios launch should help them grow their international presence
  • Remainder of their gaming machines at Aria should be connected to SB "shortly."  In coming quarters, Aria will introduce their portal games and Wagenet.
  • Wagenet is currently on trial at several facilities and once approved that should be another engine of growth for them along with their portal technologies.
  • Expect to continue growing their WAP installed based and growth in average daily win per day.  Expect to remain above the high end of their guidance for daily fees on participation
  • ASP on sale games also exceeded the high end of their guidance, with the launch of BlueBird xD and strong performance of BB, ASP should continue to exceed $15,000 per unit for the balance of the year.  ASP will be negatively affected by Helios & Australia launches
  • Expected WMS's new unit volumes to increase in the 3rd quarter due to Mexico, replacements, and Helios
  • For FY2010 expect total units to be a little below the low end of their guidance, but ASP's to be above the high end of high end
  • Product sales gross margins were impacted by lower conversion sales, higher used game sales (lower margin), and increased shipments into new markets
  • Expect R&D to run at 14-15% of total revenues (above original guidance)
  • Continued to use cash to finance game sales
  • Expect future cash flow to be impacted due to investment in new WAP rollouts and Italy launch
  • Opportunistic share repurchases remain an attractive use of cash for WMS
  • Think that over time fewer customers will choose extended term financing, and think they will take advantage of discounts associated with shorter payment terms
  • Inducement charge for converts was $0.4MM


  • Illinios expect to have better than their average NA share, expect shipments to kick in 2Q2011
  • Internet gaming in UK follows on the heels of what they have already been doing with network gaming and online character customization. Won't launch until 2011
  • Their share of WAPs are growing, and think that their products coming out in the 2H2010 will allow their footprint to continue to grow
  • Seen a decrease in sale financing recently as operator balance sheets improve
  • Launch of Helios, a value priced platform, so that will depress ASP's a little but GM is similar to other products
  • Australia is through a distributor, hence the margins and ASPs will be a little lower than normal, but neither Helios nor Australia will have an impact on guidance
  • Italy will be part of their game ops business? Will be recorded in other gaming operations revenues so it won't impact their average daily fee.  Expect shipping in June 2010 Q but likely no revenue recognition until Sept Q since there's still testing to do.  Australia will happen before Italy
  • Think that their replacement share is in the low 30s
  • Game operations had some unfavorable jackpot expenses and lower high margin royalties
  • Product sales margins in 2H2010? Should be in the mid 50's range as volume increases.
  • Wizard of Oz continues to hold up very well, but have seen a slight degradation in the quarter - nothing alarming and Ruby Slippers should help
  • How is their Class II expansion going?
    • Shipped a few hundred units to Washington and some to Alabama and Oklahoma. Going slower than they expected but should ramp in 2H2010 (have some nice orders)
    • Right now they are predominantly selling the Class II games
  • Lord of the Rings, timing / strategy?
    • Coming out June/July time frame. Have great expectations, focus group testing and show responses have been great.  Think it can be another Wizard of Oz
  • Big negative working capital was in the Sept quarter, due to total receiveables increasing (financing) and increase in inventories due to the advance purchase of the computer chips, also some drag from royalty agreements. Hopeful that most of the WC drag is behind them
  • Where is the sequential increase in revenues in 3Q2010 coming from? Combination of better product sales and gaming operations. Highly unlikely that the gaming install base will decrease by YE
  • Depreciation in games operations continues to decrease?
    • games are staying on the floor longer


I can’t seem to shake the bearish mentality!


The past three months have been kind to most restaurant stocks, especially casual dining.  Clearly, I have not been bullish enough, but I keep seeing macro data points that leave me concerned that any sequential improvement in restaurant demand has been driven by easy comparisons rather than any real improvement in underlying demand.  The current unemployment picture has clearly hurt the QSR names, but spared casual dining from seeing trends get any worse on a 1-year basis. 


The charts below, however, keep me up at night.  The consumer is still retrenching.  I know everybody needs to eat, but you can eat three meals a day at MCD for less than $12.  Knowing that more than 60% of casual dining meals (probably higher) are put on a credit card, the current trends in revolving credit don’t support a sustained recovery in casual dining. 



RESTAURANTS - TRYING TO SEE SOME GOOD - knapp vs consumer credit outstanding


RESTAURANTS - TRYING TO SEE SOME GOOD - knapp vs consumer credit outstanding 2 yr


Howard Penney

Managing Director

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