Initial claims fell 8k to 470k last week, down from 478k the prior week (revised down 4k). On a rolling 4-week basis, average initial claims rose 9k to 457k from 448k and are up 15k in the last two weeks. While the rolling number remains within the channel of improvement shown in the following chart, it is moving to the upper band of that channel quickly. Given the historical tendency for this seasonally adjusted data to trend up in mid-to-late January we will give it the benefit of the doubt for now that the longer-term trend lower remains in place, but we think the next month's worth of data will be very important. it's definitely time to pay attention.


Joshua Steiner, CFA





The Macau Metro Monitor. January 28th, 2010



LVS announced that it will start construction on sites 5 & 6 right after Chinese New Year, on Feb 14th. According to Tribuna de Macau, Steve Jacobs, LVS's Macau president, said they are now looking to recruit around 10,000 workers to get lots 5 and 6 going again after over a one year halt. The project will be built in three phases with Phase I expected to open June 2011 with  three luxury hotels with around 3,700 rooms and casino facilities with 670 gaming tables and 2,200 slot machines.


BYI met consensus EPS but top line was soft.  We thought they would’ve done better.   BYI did maintain previous guidance, albeit a very wide range, but seemed more cautious on the current Q.



IGT and WMS beat but the quarters were of low quality.  Both provided somewhat disappointing guidance – IGT didn’t raise despite the beat and WMS provided FQ3 (March) guidance below Street consensus.  BYI was a little different because the company only met consensus but missed our expectations.   However, their quarter was also low quality.  Revenues missed but an very high gross margin on product sales and a low tax rate allowed them to make the EPS number. 


BYI reiterated its FY2010 EPS guidance range of $2.30-2.55, although given our view on new/expanded casino openings over the next two quarters, we’re guessing the Street may have to come down off of its $2.44 estimate.  The Street’s $0.65 estimate for the March quarter may be even more at risk – BYI hinted as much during their call.


BYI is down 7% since IGT reported last Thursday night so some of the disappointment may be in the stock already.  Even though the important part of the long-term thesis remains new markets and normalizing replacement demand – both very much intact – we’d prefer to see more conservative near-term estimates for BYI and the rest of the sector.


So what did we learn from the release?


Game sales

  • Similar to WMS (but not IGT) replacements orders were better than expected while new and expansion units were disappointing (we will have another note out shortly elaborating on this issue)
  • Calendar Q4 slot orders for the industry may have been a “catch up” quarter given it’s the last quarter of the fiscal year for most operators and orders from the rest of 2009 were paltry
  • Unlike IGT and WMS, BYI’s international shipments where surprisingly good.  We suspect that a couple hundred shipments to Mexico helped
  • ASP’s were disappointing, but this could be because the units shipped to Mexico are at a lower ASP
  • Margins were very impressive due to reductions in material costs and mix shift towards more video shipments which have slightly higher margins than mechanical reel machines. Conversions kits, while down sequentially where also likely a higher % of the "other mix"


Game Operations

  • Placements were below expectations although we agree with management that the timing of new game introductions hurt them this quarter
  • Win-per-unit was also disappointing.  We thought that blaming it on the weather was kind of weak… Robert you’re better than that



  • No real revelations on systems
  • SG&A was a little higher than our estimate, but the Dec Q did include $3MM of G2E related expenses
  •  R&D expenses, similar to IGT and WMS, were below expectations
  • BYI’s tax rate was lower, although that’s mostly due to the strong performance of lower tax international jurisdictions(which represented a higher share of profits) as well as higher shipments to Nevada, which also has a lower tax rate.  If international shipments stay strong the lower tax rate could continue in 2H FY2010

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When One Door Closes

“When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.”   
-Alexander Graham Bell
I expected much more from yesterday.  It’s not that I like to revel in the agony of others, I just like good theatre. Yesterday the “Super Bowl of Politics” was one of those days where you knew what was going to happen and it happened as planned, but I was hoping for some fireworks.  
With the market up 62% from the March 2009 low, the door on the financial crisis is closed.  Yet politicians and policy makers are looking at the closed door.  
Act I - Tim Geithner continued to use his fear-factor strategy to defend his actions and employed the age old theory of “If the facts don't fit the theory, change the facts.”  The real tell on how he fared during the day was when the camera focused on him during the State of the Union - he looked beaten.    The Treasury secretary did what he needed to do to ensure job security once he leaves Washington.   
Caroline Baum of Bloomberg news made a great point that firing Geithner might be good for both President Obama and  the Treasury secretary, stating, “Obama would be seen as an ally of the people and Geithner would be free to claim his just reward:  that plum offer from Goldman Sachs.  The circle would be squared.  Obama would have his man on the inside.”
Act II - We then moved to the "exceptionally low" for an "extended period" stage.  I’m YOUTUBING myself on this one.  I have written many times that the Fed was going to change the language in its policy statement in January.  The Fed did not, and I was wrong.  
Can you learn from your mistakes?  Yes, you can. Ben Bernanke is just another Washington insider that is fighting for his job; of course he is not going to change the language in the policy statement if his job is on the line.
It gets better.  Two days before the government reports 4Q09 GDP, the Federal Reserve declared that the U.S. economy is in “recovery” mode.  Yet, it maintains a monetary policy that was put in place during the “great recession.”  As of tomorrow, by definition, the recession is over as the U.S. economy will have posted two straight quarters of GDP growth.  
Most people believe that the initial estimate of GDP is the most heavily rigged and politicized data point put out by the government. Knowing this, do you think tomorrow’s GDP number is going to be better or worse than consensus?  Yes, the Fed is trying to tell us something.  
What are the markets doing with this information?  As of 5 am, stocks around the world are rallying and the futures in the U.S. are indicated higher.  The VIX is down 5% and the Dollar index is flat on the day.  Another door has opened, but Ben is looking at the closed one!
Act III - The State of the Union was a non-event, too.  I love America and last night was a very important part of our Democracy.  I wanted to listen to the President, who is known for being a great orator, deliver a great speech.  The likelihood of the speech including something shocking was low, but that’s ok.  More importantly, I could care less if the RIGHT or LEFT approves of what he was saying - we know what each stands for.  
Is it just me or was it nauseating to see Nancy Pelosi and Joe Biden shaking their heads and jumping up and down every five minutes. Personally, I think his speech would have been far more effective if all of the partisan politicians would just shut up and let the President speak.  Now that would be good theatre!
Yesterday, the Financials (XLF) was the best performing sector by a moon shot, outperforming the S&P 500 by 190 bps.  The outperformance was even more telling knowing that the President has the bankers in his sights and said so last night.
I’m going to give the President the benefit of the doubt that he is looking through the door that has opened for him.  We will know for sure if and when he begins cleaning house and gets rid of some of the dead wood lying around.
Function in disaster; finish in style
Howard Penney
Managing Director


XLV – SPDR Healthcare
— We bought back our bullish intermediate term view on Healthcare on 1/22/10.
EWC – iShares Canada — We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF, we bought Canada on 1/15/10 and 1/21/10.
XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.
UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).
EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.


GLD – SPDR Gold Shares
We re-shorted Gold on a bounce on 1/25/10. We remain bullish on the US Dollar and bearish on the intermediate term TREND for the gold price as a result.

IEF – iShares 7-10 Year Treasury
One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.
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.


Most people believe that the initial estimate of GDP is the most heavily rigged and politicized data point put out by the government.  Knowing this do you think tomorrow’s GDP number is going to be better or worse than consensus?  Yes, the FED is trying to tell us something. 


A day before the government reports 4Q09 GDP, the Federal Reserve declared that the U.S. economy is in “recovery” mode.  Yet it maintains a monetary policy that was put in place during the “great recession.”  As of tomorrow, by definition the recession is over as the US economy will have posted two straight quarters of GDP growth. 


What are the markets doing with this information?  As of 5am, stocks around the world are rallying the futures in the U.S. are indicated higher.  The VIX is down 5% and the Dollar index is flat on the day. 


Yesterday, the S&P 500 US equities finished higher on accelerating volume.  Early in the day a negative tone was set by tightening concerns that drove a fourth consecutive downturn in China stocks.  Last night China was up slightly, while the rest of Asia rebounded nicely.


On the MACRO front yesterday, new home sales fell 7.6% month-over-month to a seasonally adjusted annualized pace of 342,000, compared with consensus estimate of 366,000.  The median home price in December declined by 3.6% year-over-year, while the months' supply of new homes for sale rose to 8.1 from 7.6, but remained below the 12.4 months seen in early 2009. 


Yesterday, news flow also helped fuel a continued bounce in the dollar, which was up 0.31% yesterday and 1.04% year-to-date.  The VIX has seen a three day correction declining 5.74% yesterday, following a nearly 3.38% decline Tuesday.   


After being the worst performing sector on Tuesday, the Financials (XLF) outperformed the S&P 500 by 190bps on Wednesday.  Yesterday’s outperformance was driven by the BKX, which was up 2.9%.  Within the banking sector the regional names were the best performers. 


The RECOVERY trade got hammered again for the second day in a row.  Yesterday the Materials sector was the worst performing sector, declining 0.98%.  No surprise that the tightening concerns out of China, sovereign credit concerns and the accompanying bounce in the dollar are putting pressure on the RECOVERY trade. 


The CRB declined 1.8% yesterday and now declined 5 out of the last 6 days.  Since the beginning of last week the CRB has declined 5%.


Howard Penney

Managing Director


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