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The sell side brushed off muted near term outlooks given by the suppliers on their last conference calls and now they are lowering estimates. Stocks are underperforming but do the next few quarters really matter?



Three issues for Q1 CY2010, the last of which should’ve been expected given the last conference call commentary:

  1. Alabama
  2. Weather – impacts gaming operations
  3. Replacements suck


So Goldman Sachs did a survey that indicated casinos were not accelerating replacement buying as much as he thought.  He lowered estimates on the “Big Three” and cut his sector rating and the rating on BYI and IGT.  Other analysts followed suit and cut estimates. 


The question we have is what took you so long?  It’s not like these companies were bullish about the near term.  Each management team made cautious comments about the March quarter:  WMS actually gave revenue guidance below the Street but analysts maintained their estimates and IGT was challenged for sandbagging but it's now apparent they were being realistic.  Bullish analysts were apparently blinded by, well, their bullishness.


Here are some thoughts about each of the Big Three:



  • We remain at $0.17 for FQ3 (March) while the Street has come down to $0.20.
  • IGT probably has more exposure to both the Alabama issue and the bad weather.  IGT’s market share in gaming operations is much higher than it is for slot sales so weaker play in the regional markets hurts them more than WMS or BYI.
  • Stock has been pretty weak lately but we still think IGT has company specific issues to contend with.  While their new products are solid, market share remains under pressure (FQ1 was awful) and the company remains over reliant on the “Wheel” games.



  • We are at $0.61, below the Street at $0.63.
  • Like IGT, BYI will take a hit from Alabama and to a lesser extent, the bad weather.
  • BYI is less reliant on slot sales so they may have a little more cushion.  However, software sales are very difficult to project.
  • At less than 15x our FY2011 (essentially forward 12 months) estimate of $2.68 the stock is beginning to look attractive.  Without a near-term catalyst, however, BYI could continue to trade off.
  • The real story is new markets, the potential for even more new markets (thanks to out of control state governments), and a bounce off trough replacement demand.  We think we are at the bottom of a five year bull cycle in earnings and stocks.



  • We remain at $0.47 vs. the Street consensus of $0.49.  We have a higher level of conviction in the March quarter for WMS than the other suppliers.
  • Alabama will not affect WMS.
  • WMS has the highest play per participation game of any of the three suppliers so they should be less impacted by the bad weather.
  • We expect WMS replacements in FQ3 to exceed that of FQ2.
  • WMS at $38.36 trades at only 16x our FY2011 estimate.  The stock could get cheaper as earnings expectations continue to fall.  Again, we think earnings will be fine.
  • The real story is new markets, the potential for even more new markets (thanks to out of control state governments), and a bounce off trough replacement demand.  We think we are at the bottom of a five year bull cycle in earnings and stocks.


Recent surprises in weaker home sales, new jobless claims (not including last week’s number) and declining consumer confidence have not been of any consequence to restaurant stock performance.  Along with retail sales in general, restaurant sales trends (primarily casual dining) continue to make sequential improvement.  Sales trends have improved across the board, but growth has been most evident in the chains that are better positioned competitively and appeal to higher end consumers.


The nearly two year decline in consumer credit has been a big contributor to lower customer counts in the casual dining sector.  The Government data posted on Friday suggest that the bulk of the contraction in credit is behind us.  While significant credit expansion is not likely any time in the immediate future, the current numbers are indicating that sales trends could be stabilizing.


A trend worth watching…


RESTAURANTS – CONSUMER CREDIT VS CASUAL DINING - knapp vs consumer credit outstanding Jan


RESTAURANTS – CONSUMER CREDIT VS CASUAL DINING - knapp vs consumer credit outstanding 2 yr Jan



Howard Penney

Managing Director

Risk Management Time: SP500 Levels, Refreshed...

Hope is healthy (I do it every time I look into my baby girl’s eyes); but hope is not an investment process.


My macro model, which re-prices risk every 90 minutes, says anything north of 1138 in the SP500 is immediate term overbought (dotted red line in the chart below). At 1139 (where we just shorted the SP500 in the Virtual Portfolio) the market is up +7.8% from February 8th in as close to a straight line as you’ll see in a monthly data series.


In terms of Mr. Macro’s global interconnectedness, there is a mathematical reality that’s not ironic about February 8th. That was the day that the Athex Index in Greece put in her Freakout YTD low at 1806. Greek stocks are up more than 2x the SP500 (+15.3%) since.


While Selling Fear is easy for the Manic Media to do, getting bullish after markets run-up is even easier. Now is a good time to make sales and take advantage of its immediate term hope. Today’s employment data is explicitly hawkish. That’s why Treasury rates are busting a move higher (bonds lower). Bernanke can only pretend that he doesn’t see real-time economic data for so much longer before he has to remove the “extended and exceptional” language from the Fed’s currently compromised policy of zero percent American money.


In terms of lines of support, I think we could see a fast correction to 1113. You want to be buying/covering down there as the intermediate term TREND line of support (1106) that’s underpinning this market’s strength is real.


Have a nice weekend,



Keith R. McCullough
Chief Executive Officer


Risk Management Time: SP500 Levels, Refreshed...  - s p


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The Week Ahead

The Economic Data calendar for the week of the 8th of March through the 12th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2




German Factory Orders Surprise to Upside

Position: Short Spain via the etf EWP


German Factory Orders rocketed to the upside on an annual basis by 19.6% in January, yet it’s worth noting that the comparison is on -36.8% in January ’09, which marked the bottom in manufacturing orders (see chart below). On a 2-year monthly average the data shows an accelerating improvement from December (-10.45%) to January (-8.6%) versus November (-11.05%). The improving trend in 2009 was aided by government stimulus measures, including the country’s successful cash-for-clunkers program issued from January to September.  Comparisons will get more difficult as we move to the back half of the year.


Certainly on an annual compare the rise is less impressive and is much more in line with our longer term thesis that Germany’s heavy industrial and manufacturing exporting base will benefit from increased global demand this year, albeit as a slow churn higher.


The sequential move in orders of +4.3% versus a contraction of 1.6% in December is significant. Export orders rose 1.9% on the previous month with a 6% increase in demand coming from the Eurozone countries. Domestically, orders rose 7.1%.  


At times over the last two years we’ve had a long position in Germany via the etf EWG in our model portfolio. Currently our only position in Europe is short Spain (for a TRADE) to take advantage of a price action move to the upside in the etf EWP; however, our continued bearish outlook on the country due to such negative catalysts as massive unemployment, public and private debt leverage, and a failed housing market, remains.


The German economy is one that we continue to like because of its sober fiscal policy. Chancellor Merkel reaffirmed her conservative stance versus the debt issues associated with Greece today in a meeting with Greek PM George Papandreou.  Although we wouldn’t rule out intermediate-term assistance from the European community to fund Greece’s debt problems, the immediate term “clean-up-your-own-house” stance from Merkel sets a positive tone for the region.


The three times oversubscribed 5 Billion EUR Greek bond issuance yesterday—albeit with at a heavy premium rate of 6.25%--is an initial positive step, but we believe significant risks still remain, which we’ll continue to monitor real-time.  


Matthew Hedrick



German Factory Orders Surprise to Upside - GER


R3: Information Overload


March 5, 2010


When same-store sales day and earnings collide, there is always the risk of information overload. Within all the data points, forecasts, and ultimately opinions, there are a handful of items that caught our eye.





When same-store sales day and earnings collide, there is always the risk of information overload. Within all the data points, forecasts, and opinions, there are a handful of items that caught our eye: 

  • Target noted that traffic continues to increase to its stores, but that the overall result was driven by a balance of transaction growth and average transaction size. Consumables also remain a leading category, with sales increasing in the mid to high single digit range. 
  • JC Penney highlighted that all major categories showed positive same store sales for the month, with one exception. Home continues to lag and remains in negative territory. Interestingly, Kohl’s noted that home was one if its best categories. While this is not the first month we’ve seen such a divergence, there is clearly a market share shift underway. 
  • Urban Outfitters announced its latest concept, set for launch on Valentine’s Day 2011. The company will create a wedding lifestyle concept, selling bridesmaid and special occasion dresses, shoes, bags, accessories, and intimate apparel. The first prototype is slated to open by year-end. The concept rounds out management’s goal of having six concepts in its portfolio as keys to growth over the next 10 years. 
  • Ross Stores noted exceptional growth in its shoes and home categories during February, with both increasing by over 20% on a same store sales basis. Both categories have been performing well for a while now, but not to this extent. Dresses were no longer mentioned as a top performer. 
  • Nordstrom noted that traffic continues to be the driving force behind its accelerating comp trend. For the sixth month in a row traffic has increased while average ticket remains negative. 
  • Genesco noted that it is seeing early signs of a shift to “brown shoes” for its customers at the same time their athletic business is underperforming. We suspect this has something to do with the recent pick up in athletic elsewhere in the mall. With Journey’s narrow athletic assortment, they are clearly having a tougher time competing. 
  • Aeropostale noted solid initial selling of its Spring merchandise. However, a mix shift towards lower priced, lighter weight Spring apparel put pressure on average unit retails (down low single digits). Units per transaction increased by mid single digits and overall transactions increased by low single digits. 
  • Abercrombie noted that its strongest week of February occurred while all brands were executing their Winter clearance and sale events. This took place over week one.


Eric Levine





Amazon launches an invitation-only WebStore - Amazon.com Inc.’s Amazon Services division has launched the new Amazon WebStore that enables online sellers to build and operate an e-commerce business and integrates with other Amazon services including Selling on Amazon and Fulfillment by Amazon. Amazon is offering a limited number of invitations to the new program, which is in a beta version, each day. Sellers can request an invitation at http://webstore.amazon.com. The new product is Amazon’s revamp of its current WebStore by Amazon that enables businesses to create their own privately branded e-commerce sites using Amazon technology. With WebStore by Amazon, businesses can choose from a variety of web site layout options and customize their sites with their own photos and branding. Retailers using the existing WebStore by Amazon service pay a commission of 7% for each product purchased through their site and a $59.95 monthly fee, which includes the cost of credit card processing and fraud detection services. Amazon did not disclose the fees for the new Amazon WebStore, but says the pricing will vary with the size of a business. <internetretailer.com>


Coach to Expand Fragrance Reach - Coach is expanding its fragrance distribution. The accessories giant, which launched its first eponymous fragrance in March 2007 in its own doors only, is rolling out that scent to about 1,400 department and specialty store doors in North America, including selected Bloomingdale’s, Nordstrom, Macy’s, Dillard’s, Lord & Taylor, Von Maur, Bon-Ton, Belk and Sephora units in the U.S. The effort begins this month. The launch will be supported by an integrated marketing and communications campaign, including widespread national print and web efforts, noted Veronique Gabai-Pinsky, global brand president, Aramis & Designer Fragrances, BeautyBank and IdeaBank at the Estée Lauder Cos, Coach’s fragrance licensee. “We’ve handled the brand very carefully and steadily since its launch, allowing it to incubate at its own pace,” noted Gabai-Pinsky. “We’ve always been in this business for the long haul, and it’s time to expand its reach.” This fall, the brand will enter global markets, beginning with Asia, and will also enter travel retail doors. <wwd.com>


Cabela's Appoints Supply Chain Officer - Cabela's Inc. hired Doug Means as its executive vice president and chief supply chain officer. Previously, Means served as Executive Vice President of Production for Better Sportswear at Jones Apparel Group, which he joined in 1992. During his 18 years at Jones Apparel, Means held a variety of positions within supply chain operations focused on day-to-day management as well as process, speed and cost improvement. His responsibilities included managing the industrial engineering, distribution, logistics, social compliance, customs, production, sourcing and product development areas. Prior to joining Jones Apparel, Means was a consultant for Kurt Salmon Associates in Atlanta, Ga., where he assisted clients in improving operations, developing strategic distribution and logistics plans, and building logistics optimization models.  <sportsonesource.com>


Winter Weather Cut into February Apparel Sales - After January's increase of 0.6%, U.S. apparel sales fell 1.8% in February 2010 on a year-over-year basis as severe winter weather depressed sales in many areas of the country, according to MasterCard Advisors' SpendingPulse. While the decline was driven by women's apparel, which was down 1.6% against last year, both men's apparel and footwear were up 5.7% and 2.2% respectively, over February 2009. While severe snowstorms hurt apparel sales in the Mid-Atlantic, Northeast and North Central regions, most U.S. retail sectors showed year-over-year growth in February, following a largely positive January, according to Michael McNamara, VP, research and analysis for SpendingPulse. He said pricing continues to remain strong. "Retailers seem not to have needed extreme discounting to drive traffic to their stores," McNamara said. "This may have been due to a much tighter inventory situation than what we saw last year." Particularly strong results were posted in eCommerce, with 16.7% year-over-year growth. McNamara noted that while the channel may have benefited from the severe weather, it was the seventh straight month of double-digit growth. "This sales channel continues to outperform traditional brick-and-mortar stores as consumers shift more of their purchasing online." According to the SpendingPulse Price Index, which tracks average ticket size and can be impacted by discounting or change in product mix, the average price of an online transaction dropped 3.7% compared to last year. McNamara explained that this was due to consumers' increasing willingness to make even small purchases online. Continuing on a positive note, Luxury ex-jewelry sales were up 15.2% over February of 2009, following a gain in December of 5.5% and again in January of 8.1%. <sportsonesource.com>


Video messages in e-mails are set for a boost in 2010, study says - Consumers this year will see a jump in e-mail marketing messages that contain videos showing content such as customer testimonials and product demonstrations, e-marketing firm Implix says in a new report. At least 80% of the approximately 200 small- and medium-sized e-mail marketers surveyed by Implix between Jan. 27 and Feb. 5 said they plan to use video e-mails this year, up from about 16% that said they used videos in 2009. Implix operates the GetResponse platform for e-mail marketing campaigns. 46% of survey respondents said videos within e-mail marketing messages significantly increase conversion rates, while another 20% said videos moderately increase conversion rates. 5% doubted videos influence conversation rates, while 29% said they were unsure. Videos that offer training courses or product demonstrations were considered the most effective types of videos by 51% of respondents. Product promotions, customer testimonials and brand image messages were considered less effective. <internetretailer.com>

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.