Now that there’s blood in the water, here come the sharks.  Germany and the UK calling for probe of Goldman Sachs.  What about Goldman’s link to Greece and its financial problems?  BofA/ML, Morgan - are they innocent?  What is to come of financial reform?


Time to pull up a chair and settle in, as we could be here for a while… For those trading GS today, the Hedgeye Risk Management models have levels for GS is: buy TRADE ($131) and sell TRADE ($164)


On the Goldman news the S&P finished down 1.6% on a big spike in volume and volatility.  Volume was up 54% day-over-day and the VIX surged 15.0%.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (17.08) and sell TRADE (19.67). 


The Hedgeye Risk management models have Utilities (XLU) broken on both TRADE and TREND, while Healthcare (XLV) is now broken on TRADE.


Friday’s carnage did not seem excessive and the mayhem seemed orderly.  The uncertainty over what happens next is what's important, especially considering that the financial regulatory reform bill is expected on the Senate floor next week.  The question surrounding the financials centers around what the business model looks like and how to value the cash flow streams.  This issue will plague the financials for the coming months. 


Fridays’ MACRO day points were mixed at best, although the housing data numbers were higher than expected.  March housing starts were 626,000 vs. consensus 610,000, and February was revised to 616,000 from 575,000.  Building permits were 685,000 vs. consensus 625,000, and February was revised to 637,000 from 612,000. Preliminary April University of Michigan Confidence was a bomb at 69.5, well below consensus 75.0. The final reading for March was 73.6. Lastly, the Eurozone March CPI was +1.4% year-over-years vs. consensus +1.5% and prior +0.9%; although an increase, consumer prices are still below the ECB’s target.


Along with Financials (XLF), Industrials (XLI), Materials (XLB), and Energy (XLE) all underperformed on Friday.  All of these sectors came under pressure as the dollar rallies and commodities collapsed. The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (79.61) and sell TRADE (80.88). 


The CRB declined 1.25% on the day.  On Friday, OIL traded down 2.97% and is currently trading at a three week low on the Goldman news.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (79.82) and Sell TRADE (83.43). 


In early trading, gold is trading at a two-week low.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,123) and Sell TRADE (1,150).


Copper fell to a three-week low in as investors shied away from riskier assets including commodities after U.S. regulators sued Goldman Sachs Group Inc. for alleged fraud.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.34) and Sell TRADE (3.59).


In early trading, equity futures are trading below fair value in continued global reaction to Friday's move by the SEC to charge Goldman of civil fraud.  Citi's Q1 earnings before the bell are expected to show a significant improvement year-over-year.  As we look at today’s set up the range for the S&P 500 is 39 points or 1.4% (1,175) downside and 1.8% (1,214) upside. 


On the MACRO calendar today:

  • March Leading Indicators


Howard Penney

Managing Director













The Week Ahead

The Economic Data calendar for the week of the 19th of April through the 23rd of April 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


I hope you had a great weekend!


Since Brinker’s announcement over six months ago about a new direction for Chili’s, we have wanted to see where they are going.  After the recent analyst meeting, and a little digging of our own, the timing is upon us.  There is a real, credible opportunity for management to create value and grow EBIT over the next 1-3 years.


The EAT Conference Call marks the publication of our EAT Black Book. The call is open to qualified institutional clients of Hedgeye's Restaurants vertical -- and for qualified prospective institutional clients.


The call, on Monday April 19th, at 11 a.m. EST, will cover in detail why we think EAT deserves a closer look, with real opportunity to invest free cash flow into an improving core business. Although we anticipate choppy near-term sales at EAT, we think menu changes and margin enhancement initiatives will lead to marked improvement across customer satisfaction and traffic, better execution and higher margins. We see EAT's potential corporate actions, alongside anticipated improved trends, as being beneficial to the stock.


Contact <mailto:> or reply to this email to request access to the conference call, or to request access/pricing on the EAT Black Book.







Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Sober and realistic have typically been good words to describe PENN management commentary. We’d say they apply to CFO Bill Clifford’s recent thoughts on MGM.



PENN CFO recently spoke at a conference and the commentary turned to Las Vegas and MGM.  Bill Clifford’s comments were enlightening and not just because we agree with them.  Here are a few:


Bill Clifford on Las Vegas and CityCenter

“I mean 63% occupancy for a CityCenter is a good thing? I don’t know, I mean. And I’m not trying to be – I mean obviously, it’s a new property and they’re going to grow into it and it’s a property that’s very focused on group business or it’s a property designed significantly for group business. And obviously that market’s got to come back, et cetera, et cetera. But – so I don’t want to downplay the CityCenter results as necessarily bad. I think that’s just a natural process and it’s an enormous facility. I mean it’s – I mean thousands and thousands of rooms that are – that they’ve got to fill. You’ve got Cosmopolitan coming. But all of a sudden the stock market’s basically saying, well, everything is great in Las Vegas. So valuations are up. I saw somebody’s report this morning. It wasn’t this guy. But 14 times is a good number. Okay, 12 times for next year, great. We can’t buy a facility at 14 times and make it work. We just can’t”


Basically, 12x is a ridiculous multiple for Las Vegas assets; unworkable from a buyout perspective.  The public equity multiple is higher than a private multiple, so what gives?  Investors must really be expecting a v-shaped recovery.  Our view is that there are too many structural issues with the consumer and the economy. The LV of 2005-2007 was housing fueled more than anything else.  We are not getting back to those levels anytime soon.  We think PENN management probably agrees.


Clifford was being fair when it came to CityCenter.  The property will get better but there are still a lot of hurdles including new capacity.  As of now, it is pretty much a disaster.


Bill Clifford on Borgata

“We’ve got 95 million for Perryville, I don’t how much Borgata can I get for [that much]...I don’t think it’s very much either. I mean buying Borgata, I just can’t imagine a situation where given that Boyd has a right for first refusal, I just can’t imagine there’s a price we would pay that Boyd wouldn’t match. So – and I don’t know anything about Boyd’s strategic objectives. But just given that they’re a controlling partner and our views on Atlantic City, the price that we’d offer is just not going to be something that I think Boyd would sit there… I actually very much expect Boyd would be 100% owner of Borgata”


Clifford’s Borgata comments followed a trashing of Atlantic City’s prospects.  The question really is how much would you pay for half of a good asset in a horrible market with no operating control from a forced seller.  The answer is not much which pretty much guarantees BYD will end up with 100% ownership at a very good price.  This is not good for MGM.


Of course, Clifford’s comments must be taken with a grain of salt.  It’s no secret that PENN maintains some dry powder and has expressed an interest in acquiring a Strip property.  From this perspective, management is probably not happy that Las Vegas valuations have gotten so high.  However, I’ve always known this management team to be straight shooters and Clifford’s assessment makes a lot of sense.


Our sense is that people want to own this group. BYI already let the cat out of the bag for the March and June quarters. Numbers would have to be awful for IGT to disappoint.



IGT is reporting its FQ2 this Thursday and we are expecting a miss.  In fact, we’ve been at $0.17 since IGT reported its FQ1.  Despite the Street’s current $0.20 estimate, real expectations are lower and therein lies the problem for any would be shorts.  Anyone who’s been listening to the company’s commentary and extrapolated from BYI’s pre-announcement knows that the near term earnings picture is cloudy at best.  Replacement demand is still sluggish, weak casino results negatively impacted gaming operations, and Alabama units have been offline for almost a whole quarter and will likely to remain so for the next few quarters. 


Not only is IGT probably not a great short into Thursday, it may actually see a relief rally.  Investors seem to want to own the slot guys.  The bad news for the group is short term and well known.  Judging from the muted reaction to a pretty nasty earnings revision by BYI, IGT will probably get another pass.  Forward commentary – beyond the June quarter – may be positive and discussion of a new Server Based Gaming contract with Cosmopolitan (See “IGT BAGS THE ELEPHANT?” from 4/14/10) could actually provide a positive catalyst.


Don’t get us wrong, we still think there are lots of booby traps with this name - primarily as it relates to share loss on the participation side, but that doesn’t mean that the name may not work for a trade – given the exuberance and momentum that is prevalent in this space.


We’re at $0.17 cents vs. the Street at $0.20 and are projecting FY2010 EPS of $0.84 vs. consensus of $0.91 (despite company guidance of $0.77-$0.87). Below are some details behind our estimates.



We are forecasting product revenue of $205.7MM and 52% gross margins

  • $124MM of NA product sales producing a gross profit of $67MM 
    • We are projecting 4.6k of units sales, with 3,250 replacements, 1,250 new units (including recognition of deferred units) at an ASP of $15.3k  
    • We estimate that NA non-box sales of $53MM, but don’t have any ‘edge’ on forecasting this number since it includes systems, conversions kits, used parts and ‘other stuff’ 
  • $82MM of international product sales producing a gross profit of $39.5MM 
    • International units of 6.2k –with 3k of those shipments from lower priced Barcrest units, thereby lowering the sequential ASP to $9.7k since Barcrest machines sell for roughly $4k. 
    • Non-box sales of $22MM- again – no real ‘edge’ here

Gaming operations revenue of $277.5MM with a 61% gross margin

  • We estimate 350 incremental installs, sequentially
  • Yield decline of 7% y-o-y


Other Stuff:

  • SG&A of $93.5MM, including $3.5MM of provision for bad debts – we’re below the company’s guidance of $95-100MM ‘run rate’
  • R&D of $51MM in-line with guidance of “low $50MM range”
  • D&A flat sequentially
  • Net interest expense of $30MM
  • Tax rate of 38%
  • While we don’t model these, we do expect charges related to the closure of IGT’s Japan operations.  The company guided up to $20MM of charges for the 2nd and 3rd quarters of FY2010.  

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