Fiat Guns

“You can get further with a kind word and a gun than you can with just a kind word."

Capone - The Untouchables


Yesterday’s intraday rally in the US stock market was decorated with rumors of Spanish politicians prancing around talking about successful “stress tests” and Ben Bernanke pulling out the “quantitative easing” gun. Thank God for the modern day Triumvirate of Fiat Fools (BOJ, ECB, and the Fed). Without professional politicians deciding our fate, what hope would we western capitalists turned socialist turtles have left?


Hope, of course, is not an investment process; neither is hanging your hat on economies that allegedly only work with financial aid’s heavy hand of Big Keynesian intervention. Fear is the cement that provides the Fiat Triumvirate its political platform - and their podium is shaking.


I couldn’t make this up if I tried, but one of the top headlines from Bloomberg this morning takes the fear mongering by Fiat Fools running global monetary policy to new heights:


“Bank of Italy Says Financial Crisis Fosters Mafia”


As Western governments continue down the political path of scaring the hell out of you, be afraid fellow citizens, be very afraid – the Fiat Guns of quantitative easing and piling Debt Upon Debt Upon Debt will continue to kill both your domestic currencies and employment prospects.


This Italian headline, by the way, didn’t come from Rome’s version of Drudge. The manic media’s guns came out after the Italian Central Bank’s Deputy General Director, Anna Maria Tarantola, made explicit fear mongering statements that would make Julius Caesar’s messengers proud:


“The crisis has given organized crime room to thrive because access to credit has become more difficult… Whoever holds large amounts of cash, like crime groups, can make investments that aren’t possible for others. They can now invest in fully legal businesses.”


Wow. I guess cash really is king. Maybe we should start to take the government’s word for it and up our asset allocation to cash before Michael Corleone sends Timmy after us…


The catalysts for Spaniard and US Federal Reserve rumors were centered around 2 very clear and present dangers:

  1. Ben Bernanke’s semi-annual Revisionist Forecasting Report to the Senate of Modern Day Rome (today).
  2. Results for the made-up European “stress tests” that already have a prescribed (positive) outcome.

If there is one thing that the Fiat Fools have taught modern day risk managers who trade markets, it would be not fighting the Fiat Gun of intervention that they hold so dearly in their heavy government hands.


That’s why 32% of companies in the so called “great earnings” season of the US can miss the revenue line for the Q2 reporting period to-date, and you can see a monster intraday reversal of earnings oriented stock market weakness turn into a melt-up of short covering. As Max (James Woods) said in “Once Upon A Time In America”: “This country’s still growing up. Certain diseases, you’re better off having when you are still young.”


We have no idea what Ben Bernanke is going to say about quantitative easing programs today, but we do understand the basic algebra associated with adding more US debt to the US DEBT/GDP ratio (email if you want to see how we get to triple digit percentage US DEBT/GDP ratios for 2011; slide 11 of our Q3 Macro Themes presentation is in our Hedgeye Picture of The Day).


If he pulls out the Fiat Gun, at least we’ll continue to get paid on the short side of our US Dollar (UUP) position!


Back to the non-rumor mill oriented macroeconomic facts, Japan’s quarterly loan index plummeted in July to minus -17 (lowest since 2004) from minus -10 in the prior period. Japanese stocks closed down for the 6th day out of the last 7, taking the Nikkei to -12% for the YTD.


All the while, the great Japanese “quantitative easing” experiment that has spanned 2 decades reminds me that living in fear on the short side of a conflicted and compromised government balance sheet is no risk management life to live.


As Carlito said in Carlito’s Way, "there is a line you cross, you don't never come back from. Point of no return. Dave crossed it. I'm here with him. That's means I am going along for the ride. The whole ride. All the way to the end of the line, wherever that is."


My immediate term support and resistance lines for the SP500 are now 1059 and 1103, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fiat Guns - mob


The Macau Metro Monitor, July 21st, 2010




According to a SEC filing, LVS has drawn down the first US$750 MN tranche of its US$1.75 BN syndicated loan for its Sites 5 & 6 on Cotai.  Venetian Orient Limited (VOL), an indirect subsidiary of LVS, received the tranche on July 16.  In addition to the first tranche of money, the credit agreement makes available a US$750 million term loan offered on a delayed draw basis until 11/17/2011 and a US$250 million revolving credit facility available until 4/17/2015.


The ten lenders of the syndicated loan include Goldman Sachs Lending Partners LLC, BNP Paribas, Citibank and three Chinese banks– Bank of China, Industrial and Commercial Bank of China, and Oversea-Chinese Banking Corporation.


June CPI increased 2.68% YoY and 0.32% MoM.



Macau registered a budget surplus of MOP 26.6 BN in the first half of 2010, with direct taxes from gaming increasing 63% YoY.  Macau's surplus since 2002 reached more than MOP 122 BN, enough to cover the government’s budget for four years.  Direct taxes from gaming in the first half of 2010 totaled MOP 30 BN, representing 85% of the public finance revenue.



Following a sharp, albeit somewhat expected, decline in two-year average trends in May in the U.S., MCD trends need to rebound.


McDonald’s is scheduled to report its June sales numbers, along with its 2Q10 earnings, before the market open on Friday.  Relative to earnings, it is important to remember that 2Q10 is the last quarter of easy comparisons on the food and paper expense line.  To recall, MCD reported its highest restaurant level margin in the U.S. in 1Q10 in nearly 16 years.  The 210 bps of year-over-year margin growth was driven largely by lower food and paper costs, which management said “have allowed [them] to continue to grow margins, while holding the line on price increases.  “Specifically, the company’s basket of goods decreased about 5% in both the U.S. and Europe during the first quarter, but full-year guidance assumes only a 2%-3% decrease in the U.S. and a slight decrease in Europe.  Although food costs likely remained favorable in 2Q10 on a YOY basis, this benefit will go away in the second half of the year (with comparisons becoming increasingly more difficult as we trend through the year).  Given the current unemployment picture and the still fragile state of the U.S. consumer, MCD may have to choose between driving traffic by keeping prices low and holding the line on margins.



June sales preview:


McDonald’s is scheduled to report its June sales numbers before the market open on Friday.  On a year-over-year basis, June 2010 has one less Monday, and one additional Wednesday, than June 2009.


June’s results will likely reflect the impact of the company recalling the “Shrek Forever After 3D” collectable drinking glasses due to potential cadmium risk.  For reference, MCD partly attributed the momentum in May in the U.S. to the popularity of its Shrek-themed Chicken McNugget and Happy Meal promotions.  June also is the last month of the summer without any impact from the rollout of the new smoothie beverages.  The impact of the McCafe smoothies, and the heat wave that gripped most of the country in early July, will be seen next month.


Below, I am providing my view on comparable sales ranges for each of MCD’s geographic segments as indicators of what I would rate as GOOD, NEUTRAL, or BAD results based largely on two-year average trends (adjusting for calendar shifts).



U.S. (facing a relatively easy 1.8% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):


GOOD:  4.5% or greater  would be perceived as a good result because it would imply that the company was able to improve U.S. two-year average same-store sales (by 30 bps) on a sequential basis.  Given the current unemployment picture, together with the recent drop in consumer confidence, a 30 bps sequential increase would be meaningful.  While May’s U.S. result was less-than-stellar, and therefore does not pose a lofty sequential hurdle for June, a 4.5% number would be the best result this year.


NEUTRAL:  Roughly 3.5% to 4.5% implies two-year average trends that are roughly in line with those seen in May.


BAD:  Below 3.5% would indicate that two-year trends have deteriorated sharply on a sequential basis.  May had already seen a decline from April; further decline would be decidedly negative and would imply a two-year trend below 3%, a level not seen since January. 




Europe (facing a 4.7% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):


GOOD:  6.5% or above would be a good result for McDonald’s European operations.  This print would imply a roughly level-to-slightly lower two-year average trend with May but would still be in the 6%+ area which is traditionally the “GOOD” level for Europe.  The two-year trend in Europe accelerated rather significantly in May from the April level so maintaining that trend would be viewed positively. Although the heavy involvement of the European nations in the World Cup may have had somewhat of an impact on McDonald’s sales, economic issues in Europe – such as unemployment – are still weighing heavily on consumer behavior.


NEUTRAL:  5.0% to 6.5% would imply two-year average trends roughly in line with what we saw in the months preceding May’s tick up in trend.


BAD: Below 5.0% would signal that two-year trends have declined sharply from May and decidedly back into the sub-6% region.



APMEA (facing an easy +0.3% compare, including a calendar shift which impacted results by -2.0% to +0.2%, varying by area of the world):


GOOD: A print of +9% or higher would be a good result for the APMEA branch; this number would imply that two-year average trends held steady or improved in June.  APMEA is lapping an easy compare of +0.3%.  The slowdown in APMEA in June last year was attributed to weakness in Japan and China, with China running negative comparable store sales.


NEUTRAL: Comparable-store sales of 8% to 9% would result in two-year average trends slightly lower than those seen in May, but 8% still represents a strong comparable-sales number when compared to the past three months.


BAD: Below 8% would result in a significant sequential deterioration in two-year average trends and, therefore, would be perceived as a negative result.



MCD JUNE SALES PREVIEW - mcd june preview


Howard Penney

Managing Director

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Bear Market Macro: SP500 Levels, Refreshed...

Conclusion: We remain short both the SP500 (SPY) and US Dollar (UUP).


Gotta love a bear market that rallies on rumors of “Fed cuts”, when they can’t cut from zero. I suppose if the rumor is that Bernanke could implement more quantitative easing, that would be more believable. If he does that, the US Dollar and balance sheet position will weaken further…


We continue to believe that the 7 consecutive weeks we’ve seen of the US Dollar trading lower (week-over-week) bodes ominously for both future US economic growth and equity performance. Unlike the bullish REFLATION trade we made in 2009 (Dollar down = stocks up), this time US Dollar weakness won’t have accelerating global and domestic growth at its back.


The Bear Market Macro intermediate term TREND line of resistance remains firmly intact up at 1144, and our refreshed immediate term TRADE line of resistance is now 1080. We probably should have covered our SPY short position on this morning’s open near our immediate term TRADE line of support (1058), but shoulda, coulda, woulda, only works in men’s league hockey when you are on the bench talking to yourself.


Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed... - 1

IGT 3Q2010 Preview

IGT is now officially cheap but near term catalysts remain elusive. Whisper expectations for the quarter are pretty low. The focus will be on replacement demand.



The sell side remains stubbornly above IGT’s fiscal 2010 guidance of $0.77-0.85.  We suspect that buy side expectations are lower, however, so a reiteration of guidance should not disappoint.  For FQ3, our projection of $0.21 is in-line with the Street.  Replacement demand should be a major focus for both the quarter and the outlook.  Despite investor pessimism, replacements have been accelerating, which should bode well for next year’s earnings.  Of course, if casino revenue trends don’t recover, all bets are off.  In that environment, no gaming company will do well but the suppliers should be better off.


Here are the details of our projections:


FQ3 Detail


Product revenues of $231MM with gross margins of 49%

  • North American product revenue of $146MM and gross margin of $73MM
    • 6,350 new units ( 4,700 replacement) at $14.4k.
    • As we wrote about on 7/1/2010, “Q2 AND Q3 MARKET SHARE COULD BE MISLEADING”, IGT typically sees a big sequential increase in ship share in the June quarter, which is also typically a seasonally stronger quarter for replacement orders than March.  Since 2006, IGT’s replacement orders have seen some sequential pick up in June. 
    • While new and expansion shipments are nothing to write home about, we estimate that June shipments will be roughly 1,200 better than March shipments.
    • IGT’s Dynamix package offer, which was supposed to expire in May, was extended through the end of June, so we expect similar pricing to March.
  • International product revenue of $88MM at a 47% gross margin
    • 5,300 new units at $10.8k.
    • Our sequential decline is due to the removal of 2,200 units shipped to Japan in March, and less units shipped to Asia, since March included shipments to Singapore, and is offset by higher shipments to Australia, UK, and S. Africa.
    • Better margins due to the removal of impairment charges related to Japan last quarter.  Pachislot also had lower margins.

Gaming operations revenue of $281MM and gross margin of $171MM

  • Average install base of 60,300 with an average win per unit of $51.30.
  • June has seasonally lower yields than March for IGT.
  • Given the shipment of a lot of new product, we assume a small pickup in D&A and therefore, a small tick down in margins.

All the other stuff:

  • SG&A (including bad debt) of $89MM.
  • R&D of $52MM.
  • D&A (expensed) of $19.8MM.
  • Net interest expense of $23MM.
  • Tax rate of 38%.


The dollar continues to look as awful as the underlying health of the USA’s balance sheet.




As we look at today’s set-up for the S&P 500, the range is 26 points or 1.9% downside (1,052) and 0.6% upside (1,078).  Equity futures are trading below fair value this morning. 


One of our 3Q Macro Themes, Bear Market Macro, continues to find support in the data and GDP estimates on the Street are being cut accordingly.  While there are two sides to this debate, our view is that data related to earnings and housing will continue to shape this debate and we are not bullish on either area.


The dollar continues to slide and looks bearish from an intermediate term perspective; Hedgeye Risk Management’s TREND line of resistance for the USD Index is 84.13.


Following Monday’s session, there are only three sectors bullish on TRADE: Utilities (XLU), Consumer Staples (XLP), and Technology (XLK).  Utilities (XLU) remains the only sector positive on TREND.


On the MACRO front today, Housing Starts came in below expectations: 549k reported vs. 580k consensus. Based on our Q3 Macro Theme of Housing Headwinds, we expect reporting risk to be to the downside for housing data points over the next 6-9 months, barring further government intervention.


















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