99 weeks of unemployment benefits running out and no jobs.  This is the scenario facing many Americans heading into year-end.


Whatever your view on the role of government in today’s economy, it is undeniable fact that government intervention is having a dramatic impact on current conditions as well long term prospects.  With the creation of the Emergency Unemployment Compensation program in 2008, the government provided income for thousands, then millions, of Americans who would have otherwise been left with no source of income.  The result has been a propping up of consumer spending and the chart below shows that story.  The beneficiary, struggling to make ends meet, will spend a large portion of the check he/she receives.  That has helped stimulate consumer spending as more and more people joined the program.


These benefits expiring (in the absence of legislative action), will provide a year-over-year headwind for consumer spending.  As of the most recent data points, there are ~500,000 people receiving benefits under the Tier 4 category of the Emergency Unemployment Compensation program. 




Howard Penney

Managing Director

Embracing Change

So, Tim, how's it going? 



Who would have thought Tim Geithner would be the last man standing on the Obama economic team?


First, let me say for those that don’t know, Lizzie O'Leary (@lizzieohreally) is a Washington D.C.-based correspondent for Bloomberg Television who covers politics and economic policy from the White House, Treasury Department, and Capitol Hill. She is officially a @Hedgeye twerp (a term of endearment).


So, Larry Summers is going back to Harvard.  President Obama campaigned on the theme “change for America” and a change it is.  Not the change we were promised, but one that is long overdue. 


There are so many quotes from Larry, Tim or Ben that I could have used to start off the Early Look today, but I chose a one-liner from the @Hedgeye twitter feed that made me laugh, and there were many.  On a serious note, this country is in need of “change” and a new economic team at the White House is a great place to start. 


Keith said it best last night, @KeithMcCullough – “The dogma of the Robert Rubin/Larry Summers economic ideology has to leave the West Wing if America wants any chance.”


The popular press and the new media just skewered Larry Summers last night, which would have made him an easy target for today’s Early Look’s musing.  If you have not figured it out yet, I have embraced a change in my daily process by integrating Twitter as part of it.  For competitive reasons, I’m not going to say how, but Reuters and Dow Jones need to be looking at the Twitter business model very closely as it is their future. 


The other one-liners that made the highlight reel on the Hedgeye Twitter feed:

  • @Moorehn - Poor Larry Summers. Leaving before he could throw a proper tantrum about a woman joining Obama's economic team. 
  • @HowardKurtz - Larry Summers bailing from WH. Will Obama name a replacement before election and portray it as jumpstarting his economic efforts?
  • @ErikSchatzker - Summers to teach job creation and stable finance at Harvard. Hmm. Reminds me of that old saying about those who can't do.
  • @zerohedge - Summers to resume his job of destroying Harvard's endowment

Ok, back to reality and the euphoria that has made September performance one of the best since the 1930’s.


So far this week, we have learned that the recession has ended and after the close last night the ABC consumer confidence index fell to -46 for the week ending September 19th, down 3 points from the week prior.  This news and the University of Michigan reading from last week spell bad news for consumer spending.  The recession may be over, but there are structural issues that demand immediate attention.  The data bears this out:

  • Over 41 million Americans are on food stamps.
  • 17 million children struggle with hunger in America. That's 1 in 4 kids.
  • 1 out of every 6 Americans is on some kind of anti-poverty program.
  • 1 out of every 7 mortgages was delinquent or in foreclosure in Q1 2010.
  • Over 8 million Americans are receiving unemployment insurance.

It’s going to have to be an impressive trick if the new Obama economic team can embrace change and get us out of this mess without feeling more pain.  As the saying goes - no pain, no gain!


The September month-to-date performance has been nothing short of spectacular, but it is difficult to reconcile this euphoria with the current fundamentals of the economy.  So far for the month of September, the Dow is up 8.62%, S&P up 7.45%, NASDAQ up 11.13% and the Russell 2000 up 10.4%.  With the Dow +0.07%, S&P (0.10%), NASDAQ (0.28%) and Russell 2000 (0.79%) yesterday, there was a clear lack of overall direction following the FED announcement; except for the direction of the dollar, which is getting crushed, down 1.1% yesterday and 3.2% over the past month.  The euphoric feel comes from:   

  • Consumer confidence is near “the great recession” lows and investor sentiment is near multi-year highs.
  • Some of the market darlings (AAPL and AMZN) look over extended.
  • The MACRO risks (housing and slowing GDP) have taken a back seat in September, but will rear their ugly heads soon.
  • The 2yr and 10yr yields are at record lows and the dollar is getting crushed.

The policies of the old Obama economic team were enough to keep us out of a full-blown depression, but were clearly not effectively dealing with the deficit.  The question is not whether or not the next team will prove any more adept at instilling confidence in government’s ability to address the nation’s debt. 


The burgeoning healthcare bureaucracy, economic stimulus spending, bailouts, and the increase in military spending have all contributed to the explosion in federal debt over the past decade.  The continued growth of that debt has provided an illusion of an economic recovery. 


In the chart below, we show one example of government spending providing an unsustainable crutch for government spending.  As America’s unemployed make their way through the 99 weeks of benefits afforded them by Uncle Sam through the Emergency Unemployment Compensation program, it is clear from Bureau of Labor Statistics data that the economy is not yet ready to put these people back to work.  Retail sales will certainly be impacted by people running out of these benefits – a stimulus that, like many others, has been financed by increased debt.


One last thought - The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew. 

-Abraham Lincoln


Function in disaster; finish in style


Howard Penney


Embracing Change - Howard Atlas Penny


The Macau Metro Monitor, September 22nd 2010



CEO So believes he will receive a response from the Government regarding its two plots on Cotai by the end of 2010.  “We hope to have a larger space for development... SJM has the least exposure in Cotai so we’ve expressed that if there is other land available [Sands China parcels 7 and 8] we’ll be interested in it,” So said.  “I think any organizations or concessionaires can express their interest and there is nothing wrong with it,” So added.  Meanwhile, So denied there are any plans to cooperate with Macao Studio City or any of the other five gaming operators to jointly develop the Cotai Strip.


So also said 4Q GGR will not grow as much as in the first nine months of this year. “For the whole year of 2010, I expect there will be an increase of around 40%,” So said.  In addition, he urged the Government to give a clearer idea about the allocation of imported labour quotas so that the gaming operators can prepare their human resources development plan accordingly.  So also suggested pegging the Pataca with the Yuan  to ease inflation pressures.



The US consul general for Macau and Hong Kong, Stephen Young, says he is optimistic that these policy changes will not damage the interests of US companies operating in Macau.  “I’ve been assured by the chief executive and others that the necessary workers that these guys [US-based casino companies operating in Macau] need to do their jobs to both build and run casinos will be available, and it’s an ongoing dialogue that they and I and the government of Macau continue to pursue,” he said.


Mr Young said he has already met CEO Chui and representatives from LVS, WYNN, and MGM.  He added he would meet with Sands' new management team today.



Total visitor arrivals rose by 14.2% YoY to 2,357,689 in August.  Visitors from Mainland China increased by 20.3% YoY to 1,263,442 (53.6% of total visitor arrivals), with 590,271 traveling to Macao under the Individual Visit Scheme, up by 18.2% from August 2009.



The number of passengers passing though Changi Airport in August rose 9.6% to 3.47 million.

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Fed Says, "No Inflation" - Today's Headlines On Bloomberg

This note was originally published September 21, 2010 at 16:03 in Macro

Bernanke didn't see inflation with $147 oil back in 2008. So of course he doesn't see it now. Pull up a chart of gold, agricultural commodities, or base metals if you want the truth.


Today's Bloomberg headlines:


  • Gold Futures Surge to Record as Dollar Tumbles on Fed's Policy Statement
  • Cotton Rises, Extends Rally to 15-Year High as China Increases Purchases
  • Orange-Juice Futures Advance to Three-Year High on Florida Storm Concerns
  • Lumber Futures Jump Exchange Limit as U.S. Housing Gain May Revive Demand
  • Copper Declines as Uneven U.S. Recovery Tempers Gain in Asia Metals Demand
  • Sugar Drops on Reduced Concern About Supplies From Brazil; Coffee Climbs
  • Uranium Prices at 10-Month High Attract Hedge Funds, Investors, UxC Says
  • Rusal Sees Aluminum Rising to $2,400 to $2,500 Next Year on Chinese Demand
  • Oil Declines for Fifth Time in Six Days on Bets U.S. Refinery Output Fell
  • Wheat Declines on Bets Prices Climbed Too High Relative to Corn Futures
  • Hog Futures Rise on Signs of Shrinking U.S. Meatpacker Supply; Cattle Gain


Howard Penney

Managing Director


Fed Says, "No Inflation" - Today's Headlines On Bloomberg - 3


Fed Says, "No Inflation" - Today's Headlines On Bloomberg - 1


Here are more notes from the WMS Analyst Day, including Q&A and the panel discussions.



Ultra Hit Progressive:

  • On average, a 31% coin in premium compared to other games without the progressive
  • 2nd - 4th portals performed even better. 2nd one is Winner's share: collects coins- lands on platform and may be 1x-4x the win. 3rd is metascreen (first theme is pirate battle- combo of community + competitive gaming). All of the portals can be mixed and matched with other games. 4th family is mega multiplier - allows player to win an amount and apply it to the pinball - which they can shoot during any point of their game for up to a 100x multiplier.

5th Adaptive gaming:

  • Aimed at active online gaming (bejeweled etc).  My Charm is the first game that will have this online element.
  • Their service window (player user window) is called "freedom port window", which is internet based. Opening the door to operators to put whatever content they want on the user window. They are developing portal applications for the window. Offer dragon world - accruing non-monetary points that you can use to customize your dragon avatar. They already have web widgets offered through Harrah's site. Allows casinos to see not only the activity at their casino but also across all properties where that person gambles.

Game Edge: 

  • Account based wagering - covers non-gaming patrons as well to the operator.
  • Will have custom lighting at each machine to celebrate different events. Diamond hunt is one of the first user window applications (side wager).
  • Games that are ready for sale or will be shortly.
    • Have 4 more episodes coming to Lord of the Rings shortly in the next installments
    • Attack on Mars: player can choose their perspective
    • Monopoly big money spin: if one of the games triggers a big event, then everyone on that bank gets a multiplier. Has the touch screen dice.
    • GodFather - (LAP) when the progressive triggers - you can take the offer or risk it for a bigger progressive. When you max bet and hit a trigger, you automatically go to the progressive. If not max bet, then it's not automatic.  (Industry first)
    • Price is Right mechanical with new base game, sensory chair and transmissive reel, and community gaming
    • All of their mechanicals use transmissive reels
    • New line of traditional looking 3 reel spinners with the character overlay
    • G+5+4 ( 5 reels with 4 lines)
    • BBxD: hybrid slant top/with the profile of an upright.  Duel screen that's networked gaming - can put reel or video on it. Have emotive lighting -where the lighting is integrated into the software (meaning colors change with wins).

Long term strategic focus and long term financial growth:

  • Use networked gaming as a differentiator and opportunity to build relationships with operators and players
  • Want to pull forward some of their R&D efforts
  • Convergence of online gambling, casino, and social gaming
  • Goal is to be the leading NA supplier
  • Guidance for FY2011 isn't based on any recovery of the replacement cycle
  • Have a weekly forecast meeting: bc they have that data real time they can react to that quickly.
  • Receivables: Mexico - most of the deals were class 2 operating lease deals. They decided to sell the games and take a receivable instead as the market was changing from class II to class III. Also the termination of the Oklahoma deal with MGAM also caused receivables to grow and finally Florida Seminoles are likely to use floor financing. At least WMS is growing its revenue as receivables grow compared to their competitors.
  • $50mm incremental spend: on transition to BB2 from BB1 (participation); Italy (lease market); accelerating development.
  • Repurchased $31mm of stock through Sept 20th at $37.60
  • Proforma peer comparisons: WMS has the 2nd highest gross margin after BYI (due to the systems business); WMS leads the pack in R&D spend as a % of revenue. Had the lowest decline in units sold (only 5.5% vs over 20% for everyone else); highest revenue per day (but it's not exactly comparable)
  • Reiterated guidance for FY11: assume higher 12 month ship share in NA, further penetration into Australia/New south Wales, Mexico, Class 2/centrally determined; entry into MD, IL, KS, and Italy; recognize revenues from portal apps and wage net
  • Longer term growth opps: do expect further gaming expansion, improvement in the replacement market, growing ship share and participation business
  • Believe that they can do a 12-15% (low/mid) CAGR on revenues through 2015
  • 55% near term gross margin goal and 25% intermediate term annual operating margin
  • Schweinfurth exercised 62,500 options that were due to expire in 60 days and that he's had for 10 years.

New Revenues Opportunities and Growth potential:

  • Want to lead the charge in the networked gaming space
  • Gaming portal applications:  allows operator to mix and match games in a unique way to maximize their returns. Ulta Hit Progressive first 2 themes (piggy banking/jackpot party) recently launched.  Ultra Hit is their most basic product of the portal applications out of the 5 they have. All of their titles produced over the last year are already compatible with portal apps. Look to launch a new family of portal applications each quarter.
  • Online gaming: allows operators to market with their content online (like Lord of the Rings); allows players to play casual games online even before the product is launched.  Drives cross play between casino gaming and casual play. Players Life Winstream shows players winning on these games across the globe. If casino gaming gets legalized, they can just flip a switch.
  • Lord of the Rings has had 50% more accounts created in its life compared to Star Trek over a comparable period
  • Players Life is also an app on iPhone
  • Jackpot Party Casino is launching in the UK soon. This entire site is a platform. Will have a progressive that all players can participate in.  Will use their branded products on the site like Star Trek and Wizard of Oz (recreated for the online space).
  • CPU-NXT (processor in the box) launched 7 yrs ago. First platform with ethernet--CPU-NXT 2 was launched 4 yrs ago.
  • This year, they will launch CPU-NXT 3 (will have 10x more power than v.2) new 3D audio platform. 2D + 3D graphics. Graphics are really cool on this platform.
  • 25 games with Players Life will be at the show, plus 9 CPU NXT games and 38 portal games


  • How are they measuring the ROI on their R&D without an acceleration of the replacement cycle?
    • Seeing little bits of positive news right now - they are negotiating a big deal now (biggest one that they've done)
  • IL isn't really in their guidance for FY11 (very small)
  • For 2011-2012, they will be at the same level of R&D as a % of revenues but over the longer term it will decrease to low teens.
  • What are the easy parts of their guidance to achieve?
    • ASP
    • Margins (xD and participations)
    • Replacement cycle is the biggest question mark
  • What drives the higher win per days?
    • More WAP mix
    • Lord of the Rings doing well
    • Players Life
  • Resistance to rising ASPs?
    • Cost of xD is a lot more than than BB2
    • Volume is also important - 80% of the cost is variable - 20% is mostly fixed.
  • Will likely lose some money on the online gaming piece. Will make money on the networked gaming. Online gaming is strategic for them.


Focusing on growth through developing new products, entering new markets, and looking for new channels of distribution


Panel discussion: Mark Pace: Networked Gaming Engineering; Jeff Allen: networked gaming tech; Richard Schwartz: Pres of Online Gaming; Allon Englman: Game Strategy + Design


Networked Gaming:

  • Successfully completed field trials and beta tests with remote config and download at 5 sites : Barona, Bellagio, Canada Inns, Island Views, Mohegan Sun
  • Ultra-Hit Progressive at 3 sites is showing a 30+% lift in coin in: Mohegan (28 games), Turtle Creek (32 games), Chances (14)
  • Pricing Model for Ultra - hit: reasonable daily fee and are contemplating a one-time fee model
  • Game Edge - "system integration" Wage-Net account based wagering
    • Has the ability to manage live data. Allows players to use their card as an ATM throughout the entire facility.
  • Are not burdened by legacy systems that their competitors have. Came into the systems business with cutting edge technology.
  • Freedom port is interoperable. They don't care about the window - just about being able to deploy their portal apps across different manufacturers games
  • Players Life: evolution of adaptive gaming - where players create an account that allows them to progress through the game. Want to create opportunities that transcend the casino. It launched at the end of June. Allows players to see what's happening globally on each title.  Players life doesn't have direct revenues today but should enhance play at the game.  Has been a hard sell initially because of data share info- but they are making traction as operators look to differentiate casino experience.  Utilization trends? Star Trek - 1.2mm accounts, have 2x as many Players Life in just 3 months. More than 10% of people that create online accounts go the casino. Haven't spent lot of money marketing it.
  • Online Gaming: also have 60 card games in addition to 20 slot games
    • Every game has a preview video - like a movie preview.  Quality is similar to casino experience.  Players have leader boards and post their wins on Facebook.  WMS's advantage is the unique content.
  • Online gaming becoming legal in the US? thinks that it will but timing is very uncertain.
  • UK - so far the revenue opportunity is modest - but if it works in the UK, they can take it globally.
  • Game development is like a fashion business now. Lead the way in making "gambling" entertainment and therefore drawing in more casual gamers and new players. Star Trek/Lord of the Rings - gives them huge information into players' preferences for bonuses and such.
  • Hasbro partnership - will introduce Battleship + Clue + Aladdin
  • Pioneering player preferences and research- leads to high success rate of new games
  • Pick brands that go along with their concept so once they developed episodic gaming they moved to those brands
  • Decided to build their own brand so that they have the ability to innovate. They aren't ruling out B2B though.

Sales Panel and Questions to Executive Management Team:

  • Lord of the Rings is doing really well as is Ruby Slippers
  • Entering Class II is all about partnering, allowing them to maximize their bottom Line
  • Mohegan portal applications was put in a b-/c+ location to see if customers seek it out
  • Not every customer in Latin America can pay current ASPs on slots - hence the lower priced Helios platform. Now, they can target Columbia which has 80k slots
  • Lots of their customers have better balance sheets (Harrah's, Stations, Herbst) and it's easier to have conversations now than 12 months ago
  • Any deals with credit terms of over 90 days go to the credit committee review and they also make sure that they have adequate returns
  • Operators get less discounts and pay interest
  • Portal applications have a daily fee type model which is totally separate from games which they need to purchase. Customer needs to purchase the server rack from Dell for 15k or so. Fee contracts are monthly.
  • Over the next 24 months, see 30% from Latin America, 30% from Europe, 20% from Australia and Asia, and 20% coming from Italy.
  • Doesn't see any change in the footprint of participation on casino floors - they've been growing by gaining share, although some operators have increased the percentage of floors on participation because they have no capital
  • Thoughts on industry consolidation? Should happen but who knows if it will. They have been successful in building vs buying market share. More likely to accelerate investment into some of their new businesses.
  • Competitive environment is very challenging now but they are doing the best they can.  All they can do is put themselves in the best competitive position for when things turn.
  • Goal is to have 9 beta sites with portal apps by Oct 2010
  • Thoughts on Konami? Making some really good products.  They pay the most attention to them in terms of product. Thinks that IGT product has also gotten better in their content.
  • How far away are they from walking into a 3,000-4,000 unit casino and getting 30% share?  Well, if they had poker that would make a huge difference.  Often times, it's 15% of the floor. Thinks that portals will help them a lot given all the permutations.
  • Their current market share on existing market is 13-14%. They're getting between 20 to high 20s share in almost all markets.  They won't be happy with 30% share 2 years from now. They are working hard on a poker product.

Fed Says, "No Inflation" - Today's Headlines On Bloomberg

Bernanke didn't see inflation with $150 oil back in 2008. So of course he doesn't see it now. Pull up a chart of gold, agricultural commodities, or base metals if you want the truth.


Today's Bloomberg headlines:


  • Gold Futures Surge to Record as Dollar Tumbles on Fed's Policy Statement
  • Cotton Rises, Extends Rally to 15-Year High as China Increases Purchases
  • Orange-Juice Futures Advance to Three-Year High on Florida Storm Concerns
  • Lumber Futures Jump Exchange Limit as U.S. Housing Gain May Revive Demand
  • Copper Declines as Uneven U.S. Recovery Tempers Gain in Asia Metals Demand
  • Sugar Drops on Reduced Concern About Supplies From Brazil; Coffee Climbs
  • Uranium Prices at 10-Month High Attract Hedge Funds, Investors, UxC Says
  • Rusal Sees Aluminum Rising to $2,400 to $2,500 Next Year on Chinese Demand
  • Oil Declines for Fifth Time in Six Days on Bets U.S. Refinery Output Fell
  • Wheat Declines on Bets Prices Climbed Too High Relative to Corn Futures
  • Hog Futures Rise on Signs of Shrinking U.S. Meatpacker Supply; Cattle Gain


Howard Penney
Managing Director
Fed Says, "No Inflation" - Today's Headlines On Bloomberg - 3
Fed Says, "No Inflation" - Today's Headlines On Bloomberg - 1

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