Nothing unexpected. BYI reiterates opportunities for systems business.



  • Canada: BYI currently undergoing consulting process regarding slot implementation
  • $3MM upfront investment in Sightline
  • Pechanga now has 1200 iViews on their floor.
  • Last few years, operators have been focused on development and is now deleveraging/ fixing cost structure and less on gaming technology
  • Next step is to send marketing offers to mobile devices; thinks it's a big opportunity
  • iView penetrated 40% of slots connected to their system without any content
  • Average size of installs has declined as they are getting into smaller casinos with sds windows.
  • 50/50 growth in domestic/international footprint
  • Service revenues have increased from $3MM to $6MM per quarter--upgrades/add ons, etc. As they penetrate smaller casinos - which have smaller IT departments, they require more outsourcing of services.
    • Wants Software to Services revenue ratio to be 1:1
  • 386,000 units that are still not serviced by an iView. Have 160k iViews installed today vs 120k in FY08. BYI has 420k slots connected to their network. Not only can they upgrade their iViews to DM but they can also start putting apps on those units, which BYI believes is a $1BN revenue opportunity.
  • Additional opportunities include:
    • If BYI can capture 30% of their domestic competitor biz, they can add 120k slots to their system, which would equate to a $420MM opportunity.
    • If BYI can capture 50% share of the new casinos, then BYI can add 70K slots, representing a $245MM opportunity.
  • All-in, they think they have a $1.8BN addressable opportunity in systems.


Conclusion: We remain bullish on corn for the intermediate-term TREND duration as the confluence of perpetuating inflation, spiraling demand, and supply shortage indicate that corn prices will continue to rise.


Position: Long corn via the etf CORN


We added our on and off again long position in corn yesterday via the etf CORN in the Hedgeye Virtual Portfolio. As a reminder, we have been bullish on corn on an intermediate-term TREND basis since August of last year, when we initiated our first long position at $26.27. With the US dollar making lower lows, it is necessary to point out that corn has a -0.52 correlation to the US Dollar over the last three weeks. As a food crop with inverse correlation to a sinking US Dollar, investors would be remiss not to notice that inflation is present and will persist. Corn futures are up +10.8% YTD and up +67.9% over the last twelve months.


According to the United Nations Food & Agriculture Organization, record food prices will be sustained this year due to high oil prices and smaller crops. Corn is facing a serious supply shortage in the year 2010-2011 as corn output is estimated at 814.3 million tons while corn demand will flirt with 836 million tons. Looking thoroughly at supply and demand fundamentals, we have good reason to be bullish on corn. Here’s why:


On the supply side, corn is facing a shortage as climate change and natural disasters have decreased production. Moreover, cold weather continues to delay planting in the world’s largest supplying country. The US harvest represents nearly 55% of world exports and 39% of the global corn output in the 2010-2011 year. Unfortunately, the US has a lot of uncertainty surrounding its corn output due mainly to a legitimate concern that La Nina is forecast to cause heavy rainfall in the northern US plains as well as Canadian prairies. Though La Nina is expected to strike in the US, you can bet your buck on it that this will threaten the global harvest of corn and result in tightening global supplies. It is certainly a stark reality that the US could see a third yearly deficit for corn.


Despite the potential decrease in the global supply of corn, the demand for the crop continues to trend higher. When the US Department of Agriculture reports tomorrow, we expect to see a reduction in their estimates for the world stockpile, as demand increases in part due to the recent political turmoil in North Africa and the Middle East. Rising demand is corroding US corn stocks and a recent surge in ethanol demand—due to runaway crude oil prices—isn’t quite helping. Dating back to January, the Environmental Protection Agency agreed to let refiners increase their corn-based fuel additive in gasoline from 10% up to 15% for automobiles made in 2001 or later. Ethanol continues to eat away at the US supply of corn. According to a Feb. 9th USDA estimate, approximately 43% (4.95B out of the 11.6B bushels) of corn demand in the US is for ethanol use. With rising demand and an insufficient corn supply, there is plenty reason to be bullish on corn.


CORN was added into the portfolio at $42.74. From a quantitative setup, CORN is bullish on both a TRADE and TREND duration with no upside resistance, TRADE line support at $42.16, and TREND line support at $39.02.


Daryl G. Jones

Managing Director


CRAZY FOR CORN - corn fred


SAM is trading lower today on lower-than-expected FY11 earnings guidance.


On February 4th, we outlined our reasons for being cautious on the Boston Beer Company in 2011 in a post titled “SAM – HEADING FOR A HANGOVER.”  Specifically, we cited the potential for slowing top-line trends and rising costs.  Yesterday, SAM reported 4Q10 earnings of $0.87 per share, which fell short of the street’s $0.90 per share estimate.   Revenues came in light relative to consensus estimates with FY10 depletions up 11.5%, at the low end of management’s upwardly revised guidance range of +11-13% that was provided in December.  That being said, with depletions up 12% during the quarter, top-line trends continued to be solid and gross margins increased by more than 500 bps YOY.


Looking into 2011, the top-line comparisons will be difficult but the company guided to 9% depletion growth, which is slightly improved from its prior guidance of up mid-to-high single digits provided during its 3Q10 earnings release.  SAM maintained its FY11 gross margin guidance of 54-56% and stated, “From a cost perspective, I think we indicated the biggest cost exposure we have is energy, sort of linked to freight sort of outbound primarily, little bit of inbound.  I know there have been observations of cost increases on some of the agricultural materials that we use, but we were in actual [sic] good position when we made our arrangements for our 2011 purchases so we think we’re actually covered there in the guidance that we had given previously. So, that hasn’t really changed since we last gave that guidance. And on the other packaging material items, we haven’t seen too much movement and certain nothing that it would just put as noise at least to date.”


This current margin guidance continues to assume a 1% revenue per barrel increase which may not be easily passed on to consumers in light of the continuing tough economic environment and could put pressure on the company’s 9% depletion target.  Management alluded to the tough competitive environment in its comments yesterday, saying that it in 2011, “we expect to augment our sales force and brand support levels further to address the increasing competitive activity and to grow our brands appropriately given the opportunities we see. It is possible that these decisions might result in slower earnings growth in 2011, as we may forsake some earnings in the short term in order to build our organizational capabilities and support our brands at appropriate levels.” 


Specifically, the company is going to increase its investment in its brands by $12 to $18 million in 2011.  Although management had stated its intention to increase the level of investment behind its brands in 2011 prior to yesterday, they had not quantified the magnitude of the increase.  This is important because the company widened the range of its FY11 EPS guidance yesterday to $3.45 to $3.95 from its prior guidance of $3.95, which it provided in December.  Management stated that the new guidance reflects the negative impact of rolling out its new Freshest Beer Program, which it expects to reduce EPS by $0.20-$0.30 as it will cause core shipment growth to lag depletion growth during the year.  Although this was the only explanation provided by management, a $0.30 impact would imply a full-year earnings range of $3.65-$3.95, rather than the $3.45-$3.95 range provided.


Given that the full-year margin guidance did not change, which was surprising to me, management must think that shipments could actually lag depletions more than the initial 2%+ estimate as a result of the new Freshest Beer Program and is providing a cushion on the downside or the company increased its planned level of spending behind its brands in 2011 in order to defend its share position in what it expects will be an increasingly competitive market.  If the latter reason is correct, it puts the company’s 9% depletion target at risk, particularly when you combine that more competitive market with the company’s trying to pass on a 1% price increase.  Either way, shipment growth would be negatively impacted.


Howard Penney

Managing Director

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Price Volatility: VIX Levels, Refreshed

I fundamentally believe that Big Government Intervention in our markets perpetuates the opposite of what the Big Central Planners at the Fed are marketing. This is not “price stability” – this is Price Volatility. And our industry is levering up (net leverage in the hedge fund industry hit its October 2007 high this month) on it again as it accelerates. That’s scary.


Obviously there was a 2008 market crash that Bernanke didn’t see coming, but his being ignorant of the risks embedded in fueling $150/oil with a US Dollar Debauchery policy doesn’t give him a hall pass on blaming the highest levels of price volatility that our markets have ever seen on the “market.” He is the market – at least in terms of establishing the cornerstones of rate cut and QE expectations.


Since the US stock market put in another lower long-term high at 1343 on February 18th (see the red circle in the chart below), volatility (VIX) is up +32%. That’s not price stability. That shows you what happens when the easy money music stops (fund flows into US, Japanese, and Western European equity markets peaked in the same week). And unless he opts for QG3 in May/June, it will stop.


One of the hallmarks of our risk management strategy is that real-time prices rule. Currently, we are seeing the confluence of a TREND line breakout in the VIX (> 17.88) and a TRADE line breakdown in the SP500 (1319). This continues to have me thinking that the SP500 is going to continue to make a series of lower immediate-term and long-term highs on rallies.


The VIX won’t be immediate-term TRADE overbought until it tests 21.70 again on the upside.



Keith R. McCullough
Chief Executive Officer


Price Volatility: VIX Levels, Refreshed - VIX


Notable news items/price action from the past twenty-four hours.

  • SBUX is rated neutral at Janney, according to a report this morning that highlights coffee prices as the primary risk to EPS over the next twelve months.  Given SBUX’s customer loyalty, control over its supply chain, and – most importantly – the fact that they have locked in their coffee prices for the year, I am maintaining a positive view on SBUX.
  • SBUX’s managing director for the U.K. has spoken of a difficult sales climate in which fewer people are out on the streets shopping.  The U.K.’s 736 Starbucks stores saw a drop in sales since early January.
  • SBUX turned 40 yesterday and unveiled its new logo.
  • CBRL’s soft performance over the last month has coincided with a spike in gasoline prices.   MasterCard Advisors’ SpendingPulse report showed yesterday that average gasoline demand fell 1.8% to 8.953 million barrels-per-day in the week to March 4th.  Year-over-year, demand slipped 1%.  Retail gasoline prices rose 19 cents last week to $3.43 per gallon, 27% higher than a year ago, after crude oil rose to a 29-month high on unrest in the Middle East, the report said.
  • SONC gained almost 4% on accelerating volume following an upgrade yesterday.  This name is not out of the woods and, as I wrote in a note yesterday, I believe that the preannounced comps for 2QFY11 flattered to deceive.
  • DIN continues to underperform, declining on strong volume yesterday.  EAT, BJRI, CAKE, and RT all gained (with EAT trading on strong volume).
  • YUM traded higher on accelerating volume.  



Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - March 9, 2011


As we look at today’s set up for the S&P 500, the range is 35 points or -1.73% downside to 1299 and 0.92% upside to 1334. 



  • 10 a.m.: Wholesale Inventories, est. 0.9%, prior 1.0%
  • 10:30 a.m.: DoE Inventories
  • 1 p.m.: U.S. to sell $21b 10-yr notes reopening
  • 1:30: p.m.: Geithner testifies at House appropriations subcommittee
  • 3 p.m.: USDA Broiler eggs set    


  • Senate to vote on $61b budget-cutting measure passed last month by Republican House
  • Arab League may call this week for a no-fly zone to shield civilians and rebels from further
  • Australian Prime Minister Julia Gillard to address a joint session of Congress
  • Nasdaq predicts at least 45 Chinese companies will list in U.S. this year, topping last year’s record  


For the third day we have 7 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.  The two sectors broken on TREND are Technology and Materials. 

  • One day: Dow +1.03%, S&P +0.89%, Nasdaq +0.73%, Russell 2000 +1.53%
  • Month-to-date: Dow (0.10%), S&P (0.41%), Nasdaq (0.59%), Russell +0.15%
  • Quarter/Year-to-date: Dow +5.50%, S&P +5.10%, Nasdaq +4.26%, Russell +5.23%
  • Sector Performance: Financials +2.19%, Industrials +1.56%, Materials +1.15%, Utilities +1.12%, Consumer Spls +0.88%, Consumer Disc +0.80%, Healthcare +0.55%, Tech +0.83%, Energy (0.82%)


  • ADVANCE/DECLINE LINE: 1558 (+3172)  
  • VOLUME: NYSE 1002.67 (-3.18%)
  • VIX:  19.82 -4.07% YTD PERFORMANCE: +11.66%
  • SPX PUT/CALL RATIO: 1.55 from 2.28 (-32.09%)


Treasuries were weaker with the rally in stocks, supply concessions and according to the WSJ

  • TED SPREAD: 21.11 +0.609 (2.969%)
  • 3-MONTH T-BILL YIELD: 0.11%  
  • 10-Year: 3.56 from 3.51
  • YIELD CURVE: 2.83 from 2.81


  • CRB: 361.09 -0.50% YTD: +8.50%  
  • Oil: 105.02 -0.40%; YTD: +12.98% (trading -0.08% in the AM)
  • COPPER: 433.85 +0.27%; YTD: -1.79% (trading +0.45% in the AM)  
  • GOLD: 1,427.95 -0.28%; YTD: +0.83% (trading +0.19% in the AM)  


  • Palm Oil Seen Advancing 12% on Shortages as Record Food Prices Roil States
  • China's Demand for New Zealand Milk Products Surges Fivefold Since 2008
  • Oil Falls a Second Day on OPEC Supply Speculation, Rising U.S. Stockpiles
  • Copper Climbs in London Before German Industrial Production
  • Wheat Climbs as Dry Weather Conditions Threaten China Crop; Soybeans Fall
  • Gold Advances to $1,431.90 an Ounce in London Trading, Erasing a Decline
  • World Soybean Surplus May Swell on South American Harvests, Analysts Say
  • K+S Raises Potash Price for a Fifth Time on Agricultural-Product Inflation
  • Asian Coking-Coal Contracts May Rise 44% to Record After Queensland Rains
  • Aluminum Fee to Japanese Buyers Halts One-Year Drop as Demand Recovers


  • EURO: 1.3909 -0.40% (trading -0.20% in the AM)
  • DOLLAR: 76.798 +0.39% (trading +0.11% in the AM) 


  • FTSE 100: (0.28%); DAX: +0.44%; CAC 40: +0.10% (as of 04:58 ET)
  • European markets trade mixed initially benefiting from a modest decline in oil prices and constructive EPS results and despite disappointing results from Texas Instruments (TXN) overnight.
  • Portuguese 10-year bonds fell for a third day, pushing the yield as high as 7.70% (the most since at least 1997.)
  • The equivalent-maturity Italian yield climbed to 5% for the first time since November 2008.
  • The euro depreciated against all but two of its 16 most-traded peers.


  • Nikkei +0.6%; Hang Seng +0.4%; Shanghai Composite +0.1%
  • Markets were mixed today, getting support from a pullback in oil prices.
  • Cathay Pacific Orders 25 Airbus, Boeing Planes After Annual Profit Triples
  • China May Deflect Geithner Pressure by Reporting Smaller February Surplus
  • Thailand Raises Key Rate a Second Time This Year as Asia Fights Inflation

Howard Penney

Managing Director

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