Forecasting Dark

“Weather forecast for tonight: dark.”

-George Carlin


When 2011 is all said and done, we’ll separate the winners in this Globally Interconnected Game from the whiners. Whoever had their growth estimates right will have had a lot of other things right.


In the meantime, we’ll have to deal with politicians, journalists, and bankers obfuscating this very simple fact – Global Growth Has Been Slowing Since The End of 2010.


That’s it. That’s what Wall Street, Washington, SocGen, and the Government of France all have in common this morning – their top-line estimates for GDP Growth are still way wrong. And, as a result, being long any of their conflicted promises that are associated with using the wrong GDP assumptions will continue to be wrong. Markets don’t lie; politicians do – and the market has this right.


Markets don’t trade on politicians, journalists, and bankers using the wrong sources – they trade on expectations. To amplify this point about Growth Expectations, let’s take a step back and review where these “blue chip” forecasters were on these matters in Q1 of 2011:


Forecasts for 2011 US GDP Growth:

  1. Bank of America = 3.2%
  2. Barclays = 3.1%
  3. Citigroup = 3.1%

*Disclaimer: these estimates must have all been based on the exact same Keynesian model for garden variety “recovery”


Forecasts for 2011 SP500 Returns:

  1. Bank of America (David Bianco) = 1400 (up +11.4%)
  2. Barclays (Barry Knapp) = 1420 (up +13.0%)
  3. Citigroup (Tobias Levkovich) = 1400 (up +11.4%)

*Disclaimer: two of these forecasting czars opted for round numbers on the absolute; one opted for the rounded off % return


2011 Reported Numbers (Year-To-Date):

  1. US GDP Growth Q1 2011 = 0.36%
  2. US GDP Growth Q2 2011 = 1.29%
  3. SP500 YTD Return = DOWN -10.9%

3 investment banks with conflicted analysis + 3 train wrecks versus expectations = priceless.


Actually, that’s not fair – there is a price to pay for Wall Street/Washington groupthink. It’s being marked-to-market in every American’s 301k each and every day. While I’ll be the first to admit that this is not 2008 (it’s 2011), all it took to remind me how bad Wall Street’s forecasting models remain at calling growth slowdowns was another growth slowdown!


There isn’t really a trickle-down effect associated with getting growth estimates this wrong – it’s more like a waterfall. To borrow a frightening quote from Bank of America’s CEO, Brian Moynihan, on yesterday’s conference call, “think about it this way and you’ll have to trust us”:

  1. COUNTRIES – when they are wrong on GDP assumptions, they are wrong on their DEFICIT/GDP assumptions.
  2. RATINGS AGENCIES – when they see countries with DEFICIT/GDP assumptions rising, their ratings start falling (on a lag)
  3. BANKS – when their GDP assumptions are wrong, their assumptions for their net interest margins and cash flows are wrong

That last point is less clear to your average journalist attempting to “trust” Brian Moynihan on the numbers. What does it mean?

  1. Banks make money on a spread (the Yield Spread – that’s why La Bernank wants to keep rates of return on your savings low)
  2. When growth slows, the Yield Spread compresses (the 10s/2s spread has compressed by 28% in the last 6 months)
  3. When the Yield Spread compresses, Bank of America, Barclays, and Citigroups NIM (net interest margin) and cash flow declines

So… if you get that… and you’re still using Hedgeye’s GDP estimates for 2011 instead of a conflicted and compromised Street’s… you would have immediately recognized anything coming out of SocGen, the Government of France, or Bank of America’s mouths yesterday as irrelevant and/or wrong.


I continue to forecast that the sun will rise in the East today.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $77.20-88.29, and 1087-1137, respectively. We bought Goldman Sachs yesterday in the Hedgeye Portfolio and we remain short Citigroup.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Forecasting Dark - Chart of the Day


Forecasting Dark - Virtual Portfolio

COH: Shorting


Keith shorted Coach in the Hedgeye virtual portfolio into the close. The stock is broken below both his TREND support of $63.54 and immediate-term TRADE support of $58.18.


While the company came in slightly better than expected on the top-line, it missed on gross margins and made up for it with lower SG&A in Q4 – not the formula you want to see for a company looking to maintain double-digit top-line growth. In addition, calling the for a bottom in gross margins after breaching a “very achievable” 72% boundary (they came in at 71.8%) as we head into the 2H does not insight confidence. Sentiment is at peak, management has been selling stock, and inventory growth remains twice the rate of sales growth. We see room for further downside from here.


COH: Shorting - COH VP 8 11


COH: Shorting - COH S 8 11


COH: Shorting - COH Sent 8 11



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Singapore says, "Be Patient."

Conclusion: Singapore's recent economic data is supportive of our call that the slope of global economic growth will continue to remain negative over the intermediate-term TREND.


Position: Long a U.S. Treasury Curve Flattener (FLAT).


Today, Singaporean officials came out and cut their forecast for 2011 non-oil export growth to 6-7% from a previous estimate of 8-10%.  This is just two days removed from a -100bps cut to the country’s 2011 GDP forecast of 5-7% (now 5-6%). Slowing U.S. and E.U. growth were cited as the main culprits.


Why does this matter? Well, simply put, Singapore is the largest exporter in all of Asia on a per capita basis. Its trailing three-year average exports/GDP figure of 215.8% completely dwarfs China’s 33.5% reading. Further, Singapore is home to the world’s second-busiest container port, and those containers are typically filled with a great deal of high-end products (i.e. consumer electronics, corporate machinery, and pharmaceuticals) waiting to be shipped all over the world (no single country accounts for more than 1/8thof Singapore’s exports). The key takeaway here is that the Singaporean economy is very relevant as it relates to short-to-intermediate term read-throughs on the global economic cycle.


Given, we think it pays to pay attention to Singapore and patiently wait for the turn in the global economic cycle – a turn that Singaporean economic data currently suggests is nowhere in sight. One quick look at the recent contractions in the key forward-looking subcomponents of Singapore’s manufacturing PMI should lead one to conclude that this global growth-sensitive country doesn’t like what’s currently under the hood of the world’s economy.


Singapore says, "Be Patient." - 1


As long-time value investor Marty Whitman once famously said, “A bargain is not a bargain if it remains a bargain.” Along these lines, we continue to believe valuation remains no catalyst to buy equities when the growth expectations investors are valuing stocks on continue to be off the mark. As a reminder, current Bloomberg Consensus forecasts for 3Q11, 4Q11, 2012, and 2013 U.S. real GDP are: +3.2%, +3.2%, +2.9%, and +3.2%, respectively - rates well above what our models continue to suggest.


In our opinion, if there’s one subtle takeaway to Bernanke’s comments yesterday, it’s that he’s seeing something negative out on the TAIL worthy enough of marking the risk-free rate of return at ZERO percent through “at least mid-2013”. Keep that in mind as you ponder the true “value” of any enterprises you’re looking to invest in at what appears to be “discounted” prices.


Last, but certainly not least, we think it’s appropriate to reintroduce an equation we published last November right ahead of the official QE2 announcement:


QG = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]


Now, just as it was then, it’s important for consensus to be careful what it wishes for.


Darius Dale



In preparation for BYI's FQ4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from BYI’s FQ3 earnings call and subsequent conferences/releases.



July 28: Empire City Systems Contract Win

  • “Bally will replace the current system with a new, one-of-a-kind, casino-management and patron-loyalty system − Bally CMP (Casino Market Place) − that will interface with Empire City’s legacy game-management and monitoring system, thus protecting Empire City Casino’s already invested capital”
  • “Bally’s systems will support more than 5,310 gaming devices at Empire City. Seven of the eight racetrack casinos in New York now use Bally for their player-centric marketing; with Empire City Casino being the largest of the group.”

July 20: Acquisition of Microview Labs

  • “Acquired privately held MacroView Labs, a leader in mobile-application development and mobile platforms for the casino gaming industry. ”
  • “This transaction bolsters Bally’s position as the leading supplier of games and systems solutions to the global gaming industry. Bally will now have full control over the development of new mobile-gaming marketing, customer service, and play-for-fun technologies for the Company’s casino customers.”
  • “MacroView Labs is the leading provider of mobile applications and mobile websites to the casino industry, with a customer base of more than 20 casinos, including some of the world’s largest gaming operators, and more than 1 million users of their provided applications. MacroView develops smart-phone and web-based mobile apps for the hospitality, retail, and gaming industries – everything from concierge services to GPS-fueled social networking integrated with Facebook and Twitter. They also help casinos manage their mobile content, launch mobile campaigns, and interpret user data.”

July 19: Systems Contract With Golden Nugget AC

  • “The installation will include a broad array of Bally’s latest systems applications, including Windows® SDS™ and CMP™ casino-management system.  Bally’s SDS Windows will be connected live to about 1,500 gaming machines using the latest high-speed networking technology.”

June 29: Sun International System Solutions Deal

  • “Enterprise-wide contract with Sun International Limited to provide key systems and server-based solutions at 17 casinos worldwide.”
  • “The agreement includes the…iVIEW player-user-interface and iVIEW Display Manager(DM) connected to more than 12,000 gaming machines and table games.”
  • “Sun International casinos in Africa will use Bally's …. CMP distributed architecture to allow patrons a single-card environment across multiple properties. CMP provides player-tracking and bonusing solutions.”
  • “Installation … is scheduled to begin in mid-calendar 2012 with all Bally solutions slated to be live at all 17 casinos by late in calendar 2013.”

June 14: Enterprise wide deal with Caesar’s for iViewDM

  • “Enterprise-wide agreement with ….Caesars Entertainment, to implement iVIEW Display Manager (DM) player-user-interfaces across their casino operations.”
  • “The initial implementation has been successfully completed at Caesars' Horseshoe property in Hammond, Indiana. An expansion of iVIEW DM at this site, as well as implementation at other Caesars Entertainment properties, will follow on suitable gaming devices across multiple gaming manufacturers.”

June 7: Agreement with Lottomatica to provide 800 games and systems for Italy’s new VLT industry

  • “Contract with Italian concessionaire Lottomatica Videolot Rete to provide 800 games and systems for Italy's new video-lottery (VLT) program. The Company now has initial agreements to provide more than 5,000 gaming devices to Italy.”

May 12: Final Results of its Modified Dutch Auction

  • “Accepted for purchase 9,912,993 shares of its common stock at a purchase price of $40 per share, for an aggregate cost of approximately $396.5 million, excluding fees and expenses relating to the tender offer…. The 9,912,993 shares …. represent approximately 18.4 percent of Bally's currently … outstanding shares.”


Youtube from Q1 Conference Call

  • “Game sale margins were…negatively impacted by the initial production runs of our Pro Series cabinets, amplified by the fact that more than 50% of our shipments in the quarter were Pro Series. Margins were also impacted by write-offs related to the warranty of older technology platforms, which reduced gross margin in the quarter by approximately 300 basis points”
  • “In the current quarter, we experienced higher bad debt expense related to a few international receivables.”
  • “We expect that our effective tax rate for the remainder of fiscal 2011 will be between 35% and 36%.”
  • “Cash Spin continues to perform well. Deployment of Vegas Hits has now gone past 550 units, and is currently our best-performing premium game. We recently released Cash Wizard, our first Pro Series ALPHA 2 premium game. The total orders for Cash Wizard, including those already installed, has now crossed the 700 mark.”
  • “We are very well-positioned to continue our solid growth in the WAP and Premium market segments”
  • “While our ASPs continue to grow in the quarter, we do expect pressure on our game equipment margins, as we are still in the early production runs of the Pro Series cabinets, and we have just introduced two new cabinets in the Pro Series line”
  • “Today, we are 80% video and have the state-of-the-art platform.”
  • “iVIEW DM, and the Elite Bonusing Suite continue to generate strong customer interest…combined with our strong pipeline and industry leadership position, should result in increased systems revenues in the coming quarters.”
  • “We did not yet expect a significant improvement in the game replacement machine market in fiscal year 2012.”
  • “We have made sizable investments in innovation in new markets that should positively develop during our fiscal year 2012. These include Canada, New York, Italy, Australia, New Zealand with ALPHA 2 platform, iVIEW DM, and our new system gaming management unit. These investments, combined with favorable capital markets, led us to refinance our debt and invest in Bally with our significantly expanded share buyback program.”
  • “Our expectation is to have a full line of products in the field by the end of fiscal ‘12, so that we’re – essentially 70% to 80% would be Pro Series and ALPHA 2 titles. By the end of the year, probably about 50 titles”
  • Game sale margins: “Pro forma margins would have been right around 46% (F3Q11). I think they’ll be in the mid-40 neighborhood. You have to remember we did just release…the Pro Curve, and the V32 is now out in the Pro series, which will put a little bit more pressure on our margins in the upcoming quarters…Longer-term, we expect to bring margins back to the low to mid-50s”
  • “The process in Italy is regulatory approval followed by installation for us; we don’t anticipate any field trial. Our expectation is now that by the end of this calendar year, we will begin deploying units in Italy. And as we’ve said before, we expect the majority of our Italy units, which are now well over 4,000 we’ve got commitments for, would be on a recurring revenue basis versus a sale basis. So, we would expect to build up beginning late this calendar year, and continuing for 9 to 12 months thereafter, installing this 4,000 to 5,000 units.”
  • “Our view is that our opportunity is more on the cost side to improve our margin. We’re doing some initial discounting on the new cabinets.  But you’re right, we’ve seen more of it [promotional activity and trade-in incentives] the last 12 months than we’ve seen the prior 2 or 3 years.”
  • “For the last two years, we’ve been more focused on our Premium footprint with the release of Cash Spin, now Cash Wizard. We just released Betty Boop and Money Vault, so two new refreshes in our WAP footprint. So, I think we would see that number starting to trend upward.”
  • “I think we would expect to see some seasonal increase in the number of replacements going into Q4.”
  • “I think we’re certainly focusing on used game markets these days. It’s something that, from an international perspective, we haven’t really focused on over the last couple years, so I would see some increases in used games going forward.”

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