prev

SLOTTED FOR A DOWNTURN

Replacement demand is obviously more difficult to predict than slot sales to new and expanded casinos. We’ve already thrown our hat in the opinion ring on replacement demand (“CAPEX, COVENANTS, AND CORPORATE CONTROL”, 11/2/08). We’re pretty negative but only time will tell on replacements.

What is indisputable (for people willing to do the work) is that non-replacement sales will fall off a cliff in 1H 2009. We estimate a 60% year over year decline in unit sales to new casinos and expansions over that time period. There just aren’t a lot of new opportunities and the comp is extremely difficult. The M Resort in Las Vegas, PENN’s Lawrenceburg expansion, and Sands Bethworks are the only major shipments expected in 1H 2009. As can be seen in the chart, 2010 will not provide a recovery either. Q4 2008 looks pretty good and maybe that is why the slot guys seem overly optimistic right now. The good times won’t last.

Despite the liquidity crunch and significantly fewer new casinos and expansions, analysts somehow believe BYI and WMS can grow revs by almost 10% and total unit sales growth for the sector in 1H 2009 will be positive. Go figure.

Major drop-off beginning in 1H 2009

HALF IN THE BAG

I continue to hold a very sober view of 1H CY2009 slot sales. Analysts are forecasting 10% revenue growth for BYI and WMS and positive slot unit sales for the sector over this period. As we wrote about in our 11/02/2008 post, “CAPEX, COVENANTS, AND CORPORATE CONTROL”, slot Capex is likely to drop off dramatically in the first half of next year as CFO’s strive to avoid liquidity crises. In addition to a replacement push back, demand for slots at new casinos will be way down in 1H CY2009. We estimate unit sales to new casinos will be cut in half over that time.

Estimates probably need to be reigned in for all of the suppliers. However, BYI looks to be more protected with almost 50% of its revenue derived from what we would consider “in the bag” sources. WMS is expected to generate only 35% from such sources. No company would be in good shape if slot sales fall to zero in 1H 2009, nor are we predicting they will. There are new casinos opening next year but it is conceivable that replacement demand could get cut in half or even by 75%.

“In the bag” revenue sources include lease and participation revenue (which we’ve discounted given the environment) and deferred revenue. Due to accounting regulations, BYI has deferred a significant amount of revenue. We estimate a little under 20% of projected revenue is derived from deferred revenue versus virtually zero WMS. This provides a nice cushion in a temporary slot slowdown. Both companies should source 30-35% of revenue from participation and lease revenue.

Considering relative valuations and expectations and BYI’s earnings cushion, BYI’s stock may be in better shape to weather a temporary slot drought.


SP500 Levels Into the Close: Buy'em!

As of the 3PM refresh, my models are signaling 1-2% downside and 6-7% upside from the 833 line we issued in our Early look.

BUY "Trade" line = 818.11
SELL "Trade" line = 885.67

The SP500 is setting up here to close at a lower low. On the margin, that's bearish. In conjunction with this event, Volatility and Volume are not confirming higher highs vs. those seen during the thralls of October 2008. On the margin, that’s bullish.

Hank “The Market Tank” is done. The CPI report tomorrow will be bullish. Buy’em!
KM

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

Spain: The Terror Mullet

A very frightening man with a very funny hair style…

News that the ETA military leader Mikel Garikoitz Aspiazu Rubina , known as “Txeroki” had been apprehended in France was headline news across the continent with Spanish Prime Minister Zapatero heralding the arrest a “severe blow” to the separatists.

The ETA has waged a smoldering terrorist campaign in Spain since the Franco regime ended with frequent violent outbursts. Since July the ETA is suspected of 3 car bombings, including one at a military academy in Santona that killed a Spanish Army officer on September 21st and one in a university parking lot in Pamplona on Oct 30th that injured 15 students. Despite the capture the IBEX continued to decline throughout the day session closing lower by 330 points or 3.77% pulled down by concerns over the gloomy prospects for a recovery anytime soon. Banco Santander, Spain’s largest financial institution fell by more than 6%.

We have followed the Spanish market closely this year and were short EWP, the Spanish ETF, during the spring as the housing market crisis there began to accelerate. We continue to keep an eye on the Spanish market, looking for signs that matter on the margin. This one certainly didn’t.

Andrew Barber
Director

US PPI: The Most Bullish Chart Of The Day

When a tree falls in a forest, does anybody hear? This inflation charts is starting to sing bullishly (albeit softly) to our macro model.

Suffice to say, the top in reported US inflation is in the rear view mirror (see chart). This is going to pave the way for "Heli-Ben" to justify cutting US interest rates to zero. Altogether, this is going to be bullish for equities and commodity prices in the months to come. Re-flating may very well be the only policy path left.

KM

Eye On Liquidity: Flatlining

LIBOR and spreads between short term and long term rates came in flat yesterday as the markets waited for PPI and CPI for cues. This morning’s PPI was deflationary, so US short rates continue to come in nominally, but three month LIBOR is holding at 2.22% On the margin, this is a bearish signal for equities and a negative sign for liquidity in general as the cost of lending in the interbank and capital markets increases slightly on concerns over counterparty risk (the low was closer to 2.10%, so we are moving up from the lows, not down from them).

The decline of 3 month LIBOR from near 5% in early October to less than half of that in the first week of this month was one of the most positive signals in our macro model, but don’t mistake lower reference rates with increased liquidity. Figures released last week by the Fed for Interbank loans by commercial banks during the first week of November showed the second sequential week over week decline (see chart) suggesting that commercial lenders are still reluctant to extend credit despite government intervention. They fear the market’s proverbial pirates. They are sitting on their cash.

Meanwhile the swap spread market still reflects the high cost of financing positions in the capital markets. Although shorter maturity swap rates decreased overnight the levels still remain over 100 basis points – well above historic averages. The drought appears to be impacting the listed futures markets as well - an informal survey of brokers suggests that FCMs on average are quoting rates above the Exchange minimum levels and that this premium has been creeping up steadily in recent weeks.

We will continue to watch reference rates for signals, but will weigh those signals against the real cost of liquidity when factoring them into our model.

Andrew Barber
Director

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next