Chart Of The Week: The Queen Mary

This is one of the most poignant charts in my notebooks. The 60 year chart of long term US Treasury Yields.

An important factor in our "New Reality" investment outlook for 2009 is the thesis that the Queen Mary (see chart) is set up to turn up into the right. Long term US interest rates are unsustainably low, and preventing real US savings in this country to find a bottom. Give liquid investors the ability to earn a real return on their capital, and they will start lending it again - liquidity will follow.

Being prepared for an environment where access to capital continues to be tight as long term cost of capital begins to heighten is critical. The free money days of slapping leverage onto levered long bets are ending, abruptly.

US Market Performance: Week Ended 11/21/08...

Index Performance:
Week Ended 11/21/08:
DJ (5.3%), SP500 (8.4%), Nasdaq (8.7%), Russell2000 (11.0%)

November 2008 To Date:
DJ (13.7%), SP500 (17.4%), Nasdaq (19.6%), Russell2000 (24.4%)

Q408 To Date:
DJ (25.8%), SP500 (31.4%), Nasdaq (33.8%), Russell2000 (40.2%)

2008 Year To Date:
DJ (39.3%), SP500 (45.5%), Nasdaq (47.8%), Russell2000 (46.9%)


Bill Boyd and Bob Boughner are the two most influential people at Boyd Gaming. Both recently bought stock. Should we care?

The last time there was a significant cluster of insider buying was in April and May of 2004. The stock more than doubled in 8 months. Management can trade as well. A year later they sold near the top, just before a 25% move down in the stock. Chairman Bill Boyd doubled his money on over 300k shares in a year’s time. Not bad.

I’m not exactly predicting a double in a year just because management bought stock again. However, it wouldn’t surprise me. I’m pretty sure BYD will generate between $1 and $2 of net free cash flow per share next year for a massive 30-60% free cash flow yield on today’s stock price. The stock could double and still yield a compelling 15%, worse case scenario.

The move could happen quickly. Short interest represents 20% of the float. Only 5 out of 19 analyst ratings are buys.

Now or later, there is real value in Boyd Gaming and they are not going bankrupt. It’s encouraging to see that management feels the same way.

Management buys low, sells high


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Commodities – Milk prices

According to the cattle network, milk prices are trending much lower than a year ago due to lower cheese, dry whey and nonfat dry milk prices. The October Class III price was $17.06 and will decline in November to around $15.55, nearly $3.70 lower than a year ago. The Class IV price was $13.62 for October and will be around $13.50 for November, about $6.90 lower than a year ago. Milk prices are not expected to improve and could go even lower in the first half of 2009.


Stealing market share can take you only so far. We expect North American slot sales to fall around 50% in the first half of calendar 2009. Yet, the sell side currently projects WMS to grow its revenue 9% year over year in 1H CY2009 (2H FY2009). That would be quite a heist, especially now that the gorilla that is IGT is beginning to flex its muscles. IGT will likely be using its balance sheet more aggressively in the financing area to “buy” some business. Wait until they flex on pricing.
  • From our posts over the past few days it is pretty clear we don’t think WMS will make the Street numbers for 1H CY2009. The December quarter looks very good for the company and we actually expect upside to consensus. As part of their FQ2 release, however, WMS will have to address guidance for the remainder of its fiscal year and we don’t think it will be pretty.
  • So what does this do to the stock? This isn’t like a casino operator lowering guidance, AGAIN. WMS has raised or affirmed annual guidance for 10 straight quarters including raising guidance in 4 of those quarters. That is quite a track record and management deserves kudos. However, this consistency has set the stage for a major disappointment. WMS could become a victim of its own success.
  • The analysts love the stock. Indeed, 13 out of 15 ratings are buy. Downgrades are more likely than upgrades. Yes, the stock is down 45% on the year which, on the surface, appears to be washed out, until you compare it to the sector. IGT and BYI are down 82% and 70%, respectively. The gaming operators are down even more.

    The more they are loved, the farther they can fall.

With such an impressive track record comes high expectations
Analyst groupthink

Eye on Regionalism: France

French President Nicolas Sarkozy announced today that France will pay out €20 billion to protect its “strategic companies” in the wake of the global financial crisis through the creation of the country’s first sovereign fund. Made up of government and private investment, with state ownership projected between 34-49%, the fund will provide the catalyst for Mr. Sarkozy’s plan, announced last month, of protecting French companies from “foreign predators”.

Yesterday before an aerospace supply manufacturing company near Paris Sarkozy said:
“The day we don’t build trains, aeroplanes, automobiles and ships, what is left of the French economy? Memories. I will not make France a tourist reserve… I want France to keep its factories. I want this process of factory relocation and outsourcing to stop and I want firms with the potential to develop to be able to do so, even if financial institutions at the moment are a little timid.”

Theodore Roosevelt once said, “Speak softly and carry a big stick; you will go far”, which became his trademark foreign policy style. Ironically, Sarkozy, who took over the EU’s six-month rotating presidency in July 2008, has proven since his inauguration in May 2007 to define himself on an internationally stage as the converse: with bouts of grandiose rhetoric and de minimis policy measures. On Friday, on a podium with Dmitri Medvedev, Le Sarko stuck his foot in his mouth, saying the Americans’ (and Czechs’ and Poles’) plan to install an anti-missile shield against Iranian nukes would bring nothing to European security.” Further, Sarkozy proved to be a poor mediator in negotiating the withdrawal of Russian troops from Georgia. Sarkozy—who has received such nicknames as Super-Sarko, Sarko L’Americain, and President Bling Bling—has been nearly as heavily covered for his private life (e.g. his high-profile new wife Carla Bruni who has posed for nude pictures) as for his public service to the French state.

An advisor to Sarkozy offered this positive spin: “People are starting to understand how he works. He has an idea, says something serious, but not diplomatically, and then if necessary he’ll correct himself. If there’s a hullabaloo, he couldn’t care less.”

It is the “idea” part of the quote that deserves attention. Since arriving in office Sarkozy has proposed the organization of Europe’s six largest countries—Germany, France, Great Britain, Italy, Spain, and Poland—to form a European military. Yet reputation always seems to come back and hit you in the face. Historically France is not known for their lack of military involvement around the world, leading back to its departure from NATO more than 40 years ago. Even with Sarkozy’s recent statements that he wants back in the club, the state’s credibility within the European community might remain an issue.

Matt Hedrick

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.