BYD pulls the trigger on a very accretive acquisition.



Could this be the deal that finally gets this stock its due?  Numbers were already going higher but BYD is adding a huge amount of EPS and cash flow without adding to leverage.  The acquisition of Peninsula Gaming is a big positive on many fronts with limited downside.  Shocking, really, that there was this good of a deal out there.



Here is what we like:

  • Huge accretion:  There are a lot of unknowns (borrowing rate and allocation of excess purchase price to goodwill) but we estimate the deal could be accretive to BYD’s 2013 EPS to the tune of $0.30-0.40 or 50-70%.  On a free cash flow basis, we calculate accretion of around $0.90-1.00 per share or 30-33% accretion.  As a percent of normalized free cash flow (BYD is under-spending on maintenance capex for a few years), the accretion climbs to 50-55%.  Maybe it’s not management hyperbole when they call the acquisition “a transformative transaction”.
  • Acquiring stable cash flow:  All four of Peninsula’s mature properties have been generating stable EBITDA.  Moreover, gaming revenues at each property have been up since January and market shares are all on a stable to upward trend (see charts below).
  • Protected markets:  While there is always potential for new competition, there are no new properties anywhere on the horizon that could materially impact any of the Peninsula properties.
  • Acquiring growthy cash flow:  Kansas Star, the new property in the portfolio, significantly exceeded expectations in its first full quarter of operations, generating almost $27 million in EBITDA.  That’s a 60% annualized ROI on a temporary facility.  The permanent facility (Phase II) will open in January 2013 at a cost of $83 million (funded by Peninsula and not BYD) which could add another $10-20 million in EBITDA.
  • Assets are in good shape:  The properties in the aggregate are newer than BYD’s existing properties so there are no deferred capex issues.
  • Financing:  We don’t calculate any increase to BYD’s leverage as a result of this deal.  Moreover, setting Peninsula as a subsidiary and putting the debt on the sub provides BYD with a lot of financial flexibility (read:  Borgata).  That flexibility is probably worth the additional interest cost of subsidiary financing.  Nice risk management move by BYD management.  They also secured a $144 million seller financed note with no interest in the first year.  Look for BYD to buy this out after year 1 or 2.


The not as good (there’s not much not to like):

  • Potential for an equity raise:  Management didn’t rule out raising equity to fund the $200 million cash piece of the acquisition.  With the stock where it is, we would not like to see dilution.
  • Little in the way of synergies:  While this is not a huge issue since the price is right, we don’t see any cost cutting opportunities and are not optimistic that B-Connected will provide a lot of revenue synergies.
  • Expensive Earn-out provision:  7.5x EBITDA exceeding $105 million in 2015 at Kansas Star.  This takes away a lot of the upside but it is understandable given the growth trajectory of the property.





Happiness Oversold

“The happiness that Jack and Jill experience is determined by the recent change in their wealth.”

-Daniel Kahneman


Across Global Equities and Commodities, this morning our Globally Interconnected Macro Models are signaling the best immediate-term TRADE oversold signal we’ve had in 2012. The perma-bulls have been under siege for 2-3 months. Happiness from their February-March highs is oversold too.


In Chapter 25 of Thinking, Fast and Slow, Kahneman does a great job debunking one of the many dogmas of modern economics. He calls it Bernoulli’s Error – and it’s one that’s pervasive in our profession today. It’s the classic mistake of generalization in assumptions when it comes to utility curves and expectations.


“Bernoulli’s theory assumes that the utility of their wealth is what makes people more or less happy. Jack and Jill have the same wealth, and the theory therefore asserts that they should both be equally happy, but you do not need a degree in psychology to know that today Jack is elated and Jill is despondent.” (page 275)


Back to the Global Macro Grind


At the end of March, if Jack bought Chinese stocks (my son Jack indirectly did), and Jill bought US stocks, Jack is up +5% and Jill is down 7%. So, even if I had a daughter named Jill, Jack would be relatively happier than her if they were going shopping this morning.


If Jill’s Dad was right levered up long in everything US, Asian, and European stocks… and he had a side pocket of Gold, Oil, and maybe a special situation basket that included long JC Penney… Jill and her Dad are going to be eating hot-dogs instead of steaks this summer.


Anyone who has run real-money under the real-time performance pressure cooker for the last 5 years knows precisely what I am talking about. Timing Matters. If you buy high and are forced to sell low, you could wreck your year in a very short period of time.


What does immediate-term TRADE oversold mean?

  1. It doesn’t mean we are all bulled up about Global Growth Accelerating
  2. It doesn’t mean we are bullish on our intermediate-term TREND (3 months or more) duration either
  3. It means that, on a 3 factor basis (price, volume, volatility), stocks and commodities are simply oversold

So the first thing I do with that is start covering short positions. That gets me longer on a net basis. Then I start to slowly take up my gross invested position, selectively, in our best ideas.


I’ve screwed this up enough times to know that you really need to wait and watch on that second part. Your gross long exposure to the market is where you can get run-over; particularly if the market continues to trend lower with no mean reversion bounce.


The good news for US Stocks is that has already happened:

  1. US Dollar Index has been up for 12 consecutive days (new all-time record – all-time is a long time)
  2. US Stocks have been down for 10 of the last 11 days
  3. SP500 and Russell2000 draw-downs from the YTD tops in March-April = -6.7% and -8.7%, respectively

Jill (and her Dad) are not happy. And they probably won’t be until their hard earned capital gets back to break-even. That’s another concept that dysfunctional gamblers don’t quite understand until it’s too late either. The market doesn’t owe you a break-even. Mr Macro Market couldn’t care less about what’s in your pocket either.


The US Stock market (SP500) is down -15.4% and -6.7% from its 2007 and 2012 highs, respectively. That doesn’t mean if you’re up +6.7% from here you break-even. It means you have to be up +7.1% from here to get back to your April 2nd2012 break-even, then up another +10.3% from there to get back to your 2007 high-water mark.


This isn’t easy.


Neither is being happy in this business. But your greed can get overbought and your happiness can get oversold, in the meantime.


Immediate-term TRADE oversold lines, across asset classes in our model are as follows:

  1. SP500 = 1320
  2. Russell 2000 = 770
  3. Nikkei = 8709
  4. Shanghai Composite = 2338
  5. German DAX = 6341
  6. Spanish IBEX = 6548
  7. Gold = $1531
  8. Oil (Brent) = $109.78
  9. Copper = $3.44
  10. Apple = $543

That’s why we bought Apple (AAPL) yesterday. It was immediate-term TRADE oversold right where we bought it at 3:06PM EST. I took our US Equity Asset Allocation up to 12% with that (Cash down to 76%). I’d much rather buy AAPL at immediate-term oversold than buy Tech (XLK) which wasn’t yet signaling the same. Not all happiness gets oversold in the same way, at the same time.


Our immediate-term term support and resistance ranges for Gold, Oil (Brent), US Dollar, and the SP500 are now $1, $109.78-112.34, $80.48-81.55, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Happiness Oversold - Chart of the Day


Happiness Oversold - Virtual Portfolio


TODAY’S S&P 500 SET-UP – May 17, 2012

As we look at today’s set up for the S&P 500, the range is 31 points or -0.36% downside to 1320 and 1.98% upside to 1351. 












  • ADVANCE/DECLINE LINE: on 5/16 NYSE -1037
    • Down from the prior day’s trading of -926
  • VOLUME: on 5/16 NYSE 872.49
    • Increase versus prior day’s trading of 0.45%
  • VIX:  as of 5/16 was at 22.27
    • Increase versus most recent day’s trading of 1.37%
    • Year-to-date decrease of -4.83%
  • SPX PUT/CALL RATIO: as of 05/17 closed at 2.34
    • Down from the day prior at 2.35 


  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.77
    • Increase from prior day’s trading at 1.76
  • YIELD CURVE: as of this morning 1.48
    • Up from prior day’s trading at 1.47 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, week of May 12, est. 365k (prior 367k)
  • 8:30am: Continuing Claims, week of May 5, est. 3225k (prior 3229k)
  • 9:45am: Bloomberg Consumer Comfort, week of May 13
  • 9:45am: Bloomberg Economic Expectations, May
  • 10am: Philadelphia Fed., May, est. 10 (prior 8.5)
  • 10am: Leading Indicators, Apr., est. 0.1% from 0.3%
  • 10am: Freddie Mac 30-yr mortgage
  • 11am: Fed to purchase $1.5b-$2b notes in 2/15/2036 to 5/15/2042 range
  • 12pm IMF’s Blanchard speaks in Washington
  • 12:35pm: Fed’s Bullard speaks in Kentucky
  • 1pm: U.S. to sell $13b 10-yr TIPS (reopening)
  • U.S. Treasury announces 2-, 5-, 7-yr auction sizes 


  • Treasury Secretary Tim Geithner discusses economy at Greater Baltimore Cmte. breakfast, 7:30am
  • Commerce Dept. issues final ruling on solar panel imports from China, may impose additional anti-dumping duties, 9am
  • Federal Mine Safety and Health Review Commission meets on whether safeguard notices sufficiently protect workers, 10am
  • Aubrey McClendon, CEO of Chesapeake Energy; and Thomas Farrell II, CEO of Dominion Resources, at Energy Central event, 2pm
  • SEC holds closed meeting on enforcement matters, 2pm
  • U.S. Postal Service announces plan for closing some mail- processing plants
  • President Obama’s schedule TBA
  • House, Senate in session:
    • House Financial Svcs holds hearing on settlement practices of U.S. financial regulators, 10am
    • Senate Finance holds hearing on whether the Social Security Administration is meeting its responsibilities, 10am
    • House Financial Svcs panel holds hearing on ability of U.S. insurance, reinsurance firms to compete internationally, 2pm 


  • Facebook IPO expected to price tonight; current range $34- $38-shr
  • Wal-Mart may show 1Q gross margin pressure in earnings report today
  • Japan’s economy grows a faster-than-expected 4.1% in 1Q
  • Companies mentioned at the Ira Sohn conference yday may move
  • Spain sells EU2.49 billion bonds, just below maximum target
  • JPMorgan’s trading losses have surged in recent days: NYT
  • Canadian Pacific proxy vote today as Bill Ackman seeks seats
  • Paulson says likes CVR Energy as Icahn may resell oil refiner 


    • Children’s Place Retail Stores (PLCE) 6am, $1.06
    • Sears Holdings Corp (SHLD) 6am, $(0.67)
    • Buckle (BKE) 7am, $0.76
    • Cato (CATO) 7am, $1.07
    • Wal-Mart Stores Inc (WMT) 7:04am, $1.04
    • Dangdang (DANG) 7:28am, $(0.22)
    • Dollar Tree Inc (DLTR) 7:30am, $0.97
    • Precision Castparts Corp (PCP) 8am, $2.27
    • Advance Auto Parts Inc (AAP) 8:30am, $1.81
    • Computer Sciences Corp (CSC) 8:30am, $0.20
    • GameStop Corp (GME) 8:30am, $0.54
    • Ross Stores Inc (ROST) 8:30am, $0.93
    • Teekay LNG Partners LP (TGP) 8:30am, $0.51
    • Teekay Corp (TK) 8:30am, $(0.35)
    • Teekay Offshore Partners LP (TOO) 8:30am, $0.38
    • Zumiez Inc (ZUMZ) 4pm, $0.11
    • Gap Inc/The (GPS) 4pm, $0.45
    • Intuit Inc (INTU) 4pm, $2.48
    • Autodesk Inc (ADSK) 4:02pm, $0.47
    • Aruba Networks Inc (ARUN) 4:03pm, $0.16
    • Applied Materials Inc (AMAT) 4:04pm, $0.24
    • Brocade Communications Systems Inc (BRCD) 4:05pm, $0.12
    • Inc (CRM) 4:05pm, $0.34
    • Aeropostale Inc (ARO) 4:15pm, $0.13
    • Youku (YOKU) 4:30pm, $(1.19)


  • Chalco Target as Mongolia Seeks to Bar State Deals: Commodities
  • Oil Trades Near Six-Month Low as ECB Curtails Greek Bank Lending
  • China Seen Toppling India as Biggest Gold Market on Demand
  • Gold Demand Fell 4.6% in First Quarter on Lower Jewelry Buying
  • Gold Rebounds as Slump to This Year’s Low Spurs Investor Buying
  • Copper Rises on Speculation About Further Fed Growth Measures
  • Wheat Set for Longest Winning Streak Since January on Dryness
  • London Metal Exchange Reports Net Income Declined 19% Last Year
  • Gas Breaks Oil Link as Gazprom Price Power Fades: Energy Markets
  • Cotton Stockpiling in China to Continue as Reserves Expand
  • CME Pulls Grain-Trade Plan Two Weeks After Bid to Match ICE
  • Gold May Beat Silver Rallying to $1,600: Technical Analysis
  • China Postal Express IPO to Fund Online-Shopping Push: Freight
  • Rubber Climbs Most in Four Months on Japanese Growth, Crude Oil
  • Oil Rises From Six-Month Low on Japan Data
  • Hong Kong Bourse Should Lose Monopoly If It Wins LME, Says Rival
  • First Indian Shale Gas Seen Four Years Off as China Output Nears






 US DOLLAR –get USD right, and you’ll get most other things big beta right. USD is immediate-term TRADE overbought as Gold, Oil, SPY, AAPL etc go immediate-term TRADE oversold. If you’re going to cover shorts and dip your toes on the long side of this thing, this is the spot (for a trade).






SPAIN  - way oversold after it crashed; mean reversion bounces across Europe haven’t happened yet, but they will (if they don’t, our entire profession should just go to 100% cash and pray). Spanish stocks go green after the bond auction #encouraging, for a trade.






CHINA up +1.4% overnight after taking a good hard look at our 2336 TREND line of support and holding it; Shanghai Comp has outperformed SP500 by more than +1100bps since April 1st; that’s the most bullish thing we can tell you (next to down oil) for Global Growth.










The Hedgeye Macro Team


The Macau Metro Monitor, May 17, 2012




1Q GDP in Singapore grew 1.6% YoY or an annualized 10% QoQ, marginally higher than the initial estimate of 9.9% growth.  This missed the median estimate in a Bloomberg survey of a 10.6% gain.  


The Trade Ministry maintained its forecast for 2012 GDP growth of 1-3%.  “Singapore’s growth momentum has picked up, anchored by a strong upturn in the manufacturing sector.  Nevertheless, the recovery in the global economy remains fragile and vulnerable to downside risks.  A disorderly sovereign debt default in the Eurozone that would hurt the global economy and Singapore’s export-dependent industries cannot be ruled out," the Trade Ministry said.

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