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Oversold: SP500 Levels, Refreshed

POSITIONS: Long Healthcare (XLV) and Apple (AAPL); Short Industrials (XLI)

 

Our core fundamental themes have not changed (#GrowthSlowing and #DeflatingTheInflation), but prices have. With the SP500 100 points lower (and AAPL $100 lower), plenty are selling low now. That’s not what we do.

 

Across risk management durations, here are the lines that matter most: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE resistance = 1346
  3. Immediate-term TRADE oversold = 1317 

In other words, we don’t get paid to freak-out and sell on moves under 1320. We get paid to book gains on the short side and, slowly, take up gross invested long positions. On the bounce to lower highs, there are no rules against re-shorting what we cover.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Oversold: SP500 Levels, Refreshed - SPX


Q1 2012 SLOT SHIP SHARE OBSERVATIONS

IGT the big winner

 

 

In terms of ship share, we believe IGT was the only winner in 1Q 2012, on a sequential basis.  The slot market remains super competitive with WMS and Konami particularly aggressive on pricing.  Q1 replacements were down slightly YoY to an estimated 14,900 units but used units are accounting for a bigger % of sales.  In Ohio, for example, ~15% of the units are used/participation.  Casinos are increasingly putting caps on participation units and showing a preference for preferring fixed fee and 80/20 deals vs. % coin in (WAP) type games in an effort to improve margins in a low growth environment. 

 

Here are the estimated CQ1 2012 market shares (based on shipped units):

  • IGT:  33%, up from 30% in CQ1 2011
  • WMS:  19%, down from 21% in CQ1 2011 despite aggressive pricing
  • BYI:  14%, unchanged YoY
  • KNM:  17%, down from 20% in CQ1 2011 
    • Konami was admittedly very aggressive on pricing in Q1
    • We believe Konami growth is stalling and they will likely be a share donor this year
  • MGAM:  2%, double the 1% in CQ1 2011
  • ALL:  11%, unchanged YoY (our guess until the company reports next quarter)

 Q1 2012 SLOT SHIP SHARE OBSERVATIONS - slot


CLAIMS TREAD WATER WHILE YIELD SPREAD COMPRESSES FURTHER

Initial Claims - Uneventful Print

Initial jobless claims rose 3k last week to 370k, though was flat after the 3k upward revision to last week's data. Rolling claims fell 4.75k to 375k. On a non-seasonally adjusted basis, claims fell 18.3k to 323k. Last week we profiled the year-over-year trend in rolling NSA claims as a barometer for avoiding the inherent seasonal distortions. That analysis showed that claims were still improving at roughly at 10% YoY rate. This morning's data point continues that trend.  

 

CLAIMS TREAD WATER WHILE YIELD SPREAD COMPRESSES FURTHER - headline 4

 

CLAIMS TREAD WATER WHILE YIELD SPREAD COMPRESSES FURTHER - rolling 2

 

CLAIMS TREAD WATER WHILE YIELD SPREAD COMPRESSES FURTHER - NSA

 

CLAIMS TREAD WATER WHILE YIELD SPREAD COMPRESSES FURTHER - NSA rolling

 

CLAIMS TREAD WATER WHILE YIELD SPREAD COMPRESSES FURTHER - S P

 

CLAIMS TREAD WATER WHILE YIELD SPREAD COMPRESSES FURTHER - FED

 

2-10 Spread Breaks Down Further

The 2-10 spread tightened another 8 bps versus last week to 148 bps as of yesterday. The ten-year bond yield fell 6 bps to 177 bps.

 

CLAIMS TREAD WATER WHILE YIELD SPREAD COMPRESSES FURTHER - 2 10

 

CLAIMS TREAD WATER WHILE YIELD SPREAD COMPRESSES FURTHER - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

CLAIMS TREAD WATER WHILE YIELD SPREAD COMPRESSES FURTHER - Subsector Performance

 

CLAIMS TREAD WATER WHILE YIELD SPREAD COMPRESSES FURTHER - table

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

     


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.

BYD: THIS IS NOT YOUR FATHER’S IP

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.

 

BYD:  THIS IS NOT YOUR FATHER’S IP - byd1

 

BYD:  THIS IS NOT YOUR FATHER’S IP - byd2




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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Happiness Oversold - Chart of the Day

 

Happiness Oversold - Virtual Portfolio


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