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Here is the consensus call: Short Boyd because business is terrible and they may bust a covenant or raise equity. My response to that is a) business is bad everywhere but that is “soooo consensus” and b) they have so many levers to pull that they will not bust a covenant nor raise equity.

So what are the levers?

1. Buy bonds at a discount – We’ve written on this extensively so all I will say is that BYD has bonds trading in the 60s so they can de-lever by about 20 cents (after tax) for every dollar they borrow from the credit facility to buy back bonds. If Senator Ensign delivers there will be not tax.
2. Cut costs – I think BYD has been very aggressive in this area and we should see it show up in their Q4 margins. Revenues are challenged but again that is the consensus view.
3. Cut Capex – Slots can wait. So can growth capex.

Management seems remarkably complacent about the covenant situation which leads me to believe that: a) recent results are better than expected, b) cost cutting is ahead of plan, c) capex is lower than projected, d) enough discounted bonds were bought back earlier in Q4 to appropriately de-lever. On a very positive note, an equity raise is not under consideration.

In the meantime, BYD will generate $175 million in net free cash flow over the next 12 months (after Q1). That is cash after all capex; growth and maintenance. The free cash flow yield on the stock is an astonishing 40%. Sometimes you just gotta say what the ….

With free cash flow like this, "sometimes you just gotta say what the ....:
Enough cushion but more levers

Commodity Nugget: The Spread Between Light Sweet and Brent

Commodity Nugget: The Spread Between Light Sweet and Brent

We posted two days ago on the steep contango curve in the oil futures curve and wanted to highlight another interesting discrepancy in the Oil market. As outlined in the chart below, the divergence between the price of West Texas Intermediate and Brent has reached an extreme at more than $10 currently.

Brent oil is pumped from the Brent formations in the North Sea, while West Texas Intermediate is pumped from, as the name denotes, the oilfields of Western Texas. The key differentiator between the two grades of oil is that West Texas Intermediate is lighter and sweeter, so is of higher quality than its North Sea counterpart.

All things being equal, consumers will use light sweet oil from West Texas before its heavy counterpart from the North Sea. As such, historically West Texas Intermediate has traded at a slight premium to Brent. Currently that spread has reversed, and as outlined in the chart below, the price of Brent is trading at an almost $10 premium. The implication of this is that oil demand in the U.S. is very weak relative to the rest of the world, which was also evidenced by this week’s DOE report.

As the divergence below suggests, determining the inflection point to a more balanced supply / demand picture in the U.S. will indeed be critical in determining the next up Trend move in oil. On the downside, we see USO (United States Oil Fund) testing the $28 level in the coming weeks.

Daryl G. Jones
Managing Director


November Retail Sales data rose by the lowest percentage in 2 years, and it still looks great!

People looking for a negative story in today’s retail sales data from Brazil had an easy time finding one. The ( by now completely stale) numbers show that retail sales in total only grew by 5.3% Y/Y * three months ago -which was seized upon by Brazil Bears as a sure signal of pain to come for an economy were consumer spending accounts for more than half of GDP.

Taken on a relative basis however, the data released today has an altogether different complexion (see table of several key index components below). On relative basis 5.3% looks very healthy, while the 2 and 3 year growth stats are still in double digit territory. While there is no denying that automotive sales have fallen off a cliff (what in this world didn’t in November!), the near term impact on the Brazilian economy is softened somewhat by the almost complete foreign ownership of the industry there (Ford, GM , Fiat and VW combined account for over 80% of car sales with the remainder primarily divided between Japanese brands).

Obviously the Brazilian economy is going to slow in sympathy with global markets, but we stand by the argument for sustainable sales growth driven by domestic demand in Brazil even if it is merely in single digits. We are long Brazil via the EWZ etf and continue to believe that Brazil and China will outperform the rest of the developing world in the coming year.

Andrew Barber

*all data presented seasonally adjusted

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European Bond Yields as Diverse as the Europeans Themselves

European Bond Yields as Diverse as the Europeans Themselves

“Things fall apart; the center cannot hold.” –William Butler Yeats

Many Europeans are asking themselves the question today, does the European Union hold up in the face of the worst recession since WWII? The downturn has ravaged budgets and credit ratings across the region.

What’s clear is that some countries will come out of this recession better than others, likely those with larger GDPs, more stable credit ratings, and have adequately stimulated their economies through fiscal and monetary packages. Certainly this is easier said than done…

What has become apparent is that the ECB has not been able to limit collective inflation in the zone, which it set out as a defining principle when the Union was envisaged. Currently the divergence of bond yields across the Euro zone display that certain countries stand to lose more, as their credit ratings are downgrade and yields tick upwards.

For example, Greece’s credit rating was downgraded this week by Standard & Poor’s and Portugal, Spain, and Italy are also under threat. The downgrade has inflated Greek bond yields to record highs. This translates to investors becoming more discerning about who they lend to. After all, shrinking economies force governments to intervene, which in turn increase budget deficits and potential credit risk. A country like Germany with a strong credit rating has relatively little risk, yet one must consider the risk-reward on higher yielding bonds for a country like Greece.

Additionally, because borrowing costs differ per country, ECB cuts in the interest rate have an uneven impact on the Euro area.

As risk managers, we must proactively prepare for tail risk. As it relates to European investing, we need to seriously consider the idea that the EU could splinter should the ECB fail at limiting inflation. In a scenario in which the EU unravels, it is likely that the strong get stronger and the differentiated countries become even more critical in the search for European alpha.

Matthew Hedrick

SP500 Levels Into The Close...

We have ourselves a worrisome quantitative picture that, well… EVERYONE is worried about.

I have outlined my updated levels below. If the low end of the range holds, the bullish intermediate “Trend” of higher lows in the SP500 will remain intact. Combine that New Reality with lower highs in volatility (VIX), and a breakdown and close in the VIX below 46.67, and you have the recipe for an Obama short squeeze.

You know I am not short that Obama option, and I don’t think your should be either. The step ups in my SP500 levels on a close above 886 are steep.

BUY “Trade” = 818
SELL “Trade” = 880

Keith R. McCullough
CEO & Chief Investment Officer

Eye On India: We Remain Bearish...

Wholesale Inflation continues to fall as fast as it rose last year…

Weekly WPI data released by the Ministry of Commerce and industry yesterday arrived at 5.28% -down from last week’s 5.91%, signaling that the trajectory of falling inflation on the subcontinent has yet to change.

The real test for the coming weeks is whether WPI declines will taper off in reaction to the relative buoyancy of several key commodities in recent weeks. The wholesale price index, represents a basket of 447 items within the three sub-indices; manufactured goods, accounting for 63.7%, primary articles at 22%, and food and energy at 14.2%. Plainly speaking, if metal and energy products begin to show signs that they are finding their feet but the corresponding WPI inputs continue to fall off it will quickly become clear how significant a factor domestic demand contraction is.

Part of our India thesis has always been that the majority of the population there, particularly the rural poor who did not share in the prosperity of the recent decade, will be unable to make up for cooling external demand nor do we believe that any public works projects or other measures enacted by Prime Minister Singh’s government will be enough to stem the tide. The reversal of foreign investment, the decrease in equity issuance and a massive national deficit will neuter any impact of the second monetary and fiscal stimulus package announced on January 2nd.

As always however, we are data dependent and stick to our process: If the data suggest that the stimulus is working then we will we rethink our stance. We Shorted IFN into strength on Tuesday and again today. For the time being, we continue to see the Indian economy as one of the weakest hands at the table among the major Asian economies.

Andrew Barber

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 80.48%
  • SHORT SIGNALS 78.35%