Takeaway: We expect BYI to provide a bullish outlook to investors and back it up with strong content at next week’s G2E

As many of you know, Todd has been in Vegas the last 2 days getting a preview into the week ahead.  After a half day of meetings in Las Vegas, a clear cut highlight was a very positive meeting with BYI.  Management was very bullish about their content for G2E and also about the outlook for all segments of their business.  We think this optimism will show through when half of the investment community attends G2E next week.


We’re usually sober regarding the pre-G2E commentary and glowing press releases regarding each company’s upcoming G2E exhibits.  What’s different for BYI is that this historically reel spinning slot supplier is going to display mostly video content that has apparently been getting great feedback from customers.  Remember that approximately 80% of units shipped are video and unbeknownst to most investors, BYI’s recent slot shipments have also been around 80% of total.  So their video content is already driving higher share recently and with what they are going to show at G2E, will likely increase their high teens overall share.  This is not your father’s Bally Gaming.


The stock has done well, certainly relative to its competitors.  However, the valuation is not excessive and forward estimates look like they may need to go higher.  We are not making a call on the September quarter – we’re essentially in-line – but G2E should be a big near-term catalyst along with the announcement of a big award from Western Canada. 


Consensus for the BYI’s FY2013 is $3.17 and company guidance is $2.95 to $3.30.  We think that consensus is achievable and beatable depending on the timing of the IL rollout and Western Canadian Lottery unit shipments.  We already know that the award for Manitoba and Saskatchewan has been awarded but given the politically sensitive topic of spending money on slots when the economy is in a funk, the government has been “sitting” on the announcement.  At least one of the suppliers that has been awarded part of the contract for 10,000 slots has told us that they expect the units to ship by September 2013.   We estimate that BYI’s allocation of the award was between 1,000-2,000 units, which could boost earnings by $0.09-$0.18/share.  


On September 25th, BYI announced contracts for 4,000 VLT shipments to IL which they expect to be deployed over the next 24 months.  In additional, 3,000 VLTs will be connected to Bally Multi-connect, an enterprise wide centralized accounting and management system.  Our understanding is that roughly 50% of the 4,000 units will be sold and the balance will be on lease arrangements.  Every 1,000 units that BYI sells into IL should contribute 8 cents to earnings. The Multi-Connect link will add to BYI’s already material base of recurring revenue from its central system products.



Notes from our meeting with management:



  • They are very bullish about their video content.  After 15 G2Es, we can say their bullishness was significantly more than normal.
  • Grease was their best WAP launch ever; then Michael Jackson exceeded that.  NASCAR coming out in Q4 2013.


  • IL 50/50 units between leased and for sale
  • 1,600 VLTs over 3 or 4 quarters to Atlantic Lottery starting in September Q
  • Won’t disclose how much of a RFP from Western Canada (Manitoba and Saskatchewan) they got but our sources indicate that the award of 10k machines will be announced soon and BYI got a very healthy share


  • Excited about their systems business as well
  • Ontario is big systems contract – not signed but going to happen
  • BC is 25k units
  • Systems maintenance growth rate 15%
  • Systems services provides 4-8 million per quarter in revs
  • Balance sheets restricting service revenues as casinos want to convert but can’t – good news is that is changing
  • 30% penetrated world-wide on systems

Wide Area Progressives

  • No policy to cap WAP outside of a few small deals where they got something else in return – they are adamant that they are not materially capping their upside on WAPs despite what the investment community and competitors say
  • 600 games on Cash Connection include MJ and Grease at 6/30/12 but 1,500 is their goal.  We think they are well on their way to exceeding that goal.


  • Columbus won’t be recognized until FQ2
  • Slot hold increase industry wide might be due to lowering player odds and then giving it back in rewards
  • CZR starting to buy a little more slot product
  • Margins:  48-49% by the end of the fiscal year for product margin – conversions will be the next leg up

Get Shorty: Rolling Over

Takeaway: Fundamentals are rolling over like US durable goods, so we think an opportunity to short some expensive stocks is coming up very soon.

Post-Bernanke party, when stocks have ripped 50-100% higher in just a few months, energy is one place where we’re looking for short ideas. Fundamentals like durable goods, growth and demand are beginning to roll over and with stocks at expensive prices, we think there’s room for a pullback. Growth is still slowing - remember that.


S&P500 revenues will be +2.2% YoY in the 3Q – adjust that for inflation and real revenue growth has gone negative.  And lately many companies are missing estimates and guiding lower, so the forward outlook is not much better. The question is how high of a multiple can some of these companies trade at in terms of price-to-earnings? 20x? 60x? 100x? Things seem to be getting worse in the market and the economy, not better.



Get Shorty: Rolling Over  - image002

The Sky Is Falling







Chicken Little had it right. Replace the word “sky” for “economy” and he’s spot on. Yesterday’s durable goods print dropped -13.2% for August, an astonishingly awful number. We posted a chart on which we implore you to take a look at. Titled “This Is What A Recession Looks Like,” the chart showcases durable goods numbers since 2000. And guess when we saw big time drops like yesterday? In 2000 and in 2007; two years when we encountered bubbles/crises of epic proportions. Things are still really bad out there, folks. Don’t let anyone tell you otherwise just because it’s a Friday.




We’re surprised that Mitt Romney’s promises to hold China accountable as a currency manipulator haven’t resonated more with the American public. Meanwhile, the Chinese yuan hit a new record versus the dollar this morning at 6.2856. This can be attributed to strong corporate demand and institutional investors getting out of short positions ahead of the long holiday weekend in China. Keep in mind that China is under economic pressure, too. Their artificial housing market has tanked and commodity demand has plummeted over the past year.






Cash:                UP


U.S. Equities:   DOWN


Int'l Equities:   DOWN   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“The harder it gets to manage this immediate-term price volatility, the more insider trading (cheating) you'll see” -@Grainmonster




“A good listener is usually thinking about something else.” –Kim Hubbard




Corn futures hit an 11-week low of $7.1625 a bushel.





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The Oracle of Delphi

“A great number of people think they are thinking when they are merely rearranging their prejudices.”

-William James


In investing, there is no hiding from your prejudices.  If your prejudices trump your intellectual honesty, then you probably won’t be in this business for long, regardless of whether you are on the sell side, buy side, or the dark side.


Since it is political season in the United States, prejudices are as heightened as they have ever been.   Unfortunately, the nature of the two-party system in the United States has evolved to a state where supporting the party trumps rational analysis.  The political overlords speak and those who are politicized vote according to party lines. But I digress . . .


In reference to the title of this note, the Oracle of Delphi was an ancient Greek figure that was at the height of power around 1600 B.C.  She supposedly spoke for Apollo and answered questions for the Greeks, and foreigners, about many topics including: colonization, religion, war, and power.  The Oracle purportedly knew all and people listened.


For a period of time, the Oracle exerted disproportionate influence over the Greek world and was consulted before every major decision.  Obviously, most of us do not run our organizations or investment teams based on the proclamations of an oracle.  And thank goodness for that. 


Ironically, one of the most effective decision making methods is called the Delphi technique, which involves assembling viable options that are then voted on independently until a quorum is reached.  As Michael O’Malley wrote in a recent blog for the Harvard Business Review:


“As the Marquis de Condorcet ( showed (in the collective wisdom proof), good, unbiased decisions are made if a solution space is well sampled and the final judgment is determined by independent decision-makers. One of the attributes that determines the range of options that bees ultimately consider is genetic diversity. The greater the diversity in the bees' DNA, the more sensitive they are to different conditions and circumstances, and the more options the hive is able to gather. More diverse hives are better at everything and more productive than less diverse ones.”


Thus, the key to effective decision making is to assemble a group of diverse individuals with independent voices. 


The Federal Reserve does not exactly fit this mode as highlighted by the backgrounds of the current board members:


-          Chairman Ben Bernanke – formerly a professor at Princeton and a Ph.D in economics;

-          Vice Chair Janet Yellen – formerly a professor at Berkeley and a Ph.D in economics;

-          Elizabeth Duke – formerly a senior banking executive at various regional banks;

-          Daniel Turollo – formerly a professor at Georgetown and a law degree from Michigan;

-          Sarah Raskin – formerly Commissioner of Financial Regulation for the State of Maryland and law degree from Harvard;

-          Jeremy Stein – formerly professor at Harvard with a Ph.D in economics; and

-          Jerome Powell – formerly Assistant Secretary of the Treasury and law degree from Georgetown.


Clearly, the nature of the Federal Reserve board is more akin to a group of oracles than a manifestation of the Delphi technique.  The key error we’ve made in assessing the Fed’s willingness to continue to ease is that we believed they were “in a box” due to the data and the political cycle.  Groupthink, of course, is not always rational.


Regardless of whether we agree or disagree with the Fed, we are back to playing the game in front of us.  Printing money is inherently an inflationary action and will ultimately slow growth.  As we have seen this year, printing money will also inflate equities until the printing presses stop or they get trumped by growth and inflationary concerns.


On the growth front, yesterday the durable goods report dropped -13.2% in August from the prior month.  Largely, this was driven by a drop in aircraft orders, so there is probably a one-time negative and likely non-reoccurring factor here,  but still it is what it is . . . pretty negative.


As it relates to currency, the Chinese yuan hit a new record versus the dollar this morning at 6.2856.  The pundits are speculating that this is due to strong corporate demand and financial institutions getting out of short positions ahead of the week long Chinese holiday.  While Hedgeye won’t be taking a holiday next week, our man on China, Darius Dale, will be writing the Early Look next week to give an update on China.


Needless to say, we are still on the sidelines as it relates to the world’s second largest economy.  We are also on the sidelines as it relates to the idea that we will see meaningful stimulus from the Chinese in the short term.  Despite this, the Shanghai Composite was up another +1.4% today on the back of being up +2.6% yesterday.  Up +4% in two days is solid, but the anecdotes from China continue to be negative.  On the back of Caterpillar saying construction demand was down -40%, we have Nike saying this morning that demand is worse than expected.


Anemic demand from Chinese is crushing the U.S. coal market.  Currently, metallurgical coal from the Appalachian region is trading hands at $52 or so, while it costs $65 - $75 to produce.  Given these economics it is no surprise that we have recently seen a bankruptcy in the sector with Patriot Coal recently filing for Chapter 11.  In our Q4 themes call next week, we will be discussing more companies that have bagel (bankruptcy) risk.


Regardless of potential bagels, we have plenty of long idea and I’ll send you into the weekend with a couple of our top ones:

  1. Las Vegas Sands (LVS)
  2. Urban Outfitters (URBN)
  3. Paccar (PCAR)

Ping for details.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $111.44-113.17, $79.36-80.36, $1.27-1.29, 1.61-1.71%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Head of Sales and Research


The Oracle of Delphi - Chart of the Day


The Oracle of Delphi - Virtual Portfolio


TODAY’S S&P 500 SET-UP – September 28, 2012

As we look at today’s set up for the S&P 500, the range is 19 points or -0.91% downside to 1434 and 0.40% upside to 1453. 













  • ADVANCE/DECLINE LINE: on 09/27 NYSE 1479
    • Increase versus the prior day’s trading of -678
  • VOLUME: on 09/27 NYSE 634.05
    • Decrease versus prior day’s trading of -14.15%
  • VIX:  as of 09/27 was at 14.84
    • Decrease versus most recent day’s trading of -11.72%
    • Year-to-date decrease of -36.58%
  • SPX PUT/CALL RATIO: as of 09/27 closed at 1.82
    • Down from the day prior at 1.84


  • TED SPREAD: as of this morning 27.40
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.62%
    • Decrease from prior day’s trading of 1.65%
  • YIELD CURVE: as of this morning 1.38
    • Down from prior day’s trading at 1.40

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Personal Income, Aug., est. 0.2% (prior 0.3%)
  • 8:30am: Personal Spending, Aug., est. 0.5% (prior 0.4%)
  • 8:30am: PCE Core (Y/y), Aug., est. 1.6% (prior 1.6%)
  • 9am: NAPM-Milwaukee, Sept., est. 45.0 (prior 42.9)
  • 9:45am: Chicago Purchasing Manager, Sept., est. 53 (prior 53)
  • 9:55am: UMich Confidence, Sept. F, est. 79 (prior 79.2)
  • 11am: Fed to buy $1.5b-$2b notes due 2/15/2036 to 8/15/2042
  • 1pm: Fed’s Fisher speaks in Dallas on economy
  • 1pm: Baker Hughes rig count


    • Obama leads in latest swing-state polls as first debate nears
    • Financial Stability Oversight Council meets to choose first nonbank companies likely to be branded potential risks to financial system
    • FDIC holds Consumer Research Symposium; panelists include Fed officials, 8am
    • CFTC holds closed meeting on enforcement matters, 10am
    • SEC holds meeting of Dodd-Frank Investor Advisory Cmte, 10am
    • WTO sets up panel to decide whether U.S. broke global commerce rules with anti-subsidy duties affecting $7.3b of Chinese products
    • Acting Commerce Secretary Rebecca Blank speaks at Council on Foreign Relations on policies to promote manufacturing, 12pm
    • FCC open meeting on licensing, operating rules for satellite services; economic, innovation opportunities of spectrum through incentive auctions; mobile spectrum holdings, 10:30am
    • Homeland Security Secretary Janet Napolitano speaks at cybersecurity summit, 8am


  • Spanish banks scheduled to release results of stress tests today
  • Monti says ECB conditions, IMF role hinder bond-buying requests
  • Yuan climbs to strongest level since 1993 on China stimulus
  • Euro-region inflation unexpectedly accelerated in September
  • Xstrata split with Glencore on terms as deadline nears
  • FSA to oversee Libor in streamlining of tarnished benchmark
  • U.S. criminal Libor probe said to seek London trader interviews
  • Sony to invest $645m in Olympus
  • Hartford to sell life-insurance unit to Prudential Financial
  • U.S. Debate, ECB Bond Buying, Spain: Week Ahead Sept. 29-Oct. 6


    • Finish Line (FINL) 7am, $0.44
    • Walgreen (WAG) 7:30am, $0.56 - Preview
    • American Greetings (AM) 7:30am, $0.14


  • Sumitomo Sees Higher Copper Fees in 2013 as Supplies Increase
  • Copper Bulls Retreat on Concern Stimulus Not Enough: Commodities
  • Crude Oil Poised for Quarterly Gain Before U.S. Spending Report
  • Gold Seen Extending Best Quarterly Gain Since 2010 on Stimulus
  • Copper Heads for Quarterly Gain on Reduced Euro-Crisis Concern
  • Corn Slides to an 11-Week Low Before USDA Report; Wheat Declines
  • Cocoa Advances Most in Three Weeks in London; Coffee Declines
  • Domestic Cuts May Make India a Net Importer of Iron Ore by 2015
  • Brazil Has 24.8 Million Tons of Sugar for Export, Datagro Says
  • Oil May Fall on Weaker Economy and Higher Output, Survey Shows
  • Airlines Threatened by Costliest Fuel Since 2008: Energy Markets
  • Shale Takeovers Loom as Texas Discounted in Australia: Real M&A
  • Xstrata Split With Glencore on Terms as Deadline Nears: Energy
  • India’s Goa Iron Ore Ban Likely to Have Minimal Effect on Market






















The Hedgeye Macro Team

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