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Zero Resistance

“Through years of experience I have found that air offers less resistance than dirt.”

-Jack Nicklaus


I was playing in a golf match at the Newport Country Club in Rhode Island yesterday and, in the final pairing of the day, found myself playing against our all-star Energy analyst (and former Princeton Hockey Captain) Kevin Kaiser.


He hit a tee-shot on a 240 yard par 3 (into the wind on the ocean side of the course) that appeared to have zero resistance until it was in the hole. #Ace


As his playing partner (former NHL’er , Jeff Hamilton) and I walked down the fairway towards the hole, Hammy said “you guys are one-down.” I had zero resistance to that comment too.


Back to the Global Macro Grind


What if the stock market had zero resistance? That would be cool. I’ve never seen it before, but that doesn’t mean it can’t happen. What is resistance for a market price after it hits an all-time high anyway?


Higher-lows and higher-highs for market prices are bullish. Higher-lows and higher-all-time-highs, are really bullish. And no matter what fairway of life you are walking down into today’s month-end, that’s what the US stock market continues to signal in our model.


Plenty of pundits who were shorting the market since March said you “sell in May and go away.” Then they changed that to June. Now I guess they’ll just have to push that out to August, because here’s what the score card reads on the last day of July:

  1. SP500 (SPY) = +4.96%
  2. US Healthcare Stocks (XLV) = +7.12%
  3. US Financial Stocks (XLF) = +5.32%

In other words, if you weren’t long stocks for all of July, you’ll either need a hole-in-one today, or to just go on CNBC and place your own ball in the hole (after the Herbalife thing, Ackman had to resort to something; pitching a massive long position at month-end).


As stocks continue to make higher-lows and higher-highs, the “value” buyer’s game gets tougher. Combine that perpetual waiting (to buy the dip that doesn’t come) with a massive tail-wind called fund-flows into equities, and playing into that wind gets tougher.


Why does consensus continue to chunk dirt into this epic rally?

  1. #CYA – lots of people who blew up buying the 2007 top are simply not allowed to buyem this high
  2. Sentiment continues to be long of fear, when fear itself in Equities (VIX) continues to crash
  3. The potentially generational fund flow shift out of bonds and into stocks still doesn’t have consensus buy in

If you look at this morning’s II Bull/Bear Spread, it’s more of the same on that front:

  1. Bulls in the survey dropped back below 50% last week to 48.4%
  2. People who admitted to still being bearish remained at 19.6%
  3. The Bull/Bear Spread = +2880 basis points to the bull side

I’m not trying to suggest that after the Russell 2000 and SP500 are up +22.9% and +18.2% YTD that everyone is bearish. I’m not telling you to chase and buy the market on green days either. I’m just reminding you that less than ½ of the players out there are bullish!


And when month-end and YTD performance is in the hole like this, time becomes the bull’s bff…


Let’s go back to the point I made about fear crashing for a minute:

  1. VIX crashed (again) in July (its -20.6% for the month-to-date)
  2. VIX is still crashing YTD at -25.6%
  3. VIX, on a 3yr basis, is -43.0%

That’s a lot of baggage for a dirty ball to carry. And I think, more than anything, else – that’s the point. There’s a lot of mental baggage out there on this course. Consensus bears have been buying 25-30 the thunder and lightning VIX rain protection all year, when it’s been a clear and sunny path toward an implied VIX of 10-12.


Never underestimate the behavioral side to this game. It’s a lot like golf – and, as the great Bobby Jones once said, “Golf is a game that is played on a five-inch course – the distance between your ears.”


Our immediate-term Risk Ranges are now as follows:


10yr 2.57-2.71%


Nikkei 132

VIX 11.99-13.89

USD 81.43-82.59

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Zero Resistance - 2


Zero Resistance - Virtual Portfolio

HBI: Bad Core, Good Acquisition

Takeaway: We don't like the base business one bit. But HBI is sandbagging on acquisition accretion. That's tough to bet against, for now.

Conclusion: We think that HBI has some fiercely opposing investment characteristics right now. It’s got abysmal top line growth and tougher margin compares shaping up on one end, but low expectations for the addition of the (sandbagged) MFB acquisition on the other. In the end, while we don’t think HBI is comfortably investable here, we think that the stock falls into the ‘unshortable’ category for the next year (at least at this price).  



On one hand, the company is ‘growth challenged’. Let’s face it…HBI is buying Maidenform because it has to.  Since it anniversaried the Gear For Sports acquisition in 2Q11, HBI’s top line growth has averaged zero percent. Yeah, there’s perhaps a 1% hit from exiting the screenprinting business, but 1% growth in aggregate is hardly anything to get too excited about. Our biggest beef is that International and Direct-to-Consumer are both smaller today than they were two years ago. FX has been a factor, we’ll give ‘em that (though it hasn’t stopped others over this time period). But DTC, which should be the low hanging fruit for any company that owns its own brand – especially one that manufacturers vertically – simply can’t seem to grow. Ironically, the MFB acquisition will not improve the proportion of Int’l or DTC, it simply fills out a different part of HBI’s bra business in US mass channels and department stores.


On the positive side, the reality on Maidenform is that a) HBI got it for a steal, b) management lowballed on accretion as they simply add it to HBI’s model, c) there’s easy margin upside as HBI unravels failed MFB programs put in place over the past two years, and d) there further upside as HBI fills out its excess capacity with MFB business (i.e. transitions MFB to an insourced model from an outsourced model).  They guided to $0.15-$0.20 per share from MFB. Seriously? If we simply add on MFB’s net income after borrowing costs from last year – which was abysmal, by the way (worst in 8-years) we get to $0.25-$0.30 in accretion. When all is said and done, we think the accretion numbers will be at least 2x guidance in year 1, and could be closer to a buck versus management’s $0.60 guidance three years out.


The bottom line is that it does not matter one iota that sales are punk. We might start to see some positive benefit from HBI’s organic marketing initiatives in 2H – but that gives them maybe a point or two in growth.  The big upside begins in another two quarters when HBI gets 15% sales growth alone just from adding MFB. Along the way, cash flow looks good, and the company looks on track to pay down the debt associated with the deal just over a year after it closes. Organically, we’re not fans of this story by any stretch (challenged top line and cotton-led gross margin benefit coming to a close). But the reality is that the market won’t look at the ‘organic growth and margin characteristics’, it will look at reported numbers, and lowballed expectations.  As a merged entity, this one will be tough to bet against.


In preparation for HYATT's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • “We have the Park Hyatt New York, which is expected to open in the second quarter of next year, which will bring us a very important luxury presence in this market. We're also developing a Grand Hyatt in Rio, another key market in Latin America.”
  • “Bookings for 2014 have increased by 10%. So the short-term booking trend is still very volatile. It's still very sensitive on a month-to-month basis and we continue to see that long-term bookings 2014, 2015 and even into 2016 look very healthy, look very promising. We don't see any issues there yet. Although, when you go back to last year August, September, October and you looked at 2013 and the booking trends were and compare it to where we are now with 2013, there has been quite of a wash, cancellation and push out into future years, and we continue to see that trend.”
  • “Overall, we see our booking experience as an indication that the booking window is lengthening.”
  • [How PCLN/Kayak will impact margins] “Well, I think the first thing to note is that the proportion of our total business that flows through online travel agency, broadly defined, without differentiating for a moment between aggregators and front ends like Kayak or opaque sites like Priceline is relatively modest. So it's, in the aggregate, not quite in the double digits."
  • “So one think I would, just to note is that, our primary application of our capital base on our balance sheet is to support our growth, that's our number one priority. We have been, more formally over the last year, been in the market and repurchasing shares."
  • “Dividend will continue to be on the table for discussion in the future.”



  • “As we look to the future, we're encouraged by several data points. First, group pace. Even though realized revenue for group business was down in the first quarter, overall group revenue production was up over 3% in the quarter.”
  • “Second, transient demand, the overall business climate in the U.S. was strength in manufacturing, technology, housing and other sectors, is supporting robust transient demand levels. Therefore, while we expect group demand to improve relative to what we saw in the first quarter, we still expect transient business to be a stronger driver of improved results this year.”
  • “Third, the economic and market conditions around the world are evolving. As we look around the world at various regional and individual economies, we believe that the hotels in Americas and ASPAC regions are likely to see stronger levels of RevPAR growth than hotels in the EAME/Southwest Asia regions over the remainder of 2013.”
  • “In China, the focus by the new leadership on austerity has and will continue to hurt F&B revenue, in particular in the short-term.”
  • “In India, the economy is starting to stabilize, while the country enters a national political process leading up to general elections in 2014. Nonetheless, the positioning of our existing portfolio as well as the hotels expected to join our portfolio over the coming year in each of China and India is very encouraging.”
  • [Renovations impact]  "We expect the impact to be towards the lower end of the previously mentioned $3 million to $6 million range per quarter for the next quarter or two. The impact is expected to decline as renovations of managed hotels are completed and year-over-year comparison issues recede.”
  • “As we discussed on our last earnings call, we are exploring sale options for six full service hotels in the U.S. This effort is moving ahead and we will update on the sale if and when closed. In all cases, we intend for these hotels to continue in our portfolio under long-term management or franchise contracts.”
  • “The $100 million to $120 million estimate on investment spending this year really relates to JV projects, which would include, for example, the Andaz Wailea Resort, which continues to make great progress. We expect a third quarter opening. And we have other construction projects that are underway in the U.S. and in Latin America through existing or new JVs, or in the case of our Hyatt Place construction projects in Omaha, it's on balance sheet development. So I would say that our activity and focus on new opportunities through both JVs and whole ownership continues to be a significant area of activity and a focus for us. And that's why we wanted to simply track this over time.”
  • “Our intention is to continue to be active through the cycle on both the buy-side and the sell-side.”
  • [Affordable Care Act impact] “We have already absorbed some of the costs for things like 100% preventative care and coverage of dependents through age 26. We know that the impact of implementation costs lie ahead and we can't really know how many associates who currently opt out from our plans will choose to participate beginning in 2014. However, we expect healthcare costs to continue to exceed inflation in the next few years and add some significant cost elements to the portfolio. But to be specific in quantifying the impact, it is too early at this stage.”
  • “I think the modeling disruption beyond the end of this year, we know now and we mentioned that the renovations in the key markets in Asia would continue into next year.”
  • “There are a couple of properties on which we continue to focus on our alternatives to what we have currently, places like Miami and Toronto, which if they come to pass and we start planning for something significant in terms of redevelopment, we will update you on that. But in terms of major renovations in our owned portfolio, we don't have any plans for anything like that in the foreseeable future.”


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • Despite an in-line to slightly below consensus quarter, BYD's tone and guidance was better than expected.  The company's exposure to Las Vegas and Atlantic City is looking more like an asset versus other regional gamers versus a 5 year liability.  


  • SAME:  BYD reported wholly-owned EBITDA (post-corp) of $132.3MM, in-line with its $132-137MM guidance range.  Borgata excluding the property tax adjustment earned $32.1MM, higher than its $27-29MM guidance range.  


  • BETTER:  The biggest surprise of BYD's markets as EBITDA grew 12% on flat revenues.  Mgmt believes operating margins are sustainable and the future looks bright.
    • "Our themed slot initiatives and related marketing programs that we discussed on prior calls have been quite successful. Looking ahead, we are optimistic about our prospects in the second quarter, which got off to a good start at the Orleans with a festival celebrating the American Country Music Awards."
    • "On a spend per visitor basis, we're running about flat, so sort of an improvement over the declines we had seen prior."


  • BETTER:  Changes to Hawaiian schedule and refined marketing programs led to operating efficiencies.  Mgmt also saw a pickup in traffic particularly on Fremont Street.
  • PREVIOUSLY:  "We are diligently focused on improving operating margins in this segment as well, and we're successful in mitigating the impact of lower revenues on the EBITDA line...Overall direction of our Downtown Las Vegas business remains encouraging. We continue to enjoy a great relationship with our Hawaiian customers, providing this business a solid foundation."


  • BETTER:  While mgmt continues to be cautiously optimistic, they are seeing improvement in business trends. 
  • PREVIOUSLY:  "We are cautiously optimistic about the economic trends that have started to form late in the quarter and the overall direction of our business."


  • WORSE:  Ex IP, the segment would have reported flat EBITDA.  Iowa and Kansas were impacted by severe weather.      
  • PREVIOUSLY:  "We are optimistic that conditions should remain relatively healthy in our Midwest and South markets in the months ahead."


  • SAME:  The surveys at Wilton Rancheria will take some time.  Believes that property can open in 2016.
  • PREVIOUSLY:  "We are well positioned take advantage of several significant long-term growth opportunities, including our agreements with the Wilton Rancheria tribe in Northern California and Sunrise Sports Entertainment in South Florida. Both of these partnerships could provide significant growth opportunities to our company in the next several years."


  • SAME:  remain confident on being the 1st online gaming operator in New Jersey.  BYD is awaiting government approvals by the end of the year.
  • PREVIOUSLY:  "We're also quite optimistic about the potential of the emerging domestic online gaming market. We intend to be among the first to offer online gaming in the State of New Jersey and are confident that the Borgata brand will allow us to capture a substantial share of this lucrative market. We're evaluating the opportunity to offer online poker in Nevada as well and are determining the best way to enter what is shaping up to be a robust yet crowded market."


  • MIXED:  Kansas Star achieved significant revenue growth (we believe 13% YoY) but also incurred much higher operating costs due to the opening of its new arena. 
    • "Marketing spend was unusually low during Kansas Star's introductory period in early 2012, and this quarter's results reflect more realistic customer reinvestment levels. We expect these trends to continue and visitation should grow further with the opening of our arena, capable of seating over 6,000 guests. This property continues to perform in line with our expectations and remains on track to generate about $100 million in EBITDA on an annual basis."
    • "Kansas Star today has 150-hotel rooms in total. We'll be increasing that to 300 in the next 18 months or so per our agreement with the state and our hotel operator."


  • WORSE:  Gulf Coast market (ex Delta Downs) has not grown.  The opening of the Golden Nuggest raised the promotional environment (though IP marketing expenses dropped).  IP was particularly weak on the slot side. 
  • PREVIOUSLY:  "I would tell you that the market is certainly, as we knew going in, a very, very competitive market. State of Mississippi issues numbers by sort region within the state and you have those handy. And the IP for us has been much more of an efficiency story than a revenue growth story, and we think as a result of that it has had a meaningful contribution to stock price and equity valuation, because we bought it at the right price and very much improved margins and EBITDA contribution at that property, and expect that to continue."


Surprising in-line quarter with decent guidance. BYD's LV/AC exposure becoming an asset vis a vis the other regional operators.



"We are making significant progress toward our strategic goals of strengthening our balance sheet and positioning ourselves for continued growth.  Operating efficiencies and effective marketing programs drove solid growth across our Las Vegas properties.  And Borgata posted year-over-year gains as well, after factoring out the impact of a tax charge.  Our Company is moving in the right direction, and I am optimistic about the outlook for our business."


-Keith Smith, President and CEO of BYD



  • 2 transactions (Echelon and Dania):  Generated $400MM, eliminated $20MM in annual expense
  • Positive momentum in business trends
  • Locals
    • All 4 locals properties had YoY growth in EBITDA
    • Believe operating margins are sustainable
    • Future looks positive
    • More jobs on the way in Nevada
    • Existing home prices up 30% YoY
  • Midwest and South
    • Ex weak results at the IP, EBITDA would have been flat
  • Borgata
    • Well ahead of expectations
    • Positive trends have continued into 3Q
    • Confident in capturing online gaming share - poker, slots, table games
      • On track to be the 1st to offer online gaming in New Jersey, awaiting govt approval
  • Rancheria tribe - early design work under way
  • LV Locals: kept costs down despite no revenue growth
  • Downtown LV:  1) changes to Hawaiian schedule led to efficiencies; refined marketing programs 2) uptick traffic at Fremont Street
  • Midwest and South:  increased capacity affected Gulf Coast properties. Iowa and Kansas impacted by severe weather.  
  • Peninsula:  significant revenue growth at Kansas Star.  Late June, opened 1,600 seat arena - completing phase 1 of expansion plans; confident for margin improvement in Kansas Star.
  • Borgata:  tax court expected to make its ruling by the end of the 3Q - positive tax ruling could occur
    • Table share drop share increased by 300bps
    • Increased promotional activity have not affected Borgata
    • Prepared for online gaming launch in 4Q
  • Debt: $3.7BN ($1.2BN- Peninsula); debt has declined $260MM; $305MM incremental available at Boyd, $30MM available at Peninsula
  • Cash: $119MM (Boyd) $30MM (Peninsula); retired $216MM 6.75% notes (saved $14.5MM in annual interest expense)
  • Secured leverage: 3.7x out of 4.5x; total leverage: 6.5x out of 7.75x
  • Borgata debt: $796MM - $4MM outstanding under $60MM credit facility
  • Borgata Cash: $34MM
  • Borgata will retire $40MM of 2015 senior notes at $103.  Redemption will occur in August
    • Interest expense savings will result in $3MM/year
    • $22.5MM CRDA refund; recorded a $5MM write-down in the quarter
  • Capex: $36MM ($11MM at Peninsula, $7MM at Borgata)
  • 3Q guidance:  wholly-owned EBITDA post corporate:  Boyd $120-125MM; Borgata: $44-46MM
  • 3Q EPS guidance (assuming 35% tax rate):  loss of 2 cents to income of 3 cents

Q & A

  • Continue to be cautiously optimistic
  • Expect modest revenue growth in LV Locals market
  • Visitation trends depend by market; Nevada did better than other markets
  • Borgata:  continue to have opportunities for operating efficiencies
  • Peninsula margins:  Kansas Star had higher operating costs ($1.3MM property tax difference- will appeal on this)
  • Peninsula performing as expected
  • I-gaming:  Bwin providing software; if Bwin launches their own product (B2C) and regulators approve, BYD gets 10% and it will be under the Borgata banner.
  • Locals promotional environment:  last to similar year; marketing expenses flat YoY
  • Borgata guidance:  soft hold in 2Q 2012; expect margin improvements to continue to Q3; expect some revenue growth; momentum has picked up post Sandy; guidance does not include potential tax refunds
  • Gulf Coast market has taken a pause (ex Delta Downs) 
  • Opening of Golden Nugget raised marketing spend in market
  • IP weakness was on the slot side; reduced marketing in 2Q
  • Golden Nugget in Lake Charles:  good news; will drive traffic from Houston
  • Wilton Rancheria project:  surveys will take some time; probably a 2016 opening

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