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Static Fear

“Fear is static that prevents me from hearing myself.”

-Samuel Butler


Scared yet? For parts of yesterday, I certainly was. I was buying into some really red stuff. And I felt alone. But I wasn’t.


It took me a lot longer (10-15 years) to not live in complete terror of my investment process than it did putting on a pair of skates. Imagine suiting up for every game in complete distrust of everything you have prepared for; imagine every time you were down by a few goals and were getting yelled at, you just left the game altogether (or Twitter)…


I am far too human to explain how and why I make all the mistakes that I make throughout my business building and market timing day. All I can tell you is that when I can’t hear myself – and I mean my process and my principles – I have no business leading anyone into making game time decisions.


Back to the Global Macro Grind


In yesterday’s Hedgeye Poll I asked whether the SP500’s correction from its all-time closing high (1709) would be:


A)     1%

B)      2%

C)      4%


I chose B. #Wrong again. (No one chose 4% this time, just fyi).


The correction is marked to market now at -2.8%. So now it’s probably time to freak right out.


Since the most differentiated call Hedgeye has had on the US side of growth in 2013 is employment #GrowthAccelerating, I also ended yesterday’s rant by emphasizing the importance of yesterday’s US weekly jobless claims report (pre-open).


If you would have personally handed me the report (that’s illegal) 3 hours before game time, I would have chose option A) and, having perfect “fundamental” economic data in hand, I would have been dead wrong on the market outcome.


In an intraday jobs note, our Senior USA Macro Analyst, Christian Drake, dissected the difference between NSA (yes, we are watching you) and SA:


1.    NSA:  Non-seasonally adjusted claims, our preferred read on the underlying labor market trend, made a new absolute low for the cycle at 280K -  marking its third consecutive sub-300K reading in a row and the lowest since September 2007.  On a YoY basis, initial claims accelerated to -11.7% from -9.9% the week prior with the 4-week rolling average improving 50bps to -8% from -7.5% the week prior.


2.    SA:  The seasonally adjusted, headline claims number printed its best number of the year, and best number since October 2007, at 320K.  This week’s data represents an accelerating YoY rate of improvement of  -12.8% YoY (vs -9% the week prior) with 4-wk rolling average down 4K WoW.   

In other words, the latest bear market crash call has now been edited to “the US employment data is too good.” Alrighty then.


Obviously, if you’ve had this right for the last 9 months, the legitimate “market top” call (that approximately 116 pundits have now tried to make on the US stock market YTD) was to call the all-time top in bonds in November of 2012.


Top calling is not a risk management process. Markets that eventually top:

  1. Start putting in a series of lower-all-time highs
  2. Then snap their immediate-term TRADE lines of support
  3. And finally crash through their long-term TAIL lines of support on accelerating volume

If you haven’t read that in a book – that’s because I made that up myself. Cool, eh!


What isn’t cool is trying to sell advertising or “thoughtfulness” based on one-way fear. With Twitter, this bearish style is basically the upside down version of what has becomes formally known as perma-bull. Zero Hedge minces no words on this. Sharp guy. Dead wrong on the market this year because perma-bear on US stocks doesn’t work any better than the bullish version does.


Perma-uncertainty? I’ll roll with that instead.


This way we can buy red and sell green; fade fear and book hope. It’s not for everyone. I know. But being everyone’s everything is no way to live anyway.


What to do from here? I’ve already made my move. I put up an intraday note titled “Buyem” yesterday at 1104AM EST. I think the actions (#timestamps) alongside the word were straightforward. The most important new Macro moves I made were:

  1. Buying the Nasdaq (QQQ)
  2. Buying British Equities (EWU)
  3. Shorting Fear (VXX)

For better or worse, I’m one of those players in this game who is maybe dense enough to just make calls. But, make no mistake, there is a tested and tried process behind every move I make. And I didn’t learn how to shoot on the #OldWall either – a long time ago, Gretzky taught me that you’ll miss 100% of the shots you don’t take.


Our immediate-term Risk Ranges (we have 12 big Macro ranges in our Daily Trading Range product too) are now:


UST 10yr 2.66-2.79%



VIX 12.95-15.22

USD 80.89-82.06

Gold 1


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Static Fear - COD


Static Fear - V. VP 816






Filipino tycoon Enrique Razon says he means to use his Manila venture - Solaire casino - as a springboard for expansion overseas.  Razon says he is interested in markets with established rules for gaming, such as Macau.  He expects the government to allow new companies into the gaming market in 2020, when gaming licences begin expiring.



DSEC indicated that visitor arrivals in package tours increased by 19.5% YoY to 790,996 in June 2013.  Visitors arrivals in package tours mainly came from Mainland China (622,977), with 216,690 coming from Guangdong Province, followed by those from Taiwan (44,918); Hong Kong (32,202) and the Republic of Korea (25,886). 
There were 99 hotels and guesthouses operating at the end of June 2013, providing 28,082 rooms, up by 15.7% YoY.  Guest rooms of 5-star hotels accounted for 66.5% of the total.
The average length of stay of guests held stable from a year earlier, at 1.3 nights. 


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




  • BYI beat the quarter ever so slightly but the quality was there.  Systems, BYI's highest valued cash flow stream, drove the beat.



  • BETTER:  Systems segment had an outstanding quarter with $72.9MM in revenues and a 79.1% gross margin.  BYI believes this will be the fastest growing segment in FY 2014.  BYI reiterated 70-75% margins and expects software and services % of mix to revert back to mid-30s. 
    • PREVIOUSLY:  "We are heading towards fiscal 2013 being a record Systems revenue year for us, beating the previous record of $218 million established in fiscal 2010 by a fair amount. We have every reason to believe fiscal 2014 will be even better."
    • [Software/hardware split] "I believe it was somewhere around 36% hardware, so not too dramatically different from the prior quarter and from the year-ago quarter. Looking into Q4, hardware might be a lower, slightly lower percentage of the overall total revenue; software might be a little bit higher...And that is reflected in the normal expectation of gross margin that we say, in the 70%s is the range our gross margin will normally be, give or take a couple of percentage points here and there."


  • SAME: 2Q gaming operations margins came in at 69.1% - within BYI's expected range.
  • PREVIOUSLY:  "The margin on Gaming Operations was 71%, within our expected range of 68% to 73%."


  • SAME:  38% growth in the installed base of WAP games.  BYI expects WAP install base to grow in FY 2014 but not at the pace of FY 2013.
  • PREVIOUSLY:  "All things considered, we expect to see the rate of WAP unit increases to pick up during the upcoming quarters...We expect the flow of WAP and premium game titles to continue in a steady well-planned and controlled fashion."


  • SAME:  Will be completed in 1Q 2014. BYI received $2.4MM in common shares.  This share count will not increase significantly due to the recent increase in weighted-average share price.
  • PREVIOUSLY:  "Just the subject alone that since November 2007, including the ASR we're doing now, we bought back $1 billion. No change in our capital allocation strategy. We think that using an ASR to basically pull in about 7.5% of our total market cap is a pretty efficient means to do that. We do have some additional powder available even during the period of the ASR, should we choose to put that to work." 


  • WORSE:  BYI thinks they might have lost a couple of % points in ship share due to disciplined pricing.
  • PREVIOUSLY:  "When I think about average order size, it's gone up a touch. I would say that's more a result of some corporate buying."


  • BETTER:  BYI  sold 1,179 international unit in F4Q, flat YoY but easily its best quarter of the year.  Buying activity picked up.  The company expects international unit sales to pick up reasonably significantly in FY 2014 from the 3,500 level in FY 2013.
    • "Because regardless of whether their replacement numbers increase or not, one thing is certain, we are very under-represented in those floors. So we have a lot of market share growth opportunities there, even if the overall replacement trends don't pick up. So we have a long way to go before we are worried about the overall macro (international) trends."
    • "Some of the new game content we've been working on for the past year specifically targeted towards various international regions will be released soon and should help grow this portion of our business during fiscal 2014 and beyond."


  • SAME:  BYI is live on 17 different sites in Europe
  • PREVIOUSLY:  "We also made very good progress on the remote gaming server front, going live with eight Bally titles on multiple European portals this past week. We expect over a dozen such portals to launch Bally's world-class game content by the end of this fiscal year."


  • WORSE:  NASCAR has not had the mass market appeal that Michael Jackson did.
  • PREVIOUSLY:  "And in terms of our expectations of NASCAR, yes, it is along the lines of Michael Jackson and GREASE, if not better."


  • SAME:  ASPs of new gaming devices decreased 6% to $16,224 per unit from $17,182 a year ago, primarily as a result of a higher mix of lower-ASP VLT and VGT units sold in the quarter.  Ex Illinois/Canada, ASPs was flat QoQ.  Net net, BYI expects ASPs in FY2014 to be up a little bit. 
  • PREVIOUSLY:  "If you remove the VGTs and the VLTs our pricing is along the same lines as it has been for the last couple of quarters. In fact, pretty close to the highest levels it's been. We remain very disciplined with pricing."


  • SAME:  BYI shipped 200 VLT units to Canada in FQ4.
  • PREVIOUSLY:  "Canada and South Africa, I mean, it's a 2014 story. It's a 2015 story. It could even beyond 2015 be a story. There's still more to come on Canada, more jurisdictions that I think ultimately will come to market."

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Systems drives a small beat



“Fiscal 2013 was a truly momentous year in Bally’s history,”  “We made enormous progress in many different ways, including continued growth in wide-area progressive (“WAP”) units, record Gaming Operations revenue, significant success in new markets like Canada, Illinois, and South Africa, establishing new revenue records in Systems while setting up Systems for further growth in the years ahead, and the launch of Bally content in regulated online jurisdictions. These achievements position us well for continued growth in fiscal 2014 and beyond.”


- Ramesh Srinivasan, BYI's President and Chief Executive Officer.


  • Reiterates FY 2014 guidance for Diluted EPS of $3.70 to $4.05. 
  • As a result of normal seasonal trends, the timing of new openings and major systems installs, the Company expects that its Diluted EPS in the second half of fiscal 2014 will exceed the first half, with the second quarter being stronger than the first quarter. 
  • Guidance anticipates continued YoY growth in each of game sales, gaming operations, and systems revenues. This guidance does not reflect the impact of the planned acquisition of SHFL entertainment or any acquisition-related costs or savings.



  • Several legal matters from F4Q 2012 have been settled
  • With respect to HPG in Italy, both parties have agreed to waive any and all disputes and terminate all agreements and HPG has agreed to begin repayment on the loan a €15 million made in 2009 with graduating monthly payments through July 2017
  • 3,733 units in North America (2,624 replacement units)
  • Ex Canadian/IL units, ASP in F4Q would have been flat QoQ
  • Average dollar margin for each gaming unit sold was up 3% YoY
  • Cash connection 1,678 units (+265 units QoQ) - NY results were very strong
  • WAP revenues up 46% YoY; WAP yields lower QoQ due to normal seasonal trends
  • Systems:  Maintenance revenues now on annual run rate of $100MM
  • Higher mix of software and service revenues.  Continue to expect 70-75% systems margins
  • ASR:  will be completed in 1Q 2014; received $2.4MM in common shares.  Will not receive significantly more shares due to recent increase in weighted-average share price.
  • F4Q FCF:  $58MM 
  • DSO:  106 days, down from 113 days year ago
  • WAP units 2,463 
  • NASCAR:   good game but has not resonated as well as expected
  • Hot Shots:  outperforming expectations
  • New WAP titles at G2E:  Pink Lady (Grease followup)
  • G2E:  new rental/daily fee games
  • Illinois VGT:  continue to exceed expectations., Since Sept 2012, 1,943 units sold; momentum will carry in FY2014 and beyond. 
  • International game sales:  meaningful uptick in South America, customer feedback has been positive
  • Top 5 customers accounted 42% of revenues in F4Q vs 41% in F3Q
  • Systems backlog:  will establish a new annual record in FY 2014
  • Systems:  17 major implementations e.g. Macau, US, South Africa
  • 68% domestic system revenues; 32% international system revenues
  • 23% of systems revenues came from new customers, 77% came from existing customers
  • Added 9,000 gaming connections to systems products in F4Q
  • Over 450,000 gaming devices connected to BYI devices; 185k equipped with iView, 42k equipped with current generation iView units; 19k equipped with iViewDM
  • I-gaming:  BYI live on 17 different sites in Europe
  • 1H 2014 will contribute 46% of FY 2014 EPS

Q & A

  • FY 2014 35 cent guidance range: visibility has been better so tight range given 
  • Replacement market has been less of a concern for BYI.  Only 13% of gross profit.  Feel like customer are buying but they may lose a couple of % of ship share from time to time because of pricing discipline.  Remain optimistic about replacement cycle. 
  • Continue to believe they will generate at least $30MM in synergies with SHFL acquisition
  • Systems growth will be the highest.  Game sales will be 2nd highest. 
  • 39.4MM diluted share count, which had added back one month of the 2.3MM ASR or 800k shares
  • NASCAR doesn't have the common global mass appeal as Michael Jackson for example.  Already started work on NASCAR 2.
  • If you take out the 2,200 Canadian VLTs in FY 2013, ASPs in 2014 will be higher. 
    • Has at least 30% of ship share in Illinois; expect to garner a similar amount in FY 2014. So that will pressure ASPs a little bit but not substantially
    • Net net, ASPs might be up a little bit
  • There could be some of moving from class II to class III next year
  • Market is happy that the SHFL combo is happening
  • F4Q Domestic replacement share? Somewhere in the teens
  • 'Normalized' flat ASPs had some impact on replacement share
  • Good growth from Pawn Stars
  • Lottery units down?  They did some floor re-concentration.
  • International:  buying activity did pick up.  Got some sales from Argentina where importation of goods has been difficult
    • For FY2014, Argentina is one important driver of a quarter being 1,200 units or a 950-1,000 units quarter.
    • Expect units to pick up reasonably significantly in FY 2014; had 3,500 international units in FY2013
  • iView DM continues to be a terrific opportunity
  • Systems:  expect Software and services % of mix to be in the mid-30s
  • FY 2014 R&D % of revenue:  11-12%
  • Gaming equipment margins in FY2014:  may grow fractionally.  Would require higher mix of conversion kit sales to grow margins
  • MJ 2:  new music, new game mechanics, customers excited

Buyem: SP500 Levels, Refreshed

Takeaway: Evidently, #RatesRising for the right reasons is the new bear case for stocks... Still, I cover shorts and buyem here.

This note was originally published August 15, 2013 at 11:04 in Macro



People are always asking me why about this and why about that – “if you are so bullish on US #GrowthAccelerating and #RatesRising, why aren’t you longer?” Well, the 1st answer is that I’m as imperfect as the rest of you at this, and the 2nd is I like to buyem when they’re really red.


What’s fascinating about today’s selloff (taking us -2.8% from the all-time closing high in SPY – I know, end of the world type stuff) is that it came on precisely the opposite reason 2013 stock market bears have been begging for (slowing growth).


In terms of how we score it (NSA rolling jobless claims) this was the best employment #GrowthAccelerating print of the year (see our Macro note on employment today for details). Rates ripped on that and now, evidently, #RatesRising for the right reasons is the new bear case for stocks.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1691, then 1709
  2. Immediate-term TRADE support = 1659
  3. Intermediate-term TREND support = 1631


In other words, I cover shorts and buyem here. And I don’t know what else to tell you other than that.


Enjoy your summer Thursday,



Keith R. McCullough
Chief Executive Officer


Buyem: SP500 Levels, Refreshed - SPX

The Queen Mary Is Turning

(Editor's note: The article below was featured on Fortune earlier today.)


By Daryl G. Jones


FORTUNE -- Every quarter, our team here at Hedgeye gets together and boils down the turmoil in global macro markets to three neat and tidy themes for our clients. But, in the spirit of Gary Keller's new, thought-provoking book, The ONE Thing, I'm going to employ a little alchemy and distill our team's latest macro toil down to one key theme: rising rates.


The Queen Mary Is Turning - tut1


Consider the following three noteworthy items on rising interest rates:


The Queen Mary of macro trends has inflected. We often use the analogy of the Queen Mary turning to describe the long-term trend in interest rates. The Queen Mary, of course, was the massive ocean super liner that dominated transatlantic voyage before the jet age. As is the case with any vehicle that is more than 300 meters in length, turning the Queen Mary around was no easy task. And certainly not without wide-reaching implications and reverberations.


This particular analogy is especially appropriate for the current sea change in interest rates, as they have literally been in decline for the last three decades, since peaking in the early 1980s. This long-term decline has enabled virtually any business that depends on borrowing money to fund its business to have a steadily declining cost of capital. In addition, this has made bonds a compelling asset class for investors.


In our second-quarter models, yields inflected notably and broke out above our TRADE (three weeks or less), TREND (three months or more) and TAIL (three years or less) levels. This is nothing to sneeze at. In fact, as shown in this Chart of the Day, 10-year yields had their largest percentage increase quarter over quarter in more than a decade. Even though 10-year yields have broken out, they remain well below the mean yield since 1989 of 5.21%. In other words, despite their recent rise, yields are still around 260 basis points off the mean.


The market is chock full of debt. Given the generational trend in interest rates going lower, and thus providing a tailwind for bonds, it should come as no real surprise that a large percentage of investors' portfolios are full of fixed income. According to the most recent data, there is $38 trillion of bonds outstanding across all subsectors of the bond market. Moreover, bonds outstanding have increased every single year since 1990.


The more critical data point from an asset flow perspective is that the notional value of bonds outstanding is currently at 68/32 vs. the market capitalization of equities. This, too, is an extreme ratio based on history and is literally the highest we have seen. For comparative purposes, this ratio was at 50/50 as recently as 1999.


Volatility and duration across the bond market are in a setup that could lead to meaningful losses. As volatility in an asset class increases, so too does the expected loss and/or return. According to Merrill Lynch's MOVE index, bond volatility has almost doubled in the last quarter and is at two-year highs. Meanwhile, duration is at close to all-time highs. My colleague Jonathan Casteleyn of our financials team highlighted this in his recent presentation on asset managers, but based on current duration, a roughly 100 basis point move in yields equates to an 8.9% loss on the 10-year Treasury.


In part, we are already starting to see the sort of generational losses in bonds that we should expect from the dynamics outlined above. To put a finer point on it, the Barclays Aggregate Bond Index is set for its first loss in 14 years, and only third loss since 1990. So, while gentleman may prefer bonds, they don't prefer losses.


The reality in markets is that there is rarely "One Thing" that dominates. Rising interest rates may prove to be the exception. This seismic "Queen Mary" shift in interest rates will certainly be one of the most critical factors over the coming quarters and years with wide-ranging reverberations. And, as money continues to flow from the bond market to avoid losses, equities will be awaiting with wide open arms.


Daryl Jones is Director of Research at Hedgeye. You can follow him on Twitter @HedgeyeDJ.


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