Fanfare for the Common Man

This note was originally published at 8am on October 16, 2013 for Hedgeye subscribers.

“You know that the Englishman’s idea of a compromise is? He says, some people say there is a god. Some people say there is no god. The truth probably lies somewhere between these two statements.”

-William Butler Yeats


I would hardly call myself a classical music aficionado, but I do enjoy tuning Spotify into classical music while grinding away in the office.  One of my recent favorites, “Fanfare for the Common Man”, was written by American composer Aaron Copland for the Cincinnati Symphony Orchestra in 1942.  (Incidentally, the Chicago Blackhawks use this as a pre-game song as they enter the ice.)


Copland’s idea for the fanfare came from a speech by then Vice President of the United States, Henry Wallace.   He gave this speech at a time when Americans were debating wartime strategy and America’s role in the post-World War II order.  One of Wallace’s key points in the speech was that any post war peace should be such that it makes the common man better off for the long run.


This morning it seems our two great political parties, and their esteemed leadership, are coming together on a compromise to benefit the common man.  According to reports this morning from our contacts in Washington, the Senate deal that is on the table is to extend U.S. borrowing authority through February 7th and fund the government through January 15th 2014.


Thank goodness that these folks are looking out for the common man by cobbling together a deal that my 11 year old niece could have negotiated.  Despite the short term and non-materiality of this proposed agreement, it still has two hurdles – a) Ted Cruz, or another Senator, could filibuster and delay passage until next week and b) Speaker Boehner in the House could opt not to send the bill to the floor for an up / down vote.


There is one data point out this morning that gives me great confidence that the debt ceiling will be resolved orderly.  No, it’s not that credit default swaps are trading lower, that Libor is benign, or that gold has been selling off, but rather that the ultimate contrarian indicator, a ratings agency, Fitch specifically, placed the U.S. credit ratings on negative watch yesterday.


Back to the global macro grind . . .


A major call-out this morning is the Shanghai Composite which is down almost -2%.  This weakness is being driven by the property sector which is under pressure based on local news reports that longer term regulations could be in place soon for controlling property in China.


Being the price and market driven analysts we are, the move in Chinese equities this morning is certainly a red flag in our notebooks, but isn’t changing our more positive view on China.  In the Chart of the Day today, we highlight China Foreign Exchange Reserves, which have continued to build even as money has left other emerging markets in recent quarters.


Admittedly, though, China is hard to ignore as it compromises more than 30% of the world’s foreign currency reserves.  Japan is a not so close second at about 10%.  After that we have Saudi Arabia, Switzerland and Russia rounding out the top 5.


From the currency war perspective, there is certainly a bit of People’s Bank of China manipulation going on as exports were admittedly a little soft in September and the Chinese Yuan is eclipsing twenty year highs.   Of course no rational person could blame the PBOC for playing games with their reserves as the U.S. central bank continues to confuse the market with its intentions.  To taper, or not to taper, that is the question?


Sadly, if we can actually get the debt ceiling and government shutdown resolved in the next day or so, then all eyes will once again be fixated on the Fed.  We’d be remiss this morning if we didn’t at least highlight how ineffective the program of quantitative easing has been.  Hat tip to David Einhorn from Greenlight Capital for flagging this in his recent investor letter:


“In August, the San Francisco Fed published an economic research paper that estimated that the $600 billion spent on QE2 added a meager 0.13% to real GDP growth in late 2010 (about $20 billion) and that the benefit fades after two years. Given that, what practical difference does it make whether the Fed buys a monthly $85 billion or $75 billion or no additional securities at all for that matter?”


Buying any good, even say jelly doughnuts, as Einhorn highlights, has a more direct impact on economic activity than QE.  After all, that is actually how the real economy works.  We buy and sell goods and the velocity of money grows the economy naturally.


Interestingly, based on the math above, the Fed could actually be the worst investor in history.  Just imagine a $600 billion capital allocation that generates a 0.13% return! Even there my 11 year old niece could do much better.


Our immediate-term Risk Ranges are now:


UST 10yr yield 2.66-2.73%

SPX 1685-1725

VIX 15.21-17.63

USD 80.11-80.67

Brent 110.01-112.05

Gold 1265-1303


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Fanfare for the Common Man - China Reserves


Fanfare for the Common Man - z  vp 10 16

Popping Bubbles

“It’s imperative that the Fed begins to taper.”

-Larry Fink


Not to be confused with what the CEO of Blackrock (and PIMCO) and anyone who was running levered long Bernanke’s Bond Bubble  was saying from June to August (when they weren’t positioned for bonds getting smoked), this is new.


We should have been tapering now for a few months so, on the margin this is progress, I guess. Don’t forget that guys like Fink and Bill Gross get paid to “advise” our un-elected Fed Chairman on timing. There’s no conflict of interest there vs The Rest of Us, of course.


Fink went on to say in Chicago yesterday that “we’ve see real bubble-like markets again. We’ve had a huge increase in the equity market. We’ve seen corporate-debt spreads narrow dramatically.” Ya think? Bubbles, bubbles, and more bubbles. Now our central planning overlords are going to time both how we inflate and pop them. #cool


Back to the Global Macro Grind


I’ll be seeing some of our top clients in NYC today, and it’s always interesting to see the whites of people’s eyes on USA central-market-planning days. When Bernanke shocked anyone who wasn’t on the inside of it all that he wasn’t going to taper on September 18th, I was seeing clients in Chicago. The look on people’s faces as they checked their iPhones and crackberries was flabbergasting.


I highly doubt Bernanke is going to signal a taper today. But I highly doubted he was going to cancel his entire “communication process” and not taper last time! So what do I know. I’m just a man in a room trying to let Mr. Market tell me who has inside information.


What I do know, and to a degree this is Fink’s blazingly obvious point, is that into both month-end (and Mutual Fund year-end) tomorrow we have a US stock market that is bubbling up to all-time highs.


Check this puppy out:

  1. Yield Chasing is Back! Slow-growth Consumer Staples stocks (XLP) = +7.9% for the month!
  2. SP500 at an all-time high (on no volume) = +5.4% for the month and +24.4% for the YTD
  3. Russell2000 at an all-time high = +32.0% YTD!

Now if you’ve been A) bullish on US stocks and B) bearish on Gold, Commodities, and Bonds for most of 2013 like we have, you’re pseudo cool with all of this. Commodities (CRB Index, 19 Commodities) are actually -5.1% YTD, so being completely out of some big asset classes has been as important as being long US growth when it was actually accelerating.


Now, not ironically, US #GrowthSlowing is what’s starting to marinate, sequentially (month-over-month) in SEP-OCT:

  1. US Pending Home Sales (SEP) reported earlier this week slowed -5.6%
  2. US Retail Sales #GrowthSlowing was reported yesterday at -0.1% vs +0.3% in AUG
  3. US Consumer Confidence for OCT dropped -11% month-over-month to 71.2 from 80.2 SEP

Isn’t this whole Bernanke Down Dollar, Rate Repression thing awesome?


To review our playbook, when they are happening at the same time:

  1. Down Dollar, Down Rates = #GrowthSlowing signal
  2. #StrongDollar, #RatesRising = #GrowthAccelerating signal

In other words, Fink finally has his policy lobby to Bernanke right. There is no US Growth Policy other than letting economic gravity occur. The only hope for 3-4% US growth (and a 4% 10yr Yield, $65 Oil, etc.) is via a consistent #StrongDollar Tapering Policy.


#StrongCurrency is cool guys. India is doing it. The British are doing it. So now all we need are all of our wonderfully and politically connected men and women of the United States of Centrally Planned America to do it.


Fink just did it. My boys tell me that back in the day he was a big Jimmy Carter Democrat. Today, he’s plugged into Obama’s ear too. So he can do this! Warren, you can do it too. Yes You Can!


If the US doesn’t do this, Europe will be the better place to allocate your capital in 2014. If the USA’s said free-market leadership signs off on Burning The Buck and Japanese Rate Repression, the Euro, Pound, and Swiss Franc are going up. If that continues to happen, you’ll basically have the exact same call we made on US growth almost a year ago occur in Europe:

  1. #StrongEuro, #StrongPound, etc. = deflates European inflation
  2. Inflation slowing = real/inflation-adjusted economic growth stabilizing, then accelerating

At the beginning of Q413 we called this Top Global Macro Theme #EuroBulls. And with Spanish consumer prices (CPI) dropping to NEGATIVE year-over-year in the most recent month (-0.1% y/y OCT vs +0.9% in SEP), we’ll reiterate that call again this morning.


As for the popping of the bubbles, to paraphrase my pal Hemingway, at first it happens slowly (#GrowthSlowing), then like in November of 2007, it happens all at once. After locking in its YTD low on September 2nd (when we were long growth), our Bull/Bear Sentiment Spread just ripped to a fresh YTD high this morning – that’s a +60% move to the bullish side in 2 months. #bubbly


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.40-2.60%



Spain’s IBEX 9588-10,097

Euro 1.36-1.39

Pound 1.60-1.62


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Popping Bubbles - Chart of the Day


Popping Bubbles - Virtual Portfolio

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.

October 30, 2013

October 30, 2013 - table



October 30, 2013 - Slide2

October 30, 2013 - Slide3

October 30, 2013 - Slide4

October 30, 2013 - Slide5

October 30, 2013 - Slide6



October 30, 2013 - Slide7

October 30, 2013 - Slide8

October 30, 2013 - Slide9

October 30, 2013 - oil

October 30, 2013 - natgas



TODAY’S S&P 500 SET-UP – October 30, 2013

As we look at today's setup for the S&P 500, the range is 22 points or 1.13% downside to 1752 and 0.12% upside to 1774.                                              










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.18 from 2.19
  • VIX closed at 13.41 1 day percent change of 0.75%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Oct. 25 (prior -0.6%)
  • 8:15am: ADP Employment Change, Oct., est 150k (prior 166k)
  • 8:30am: Consumer Price Index, Sept., est. 0.2% (prior 0.1%)
  • 10:30am: DOE Energy Inventories
  • 2pm: FOMC Rate Decision, est. 0%-0.25% (prior 0%-0.25%)


    • 9am: HHS Sec. Sebelius to testify before House Energy and Commerce Cmte on problems with rollout
    • 9:30am: House Transportation Cmte hearing on FAA’s aircraft certification process
    • 10am: House, Senate negotiators meet on FY 2014 budget resolution; have until Dec. 13 to deliver recommendations to Congress
    • 10am: FDIC to consider plan to implement liquidity risk standards for certain FDIC supervised firms
    • 10am: Senate Banking panel hearing on JOBS Act
    • 3:55pm: President Obama speaks on health care in Boston


  • Boeing said to near order haul of up to $87b for 777X
  • CFTC to adopt client-funds rule after MF Global, Peregrine
  • Obama presses lawmakers to confirm Mel Watt for FHFA
  • JPMorgan said to meet U.S. resistance on mortgage accord terms
  • AMR’s CEO sees way to settle federal suit on US Airways Merger
  • U.S. Steel to close some North American Capacity amid review
  • Defaults seen below crisis levels in next cycle, Moody’s says
  • Brixmor raises $825m in first REIT IPO by Blackstone
  • RBS said to review currency-trading practises
  • Barclays quarterly profit meets ests. as FICC revenue falls
  • Twitter adds photos and video previews to user feeds: NYT
  • LinkedIn 4Q rev., adj. Ebitda views miss ests.
  • Batista’s OGX said to plan bankruptcy protection filing today


    • AGL Resources (GAS) 8am, $0.15
    • American Tower (AMT) 7am, $0.91
    • Arrow Electronics (ARW) 8am, $1.20
    • Athabasca Oil (ATH CN) Bef-mkt, C$(0.07) - Preview
    • Automatic Data Processing (ADP) 7:30am, $0.66
    • BorgWarner (BWA) 8am, $1.34
    • Cameco (CCO CN) 8:30am, C$0.18 - Preview
    • Comcast (CMCSA) 7am, $0.61 - Preview
    • Corning (GLW) 7am, $0.32
    • Diebold (DBD) 8am, $0.42
    • Energen (EGN) 6:30am, $0.61
    • Exelon (EXC) 7:30am, $0.67
    • Garmin (GRMN) 7am, $0.59
    • General Motors (GM) 7:30am, $0.94 - Preview
    • Graphic Packaging (GPK) 7:30am, $0.13
    • Hess (HES) 7am, $1.44 - Preview
    • Hyatt Hotels (H) 7:30am, $0.22 - Preview
    • Jones Group (JNY) 7am, $0.42
    • Level 3 Communications (LVLT) 7am, $(0.12)
    • MSC Industrial Direct (MSM) 7:30am, $0.90
    • PG&E (PCG) 8:03am, $0.78
    • Phillips 66 (PSX) 8am, $0.93
    • Praxair (PX) 6:05am, $1.51
    • Public Service Enterprise (PEG) 7:30am, $0.76
    • Sealed Air (SEE) 6am, $0.33
    • Sherritt Intl (S CN) 7:42am, C$0.02 - Preview
    • SodaStream Intl (SODA) 7:30am, $0.84
    • Southern (SO) 7:30am, $1.11
    • Spirit Airlines (SAVE) 6:15am, $0.75
    • Sprint (S) 7am - Preview
    • SPX (SPW) 6:30am, $1.25
    • Taser Intl (TASR) 7:30am, $0.08
    • TE Connectivity (TEL) 6am, $0.90
    • Walter Energy (WLT) 8am, $(1.01) - Preview
    • Wisconsin Energy (WEC) 7am, $0.59


    • Active Network (ACTV) 4:05pm, $(0.01)
    • Allstate (ALL) 4:05pm, $1.44
    • American Capital Mortgage Investment (MTGE) 4:01pm, $0.78
    • Arris (ARRS) 4pm, $0.34
    • Atmel (ATML) 4:05pm, $0.09
    • Avis Budget Group (CAR) 4:15pm, $1.51
    • Axis Capital (AXS) 4:05pm, $1.22
    • Boston Beer (SAM) 4:10pm, $1.82
    • Canadian Oil Sands (COS CN) 5:01pm, C$0.42
    • Capstone Mining (CS CN) Aft-mkt, $0.02
    • Centerra Gold (CG CN) Aft-mkt, $(0.01)
    • Cogeco Cable (CCA CN) Aft-mkt, C$1.03
    • Community Health Systems (CYH) 4:15pm, $0.68
    • Computer Sciences (CSC) 4:15pm, $0.83
    • Cousins Properties (CUZ) 4:01pm, $0.12
    • Crocs (CROX) 4pm, $0.17
    • Duke Realty (DRE) 4:09pm, $0.28
    • Equity Residential (EQR) 4:21pm, $0.73
    • Exelixis (EXEL) 4:17pm, $(0.37)
    • Expedia (EXPE) 4pm, $1.36 - Preview
    • Facebook (FB) 4:05pm, $0.19 - Preview
    • First Quantum Minerals (FM CN) 5pm, $0.21 - Preview
    • FleetCor Technologies (FLT) 4:01pm, $0.98
    • Hanesbrands (HBI) 4:01pm, $1.13
    • InterMune (ITMN) 4pm, $(0.71)
    • International Rectifier (IRF) 4:01pm, $0.14
    • Intersil (ISIL) 4:05pm, $0.17
    • Intrepid Potash (IPI) 4:03pm, $0.07
    • Jarden (JAH) 4:05pm, $1.00
    • JDS Uniphase (JDSU) 4:05pm, $0.12
    • Key Energy Services (KEG) Aft-mkt, $0.01
    • Kraft Foods (KRFT) 4pm, $0.70 - Preview
    • Lincoln National (LNC) 4:10pm, $1.22
    • Lundin Mining (LUN CN) 5pm, $0.07 - Preview
    • Marriott (MAR) 4:30pm, $0.45 - Preview
    • MetLife (MET) 4:05pm, $1.36
    • Microchip Technology (MCHP) 4:15pm, $0.60
    • Murphy Oil (MUR) 4:31pm, $1.47
    • Owens-Illinois (OI) 4:04pm, $0.77
    • PerkinElmer (PKI) 4:01pm, $0.48
    • Questar (STR) 4:10pm, $0.18
    • Rovi (ROVI) 4:05pm, $0.48
    • Ruckus Wireless (RKUS) 4:05pm, $0.04
    • Skyworks Solutions (SWKS) 4:30pm, $0.62
    • Starbucks (SBUX) 4:05pm, $0.60 - Preview
    • SunPower (SPWR) 4:05pm, $0.25
    • Trinity Industries (TRN) 4:01pm, $1.17
    • United Online (UNTD) 4:15pm, $0.09
    • Visa (V) 4:05pm, $1.85
    • Williams (WMB) 4:01pm, $0.14
    • Williams Partners (WPZ) 4:01pm, $0.30
    • XL Group (XL) 4:01pm, $0.54


  • WTI Crude Declines for a Second Day as U.S. Inventories Grow
  • Billionaire Bets on Rare Earths After Uralkali Exit: Commodities
  • Copper Reaches One-Week High as Stockpiles Continue to Shrink
  • Cotton Has Longest Slump Since May as Harvests Add to Supplies
  • Soybeans Advance for Second Day on Export Demand, Palm’s Rally
  • Gold Swings Below Five-Week High in London Before Fed Meeting
  • Potash Producer ICL Weighing on Benchmark Index: Israel Markets
  • Indian Wheat Exports Seen at Record on Government Price Cut
  • MORE: Chalco Sees China Aluminum Output Reaching Record 24M Tons
  • EDF Nuclear-Deal Support Will Spur Power Projects: U.K. Credit
  • Silver Coin Premiums Fall as Comex Inventories Climb: BI Chart
  • Crop Insurance Hazards Revealed in Lost Pheasants in Grasslands
  • CFTC to Adopt Client-Funds Rule After MF Global, Peregrine Cases
  • Indonesia Seen Avoiding Total Ban on Mineral Ore Exports in 2014


























The Hedgeye Macro Team















In preparation for BYI's F3Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • FY 2014 guidance of $3.70 to $4.05 per fully diluted share.  Due to normal seasonal trends and the timing of new openings, we expect our diluted EPS from the first half of FY 2014 to contribute about 46% of the earnings. Within that first half, we expect the second quarter to be stronger than the first quarter. In proportional terms, that would be very much along the lines of the fiscal year 2013 results. 


  • While in this fiscal year the WAP growth will continue.. to grow, we have a good pipeline coming, not at the pace that you are used to the last couple of years. The pace is going to slow down a bit in terms of pace of growth, and the rate at which the WAP titles are coming out are going to start increasing over the next three quarters or four quarters, and then the pace will pick up again.
  • Our R&D resources allocation to the WAP and the gaming operations portion of the business is increasing. So in terms of release of WAP titles, you will see that is ticking up over the next few quarters.


  • In terms of being a good content provider, we've already launched our games in about 12 portals to 15 portals in Europe, in all the regulated legal wagering sites and that is going well. We are just about to launch our version two there. We've learnt a lot from our first round experience there, and we created a version two of our content server and that is going to be launched this month and we expect further improvement there.


  • I think over the next couple of years, probably more like the latter half of FY 2015 and FY 2016... the Asia expansion will have a very positive effect on how Bally continues to grow. The SHFL acquisition is really going to help us a lot because it really showed us of our strength in the Australia/Asia part of the world where SHFL does extremely well with their game sales, with their electronic gaming machines. They do extraordinarily well there. And also, of course, the table strength that we will now have.


  • We have sold 1,943 units into Illinois through the end of FY 2013. We expect this momentum to carry into fiscal 2014 and beyond....We expect to exceed, by a good margin, the 4,000 total units we originally expected to place in this market.
  • We've gone in and we're about a 30-ish percent shift-share in that market. The Illinois Gaming Board continues to approve, I think they approved 250 locations roughly this week. So it's just an ongoing market for us, it's an exciting market. From a overall market, you'll probably see at the end of this over 15,000 machines in that market. And I think we'll continue to play at least the 30% share in that market.


  • It hadn't changed that dramatically from a promotional standpoint. Again, tough to talk about what the competitors are doing product-wise. We have some suspicions. From a pricing and product standpoint, I don't see much change. The benefit about innovating and having unique products like the Wave, like the Curve. We were first with a V32-type product is the ability to put a little bit of a premium on that product.


  • As you see all the regional markets year-over-year down somewhat some bigger than others, I would say our overall performance doesn't mirror that, it's down. But not at the same trajectory that you see some of the regionals down.
  • New York is a market where year-over-year-over-year, we've just had some great results there.


  • As expected, our ASP continued to be impacted by shipments of 200 lower ASP Canadian VLT and 713 lower ASP Illinois VGT units in the quarter. After factoring out these lower ASP units, our domestic ASP was flat versus last quarter. We continue to remain very disciplined with our pricing strategies.
  • (2014) Overall, I'd say net-net you might be up a touch.


  • The margin on Gaming Operations was 69%, within our expected range of 68% to 73%.


  • We continue to expect our Systems margin going forward to approximate an annual range of 70% to 75%.


  • we expect the program to be completed by the end of the first quarter of fiscal 2014. In April, we delivered $150 million in cash and received 2.4 million shares of our common stock. Upon completion of the program, we will likely not collect significantly more shares than the 2.4 million already received, given the recent increase in the volume weighted average share price of our common stock.


  • We feel like customers are purchasing in the marketplace. We may lose maybe a couple percentage of our ship share from time-to-time just because we're a little bit more disciplined in pricing. So we remain optimistic about the replacement cycle, but again, in terms of earnings for us, it's a small piece of our gross profit.


  • We continue to believe we're going to generate at least $30 million in synergy.


  • Looking forward into FY 2014, I think one of the challenges for our international – the game performance is going well, we've launched a lot of different products, but Argentina is a market that, depending upon our ability to get goods into the country, that is one of the drivers in an international quarter being 1,200 units or an international quarter being 950 or 1,000 units.
  • And in terms of FY 2013 we finished, Todd, at about 3,500 units internationally. We expect that number to pick up reasonably significantly in FY 2014.


  • Software and services has been kind of a mid-30s% in terms of percentage. Whereas this quarter, it was nearing 40%. I I'd guesstimate that that comes back down to the mid-30s%.


  • All-in-all, I would expect for R&D to remain at that 11% to 12% of revenue range.


  • Looking into FY 2014, from a margin standpoint, one thing that we've done an okay job at in the last 12 months and 24 months is conversion kit sales. I say, okay, because I think as you sell units and increase your footprint, that increases your ability to ultimately sell more conversion kits into the market, which come at a higher margin.
  • Our hope would be when I look into 2014, maybe we grow the margin fractionally. But again, a lot of the supply chain, for the most part, we've gotten through. From here it's going to require a little bit of change in mix, with our ability to sell conversion kits and go from there.


  • The new Michael Jackson game, that is too early to tell now. We are just launching it. The reaction when we have shown it in various shows has been very positive from customers. A number of customers are eagerly waiting for it. And once we place it this quarter, in the coming months, in our next call we'll be able to give you more color on it.

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