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LEISURE LETTER (04/11/2014)

TICKERS: LVS, IGT, PENN

 

EVENTS TO WATCH:  UPCOMING EARNINGS / CONFERENCES / RELEASES

Monday, April 14

Atlantic City March revenues 

 

Monday, April 22

IGT FQ2 earnings:  , Passcode: IGT

 

Monday, April 24

PENN Q1 earnings:

 

Monday, April 24

HOT Q1 earnings:  , Passcode: 12049644

 

COMPANY NEWS

LVS - (The Morning Call) Tropicana Entertainment interested in LVS's Sands Bethlehem.  In the past, LVS had indicated it wants a high bid - around $1 billion.

TAKEAWAY:  Get it done. Not critical to the portfolio and we're sick of hearing about the transaction.

 

IGT - Installing Powerbucks (new WAP product) in CZR and BYD's casinos

TAKEAWAY:  In a secular declining demand environment, differentiation is key for operators.  Exclusivity won't last, however, as IGT needs to make a few power bucks.

 

PENN - Argosy Alton (IL) began closing one of its three gambling decks four days a week in early March.

TAKEAWAY:  More evidence of the tough environment for regional casinos

 

INDUSTRY NEWS

Lights dim for Japan's pachinko parlours FT 

Pachinko has been all but abandoned by younger Japanese.  Data from a Japanese research group show that the number of players has fallen by two-thirds over the past 20 years to 11m in 2013. 

 

Converting winning pachinko balls to cash is illegal but that violation is universally ignored by police.  Now, some pachinko groups are arguing that the looming acceptance of casinos means their industry should be brought out of the shadows too, gambling element included. Lawmakers who support them have formed a cross-party group to promote the idea – a development that has worried some in the casino lobby, who think it could increase public opposition to the pro-casino bill.

TAKEAWAY:  Pachinko lobbying would complicate Japan casino legislation 

 

 

Stomach illness that hit 83 people on Crown Princess may be linked to norovirus CNN

TAKEAWAY:  Media taking notice of the numerous norovirus cases.  Bad publicity for the cruise industry. 

 

Spain receives ~40% more cruise passengers thru February Hosteltur

In February, Spanish ports received 382 vessels, representing 62 more ships YoY or a 19.4% increase.  The number of cruise passengers who arrived in the Spanish ports surged 39.62% in the first two months of 2014 to 838,117 cruise passengers.

TAKEAWAY:  Spain recovering but capacity is rising as well

 

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.

TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


BYD: OFFSETTING THE TRENDS

State revenues from March are still coming out and they’re ugly as expected. Beyond these numbers, BYD seems to have a few positive catalysts.

 

 

CALL TO ACTION

Up to 4 significant refinancing transactions and potentially better (than whisper) near term property level performance could lead to BYD stock outperformance in 2014.  We’re still worried about the rest of the weak March numbers coming out from the states as well as more negative earnings revisions from other analysts.  However, we would view weakness as an entry point.

 

OPERATIONS

We’ve been worried about the March performance of the regional markets for a while now and regional results are certainly coming in ugly.  While downside to Q1 consensus estimates appears likely for PENN and PNK, BYD could be fine for Q1.  Recall, Boyd didn’t provide Q1 guidance until March 5th and the sell side may not be taking into account the contribution of the apparently successful Penny Lane slot initiative and potential margin improvement.  We’re not sold that management has found religion in terms of overhauling its operations but there are still some low hanging fruit (already eaten by the competition) that could boost near term performance.

 

REFINANCINGS

Beyond Q1, our more positive view on the stock is bolstered by four significant debt refinancing transactions we expect to occur over the next four to eighteen months.  Over this time period, Boyd should be able to call and refinance $1.4 billion of debt carrying a blended interest rate of 9%.  The debt should be refinanced at significantly lower interest rates, which in turn will result in lower interest expense and ultimately positive fully taxed earnings per share accretion of $0.12 to $0.17 (assuming a blended rate of 7.5% to 7.0%).  Realistically, with NOLs of $1.1 billion, the EPS and FCF/shr accretion will be in the range of $0.19 to $0.25.  For reference, our 2015 calendar year EPS estimate is $0.42.


BYD management could begin to discuss the refinancing strategy as soon as the 1Q14 earnings call which we expect to occur in early May.  There are significant fact parallels between Boyd’s upcoming refinancings and MGM’s refinance activities during 2011 and 2012 which helped boost that stock. 

 

BYD: OFFSETTING THE TRENDS - BYD

 

INVESTORS FADING THE REIT

The REIT chatter has died down and that’s probably a good thing.  However, BYD management still faces numerous options to unlocking shareholder value through real estate transactions.  A full REIT spin is possible but not probable and may not be imminent.  As we outlined in our 03/14/14 presentation and conference call, the hurdles are significant but not insurmountable.  Management seems more open to asset sales.  For us, the highest value could be achieved through a sale to GLPIGLPI should be willing to pay a high multiple and diversify its tenant base and BYD could retain ownership of the operations.  Stay tuned here.


The activist pop also seems to have waned.  We’re only a month removed and 3% off the close (and 2 UCONN Husky basketball championships) before Elliot Capital’s position was made public.  Elliot’s ability to influence management both publicly and privately could be limited unless they obtain gaming licenses in BYD’s jurisdiction.  However, subtle pressure can work as well.

 

THE END GAME  

A full operations overhaul would be value creation option #1 in opinion.  Unfortunately, option #1 is not imminent.  However, some improvements seem to have been made and forward numbers may not be as bad as feared as a result.  Upcoming refinancings should juice EPS and FCF/shr later in the year and in 2015 and could catalyze the stock.  And who knows, maybe BYD could even play a few real estate cards.


April 11, 2014

April 11, 2014 - Slide1

 

BULLISH TRENDS

April 11, 2014 - Slide2

April 11, 2014 - Slide3

April 11, 2014 - Slide4

April 11, 2014 - Slide5

April 11, 2014 - Slide6

April 11, 2014 - Slide7 

BEARISH TRENDS

April 11, 2014 - Slide8

April 11, 2014 - Slide9

April 11, 2014 - Slide10

April 11, 2014 - Slide11
April 11, 2014 - Slide12

April 11, 2014 - Slide13


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 80.32%
  • SHORT SIGNALS 78.48%

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 11, 2014


As we look at today's setup for the S&P 500, the range is 32 points or 0.33% downside to 1827 and 1.41% upside to 1859.                                                          

                                                                     

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.73 from 2.30
  • VIX closed at 15.89 1 day percent change of 14.98%

MACRO DATA POINTS (Bloomberg Estimates):

 

  • 8:30am: PPI Final Demand m/m, March, est. 0.1% (prior -0.1%)
  • PPI Ex Food and Energy m/m, March, est. 0.2% (prior -0.2%)
  • PPI Final Demand y/y, March, est. 1.1% (prior 0.9%)
  • PPI Ex Food and Energy y/y, March, est. 1.1% (prior 1.1%)
  • 9:55am: UofMich. Confidence, April preliminary, est. 81 (prior 80)
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • President Obama addresses National Action Network in New York
    • 8:30am:  World Bank, IMF hold annual Spring Meetings
    • 11:30am: Senate Env. Chairwoman Barbara Boxer, D-Calif., Sen. Sheldon Whitehouse, D-R.I. hold Keystone XL pipeline media call
    • U.S. ELECTION WRAP: Poll Shows Obamacare Motivates GOP Voters

WHAT TO WATCH:

  • Coldwater Creek files bankruptcy after clothing sales decline
  • Sebelius resignation may give successor more room on Obamacare
  • H&R Block shrs jump as tax preparer agrees to sell bank
  • U.S. warns Russia of more sanctions as G-7 studies Ukraine aid
  • China’s inflation stays below target as producer prices drop
  • Wall Street bond trading, allocation draws scrutiny from Finra
  • Samsung adds $600 of S5 freebies to fend off Apple, Xiaomi
  • Citadel fund said to quadruple with high-frequency trading gains
  • Gallagher priced at $43.25 in sale to fund Wesfarmers deal
  • Heartbleed flaw found in Cisco, Juniper networking equipment
  • Li & Fung said to work with Citigroup on brands unit spinoff
  • Citi said investigated by DOJ on suspicious transactions: WSJ
  • Vista Equity may seek to raise $5b for newest fund: NYT

EARNINGS:

    • Fastenal Co (FAST) 6:50am, $0.38 - Preview
    • JPMorgan Chase & Co (JPM) 6:58am, $1.46 - Preview
    • Wells Fargo & Co (WFC) 8am, $0.96 - Preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

  • Australia Braces for Strongest Storm Since 2011 in Queensland
  • Nickel Favored by UBS on Supply Shocks, Macquarie Sees Deficit
  • China’s Li Swaps Steel Production for Cleaner Air: Commodities
  • WTI Heads for Weekly Gain as Discount to Brent Shrinks on Libya
  • Gas Loses Decades-Old Link to Crude Oil in Landmark Contract
  • Nickel Heads for Second Weekly Gain on Mounting Supply Concerns
  • Shanghai Gold Exchange to Start Leasing Platform by End of June
  • Westinghouse Says EU States’ Uranium Interest Gains on Ukraine
  • Cotton Shipments From India Jumping as Harvest Climbs to Record
  • Shanghai to Introduce Gold Leasing Platform in 1H, Exchange Says
  • Gas Carousel Making Spain Europe’s Biggest LNG Exporter: Energy
  • Soybean Traders Bullish First Time in 6 Weeks on Tight Supplies
  • Platinum Favored Over Gold on Supply Shortage: Chart of the Day
  • Drought Seen Hurting Thai Farm Output as El Nino Risk Climbs

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


False Positives

This note was originally published at 8am on March 28, 2014 for Hedgeye subscribers.

“Beware of false knowledge; it is more dangerous than ignorance.”

 -George Bernard Shaw

 

Every effective stock market operator knows that investment analysis is at best an imperfect science.  The mosaic theory is an apt description because with the absence of a silver bullet (knowing the results of a drug test before everyone else as an example), an investment analyst’s best tool is his or her ability to collect more data than his or her peers and to then use that data to reach a more informed conclusion.

 

Even then, in the absence of perfect information, many outcomes are flawed.   In fact, many analysts are guilty of making what is called a Type 1 error, or a false positive.   False positives lead analysts to conclude that a relationship exists when in fact it does not.  In medicine, this might occur when a test shows a patient has a disease, when they don’t.

 

False Positives - 55

 

As Europe contemplates another round of extreme monetary policy to offset perceived deflationary pressures, it does beg the question of whether there is a relationship between a monetary policy and a tightening economy.  Certainly, many supporters of former Fed Chairman Bernanke point to the fact that the economy recovered under him as evidence that his implementation of the most extreme monetary policy in the history of central banking was the reason for this recovery.

 

Conversely, though, the question remains whether the economy has recovered at all because of QE or even commensurately with the QE that has been implemented.  As former Dallas Fed President Bob McTeer recently wrote in Forbes:

 

“The hoarding of excess reserves limited the money creation or “printing” that took place despite the Fed’s massive purchases of securities and expansion of its balance sheet. That’s why the dire consequences predicted never came to pass. However, it is also the reason that the Fed’s purchases never stimulated the economy as much as hoped.”

 

In reality if you print dollars and don’t allow them to be spent, then you are really only debauching the currency by increasing the denominator.  Certainly this a policy that is good for the inflation trade, especially relating to those commodities priced in U.S. dollars

 

Back to the Global Macro Grind...

 

As Portugal’s bonds fall below the 4% yield for the first time in almost ever, one has to wonder if there isn’t a bit of a false positive emerging in the European peripheral sovereign debt markers.   Currently the 10-year yields of Portugal, Italy and Spain stand at 3.99%, 3.27%, and 3.20%, respectively.  Certainly these yields are still wide versus German bunds, but are these yields, on absolute basis, truly reflective of the underlying creditworthiness of those economies?

 

Take Spain as an example. This morning the Spanish central bank is projecting the Spanish economy will grow by 1.2%.   Given that this is below par economic growth, it is likely that Spanish unemployment stays above 25%.   This morning consumer prices were also reported to have fallen at an annual rate of -0.2%, which is the first decline in consumer prices in four years in Spain and indicative that consumers in Spain aren’t really spending (recent retail sales data show the same).

 

Clearly, on the margin, the economies in the periphery in Europe have improved, but if you are a buyer of Italian or Spanish 10-year bonds at 3.2%-ish, you need to put on the big boy analytical pants and decide if for that yield, the risk is commensurate.  At a 10% dividend yield, Linn Energy ($LINE) might be a good relative bet . . . actually I take that back, we’d continue to stay the heck away from LINE and much of the MLP complex !!!

 

My colleague Christian Drake, our U.S. focused economic analyst, wrote a note yesterday that he titled, “INFLECTIONS OR FALSE POSITIVES? CLAIMS, CONSUMPTION & CAPEX” where he addressed some of the myriad of U.S. economic data out recently:

  • #ItsNot2013:  Growth estimates globally continue to get marked down.  Slowing topline (GDP) and compressing margins (rising inflation) is not the stuff of market multiple expansion or macro P&L dynamics to remain lazy long of.
  • RISING INEQUALITY:  Corporate Profits - measured as the % of National Income or GDP -  made another new high in 4Q13.  The other side of that, of course, is a lower low in labor’s share of income.  Latent risks can remain latent, however.
  • CAPEX RESURGENCE?  General acknowledgement that assets are aging and businesses have under-invested isn’t a catalyst.
  • PAY-ME-NOW:  Productively continues to grow at a positive spread to unit costs and investors continue to reward the ‘pay-me-now’ corporate capital strategy. 
  • DURABLE DISAPPOINTMENT:  New Orders for Capital Goods non-Defense Ex-Air have been negative on a month-over-month basis for four of the last six months.
  • INITIAL JOBLESS CLAIMS:  A positive week of data…finally.  The next few weeks of data should be important

His conclusion, which is highlighted in the Chart of the Day below, is that although the U.S. economic data is part positive and part negative, GDP estimates continue to fall.  Ultimately the direction of GDP change is what matters.

 

But that all said, as you head into the weekend I would leave you with words of Mark Twain:

 

“All generalizations are false, including this one.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.64-2.75%

SPX 1842-1878 

VIX 13.85-15.81 

USD 79.35-80.39 

Gold 1278-1325 

Copper 2.91-3.06 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

False Positives - chartday

 

False Positives - Virtual Portfolio



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