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.




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.



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.



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. 





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.



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

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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.                                                          










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • 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


    • 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


  • 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


    • 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



  • 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 Macro Team














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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

Be The Mustache

“They complain that I’m robotic, abrupt, I’m not cheerful and smiley, and you know what? That’s not my problem,”

Arthur Chu


On the back end of a 14-hour work day yesterday, after dinner time, bath time, story time, bed time and the host of other daily, toddler parenting “times,” I swilled back some late night espresso and fired up the DVR to watch something I’ve been itching to review for a while now  - Jeopardy!. 


Jeopardy is still on?  The White House Petition to deport Justin Bieber only got 275K signatures? ….that fat guy is the kid from The Sixth Sense?  


The story is a bit stale now, but if you didn’t follow its procession last month, controversial Jeopardy contestant, Arthur Chu, emerged out of the arithmetic ether like some sort of sagely, evil game-show probabilist savant. 


Be The Mustache - chu


Using math and a game theory based playing strategy, he managed an 11-game win streak and ultimate winnings of $298K – good for 3rd all-time (Wikipedia). 


Alongside terseness and less than conventional congeniality, Chu’s most noteworthy exploit was his innovative use of the “Forrest Bounce” - whereby you jump quickly from category to category – across the bottom three rows of the board in an attempt to locate the “daily doubles”. 


The daily double sits as the singularly largest source of uncertainty in the early rounds of the game.  If that uncertainty can be systematically eliminated, the odds of winning increase provided one’s knowledge of the other trivia is marginally better than that of the other two contestants.


Here's the clip of Chu ferreting out a daily double, dismissively betting $5, answering “I dunno” after 1 second and summarily continuing on.


Chu’s challenge of conventional contestant etiquette inspired the ire of Jeopardy ‘purists’ nationally who took to social media en masse to voice their discontent and defend the game’s storied, 3-decade tradition from the emergent nihilist.   


Applied mathematical innovation challenging preconceived wisdoms and conventional orthodoxy…..sound familiar? 


Fortunately, in the end, #Evolution has a sneaking ability to overcome both antiquated conventionalism and institutional (ivory tower) obstructionism.   


Back to the Global Macro Grind….


When hearing economists discuss markets in terms of rational agents, benevolent dictators, and other nonsensical simplifying assumptions, the economy becomes something largely abstract and intangible. 


Certainly, the dynamic, complex system that is globally interconnected macro is difficult to comprehend (let alone forecast) in full, but a coherent understanding of the drivers of significant parts of the economy over defined periods isn’t inaccessible.  


Consider the largest part of the domestic economy  – consumption, in the short run. 


Broadly speaking, the drivers of Consumption aren’t overly complicated.  In short, consumer spending growth is a function of the growth in income, the marginal propensity to consume or save that income, and the net change in household credit. 


Asset appreciation and credit growth matter, but they are somewhat indirect drivers.  We discuss the wealth effect further below and leave the discussion and analysis of credit for another missive.  


So, what do income and savings trends tell us about the slope of consumption growth?


Together, growth in disposable income and the change in the savings rate explain most of the change in nominal consumption (PCE) growth.  Indeed, over the last 30 years, the multiple regression between PCE growth vs. nominal Disposable Income growth and the change in the Savings Rate produces an R-squared of 0.99.  #tight


While that ultra-strong correlation doesn’t provide much insight into how to actually go about fostering significant, sustainable real income growth, it does provide a means of reasonably nowcasting the 68% of the economy that is consumption. 


For instance, under a baseline assumption that the 3 primary input variables (Disposable Income growth, the Savings Rate and PCE inflation) come in at their respective QTD averages in March, the regression model suggests year-over-year real consumption growth of 2.2% in 1Q14 – down 10bps sequentially from 4Q13, but +20bps ahead of the TTM average


Nothing revolutionary or proprietary there - just the gravity of a few numbers to which consumption growth remains inextricably hostage. 


What about the Wealth Effect?  


The wealth effect ‘theory’ posits that when real wealth increases, consumer spending permanently increases by some fraction of that wealth increase in every subsequent year.


Consumers, on balance, don’t immediately convert 100% of a wealth increase into current consumption.  Instead, in annuity like fashion, they tend to spread that ability for increased consumption out over their lifetime.


In general, studies examining the marginal propensity to consume show that consumer spending increases between 2 and 7 cents for each dollar of wealth increase.


It makes intuitive sense that an increase in real wealth, be it from housing or financial asset appreciation, lends itself to increased consumption. 


Again, when hearing analysts and pundits discuss it in the media, one is left feeling that the wealth effect occurs via some mystical monetary transubstantiation whereby higher net wealth is somehow cleanly and instantaneously transformed into higher consumption.


In reality, a number of key, very mechanical conditions must be satisfied for increased housing/financial asset wealth to translate into higher consumer spending on non-housing related goods and services


Practically,  increased real wealth needs to drive a behavior shift such that households decrease savings or other investments, increase home equity/other collateralized borrowing, or downsize to a cheaper residence (liquidity event freeing up cash for spending), for that wealth increase to be effective in driving higher consumption growth.


With the value of corporate equities and the aggregate housing stock up $3.52T and 2.0T, respectively, in 2013, the case for wealth effect spending has some residual legs.  However, with equities down YTD and housing in the midst of a discrete deceleration, we expect wealth effect support to consumption to continue to ebb. 


While consensus continues to make the pro-growth, pro-consumption call that should have been made last year, we think the consumer slows sequentially in 1H14.  We layed out ‘the why’ in our 2Q Macro themes call on Tuesday.  Ping if you’d like the replay/presentation. 


Like Alex Trebek’s facial hair, the forward slope of consumption growth remains the subject of ongoing conjecture and speculation.  Both continue to fascinate and confound consensus onlookers on a regular basis.  Understanding both will remain central to generating global macro alpha in 2014.    


Be the mustache, don’t be consensus…..or something like that.


Our immediate-term Global Macro Risk Ranges are now as follows:


VIX 14.72-16.67

Nasdaq 4007-4203

UST 10yr Yield 2.61-2.73%


Gold 1 


Enjoy the weekend.    


Christian B. Drake



Be The Mustache - Consumer

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