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Singapore says, "Be Patient."

Conclusion: Singapore's recent economic data is supportive of our call that the slope of global economic growth will continue to remain negative over the intermediate-term TREND.


Position: Long a U.S. Treasury Curve Flattener (FLAT).


Today, Singaporean officials came out and cut their forecast for 2011 non-oil export growth to 6-7% from a previous estimate of 8-10%.  This is just two days removed from a -100bps cut to the country’s 2011 GDP forecast of 5-7% (now 5-6%). Slowing U.S. and E.U. growth were cited as the main culprits.


Why does this matter? Well, simply put, Singapore is the largest exporter in all of Asia on a per capita basis. Its trailing three-year average exports/GDP figure of 215.8% completely dwarfs China’s 33.5% reading. Further, Singapore is home to the world’s second-busiest container port, and those containers are typically filled with a great deal of high-end products (i.e. consumer electronics, corporate machinery, and pharmaceuticals) waiting to be shipped all over the world (no single country accounts for more than 1/8thof Singapore’s exports). The key takeaway here is that the Singaporean economy is very relevant as it relates to short-to-intermediate term read-throughs on the global economic cycle.


Given, we think it pays to pay attention to Singapore and patiently wait for the turn in the global economic cycle – a turn that Singaporean economic data currently suggests is nowhere in sight. One quick look at the recent contractions in the key forward-looking subcomponents of Singapore’s manufacturing PMI should lead one to conclude that this global growth-sensitive country doesn’t like what’s currently under the hood of the world’s economy.


Singapore says, "Be Patient." - 1


As long-time value investor Marty Whitman once famously said, “A bargain is not a bargain if it remains a bargain.” Along these lines, we continue to believe valuation remains no catalyst to buy equities when the growth expectations investors are valuing stocks on continue to be off the mark. As a reminder, current Bloomberg Consensus forecasts for 3Q11, 4Q11, 2012, and 2013 U.S. real GDP are: +3.2%, +3.2%, +2.9%, and +3.2%, respectively - rates well above what our models continue to suggest.


In our opinion, if there’s one subtle takeaway to Bernanke’s comments yesterday, it’s that he’s seeing something negative out on the TAIL worthy enough of marking the risk-free rate of return at ZERO percent through “at least mid-2013”. Keep that in mind as you ponder the true “value” of any enterprises you’re looking to invest in at what appears to be “discounted” prices.


Last, but certainly not least, we think it’s appropriate to reintroduce an equation we published last November right ahead of the official QE2 announcement:


QG = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]


Now, just as it was then, it’s important for consensus to be careful what it wishes for.


Darius Dale



In preparation for BYI's FQ4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from BYI’s FQ3 earnings call and subsequent conferences/releases.



July 28: Empire City Systems Contract Win

  • “Bally will replace the current system with a new, one-of-a-kind, casino-management and patron-loyalty system − Bally CMP (Casino Market Place) − that will interface with Empire City’s legacy game-management and monitoring system, thus protecting Empire City Casino’s already invested capital”
  • “Bally’s systems will support more than 5,310 gaming devices at Empire City. Seven of the eight racetrack casinos in New York now use Bally for their player-centric marketing; with Empire City Casino being the largest of the group.”

July 20: Acquisition of Microview Labs

  • “Acquired privately held MacroView Labs, a leader in mobile-application development and mobile platforms for the casino gaming industry. ”
  • “This transaction bolsters Bally’s position as the leading supplier of games and systems solutions to the global gaming industry. Bally will now have full control over the development of new mobile-gaming marketing, customer service, and play-for-fun technologies for the Company’s casino customers.”
  • “MacroView Labs is the leading provider of mobile applications and mobile websites to the casino industry, with a customer base of more than 20 casinos, including some of the world’s largest gaming operators, and more than 1 million users of their provided applications. MacroView develops smart-phone and web-based mobile apps for the hospitality, retail, and gaming industries – everything from concierge services to GPS-fueled social networking integrated with Facebook and Twitter. They also help casinos manage their mobile content, launch mobile campaigns, and interpret user data.”

July 19: Systems Contract With Golden Nugget AC

  • “The installation will include a broad array of Bally’s latest systems applications, including Windows® SDS™ and CMP™ casino-management system.  Bally’s SDS Windows will be connected live to about 1,500 gaming machines using the latest high-speed networking technology.”

June 29: Sun International System Solutions Deal

  • “Enterprise-wide contract with Sun International Limited to provide key systems and server-based solutions at 17 casinos worldwide.”
  • “The agreement includes the…iVIEW player-user-interface and iVIEW Display Manager(DM) connected to more than 12,000 gaming machines and table games.”
  • “Sun International casinos in Africa will use Bally's …. CMP distributed architecture to allow patrons a single-card environment across multiple properties. CMP provides player-tracking and bonusing solutions.”
  • “Installation … is scheduled to begin in mid-calendar 2012 with all Bally solutions slated to be live at all 17 casinos by late in calendar 2013.”

June 14: Enterprise wide deal with Caesar’s for iViewDM

  • “Enterprise-wide agreement with ….Caesars Entertainment, to implement iVIEW Display Manager (DM) player-user-interfaces across their casino operations.”
  • “The initial implementation has been successfully completed at Caesars' Horseshoe property in Hammond, Indiana. An expansion of iVIEW DM at this site, as well as implementation at other Caesars Entertainment properties, will follow on suitable gaming devices across multiple gaming manufacturers.”

June 7: Agreement with Lottomatica to provide 800 games and systems for Italy’s new VLT industry

  • “Contract with Italian concessionaire Lottomatica Videolot Rete to provide 800 games and systems for Italy's new video-lottery (VLT) program. The Company now has initial agreements to provide more than 5,000 gaming devices to Italy.”

May 12: Final Results of its Modified Dutch Auction

  • “Accepted for purchase 9,912,993 shares of its common stock at a purchase price of $40 per share, for an aggregate cost of approximately $396.5 million, excluding fees and expenses relating to the tender offer…. The 9,912,993 shares …. represent approximately 18.4 percent of Bally's currently … outstanding shares.”


Youtube from Q1 Conference Call

  • “Game sale margins were…negatively impacted by the initial production runs of our Pro Series cabinets, amplified by the fact that more than 50% of our shipments in the quarter were Pro Series. Margins were also impacted by write-offs related to the warranty of older technology platforms, which reduced gross margin in the quarter by approximately 300 basis points”
  • “In the current quarter, we experienced higher bad debt expense related to a few international receivables.”
  • “We expect that our effective tax rate for the remainder of fiscal 2011 will be between 35% and 36%.”
  • “Cash Spin continues to perform well. Deployment of Vegas Hits has now gone past 550 units, and is currently our best-performing premium game. We recently released Cash Wizard, our first Pro Series ALPHA 2 premium game. The total orders for Cash Wizard, including those already installed, has now crossed the 700 mark.”
  • “We are very well-positioned to continue our solid growth in the WAP and Premium market segments”
  • “While our ASPs continue to grow in the quarter, we do expect pressure on our game equipment margins, as we are still in the early production runs of the Pro Series cabinets, and we have just introduced two new cabinets in the Pro Series line”
  • “Today, we are 80% video and have the state-of-the-art platform.”
  • “iVIEW DM, and the Elite Bonusing Suite continue to generate strong customer interest…combined with our strong pipeline and industry leadership position, should result in increased systems revenues in the coming quarters.”
  • “We did not yet expect a significant improvement in the game replacement machine market in fiscal year 2012.”
  • “We have made sizable investments in innovation in new markets that should positively develop during our fiscal year 2012. These include Canada, New York, Italy, Australia, New Zealand with ALPHA 2 platform, iVIEW DM, and our new system gaming management unit. These investments, combined with favorable capital markets, led us to refinance our debt and invest in Bally with our significantly expanded share buyback program.”
  • “Our expectation is to have a full line of products in the field by the end of fiscal ‘12, so that we’re – essentially 70% to 80% would be Pro Series and ALPHA 2 titles. By the end of the year, probably about 50 titles”
  • Game sale margins: “Pro forma margins would have been right around 46% (F3Q11). I think they’ll be in the mid-40 neighborhood. You have to remember we did just release…the Pro Curve, and the V32 is now out in the Pro series, which will put a little bit more pressure on our margins in the upcoming quarters…Longer-term, we expect to bring margins back to the low to mid-50s”
  • “The process in Italy is regulatory approval followed by installation for us; we don’t anticipate any field trial. Our expectation is now that by the end of this calendar year, we will begin deploying units in Italy. And as we’ve said before, we expect the majority of our Italy units, which are now well over 4,000 we’ve got commitments for, would be on a recurring revenue basis versus a sale basis. So, we would expect to build up beginning late this calendar year, and continuing for 9 to 12 months thereafter, installing this 4,000 to 5,000 units.”
  • “Our view is that our opportunity is more on the cost side to improve our margin. We’re doing some initial discounting on the new cabinets.  But you’re right, we’ve seen more of it [promotional activity and trade-in incentives] the last 12 months than we’ve seen the prior 2 or 3 years.”
  • “For the last two years, we’ve been more focused on our Premium footprint with the release of Cash Spin, now Cash Wizard. We just released Betty Boop and Money Vault, so two new refreshes in our WAP footprint. So, I think we would see that number starting to trend upward.”
  • “I think we would expect to see some seasonal increase in the number of replacements going into Q4.”
  • “I think we’re certainly focusing on used game markets these days. It’s something that, from an international perspective, we haven’t really focused on over the last couple years, so I would see some increases in used games going forward.”

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MACRO BLACK BOOK: The Roadmap for Investing in Brazil

To download the presentation materials, please click here: HEDGEYE BLACK BOOK: The Roadmap for Investing in Brazil


Where We’ve Been:

We’ve been aggressively bearish on Brazilian equities for the last nine months. Down just under -26% YTD and nearly -30% from its early November peak (coincidentally right when QE2 was formally introduced), the Bovespa Index’s dramatic underperformance is appropriately reflecting the three key concerns facing the Brazilian economy we outlined many months ago: 

  • Growth is Slowing;
  • Inflation is Accelerating; and
  • Interconnected Risk is Compounding. 

To the first point on Brazil’s domestic growth curve, real GDP growth has slowed from +6.7% YoY (3Q10) to +4.2% YoY (1Q11) with further downside to the reported 2Q and 2H figures according to our models. From a higher-frequency perspective, the strong real (widening interest rate differentials) and higher cost of credit have weighted substantially on Brazil’s manufacturing sector, with industrial production growth coming in a mere +0.9% YoY in June, alongside a contraction in PMI to 47.8 in July.


MACRO BLACK BOOK: The Roadmap for Investing in Brazil - 1


To the second point on Brazil’s domestic inflation readings (perhaps the core component of our Brazilian Stagflation thesis), CPI accelerated in July to a 73-month high of +6.9% YoY and our models see one more month of sequential acceleration from a YoY perspective (as does the central bank’s).


MACRO BLACK BOOK: The Roadmap for Investing in Brazil - 2


To the latter point on interconnected risk, we’ve been appropriately bearish from a research perspective on the big things in Global Macro. Be it calling for global Stagflation in January, reaffirming our long-term Housing Headwinds call in 1Q, or staying ahead of key developments within the Sovereign Debt Dichotomy, we certainly won’t be accused of being broadly bullish in 2011. Though none of this has anything to do with Brazil on paper, the nature of our interconnected Global Macro model has kept us out of the way on the long side of many assets YTD – including Brazilian equities. Managing risk on any country or security doesn’t occur in a vacuum.


Where We’re Headed:

In this presentation (see link above), we detail the key issues facing the Brazilian economy from a long-term perspective. Additionally, we walk through what we’d need to see from a variety of perspectives to turn constructive on Brazilian equities. This report isn’t an “act now” piece. Rather, it’s our best shot at producing a desk reference for managing the currently foreseeable Macro risk in and around Brazil over the long-term TAIL.


At current valuations, Brazil is no doubt atop a lot of investors’ minds as it relates to timing the “turn”. Understanding that bottoms are processes, not points, the issues and catalysts outlined in this report should help to adequately frame the bull/bear debate – a debate that, up until the last couple of weeks, we felt the market wasn’t having properly.


If there’s one thing we learned from attending the recent Bloomberg Brazil Summit, it’s that the delta between consensus long-term expectations for the Brazilian economy and our own conclusions are as wide, if not wider, than any country in my universe (Asia; Latin America). We think the road ahead for Brazil is rockier than consensus thinks it is and the headwinds themselves are vastly misunderstood by many. Given, we’ve taken the liberty to highlight the key issues going forward, in addition to identifying the potential solutions one must watch for as an indicator(s) that it’s time to buy.


As always, we are around for further dialogue on this topic. Email us at if you’d like to set up a call.


Happy bargain hunting out there; just be sure to ignore Brazil for now. The Bovespa’s current quantitative setup (Bearish Formation) is telling us that some of the key intermediate and long-term issues we’ve outlined in this 75-page report aren’t fully priced in. When they are (at least on the margin) we’ll be among the first to signal.


Darius Dale



MACRO BLACK BOOK: The Roadmap for Investing in Brazil - 3

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