FQ4 was likely not a great quarter but expectations are pretty low and 2011 ship share should improve from the depths of FQ3.



When BYI reports its FQ4 results, EPS may come in at the lower end of its guidance range and perhaps a slightly below current consensus estimates.  We’re also a touch below the street for FY2011 given likely delays in IL, NY, and potentially Italy.  However, a small miss off of consensus should be no surprise and likely good enough with the stock down 25% from its 52 week high and only 3% above its low of the year.


BYI is at a potential inflection point, given their recent ship share losses coupled with the very recent launches of its new Pro Series Alpha II cabinet and Cash Spin product.  We view fiscal 2011 as a make or break period for BYI.  The next few quarters (beyond FQ4) will either prove out the bear thesis that ship share is heading to low double digits or validate the bull thesis that ship share will recover with the new cabinet and product launches.


As shown below, BYI’s ship share has taken a clear share hit since averaging 21% in 2008.  In 2009, BYI’s share slipped to 18% and most recently to 14% in the March quarter.  While 21% share is probably too high, we do think that BYI’s share will rebound to the high teens by the December quarter for two reasons.  First, customers have likely been postponing BYI purchases during the last two quarters while BYI readies its new Alpha Series cabinet for release.  In addition, a significant number of game titles will become available for the new platform in the September and December quarters which should facilitate sales momentum for the new cabinet.  Second, it appears that Konami was at least partly responsible for BYI’s March share loss.  Konami increased its own share 4.4 percentage points sequentially but that is not good run rate to use for the balance of the year as the March quarter (fiscal year end) is always Konami’s best.




While video has historically been BYI’s Achilles heel, its V32 cabinet is doing very well and the core video product should see a nice lift with the new cabinet launch.  According to the company, roughly 50% of units being shipped today are video. BYI’s gaming operations business is also doing well.  We continue to hear that the company is executing well on multiple fronts here with the Tower Series, new wheel games, and excitement surrounding Cash Spin.  If the anecdotal evidence proves correct, gaming ops growth could accelerate over the next few quarters.


Given the recent move down, the stock now trades at 13x forward earnings.  This looks low especially considering the very favorable long-term fundamental backdrop for the slot suppliers.  Execution on the new cabinet and game library will be critical.


While the level of discounting in casual dining continues to decline, growth in guest counts remains depressed. 


Malcolm Knapp reported May same-store sales and traffic results of -0.9% and -3.9%, respectively.  For same-store sales, this constitutes a two-year average number of -3.8%, which is down sequentially from the -3.5% (revised) two-year average decline in April.  The traffic number represents a two-year average of -4.9%, a sequential improvement of 10 bps from April’s two-year average traffic number.  During earnings calls pertaining to the first quarter, management teams had been mentioning an improvement in traffic numbers in April that did not manifest in the Knapp track numbers.  May shows a slight improvement in two-year traffic trends but, on a year-over-year basis, traffic trends are indicating softness.   


In terms of the general consumer environment, Knapp signals the ongoing financial crisis as the primary cause of weakness in sales.  This is reflected, according to Knapp, by increasing mortgage defaults and continuing high levels of unemployment and underemployment.   Knapp also cites a recent Wall Street/NBC News poll that showed that 62% of adults believe the country is on the wrong track, the highest level since before the 2008 elections. 


The chart below shows that the discounting level is abating; the unusual excess of guest counts over same-store sales indicated a discounting environment.  The level of discounting seen for a large part of 2009 seems over with comparable sales exceeding comparable guest counts by 3% (the largest margin since May 2008) in May.  Knapp states that value propositions with “meaningful products for the majority of concepts will continue to be very important”.  If macro headwinds persist, it seems it will be difficult for casual dining companies to meaningfully elevate traffic trends without further discounting.


KNAPP – UGLY TRAFFIC NUMBERS - knapp discounting



Howard Penney

Managing Director



Five of eight Risk Monitor metrics were worse week over week as of Friday's close, with one neutral and two positive. Greek bond yields continued to climb as Greek CDS broke out to an all-time high last week, but high yield and the TED spread both showed small improvements, on the margin.  We'll keep a close eye on this dynamic in the coming weeks.  

Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. Journal of Commerce Commodity Price Index

6. Greek Bond Spreads

7. Markit Subprime Spreads

8. AAII Bulls/Bears Sentiment Survey


1. Financials CDS Monitor – After coming down across the board in last week's Risk Monitor, this week credit default swaps ticked back up.  SLM, RDN, and XL saw the smallest percentage increases, while BAC, LNC, and PRU increased the most week over week.   The field is mixed on a month-over-month basis, with AXP, COF, and AIG decreasing the most and ACE, BBVA-ES, SAB-ES, and BKT-ES increased the mostl.  Conclusion: Negative.




2. High Yield (YTM) Monitor - High Yield rates fell 5 bps last week, with a climb in the last few days halting last week's sharp move down. Despite this momentum shift, rates finished at 8.89%, down from 8.94% last Friday. Conclusion: Positive.




3. Leveraged Loan Index Monitor - Leveraged loans were flat last week, rising a fraction of a point, enough to round up to 1464 versus 1463 last week.  Conclusion: Neutral.




4. TED Spread Monitor - The TED Spread is a great canary. It continued to fall last week closing at 40.8 bps down from 44.4 bps in the week prior. Conclusion: Positive.




5. Journal of Commerce Commodity Price Index – The JOC smoothed commodity price index is another useful leading indicator.  A sharp sell-off in this index starting in July ’08 heralded further declines in the stock market.  This week, the index fell from 16.48 the prior Friday to 15.21 last Friday.  Conclusion: Negative. 




6. Greek Bond Yields Monitor - The Greece situation remains in flux and so we include Greek Bond 10-Year Yields as a reflection of that dynamic. Disturbingly, last week Greek CDS reached an all-time high, blowing out above the pre-bailout elevation.  Greek bond yields mirrored this dynamic, increasing 100 bps from 942 to 1042 ahead of the G20 meeting.  Conclusion: Negative.




7. Markit ABX Index Monitor - We use the 2006-2 series and look at the AAA, AA, A and BBB- series. Last week the AAA series moved down, while the other tranches were mostly flat.  We include this measure as a reflection of what is going on in deep subprime distressed paper. Conclusion: Negative.




8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more bearish on the margin vs last week. Bulls decreased by 8% to 34.5% while bears rose 1.7% to 32.4%, putting the spread at 2% on the bullish side, versus 12% to the bullish side last week. Conclusion: Negative.


One caveat is that our interpretation of the AAII Bulls/Bears survey is that a more bearish reading is bearish. Most market observers would use this survey as a contrarian indicator, which we wouldn't disagree with from a practitioner standpoint. However, for the purposes of this risk monitor, we treat an increase in bearish sentiment as a negative.





Joshua Steiner, CFA


Allison Kaptur

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Exit Spending

“Few men of action have been able to make a graceful exit at the appropriate time.”

-Malcolm Muggeridge


This weekend’s G-20 meetings in Toronto resulted in exactly what Professional Politicians were hoping for – no timeline that they’ll be in office to see through. How’s that for the new era of rhetorical “accountability”?


There were a lot of interesting quotes coming out of the meetings, but I thought the compare and contrast between the the world’s largest Creditor and Debtor nations to be the most poignant:

  1. China’s President Hu Jintao – “The deeper impact of the global financial crisis has yet to be overcome, and systemic and structural risks remain very serious.”
  2. US President Barack Obama – “We can’t all rush to the exits at the same time. What we have to recognize is that the recovery is still fragile.”

After seeing a big sequential deceleration in US economic growth in Q1 of 2010 (GDP dropping to +2.7% from +5.6% in Q4 of 2009), you’d think that the game plan would be for the US to change the plan. Think again. The US government sounds like it will keep pounding Big Keynesian Spending.


In sharp contrast to China’s sequential acceleration in Q1 GDP growth (from +10.7% in Q409 to +11.9% in Q110), as of Friday’s Q1 GDP release US economic growth is headed in the wrong direction all of a sudden. We think consensus growth estimates for the back half of 2010 and beyond look way too HIGH.


This, of course, makes the consensus 2010 and 2011 US deficit and debt to GDP calculations too LOW. As a result, with the world’s eyes hyper focused on these deficit and debt ratios, both the US Dollar and US stock market will remain in very precarious prospective positions.


The ultimate conclusion of the G-20 meetings doesn’t reflect the world that the Chinese or Brazilians would like to see. Remember, these 2 countries have been tightening monetary policy. The goal of “cutting deficits in half by 2013” really ends up being the conclusion that debt-laden-deficit-spending countries need as their stock and bond markets continue to discount that both economic growth and deficits in 2011 will be worse than expected.


The biggest problem with Professional Politicians in Washington right now is that they aren’t proactively nipping this 2011 deficit/GDP problem in the bud. Instead, the US Economic Commander in Chief is trying to push another $55 BILLION jobs bill through the Senate so that he can try to kick the unemployment rate can down the road for a few more quarters to get him through the midterm elections.


This is not the time to ramp up US government spending. It’s time for American Austerity. Or at least something that sounds like it rhetorically (see all Western European countries for the playbook).


The Creditor agrees. Chinese Foreign Ministry spokesman Qin Gang told reporters in Beijing late last week that an appreciating Chinese Yuan won’t solve U.S. economic problems:  “The appreciation of the Yuan cannot bring balanced trade. A strengthening Yuan cannot help to solve U.S. problems of unemployment, overconsumption and low savings rate.”


Not to take sides, but we have to agree with the Chinese on this. We’ll go through this new theme of American Austerity on Thursday when we hold our Q3 Macro Themes Conference Call (email if you’d like to participate).


Whether you agree with the US government calculations of savings and unemployment rates or not is not the big picture macro point we will be making. We get that government calculations are conflicted and compromised – so we simply compare these bad apples to the bad apples reported in years past. While it does get tricky when the government changes the calculations (forcing us to compare bad apples to bad oranges), we can live with our forecasting model.


What we can’t live with is this idea that government spending is good. Not here, not now. America will continue down the Fiscal Road to Perdition until its political leadership comes to grips with the reality that today is still 2010, not 2013.


Both the SP500 and the US Dollar were down -3.7% and -0.4%, respectively last week. For the world’s reserve currency gone fiat, that was the 3rd consecutive week-over-week decline. The US Dollar Index is now broken from an immediate term TRADE perspective ($86.57 TRADE line resistance) and the Euro moves to bullish from an immediate term TRADE position as a result ($1.22 TRADE line support). The exit of spending apparently has a stabilizing effect on a currency.


My immediate term support and resistance levels for the SP500 are now 1068 and 1087, respectively. We remain short the US Dollar Index (UUP) in the Hedgeye Virtual Portfolio.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Exit Spending - apple



On Friday, the S&P 500 got a boost from the end of the financial reform saga and a boost in the RECOVERY trade; the Russell 2000 was the best performing index in the world on Friday.


The Financials (XLF) dramatically outperformed, up 2.7% on the day, as the Banks led the way with the BKX up 2.9%.  With the consensus thinking that the financials “dodged a bullet,” the final impact to business is still to be determined. 


While the sectors leveraged to the recovery trade got a boost on Friday, the latest MACRO data released on Friday does not support the move.  GDP came in slower than originally released and consumer sentiment improved in June.  The 1Q10 GDP (final number) is now 2.7% vs. consensus of 3.0% (personal consumption 3.0% vs. prior 3.5%, GDP Price Index 1.1% vs. consensus 1.17%, and Core PCE 0.7% vs. consensus 0.6%).  


Treasuries finished higher on Friday, with the weaker economic growth numbers.  The dollar index traded down 0.45% on the day and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.21) and Sell Trade (86.57).  The VIX declined 4.1%, but was up 19.1% for the week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.89) and Sell Trade (31.53).


The Euro moved higher by 0.1% on Friday, but declined by 0.1% for the week.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.24).


Along with the Materials (XLB) outperforming, commodities also had a strong day on Friday.  Crude and Copper prices were up 3.1% and 2.9%, respectively.  Also, the XAU rose 3.6%; FCX up 4.9%, NEM up 4.6% and ABX up 3.9%.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,241) and Sell Trade (1,259).  The S&P Steel Index rose 2.7% (X rose 2.8% and NUE rose 1.5%). The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (77.70) and Sell Trade (79.45).  


In early trading today copper is trading at a four month high.  Shanghai copper stockpiles decreased by the most in 11 months last week, to the lowest level since the week ended February 19th.  The Hedgeye Risk Management models have the following levels for COPPER – Buy Trade (2.98) and Sell Trade (3.11).


The Consumer Staples (XLP) and Technology (XLK) were the only two sectors to decline on Friday.  The XLP was dragged down by the S&P 500 Beverages Index which declined 2.6% (KO down 3.0% and PEP down 2.6%).


As we look at today’s set up for the S&P 500, the range is 19 points or 0.8% (1,068) downside and 1.0% (1,087) upside.   Equity futures are trading above fair value, as the personal income for May is due out today. 


Howard Penney













The Week Ahead

The Economic Data calendar for the week of the 28th of June through the 2nd of July is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - c1

The Week Ahead - c2

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.