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Silvio’s Black Eye

Position: Long Germany (EWG); Short Euro (FXE), Short Italy (EWI), Short Spain (EWP)

 

Italians are calling tomorrow B-Day, where ‘B’ is for Berlusconi, when Prime Minister Silvio Berlusconi faces a no-confidence vote that could swing on just one or two votes. In remarks today Berlusconi seemed to issue an ultimatum: either vote for him or else the country will be sent spiraling into the Eurozone debt crisis.

 

The 74-year old Berlusconi, whose center-right People of Freedom party is expected to win a vote of confidence in the upper house, but is more vulnerable in the lower house, has stood in a perilous state since July when followers of his former deputy, Gianfranco Fini, left the governing majority to set up a parliamentary group of their own.

 

We’ve had the opportunity to write about Berlusconi this year due to his numerous “scandals” and the risky state of Italian finances with the Eurozone’s largest public debt, at ~120% of GDP. We’ve presented Italy’s Crisis in Confidence as one not unique to Italy alone, but many EU states such as Greece, Ireland, Portugal, Spain, and Hungary that have mismanaged and overextended their public balance sheets.

 

However, here we must stress that Italy is a much larger “fish” than its European peers who have already been forced to receive bailouts from the EU/IMF, both in terms of size of the economy and debt outstanding (see chart).  We’ll be managing risk around a scenario in 2011 in which Italy may too need funding assistance to prevent a default. Both a rising yield premium (see chart below) to own Italy’s debt and underperformance of its equity market this year have been signaling a heightening risk trade.

 

Silvio’s Black Eye - b1

 

Silvio’s Black Eye - b2

 

Investment risk in Italy revolves around the confluence of these macro factors:

 

1.) Public Debt  – the country is rolling up against €500 Billion of government debt maturities (principal +interest) over the next three years--a level equivalent to Germany’s obligations, yet from an economy 1.6x larger than Italy’s. As the chart below shows, a major headwind comes in 2011, ~ €350 Billion.

 

Silvio’s Black Eye - b3

 

Silvio’s Black Eye - b4

 

2.) Political Uncertainty  –  government instability begets investor uncertainty and unleashes the snowball of investor fear that runs government yields higher. We’ve already seen this film in Greece and Ireland this year.

 

3.) Austerity’s Blues – We continue to see strong foot power (strikes) against the government’s proposed €30 Billion in austerity cuts.

 

4.) Aging Population  – Italy will have the oldest population by 2015 and 2020 in the Eurozone, with a population >65 at 21.9% and 23.2%, respectively (see chart).

 

Silvio’s Black Eye - b5

 

In remarks today Berlusconi noted that he is seeking to form a new government supported by “all moderates” if he wins the confidence vote.  Unfortunately, should Berlusconi win, his majority may still be so small that he simply prolongs Italy’s Crisis in Confidence.

 

Suffice it to say, we’re forecasting rocky waters for Italy in 2011. Look to meetings this Thursday and Friday at the European Summit in which discussions will include new  mechanisms to deal with Europe’s sovereign debt problems.

 

Matthew Hedrick

Analyst


MACAU TRENDING UP 60%

Strong revenue growth continues thru Dec 12th
 

 

Through the first 12 days of December, Macau table revenues were HK$6.629 billion.  After taking into account the number of weekend and weekdays and a full month of slots, our previous HK$17.5 billion estimate for December gaming revenues remains intact.  If our projection holds, December would represent another very strong month in Macau, up approximately 60% from last year.

 

Market shares month-to-date are shown below although they are probably of little value this early in the month.  Hold related volatility is obviously a bigger factor over shorter time periods.  However, we remain impressed with Wynn’s market share rebound over the last few months.  The addition of two new VIP rooms should continue that trend.  MGM also remains above the recent trend and we expect that to continue, even beyond the Q1 IPO.

 

MACAU TRENDING UP 60%  - macau1


THE M3: LEVEN COMMENTS; PACKAGE TOURS; WAGES

The Macau Metro Monitor, December 13th, 2010

 

SANDS SEEKS 'EQUITABLE SOLUTION' WITH GOV'T: LEVEN  Macau Daily Times

Acting Sands China CEO, Michael Leven, has said that the company wants to work with the Macau Government to find an “equitable solution” regarding plots 7 and 8 on Cotai.  Leven said the Government gave “no official reason” for rejecting the company’s request.  "We want to better understand what happened. Why, how and now what can be done to reach a fair solution for all parties,” he said.

 

Regarding meeting Macau CEO Chui, Leven said neither he nor Adelson had met with him but confirmed that the company has requested a meeting.  Also, according to Leven, a new Sands China CEO will not be confirmed by the year-end deadline.

 

Regarding sites 5 & 6, Leven said, “We still aim at opening the first phase in December next year, but probably just in a couple of months I can tell what we’ll open. The rest will be opened during 2012." For the Four Seasons apartments sale, it is still in the hands of the government.  Leven reiterated that the request is not aimed at getting approval for the sale, but the authorisation to transfer it to a new limited company, in which holders can then sell shares.

 

Despite more Cotai competition, Sands China “will still be one of the major growth vehicles [in the territory], with plots 3, 5 and 6, especially after the completion of Galaxy Macau,” he added.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR OCTOBER 2010 DSEC

Visitor arrivals in package tours increased by 4.2% year-on-year to 396,310 in October 2010.  Visitors from Mainland China continue to lead the pack with 274,805 or 69% of the total.  628,773 guests checked into hotels and guest-houses in October 2010, up 8.2% YoY.

 

VENETIAN, CLEANERS REACH AGREEMENT Macau Daily Times

According to the Labour Affairs Bureau (DSAL), Venetian has reached an agreement with 70 local cleaners regarding unequal wages.  The Venetian told workers that the company will follow the initial plan which will see the operator increase perks and wages in the first half of next year for all personnel and review the internal management mechanism, such as the promotion system and distribution of tasks.
 


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THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - December 13, 2010

 

As we look at today’s set up for the S&P 500, the range is 33 points or -1.64% downside to 1220 and 1.02% upside to 1253.  Equity futures are trading above fair value following a strong start to the week across Asian and Europe where China's decision to not to raise its benchmark interest rate has prompted further risk appetite.  On the data front this week, the passage of the newly-proposed fiscal stimulus package through both Houses of Congress will be the main focus today. For the rest of the week, data highlights include tomorrow's FOMC rate decision plus November Retail Sales, November CPI and Empire Manufacturing on Wednesday.  In addition, weekly Jobless claims plus the Philly Fed Index on Thursday.

  • Airgas (ARG) told court its directors disagreed over minimum price they would accept for co. from Air Products & Chemicals in takeover; earlier stated they were unanimous
  • American Superconductor (AMSC) may be overvalued as wind- turbine inventories at customer Sinovel increase, Barron’s says
  • Colonial Properties Trust (CLP) said it may sell shares equivalent to as much as $100m
  • EXCO Resources (XCO): Wilbur Ross has bought 7.5% in XCO and wants to discuss “extraordinary corporate transactions,” such as a merger or asset sales, according to SEC filing
  • GFI Group (GFIG) said it will pay a special 25c-shr dividend
  • Horace Mann Educators (HMN) boosted quarterly dividend to 11c-shr, vs Bloomberg forecast 10c
  • Mattel (MAT) may rise 20% or more in next year on demand for American Girl dolls, Monster High dolls, Barron’s says
  • Plains All American Pipeline (PAA) and Western Gas Partners (WES) may rise as their fee-based business expands, Barron’s said, citing UBS analyst Jeremy Tonet
  • W&T Offshore (WTI) said it will pay special dividend of 66 cents per share

PERFORMANCE

  • One day: Dow +0.35%, S&P +0.60%, Nasdaq +0.80%, Russell +1.20%
  • Last Week:  Dow +0.25%, S&P +01.28%, Nasdaq +1.78%, Russell +2.70%
  • Month-to-date: Dow +3.67%, S&P +5.07%, Nasdaq +5.58%, Russell +6.85%
  • Quarter-to-date: Dow +5.77%, S&P +8.69%, Nasdaq +11.35%, Russell +14.89%
  • Year-to-date: Dow +9.42%, S&P +11.24%, Nasdaq +16.23%, Russell +24.22%
  • Sector Performance (last week): Financials +3.78%, Tech +1.53%, Consumer Staples +1.15%, Industrials +1.04%, Materials +0.65%,  Healthcare +0.64%, Consumer Discretionary +0.37%, Energy +0.12% and Utilities (-0.50%)

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 827 (+473)  
  • VOLUME: NYSE 974.51 (-2.96%)
  • VIX:  17.61 +2.09% YTD PERFORMANCE: -18.77%
  • SPX PUT/CALL RATIO: 1.48 from 1.33 +11.66%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 17.68 -0.811 (-4.388%)
  • 3-MONTH T-BILL YIELD: 0.13% -0.01%  
  • YIELD CURVE: 2.68 from 2.59

COMMODITY/GROWTH EXPECTATION:

  • CRB: 314.91 -0.37% (-0.49% last week)
  • Oil: 87.79 -0.66% (-1.57% last week)
  • COPPER: 411.20 +0.61% (+2.83% last week)
  • GOLD: 1,384.95 -0.31%% (-1.53% last week)

CURRENCIES:

  • EURO: 1.3226 +0.03% (-1.40% last week)
  • DOLLAR: 80.070 flat (+0.87% last week)

OVERSEAS MARKETS:

 

EUROPEAN MARKETS:

  • European markets opened up and extended gains with mining shares the leading advancers up +2.1% after Chinese industrial output data beat expectations buoying confidence about the economic outlook.
  • Investors took comfort that China did not raise its interest rates over the weekend, though they did raise bank reserve requirements on Friday, and shrugged off China's inflation rate rising to its highest level in over 2 years.
  • Continuing M&A activity also helped sentiment.
  • In a broad advance all but one sector, healthcare (0.1%) trade higher. Peripheral European debt spreads and the euro were pressured ahead of the EU Leaders Summit on 16-17 Dec. Major indices trade slightly off session highs.
  • UK PPI input +9.0% y/y vs consensus +8.5% and prior downwardly revised +8.2%
  • UK Rightmove Dec house prices (3.0%) m/m, up +0.4% y/y; predicts 2011 house prices flat to down (5%)

 

ASIAN MARKTES:

  • Most Asian markets went up today as the region reacted well to China's raising banks' reserve requirements rather than interest rates.
  • Railway stocks continued up in China on government plans to develop a high-speed rail network.  Energy stocks outperformed on economic data suggesting the global economy is recovering.
  • Japan finished higher, with a weaker yen supporting the market. The market opened flat, but took heart on China’s rise.
  • Energy stocks gained on higher oil prices, and property stocks advanced on reports that secondary home sales have picked up, moving Hong Kong higher in light trade.
  • Australia rose, with miners gaining on the belief that China’s raising its reserve requirements for banks was not as harsh a tightening measure as the country might have chosen. The country’s big banks went up on relief that banking system reform measures announced yesterday were not as radical as feared.

Howard Penney

Managing Director

 

THE DAILY OUTLOOK - S P 1213


WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 2 of 10 improved / 5 out of 10 worsened / 3 of 10 unchanged
  • Intermediate-term (MoM): Negative / 0 of 10 improved / 6 of 10 worsened / 4 of 10 unchanged
  • Long-term (150 DMA): Negative / 1 of 10 improved / 5 of 10 worsened / 3 of 10 unchanged / 1 of 10 n/a

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - summary

 

1. US Financials CDS Monitor – Swaps continued to tighten across domestic financials last week, widening for just 5 of the 28 reference entities and tightening for the other 23.

Tightened the most vs last week: C, SLM, PRU

Widened the most vs last week: ALL, CB, TRV

Tightened the most vs last month: JPM, C, PRU

Widened the most vs last month: CB, TRV, MBI

 

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - US cds

 

2. European Financials CDS Monitor – In Europe, banks swaps reversed course and widened out.  Swaps widened for 32 of the 39 reference entities.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - euro cds

 

3. Sovereign CDS – Sovereign CDS rose 27 bps on average last week.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates rose slightly last week, closing at 8.31 on Friday.  

 

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index came close to new highs, closing at 1556.   

 

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - lev loan

 

6. TED Spread Monitor – The TED spread backed up on Friday to close the week at 18.5.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index rose 3.8 points, closing at 25.7 on Friday.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose slightly, ending the week 12 bps above the prior week’s close.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads increased sharply last week, closing at 208 bps, 35 bps higher than last week.     

 

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - markit mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index fell 7.3 points to close at 209.5.   

 

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - baltic dry

 

11. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: 1.2% upside to TRADE resistance, 3.6% downside to TRADE support. Typically, when downside to upside is greater than 2:1, we believe caution is warranted.  

 

WEEKLY FINANCIALS RISK MONITOR: MUNI SWAPS BACK UP SHARPLY - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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20 Proprietary Risk Ranges

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