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Europe: Sweden Hikes Rate as PIIGS Tumble

Positions in Europe: Long British Pound (FXB)


Sweden raised its benchmark repo rate 25bps today to 1.75%, the sixth time since July 2010. Today’s hike further confirms the proactive policy measures taken by Sweden’s central bank (Riksbank) and government to in particular control inflation and spur investment. (Please see our note on 4/15 titled “Sweden in the Sweet Spot” for our fundamental take on the country).  The Swedish Krona reacted favorably to the hike, rallying against all major currencies this morning and to its strongest level against the USD since August ‘08!  As the chart below presents, we’ve seen associated strength in the Krona vs the USD with every rate hike since July 2010, a trend we’d largely expect to continue throughout the year.


Europe: Sweden Hikes Rate as PIIGS Tumble - Sweden1



-We continue to express the severe turn we’ve seen in the capital markets of Europe’s peripheral countries while also noting a slight negative inflection in the data from Europe’s larger (and fiscally sober) countries like Germany, France, and the Netherlands.


Yields Ramp for PIIGS


Today both Spain and Portugal issued debt. Recent weeks have shown a strong reversal in the trend we saw in early 2011 of PIIGS issuing debt at lower yields than previous auctions, largely a response to the commitment from China and Japan to buy European debt.


Spain sold €3.4 billion of treasury bonds at auction today and the 10YR yield jumped to 5.472% versus 5.162% in March. Interestingly, Portugal issued €320 million of six-month bills today at nearly the same yield as Spain’s 10YR, or 5.529% versus 5.117% on April 6.


The clear take-away here is the risk premium imbedded in owning Portugal’s debt, which should continue to heighten as the size and structure of an EU/IMF-led bailout of Portugal remains at large, and given the election results in Finland that saw the euro skeptic/anti-bailout parties take voting share (for more see our post on 4/18 “European Risk Monitor: Peripheral Risk Pops as Finnish Elections Inflect”). As a calendar catalyst to monitor, the expectation is for a bailout of Portugal in mid-May, ahead of the June 5 election date set by the current interim government.


A familiar chart of 10YR bond yields of the PIIGS (below) continues to be telling of the debt refinancing headwinds these countries are bumping against. Greece’s 10YR hockey stick yield is now at 14.65%!


Europe: Sweden Hikes Rate as PIIGS Tumble - yieldsheut



Data Drag


Yesterday Reuters issued its initial April reading of Manufacturing and Services PMI for Germany, France and the Eurozone. A notable call-out is the inflection in the German Services PMI number, registering 57.7 in April versus 60.1 in March.  We called for the German Services number to mean revert in a post titled “Germany’s Marginal Turn” on 4/12, with the tag-line that the 60 line is a historically heavy resistance level.  Eurozone Services also declined month-over-month, falling to 56.9 in April versus 57.2 in March.


We think the inflection in some of the high frequency data is a reflection of the marginal slowing in European growth expectations (especially in Germany) and that the slight dip or deceleration in consumer and business confidence reflects inflationary pressures and continued macro volatility, including sovereign debt contagion in Europe, instability in MENA and around Japan’s nuclear reactor(s) and rebuild, and US political indecision regarding its debt and weak USD policy.


Of note, tomorrow we get German business expectations from the IFO survey. The March figure turned down to 106.5 vs 107.9 in February. We think we’re likely to get a lower April figure.



Currency Positioning


We have a positive bias on both the EUR and GBP versus the USD due primarily to USD weakness. Due to the strong daily push/pull headline risk in Europe on the common currency, we view the EUR-USD as a trade to monitor on a daily basis. That said, we have a bullish immediate term outlook on the EUR-USD, with TRADE levels at $1.42 - $1.45, and think that Portugal, like Greece and Ireland, will be bailed out by the EU/IMF, which is increasingly being priced in.


The Bank of England continues to signal a hawkish stance on interest rates, however has not come off its 0.50% benchmark rate. The most recent BoE minutes show 6 votes against to 3 votes for a rate hike. Importantly, BoE head King recognizes inflationary threats to the economy, a position ignored by Ben Bernanke at the Fed, and in our opinion a major dislocating factor feeding USD weakness.


Besides our long position in the British Pound (FXB), we have no other current European country or currency position in the Hedgeye Virtual Portfolio. We covered our short position in Spain (EWP) on weakness on 4/18 for a TRADE, but remain bearish on the country’s outlook over the long-term TAIL.


Matthew Hedrick



Notable news items and price action from yesterday, along with our fundamental view on select names.

  • CAKE estimates were raised at Janney driven by superior positioning within the casual dining segment, as well as recently improving segment sales trends.
  • YUM’s Taco Bell is going on the offensive.  After the plaintiff dropped a law suit over Taco Bell’s beef, the company is now looking to set the record straight via various media outlets and reiterate that its products’ quality has not been compromised.
  • MCD’s first National Hiring Day was awarded with a strong response from job seekers.  The company planned to hire 50,000 people in one day, boosting its staff by about 7%.
  • WEN and PZZA both traded down on accelerating volume.
  • KONA, CAKE, and BJRI shares gained on accelerating volume.  CAKE and BJRI report today after the close.  RT shares declined 2.7% on accelerating volume.  The stock is down 11% over the last thirty days.




Howard Penney

Managing Director

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Galaxy posts another strong quarter




  • GEG Group EBITDA of HK$712MM
  • Starworld EBITDA HK$664MM and revenue of HK$5,726MM
    • Turnover: HK$151BN
    • Win %: 2.9%
    • Net win: HK$4.4BN
    • EBITDA margin under GAAP would have been 23%
    • Annual ROI of 69% as of 1Q11
    • Occupancy 97%
  • City Clubs EBITDA of HK$57MM
  • Construction materials EBITDA of HK$68MM
  • Galaxy Macau on schedule and budget for May 15th opening
    • initial opening: 1,400 rooms, 50 F&B outlets, 30 retail shops, 450 tables and 1,100 slots
  • Cash: HK$4.2BN
  • "In 1Q 2011, all of the HK$1.3BN convertible notes converted into 173MM shares of common"


  • HK$11BN has been invested into Galaxy Macau as of March 31st.  7,600 team members on opening day.
  • Will conduct full simulations for 3 weeks before opening - with 8-10k people
  • Actively exploring developing plans for their remaining land bank


  • Have 7,100 employees on the payroll at Galaxy Macau currently
  • Target return is mid to high teens for Galaxy Macau
  • Will operate 10 VIP / junket rooms upon opening Galaxy Macau
  • Split between Mass & VIP tables: 150 VIP and 300 Mass
  • What are they doing on the promotional front for Galaxy Macau?
    • They have been working their marketing program with Banyan Tree and Okura for a year now 
    • Working with travel executives in all the main Chinese cities
    • Visiting travel agencies throughout agency as well
    • Engaged in digital marketing through social media and through their website
    • Program of taxi cabs, buses, and MTR station advertising in HK (first of its kind that MTR has done - they have the exclusive right to advertise inside the station)
    • Have over 70 shuttle buses that will be operating in Macau 
  • They are moving some of the tables from Starworld to Galaxy Macau


TODAY’S S&P 500 SET-UP - April 20, 2011


As we look at today’s set up for the S&P 500, the range is 25 points or -0.20% downside to 1310 and 1.70% upside to 1335.




THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: +1026 (+2908)  
  • VOLUME: NYSE 836.38 (-19.8%)
  • VIX:  15.83 -6.7% YTD PERFORMANCE: -4.45%
  • SPX PUT/CALL RATIO: 1.80 from 2.11 (-10.82%)



  • TED SPREAD: 21.291  22.305
  • 3-MONTH T-BILL YIELD: 0.06%
  • 10-Year: 3.39 from 3.40
  • YIELD CURVE: 2.71 from 2.71



  • 07:00a.m.: MBA Mortgage Applications, Apr 15, 5.3% actual
  • 10:00 a.m.: Existing Home Sales, est 5.0m, 4.88m prior



  • DoJ said to query market participants about how takeover of NYSE would affect competition in equity listings
  • Chi-X Global said to be in advanced talks with four banks, trading firms to sell minority stake: FT
  • Berkshire Partners in talks to buy Husky Injection Molding Systems in deal that could be worth up to $2b: Globe and Mail
  • EBay may announce as soon as today purchase of WHERE, service that lets mobile-phone users get info. on nearby businesses
  • AES agreed to buy DPL Inc. for $3.5b in cash, adding more than 500k customers in Ohio, AES said earlier today
  • Panasonic set to announce plans to move its North American HQ to Newark, New Jersey, later today




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Gold Exceeds $1,500 as Dollar Drops on Concern About U.S., European Debts
  • Sugar Exports From Thailand to Climb 36% as Yields Surge on La Nina Rains
  • Copper Rises as Dollar Weakens; Aluminum Reaches Highest Price Since 2008
  • Tepco's LNG Imports to Jump 50% as Japan Rewrites Policy: Energy Markets
  • Wheat Set for Longest Advance in Three Months on Dry Weather; Corn Climbs
  • Sugar Rises for Second Day as Brazil Supply May Be Delayed; Coffee Climbs
  • Cotton Farmers in China Fail to Boost Crop, Top Agency Says; Prices Climb
  • India May Ease Sugar, Wheat Export Bans Amid Predictions for Normal Rains
  • China Issues Emergency Notice to Curb Aluminum Projects Amid Overcapacity
  • Cotton Moving Average Signals 12% Drop, FCStone Says: Technical Analysis
  • Cut Diamonds Outpacing Gold Still `Grossly Undervalued': Chart of the Day
  • Rusal May Reach Agreement on $4 Billion Syndicated Loan as Early as May
  • Corn, Cotton Rallies May Weaken as U.S. Output Shifts, Deere's Allen Says
  • Hindalco, Sterlite Said to Have Doubled Copper Refining Fees After Quake 




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • European Stocks Rise as Peugeot, L’Oreal Sales Spur Confidence in Recovery
  • Bank of England Voted 6-3 to Hold Rate as Majority Highlighted ‘Downside’
  • Company Refinancing, Sovereign Debt Hurt European Recovery, Moody’s Says
  • Peugeot First-Quarter Sales Rise 10% on New Models, Emerging Market Demand
  • Vodafone May Consider IPO of Indian Joint Venture After 2011, Colao Says
  • ECB Raising Rates May Turn Into Mistake Weakening Euro, Standard Life Says
  • Cat Bonds Find Bottom After Quake Triggers Biggest Losses: Credit Markets
  • Long Bond Scrapped as Yield Gap Nears Widest Since January: Russia Credit
  • Farmers Get Rich as Wheat Trade Gives Deere Record Profit: Freight Markets
  • Yen, Dollar Decline as Stocks Gain; Euro Advances on Interest-Rate Outlook
  • Audi Targets ‘Suburban Mommies’ With Compact SUV Rivaling BMW’s X1 Model
  • Skyscraper Boom Reaches End as City of London Goes 'From Vanity to Sanity'







  • Asian Stocks Rise as U.S. Housing, Earnings Boost Confidence; BHP Advances
  • Li’s ‘Superman’ Status Tested in Hong Kong as Yuan IPO Meets Tepid Demand
  • China Mobile First-Quarter Profit Rises, Helped by Wireless Internet Usage
  • Thailand Raises Benchmark Interest Rate to 2.75% as Inflation Accelerates
  • Power Bonds Rally Before First Global Bond Offering of 2011: India Credit
  • China Issues Emergency Notice to Restrict Aluminum Projects; Prices Jump
  • Indonesian Millionaire Uno Sees More Buyouts as Conglomerates Sell Units
  • Vedanta May Use $1.5 Billion Cairn India Purchase as Hedge for Open Offer
  • Acer Declines to Lowest in Two Years After Cutting Forecast for Shipments
  • Tepco's LNG Imports to Jump 50% as Japan Rewrites Policy: Energy Markets
  • New York Loses to Shanghai as Toyoda, Ghosn Head to China’s Top Auto Show
  • Christchurch Banker Exodus After Quake is Aftershock For Property Market













Howard Penney

Managing Director


In preparation for IGT’s FQ2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from its FQ1 earnings release/call and subsequent conferences.




  • “Over the last few months is a return to stability in that wide area progressive business with some of these new brands helping us start to regain some floor share in that space.”
  • “But currently, we’re very focused on how do we reduce the reliance on the need for North American replacements, continue to grow the business globally, very focused on cash flow generation, as last year we paid down about $410 million of debt, and arguably what could be considered a pretty trough here. And we’re very focused on driving higher ROICs particularly on our game operations business.”
  • “Very focused on every dollar of R&D spend. I think we are probably going to be somewhere around $200 million a year in R&D spend. I don’t know if there is much opportunity to shrink that number. But we know there’s a lots of opportunity to make a better line of sight to every dollar that’s spent there so that we are focused on the greatest opportunities first, for driving value.”
  • “The strategy in our systems business now that, particularly if you look at the server-based technology, a lot of the efforts to this point could be characterized as working on the infrastructure, developing the infrastructure. We’re now shifting the focus to applications that can drive higher value for our customers.”
  • “And as it relates to driving higher ROICs, what you are going to notice is, we are doing a lot more standardization at the platform level so that when a game like Sex and the City, for example, runs its economic life and there’s a need to refresh that box on a floor, we no longer have to bring that box back into our facility and refurb it in some fashion or re-merchandize it. All of that can be done now in the field, very simply with a software download of the new game that you want to put on there. And that a little bezel that snaps off the top box and a new ones snaps on to kind of differentiate the two products from a point of sales standpoint. And we’ve done that throughout our game operations business, particularly in the segment that are the highest yielding, the mega-jackpots. So we eliminated the need to disrupt a casino operation when we are moving the equipment on and off the floor. And how this relates to higher ROIC is, if we are able to run new software across that platform, we will be able to extend its useful life on the floor and thus we’re going to be able to have a change in estimate around depreciable lives which will be very impactful at the gross margin.”
  • [Macau]“We are probably the number two position behind Aristocrat, which that market historically was served out of Australia. And a lot of the casinos are operated by the management teams that are out of Australia. So there is a maybe a natural bias to that product. And also the familiarity on the part of the consumers that play there. But I think, we are gradually getting better at it.”



  • “Fiscal year 2011 is expected to be lighter in new and expansion units versus last year or next year.”
  • “For the current fiscal year 2011, we are updating our earnings guidance to $0.79 to $0.87 per share, excluding the $0.03 per share from our lower tax rate in the first quarter, and the $0.01 gain on an investment sale.”
  • “We expect total R&D expenses for the full year to remain similar to fiscal 2010.”
  • “We expect to see SG&A stay about flat on a dollar basis, when compared to fiscal ‘10, as we invest in the people and processes necessary to take advantage of the expected industry turnaround and new business opportunities.”
  • “We also had a respectable quarter in our Gaming Operations business, and we continue to see stabilization yields with a return hopefully to more normal seasonal patterns.”
  • [Game Ops margin] “It’s going to be a little bit volatile, as it always has been, but I think what you’ve seen over time is the mix within there becomes less heavily weighted to jackpot bearing-type links, because naturally whenever you don’t have a jackpot, you’ve got an actually higher margin activity. And I think that’s a continual trend we see over time, but it’s still going to be a little lumpy, and probably interest rates, to the extent we experience volatility there, will move it around a little bit.”
  • “While the installed base isn’t expected to grow meaningfully this year, we have begun in earnest to replace some of our older participation games with new titles and platforms, a trend that should continue, and may accelerate.”
  • “We expect the tax rate to be 36% in each of the next three quarters or approximately 34% for the full year.”
  • “Additionally, there are more than 70 North American sbX and Tier 1 opportunities that we are working on.”
  • “The sense is from our travel customers, they’ve been fairly resilient in the downturn, continue to invest at a lower than normal, but steady rate. Some of our commercial regional customers are feeling more optimistic, feel more optimistic, but aren’t necessarily spending any more money and have a hard time giving us visibility to whether they will.”
  • [Fiscal Year guidance driver] “I think it’s all around product sales.”
  • [What’s in guidance?] “I think the Italy piece is. The Illinois, I think, we probably misspoke if we led you to believe that it had. I don’t believe there’s any Illinois in the guidance.”
  • “Our CapEx spend has been almost universally on the Games Operations business. So, I think it’s more reflective of just kind of that natural rate of CapEx that’s needed to churn those assets as necessary, and, of course, right now we’re trying to get our installed base upgraded to the newest technology so we can avail our own installed base of the latest and best games.”
  • “I would say that if you could take fierce and up it a little bit, that would be the U.S. marketplace. Konami has been doing very well over the last couple of quarters with some of their games, but we actually expect that. I mean, we actually move forward with this notion that we’re going to be in a competitive environment forevermore.”

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