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HEDGEYE MACRO & FINANCIALS: WHAT'S NEXT FOR THE FED?: DIAL IN & MATERIALS

HEDGEYE MACRO & FINANCIALS: WHAT'S NEXT FOR THE FED?  

AND WHAT ARE OUR TOP FINANCIALS LONGS AND SHORTS IN THAT SCENARIO

DIAL IN & MATERIALS
TODAY, JUNE 9, 2011, 11AM EDT

 

Valued Client,
 
5-10 minutes prior to the 11 AM EDT start time please dial:

(Toll Free) or (Direct)
Conference Code: 848675#

Materials: http://docs.hedgeye.com/Macro%20Financials%202.pdf

                 
To submit questions for the Q&A, please email .

****************************************************************************** 

 

"WHATS NEXT FOR THE FED?"  

 

Some of the key topics we will be addressing in this presentation include: 

  • A refresher on our Q2 theme Indefinitely Dovish, which postulates lower interest rates much longer than consensus expects.
  • What are the trigger points for QE3? And does inflation matter?
  • Why the Fed's Indefinitely Dovish policy is about to go from a tailwind for the Financials to a headwind.
  • Not all Financials are positioned equally. We look at which Financials are best (and worst) prepared.
  • A look at hidden sources of interest rate exposure that aren't on most investors' maps.  

Please contact if you have any questions.  

Regards,

 

The Hedgeye Macro Team


JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD

We are hosting a call this morning at 11 am with the Hedgeye Macro Team:

"MACRO & FINANCIALS: WHAT'S NEXT FOR THE FED?"

Contact us for access to the slide deck 

Dial-in:

Code: 848675#

 

End of QE2 Presents Risks for Claims

At the end of QE1, claims stopped going down.  When QE2 began, claims started falling again.  While this model may be simplistic, it's shown to be effective over the last two years, as the chart below shows.  When the Fed has the spigots on, the market has climbed and claims have dropped.  In the drought between QE1 and QE2, claims tread water.   We have been watching the charts below for several weeks with a sense of unease, and we expect that the end of QE2 in a few weeks will present another choppy period for claims.

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - fed and claims

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - s p

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - s p and fed

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - XLF

 

Claims Rise 5k

Initial Claims rose 5k to 427k last week (+1k against the upwardly-revised print from last week).  The 4-week rolling average dropped slightly, falling 3k to 424k.  According to our model, claims must drop into the 375-400k range before unemployment can begin to improve.

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - rolling

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - raw

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - NSA

 

2-10 Spread 

We track the 2-10 spread as a proxy for NIM.  Thus far the spread in 2Q is tracking 11 bps tighter than in 1Q.  This week's spread level of 257 bps compares to 250 bps last week.  

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - spreads

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - spreads qoq

 

Financials Subsector Performance

The chart below shows the price performance of subsectors over four durations.

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - perf

 

Joshua Steiner, CFA

 

Allison Kaptur


TALES OF THE TAPE: MCD, CPKI, BOBE, DRI, BWLD, DIN, TXRH, KONA

Notable news items and price action from the restaurant space as well as our fundamental view on select names.

  • MCD traded flat yesterday despite weaker than expected May sales results being released yesterday before market open.  Our view is that May’s results offer further evidence that the core business is waning and comps are being driven by beverages.  Europe’s soft performance is a focus for many as the E Coli situation continues on the continent with a potential negative impact for MCD’s June sales causing concern.
  • CPKI and Golden Gate Capital today announced that CPK Merger Sub Inc. has commenced the previously-announced tender offer for all of the outstanding shares of common stock of the Company at a price of $18.50 per share, according to a press release published by the company yesterday.
  • BOBE was raised to Buy from Hold at Miller Tabak.  Bob Evans gained 11.5% on accelerating volume yesterday. 
  • Casual dining traded poorly yesterday.  DRI, BWLD, DIN, TXRH and KONA all traded lower on accelerating volume.

TALES OF THE TAPE: MCD, CPKI, BOBE, DRI, BWLD, DIN, TXRH, KONA - stocks 69

 

Howard Penney

Managing Director


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THE M3: HODW; SHOPPES AT MBS; JUNKETS

The Macau Metro Monitor, June 9, 2011

 

 

DANCING WATER TURNING A PROFIT Macau Daily Times

Sunny Yu, MPEL's VP for entertainment and projects, said The House of Dancing Water (HODW) so far has received over 500,000 spectators and that the attendance rate is still above 90%.  Yu confimed HODW's revenue is covering all operating expenses.  "If it continues doing great, within 10 years we will get our investment back," said Yu.


LAS VEGAS SANDS AIMS TO SELL SHOPPING MALL AT SINGAPORE CASINO Business Times, Reuters

LVS COO Michael Leven said, "We did over a billion dollars in our first year in EBITDA (for MBS). We expect that to grow. I think a four-to-five year payback in that situation, anybody would be happy with that return on investment. We should do that very easily without even selling an asset like our mall (The Shoppes at MBS), which we expect to sell maybe in 2013 or 2014, which can provide as much as US$4 billion back for our $6 billion investment just on the mall alone."

 

The Shoppes now has more than 250 stores and restaurants.  The Shoppes has been facing complaints of slow traffic from some retailers.

 

NO GOLDMINE Macau Daily Times

Samuel Tsang, the Century Legend Group chairman, said most investors don’t understand the risks of running a junket.  He stressed the percentage of the bets paid back to VIP gamblers is increasing to an average of 1%.  Meanwhile, the former executive vice president of Sands China, Luís Mesquita de Melo, wants more transparency and supervision of junkets. "The regulations somehow dilute the responsibility between junkets and operators, which allows for a lot of sub-junkets that don’t go through the licensing process...politicians need to discuss and decide if it makes sense to allow junkets to remain a subculture or if they should bring them into the gaming business," he remarked.



Squirrel Hunting

“Hunting is not a sport.  In sport, both sides should know they’re in the game.”

-Paul Rodriguez

 

Keith and I played hockey in college with a French Canadian by the name of Yvan Eric Stephane Champagne.  Like most French Canadians, he has a great name, though we appropriately shortened it to Champy.  Our friend Champy has many great attributes, but he is most well known amongst our friends and former teammates for enabling us to create the term Squirrel Hunting.

 

My junior year I lived in a tired old fraternity house with Champy.  Like many college fraternity houses, this one had some issues related to cleanliness, or lack thereof.  The noteworthy affliction of this house was an infestation of squirrels.  While the squirrels certainly weren’t sanitary, living with squirrels did provide us some level of entertainment, particularly when Champy attempted to hunt them in the house with his hockey stick.

 

On one legendary Sunday morning, I laid in my bed for a good four hours listening to Champy chase the same squirrel up the front stairs of our three story fraternity house and then down the back stairs of the fraternity house.   For those that have attempted to hunt squirrels with hockey sticks in a massive fraternity house, you know the reality . . . it is a herculean task.  In fact, the little critters are incredibly hard to catch. 

 

After four hours of chasing the squirrel, while I laid in bed laughing at him, Champy finally succumbed to frustration and lost it on me for not helping him.  Needless to say, he also never caught the squirrel. From that day forward, whenever any of our friends engage in an activity that defied logic or rationality, we deemed it Squirrel Hunting.

 

On Tuesday, Chairman Bernanke was speaking at the International Monetary Conference in Atlanta and sounded like he just spent four hours in the Zeta Psi house at Yale chasing squirrels up and down the stairs.  To quote the venerable Fed Chairman:

 

“The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets.  In this context, monetary policy cannot be a panacea."

 

The irony of that statement, of course, is that Chairman Bernanke has overseen the most stimulative Federal Reserve in, well, the history of the Federal Reserve.  We have quantified this in the Chart of the Day below, which comes courtesy of Grant’s Interest Rate Observer.  In essence, the Federal Reserve has been more than five times more stimulative over the last four years than in any other period, including the Great Depression.  So, for Chairman Bernanke to now suggest that monetary policy cannot be a panacea after these actions, well that is somewhat akin to Champy telling me there were no squirrels after I listened to him chase one for four hours.

 

On the same day, Chairman Bernanke’s colleague, Atlanta Federal Reserve Bank President Dennis Lockhart, echoed the Chairman’s view when he stated:

 

“I have to express some frustration with the economy.”

 

No doubt.  After four years of hunting squirrels with a hockey stick, I’d be frustrated as well.

 

Later today, we will be doing some squirrel hunting of our own as we host a conference call for clients (email if you need the information for the call and/or want to trial our services) with the title, “What’s Next For The Fed?”  On the call, we will update our view of interest rates, which we have termed Indefinitely Dovish, discuss our thoughts on the possibility of another round of quantitative easing, and then hand it off to Josh Steiner to discuss the implications of our interest rate view on the financials sector.

 

In a nut shell, our view is simply that the Federal Reserve will remain dovish longer than the market and most participants currently realize, which from our perspective suggests well into 2012, if not beyond.  The key factors supporting this view, which we will get into greater detail today, are as follows:

  1. Housing – We are facing another leg down in housing prices in the U.S. and any increase in interest rates would accelerate this.
  2. Employment – The unemployment issue in the United States is structural in nature and is likely to get worse before it gets better.
  3. Growth – Economic growth in the United States has been illusory at best and set to decelerate well below the long run average.

Inflation, of course, could be the one measure which changes our view and forces the hand of the Fed.  Even though the Fed has been willfully blind to commodity inflation, Dallas Federal Reserve Bank President Richard Fisher alluded to the idea that that quantitative easing may actually be causing inflation.   If that idea becomes pervasive amongst the Squirrel Hunters at the Fed, then our view on interest rates could change dramatically.  As for now, we are sticking with Indefinitely Dovish

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Squirrel Hunting - Chart of the Day

 

Squirrel Hunting - Virtual Portfolio


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