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Greek Hysteria

Positions in Europe: Long Germany (EWG); We covered Spain (EWP) in the Hedgeye Virtual Portfolio today

 

Uncertainty reins in Greece—at least Greek government bond yields and cds spreads are indicating this as they make higher highs today.

 

Uncertainty has compounded along the lines of another temporary fix for Greece’s debt problems. The downturn in European equity markets, especially from the PIIGS, and the rise in bond yields over the last two days, alongside the -2% plunge in the EUR-USD yesterday (currently at $1.4143) reflect rising indecision on the fate of Greece following the inability of the Eurozone’s 17 Finance Ministers’ meeting to come to consensus on a solution; the downgrade of Greece’s credit rating to CCC by S&P; Greek protests against austerity yesterday; and calls from PM Papandreou late yesterday that he may step down, reshuffle his cabinet, or both, in the next day (or perhaps as soon as later today) as a handful of members from his slim majority ruling PASOK party have resigned over the last days (see chart below).

 

Greek Hysteria - meeeee1

 

Greek Hysteria - meee2

 

If confusion breeds contempt, market participants want clarity over the near term on 1.) an agreement for a bailout package for Greece, and 2.) a restructuring of the PASOK party with the minority conservative party.

 

Regarding point 1.), we think it’s highly probable that troika (ECB, EU, and IMF) steps in once again to fund Greece’s short term debt issues. Despite the higher highs in yields and CDS in Greece, which among “normal” conditions would clearly indicate default, the backing of Eurocrats to prevent a country from defaulting (here the ECB has the loudest voice), a currency crash, or a country exiting the Eurozone, should not be overlooked. We think this is why we’re seeing a floor in the EUR-USD around $1.40, and not freak-out levels to $1.20 or lower.

 

The debate now centers on a second bailout package for Greece to the tune of ~ 90 B EUR, complicit with the Greeks selling off state assets worth ~ 30-50 B EUR and more strict enforcement of austerity measures.  The Germans, under the voice of Finance Minister Wolfgang Schaueble, have proposed for investors to exchange all the Greek bonds currently in their portfolios for new ones with maturities extended by seven years. This presumes lower interest rates, with the original principal paid in full at the new maturity. The extent of this haircut, however, is not known, and obviously a very substantial risk. The ECB, on the other hand, is vehemently against investors (namely private) taking on any losses, which would imply under technical definitions (from the rating agencies) default/restructuring. The ECB advocates a straight bailout for Greece.

 

Regarding point 2, in the larger context we don’t think a reshuffling of the ruling party is material in terms of overall market direction. The opposition conservatives’ position against austerity (~6.5 Billion EUR in tax hikes and spending cuts) doesn’t address the country’s current outside funding needs to pay off maturing debt, nor are there white horse candidates to fix years of fiscal imbalances in Greece.

 

In our minds, Troika holds the reins in keeping Greece half-way “solvent” as it pushes the can of debt further down the road. As we’ve stated numerous times, Greece (and some of its peripheral peers) should be allowed to default and leave the union, for under the current structure there is no way for countries like Greece to use monetary policy to maneuver around weak growth and rising debt. Further there’s no mandate from the ECB on fiscal policy for the individual members to discourage fiscal excesses. This has created relative winners and losers under one currency, a paradigm that isn’t going to change, and is most clearly evident when regions (or the globe) enter a downturn in growth. 

 

Below is a calendar of critical meetings to address Greece’s debt issues, any of which may be a catalyst for an announcement of a new bailout package and/or a reshuffled Greek government. Among all this confusion, we remain grounded in the opinion that big brother (Troika) will once again fund Greece’s fiscal excesses. While this is no long-term solution, it should serve to cool near term market fears, support the common currency and reduce risk metrics from their highest highs to the more elevated levels we’ve seen year-to-date.  

 

New Greek cabinet – could hear of a reshuffling as soon as later today

Greek confidence vote – could occur soon after a new cabinet is named

 

Sun June 19 – a pre “emergency” Finance Ministers’ meeting will be held to discuss Greece

Mon June 20 – official Eurozone Finance Ministers’ meeting in Luxembourg

Thurs June 23-Fri June 24 - summit of EU leaders to assess the 18-month-long debt crisis

 

 

Matthew Hedrick
Analyst



BYD: IP ACQUISITION CONFERENCE CALL

Price seems reasonable. Given low borrowing rate, deal should be very accretive, particularly with synergies included.

 

 

CONFERENCE CALL NOTES

  • Property generated $41 EBITDA as of May 11 2011; in addition, at least $5 MM in purchasing synergies (e.g. insurance) is expected, which can improve margins.
  • $1BN market; market grew 2% in 1Q 2011.
    • #2 property in the market; similar customer type to Beau Rivage
  • 13 acres of undeveloped land on the property - can be used for additional hotels/retail facilities
  • Priced at 7.2x multiple including synergies and $44m in incremental capital
  • Net debt will increase by 150-200MM to fund purchase net of jai lai sale in FL 
    • 560MM in RC availablity: 64% of commitments related to extended portion 
    • Plans to use extending portion of debt to fund purchase; non-extending portion of credit facility (330MM) will mature in May 2012.
  • Completely unrelated to whether or not they buy Borgata
  • 2,500 lot parking garage
  • B Connected program will be deployed immediately after the acquisition is approved.
  • Other BYD properties impact:
    • Treasure Chest will benefit the most from this acquisition since it's pretty close and IP can give the local New Orleans customers a more destination-type experience.
  • Shreveport property (Sam's Town) under pressure from Native American gaming in Oklahoma.
  • Insurance market: stable to slightly decreasing
  • $20MM D&A run rate; should use Blue Chip as a proxy
  • $44MM Capex used:
    • Will be spent across 10-12 months
    • Slot product--pretty up-to-date; don't see much need for replacements
  • De-leverages balance sheet by 50 bps
  • Property Maintenance capex: 5-8MM
  • Covenant risk not an issue

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WEN - INTERMEDIATE TERM ISSUES BUT THE LONG TERM STILL LOOKS GOOD

Wendy’s is a name that has divided the street of late.  A recent upgrade has put some support under the stock but, overall, the intermediate term carries a fair degree of uncertainty for the concept.  Longer-term, a more focused management team thanks to the long-overdue sale of Arby’s.  Below, I go through some key initiatives being enacted by management and give my take on whether or not the initiative is progressing well or has positive implications for future earnings power.

 

Improvements completed to the core menu:

  • Value, with the introduction of the My 99 Value Menu
  • Salads, with the introduction of four premium entrée salads
  • Fries, with the introduction of natural-cut fries with sea salt

HEDGEYE VIEW - A much needed upgrade that will benefit the perception of the Wendy’s brand!


 

Improvements in the pipeline to be done by year-end:

  • Working to improve the core hamburgers line - Dave's Hot 'n’ Juicy cheeseburgers will be introduced 2H11. 
  • Working to improve chicken sandwiches; In 4Q11 will see the introduction an entirely new line of chicken sandwiches known as the Gold Chicken line, including new flavors and toppings, such as bruschetta with diced tomatoes, chopped basil and balsamic glaze. These sandwiches will also feature a new butter-toasted bun. 

HEDGEY VIEW - This will be critical in developing incremental customer visits in 2H11.  This should be a positive for comps as it is rolled out across the system. 


 

Current sales trends as of the end of 1Q11:  North America company-owned same-store sales turned positive in April, up 0.5%.  Furthermore, the U.S. was stronger at up 1.1%.  In the current quarter, Wendy’s restaurants are promoting the Bacon Mushroom Melt Hamburger or Flavored-Dipped Chicken Sandwiches.  In June, Wendy’s introduced the new Berry Almond Chicken Salad and Wild Berry Tea.

 

HEDGEYE VIEW - I continue to believe that current trends remain in the 2-3% for WEN USA.  Using a strategic pricing model initially implemented in 2010, WEN plans to raise prices in 2011.

 


REMODELS - An important part in pulling all the initiatives together will be upgrading the asset base of the concept.  Management has been working on several new restaurant designs, with the intention of beginning the remodel process in 3Q11.  They are currently testing four new restaurant designs and expected to have at least one of each open by late September, with expectations for an aggressive rollout program to begin in 2012.

 

HEDGEYE VIEW - I believe that the customer feedback is not working and that management is going back to the drawing board.  I also believe that the success of the MCD units in Tampa, Florida has had an impact on what features management is ultimately seeking to implement at the remodels.

 

 

BREAKFAST - Wendy’s is trying very to participate in the fastest growing day-part of the QSR segment.  Management has last communicated that they are making excellent progress on Wendy's breakfast program, and they are very encouraged with both sales and customer reaction to our new breakfast products.”  Currently, the company is testing its products in six markets and has recently reduced couponing. 

 

The breakfast expansion timeline:

  • In 2H10 management launched the new breakfast menu in four test markets: Kansas City, Phoenix, Pittsburgh and Shreveport.
  • In the first half of 2011, expanded breakfast into two additional markets: Louisville and San Antonio. 
  • Over the balance of 2011, the intention is to have more breakfast markets added. 
  • By the end of 2011, the intention is to have the breakfast menu in about 1,000 restaurants including approximately 600 franchise restaurants.

HEDGEYE VIEW - Longer term, we believe breakfast represents an opportunity to grow incremental system wide sales.  In the short run, while customer awareness, trial and repeat purchase rates are all improving, the current level of sales are not supportive of a major roll-out, which could cause the company to fall short of the 1,000 unit goal. 

 

 

SUMMARY - I like the long term potential for the Wendy’s as a standalone concept.  While 2011 is a transition year, a short fall in a couple of the growth initiatives could lead to a short fall for the company being able to hit the double-digit EBITDA growth in 2012.  At the very least it puts incremental pressure on core menu initiatives to incrementally more successful to make up for the short fall in the other initiatives.

 

WEN - INTERMEDIATE TERM ISSUES BUT THE LONG TERM STILL LOOKS GOOD - mcdwenjacksonc comps

 

 

Howard Penney

Managing Director


THE M3: MACAU STUDIO CITY; MBS CAN'T SELL MALL UNTIL 2017

The Macau Metro Monitor, June 16, 2011

 


MELCO CROWN GAINS CONTROL OF MACAU PROJECT Melco Crown Entertainment, WSJ, Channel News Asia

MPEL plans to pay the affiliate of eSun US$260 million for a 60% interest in the Cyber One Group, the developer of  Macau Studio City (MSC), and will further pay New Cotai--an arm of U.S. investment firms Oaktree Capital Management L.P. and Silver Point Capital L.P which owns 40% of MSC--US$100 million in cash in three installments over two years.  According to a person familiar with the situation, under a previous deal, MPEL was to receive 10% of mass GGR and 5% of VIP GGR. 

 

MPEL CEO Lawrence Ho said, "We believe Macau Studio City’s existing land grant and previously completed site work will allow us to significantly expedite its construction timetable.”

 

ESun said a default notice from the Macau government regarding the lack of progress on the project was among its reasons for wishing to settle a multi-year dispute among the involved parties.  Meanwhile, CapitaLand has sold its 20% interest in MSC to eSun for HK$658.7 million (S$104.5 million) to help resolve any disagreements.  According to the terms of the settlement, the eSun-led joint venture and New Cotai will settle legal proceedings initiated against each other in Hong Kong without admitting liability, eSun said.


SINGAPORE BOARD: MARINA BAY SANDS CAN'T SELL SHOPPING MALL AT SINGAPORE RESORT UNTIL 2017 WSJ

Singapore Tourism Board's director of integrated resorts/business tourism development, Carrie Kwik said, "Marina Bay Sands Pte. Ltd., the successful bidder of the Marina IR, is not allowed to sell, transfer or dispose of its estate interest in Marina Bay Sands within the exclusivity period of 10 years. The approval of the Singapore government must be sought if the IR operator were to consider any sale or subdivision of the IR after that period."

 

A Marina Bay Sands spokesman said Leven's statements were "inadvertently made without reference to certain restrictions set out in the development agreement between Marina Bay Sands Pte. Ltd. and the Singapore Tourism Board."


INITIAL JOBLESS CLAIMS STILL STAGNATING

Claims Drop 13k, Remain Flat on a Rolling Basis

Initial claims fell 13k last week, dropping to 414k.  The 4-week average was unchanged, and claims remain higher than they were at the beginning of the year.  We show below initial claims with the S&P and XLF.  Over the last several years, the indices have climbed when claims are dropping, and held flat or pulled back when claims stagnate or rise.  The tight correlation between market performance and Federal Reserve purchases is ominous heading into the end of QE2.


INITIAL JOBLESS CLAIMS STILL STAGNATING - rolling

 

INITIAL JOBLESS CLAIMS STILL STAGNATING - raw

 

INITIAL JOBLESS CLAIMS STILL STAGNATING - NSA

 

INITIAL JOBLESS CLAIMS STILL STAGNATING - s p

 

INITIAL JOBLESS CLAIMS STILL STAGNATING - XLF

 

INITIAL JOBLESS CLAIMS STILL STAGNATING - s p and fed

 

INITIAL JOBLESS CLAIMS STILL STAGNATING - fed

 

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 259 bps compares to 257 bps last week.  

 

INITIAL JOBLESS CLAIMS STILL STAGNATING - spreads

 

INITIAL JOBLESS CLAIMS STILL STAGNATING - spreads QoQ

 

Financials Subsector Performance

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

 

INITIAL JOBLESS CLAIMS STILL STAGNATING - subsector perf

 

Joshua Steiner, CFA

 

Allison Kaptur


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