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ECB Hikes 25bps; Trichet Folds Portugal Further into Socialized ECB Framework

Positions in Europe: Long Germany (EWG); Covered Spain yesterday (EWP)


Today the ECB announced that its Main Refinancing Rate would be raised 25bps to 1.50%, yet the attention of the press conference that followed was focused squarely on the implications of Moody’s credit downgrade of Portugal to junk (on Tuesday) and the fiscal states of Greece et al that teeter on default.

 

What’s our take-away from today meeting?  From Trichet’s comments it’s increasingly clear just how far the ECB (or more broadly Troika that includes the IMF and EU group) is willing to step in to subsidize member nations, either in the form of borrowing from the ECB, through additional bailout packages, and/or concessions on debt repayments to avoid the nasty words of default/restructuring at all costs. [And this should act as a support for the EUR vs major currencies over the near to intermediate term, more below on our levels].

 

Importantly, today Trichet announced that Portugal would join the club of Greece and Ireland that have special privileges to post debt that is rate junk as collateral when borrowing from the ECB window. Questions quickly turned to the possibility that any or all of the main credit rating agencies could rate a peripheral country’s credit “in default”, while Trichet states that a default of any member nation is not possible.

 

The rub here is an obvious one, especially considering that credit ratings agencies have already stated that under their technical definitions a rating of “default” would be issued if any sovereign debt is restructured (or re-profiled). And as we know, over recent days plans have been floated from France and Germany to voluntarily “restructure” the Greek debt holdings of its banks, including by extending repayment on shorter term paper (5 years or less) to 30 year maturities. Hummm….

 

It’s important to note that while the ECB’s official mandate is to regulate price stability, preservation of the Eurozone remains the ECB’s highest call, yet the disconnect is that no European central authority has control over the fiscal policy of any member nation. This leads to a game of finger pointing between the ECB and individual governments over fiscal consolidation (or austerity programs) to fix grossly imbalanced budgets, that is compounded by the downgrades in a country's credit rating by the agencies, all of which erodes investor confidence, exacerbates contagion and leads to the game of providing short-term fiscal band-aids to one country after the next, before seconds are handed out after they creep up once again.

 

With respect to the volatility that a downgrade from a credit rating can have on a country, just yesterday in Berlin Finance Minister Schaeuble said there's a need to "break up" the dominance of the big three rating companies, and German Foreign Minister Guido Westerwelle called for an independent European rating company to be set up. This debate is in the early innings, yet it's important to note that push back on the big three is being voiced by a major player like Germany.

 

Inflation Fighting

Returning to the only agenda that Trichet really wanted to speak of, the 25bp hike should help mitigate some of the inflationary pressures the region has seen over the intermediate term. Eurozone CPI in June measured 2.7% year-over-year, above the Bank’s mandate of the 2% level. We’re calling for the ECB to be on hold for further hikes into year-end as Deflation of the Inflation plays out global, but particularly in the US and Europe as comps get more favorable and energy and food costs come in.

 

EUR-USD

As we noted above, Troika has made it very clear that it will backstop any European country that faces the threat of a default/restructuring.  This, we believe, is a critical point that should lend support to the common currency. Yet as we get incrementally more bullish on the USD, we’ll be focused on the intermediate term TREND line (3 months or more) of $1.43, a critical momentum line that the pair is just holding above intraday.  Below we chart our TRADE levels (3 weeks or less) on the EUR-USD, which is $1.41 to $1.45.

 

ECB Hikes 25bps; Trichet Folds Portugal Further into Socialized ECB Framework - EUR CHART HEUT

 

Positioning

To say the least, we’re very cautious on owning European countries on the long or short sides. To the latter, we think there’s more downside from here for the capital markets of the periphery. We remain long Germany (via the etf EWG) in the Hedgeye Virtual Portfolio, a position that has worked well for us over the last two years. We’re however cautious on Germany as the high frequency data has slowed in recent months and contagion, even for a fiscally sober country like Germany, is a pressing threat. The DAX has outperformed the S&P500 for the balance of the year, at 8.2% YTD. We covered our short position in Spain (EWP) yesterday. 

 

Matthew Hedrick

Analyst


NO CASINO AT MSC? NO CHANCE

More comments by the Transportation Secretary but let’s be realistic.

 

 

We were just in Macau last week, a few days after Transportation Secretary Lau Si lo made his first comments regarding MPEL to stick to its original 2008 plans for Macau Studio City.  Well, Mr. Lau made some more comments that seem to be spooking investors this morning.

 

While there may be concern among US investors, there doesn’t seem to be much concern in Macau.  It is our understanding that the government approached many of the operators about taking over the project and gave assurances about gaming tables at the site.  Lawrence Ho and MPEL had first dibs on the project and they took it.  Would they really buy out ESun and commit capital to this project without a casino?  Come on.

 

We think the government is just publicly showing its power.  They certainly want to retain most of the original plan since it contained many appealing entertainment options and want to ensure those get developed.  MPEL is completely on board with the original design including the Studio.  The government is smart enough to know that MSC doesn’t get done without a casino.

 

Q2 looks very strong for MPEL and we are expecting a significant beat over consensus EBITDA of $146 million.  As much as $180 million is possible in our opinion.  We will have a better estimate after we go through the June property detail we just received this morning.


JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT

Initial Claims Remain Elevated

Initial jobless claims fell 10k last week (14k after the revision) to 418k.  Rolling claims edged down by 3k to 423k.  This week's decline keeps rolling claims in the same band they've occupied for the last eight weeks, still far from the levels required to see unemployment improve.  

 

On a separate note, USA Today noted earlier in the week that regulators are increasing the pressure to combat fraudulent claims.  The Labor Department estimated that 12% of claims were fraudulent in the 12 months ended March 2011, up from 11% the prior year and roughly 9% in 2008.  Increased scrutiny of these claims could result in a small reduction in the level of claims going forward.   

 

JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT - rolling

 

JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT - raw

 

JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT - nsa

 

JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT - s p

 

JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT - XLF

 

JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT - fed

 

Bankruptcies Fall 5% YoY in June

Bankruptcy data shows that consumer filings fell 5% YoY in June (compared to -16% YoY in May).  Lower bankruptcies are a positive signal for net charge-offs, since credit card debt is charged-off when a borrower declares bankruptcy without ever being marked as delinquent.

 

JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT - bankruptcies

 

Bankruptcies are not far out of line with their long-term average levels, as the chart below demonstrates.  (The law change in 2005 pulled bankruptcies forward dramatically; this data is shown with a break in the y-axis.)

 

JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT - bankruptcies LT

 

Spreads Widen Slightly to Begin 3Q

The 2-10 spread, which we track as a proxy for bank margins, widened 5 bps in the first week of the quarter.  

 

JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT - spreads

 

JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT - spreads QoQ

 

Financial Subsector Performance

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

 

JOBLESS CLAIMS FLAT WHILE BANKRUPTCIES SLOW THEIR RATE OF IMPROVEMENT - perf

 

Joshua Steiner, CFA

 

Allison Kaptur


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TALES OF THE TAPE: KKD, SBUX, MCD, CPKI

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

 

MACRO

 

This morning, jobless claims were above 400k yet again, coming in at 418k.  While this was in line with consensus at 420k, it shows that the employment scenario is still far, far away from improving meaningfully.  4-week rolling claims declined slightly week-over-week but remain elevated at 425k. 

 

TALES OF THE TAPE: KKD, SBUX, MCD, CPKI - jobless claims77

 

 

Wheat prices dropped again yesterday as U.S. weather improved and Russia moved to resume its exports.

 

QUICK SERVICE

  • KKD’s largest holder Mohamed Abdulmohsin Al Kharafi & Sons files form 144; registers to sell 2.3M shares.
  • SBUX was downgraded at Goldman Sachs to Neutral from the Conviction List.  YUM was downgraded to sell on China uncertainty while the restaurant space was downgraded to Neutral from “Attractive” on valuation.
  • SBUX price target was target raised at Credit Suisse to $46 from $44. FY11 EPS lowered to $1.54 from $1.55 v. Reuters $1.50 and FY12 EPS reduced to $1.92 from $1.97 v. Reuters $1.80.
  • SBUX Baristas at outlets in Chile plan to strike on Thursday because their wages are so low that they cannot afford to buy lunch, the Wall Street Journal reported Wednesday. This would mark the first strike at a Starbucks-owned store in Chile.
  • MCD is rated Buy by Bank of America, the price target was raised to $96 from $85.


FULL SERVICE

  • CPKI’s acquirer, Golden Gate Capital, has completed the tender offer for California Pizza Kitchen.

TALES OF THE TAPE: KKD, SBUX, MCD, CPKI - stocks 77

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - July 7, 2011

 

Part of the Hedgeye philosophy is to just let the market show us her path of least resistance; we have shifted to be a little longer this week - the Pain Trade is up (for now).  As we look at today’s set up for the S&P 500, the range is 45 points or -1.81% downside to 1315 and 1.55% upside to 1360.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 77

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 377 (416)  
  • VOLUME: NYSE 821.05 (-9.47%)
  • VIX:  16.34 +1.74% YTD PERFORMANCE: -7.94%
  • SPX PUT/CALL RATIO: 2.04 from 1.87 (+9.10%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 24.07
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 3.12 from 3.16
  • YIELD CURVE: 2.69 from 2.72 

 

MACRO DATA POINTS:

  • 8 a.m.: RBC Consumer Outlook Index
  • 8:15 a.m.: ADP Employment Change, est. 70k, prior 38k
  • 8:30 a.m.: Jobless claims, est. 420k, prior 428k
  • 9:45 a.m.: Bloomberg consumer comfort, est. (-44.3), prior (-43.9)
  • 10 a.m.: Freddie Mac mortgage survey
  • 10:30: EIA Natural Gas storage, est. 82, prior 78
  • 11 a.m.: DoE inventories
  • 12:30 p.m.: Fed’s Hoenig speaks in Ada, Okl.
  • 2 p.m.: USDA cattle, hog slaughter

 

WHAT TO WATCH:

  • President Obama meets with congressional leaders over debt
  • NYSE Euronext holders vote on $9.33b Deutsche Boerse takeover
  • Allen & Co. conference continues in Sun Valley
  • Verizon Wireless ends unlimited data plans for new customers
  • LG Electronics cut its year sales for target for smartphones; losing share to Apple, Samsung
  • Bank of England Holds Key Rate at 0.5%, as Expected

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • World Food Prices Climb on Sugar, Dairy Costs, Stoking Inflation Pressure
  • Copper Fees May Stay High on Japan Quake, Slumping China Imports, JX Says
  • Oil Rises in New York on Signs U.S. Crude Stockpiles Shrank a Fifth Week
  • Copper Reaches 11-Week High as Adverse Weather Fuels Concern About Supply
  • Wheat Drops for Second Day as U.S. Weather Improves, Russia Exports Resume
  • Sugar Climbs as Brazil’s Cane Crop May Miss Estimate; Cocoa Prices Decline
  • Goldman, Morgan Stanley Stay Bullish on Oil, Copper as Economy to Recover
  • China’s $70 Billion Fund Managers Rush to Boost Gold Investment Overseas
  • Gold for Immediate Delivery Declines 0.2% to $1,525.65 an Ounce in London
  • Cocoa-Bean Production in Indonesia to Expand on Replanting, Rehabilitation
  • China Corn Buying Too Little to Spur Rally After USDA Report, Cofco Says
  • Coal Poised for Worst Quarter This Year on China, Japan: Energy Markets
  • Florida Orange Output Will Be Below Forecast on Dry Weather, Survey Shows

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • European stocks advanced for the eighth time in nine days
  • UK May Manufacturing output +2.8% y/y vs consensus +2.1% and prior revised +1.2% from +1.3%; UK May Manufacturing output +1.8% m/m vs consensus +1.0% and prior revised (1.6%) from (1.5%)

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: looking healthier by the day; India ripped +1.7% higher overnight and the squeeze is on there now too; KOSPI and China look solid.

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


THE M3: MSC; FISHERMAN'S WHARF

The Macau Metro Monitor, July 7, 2011

 

 

NO CASINO IN STUDIO CITY: LAU Macau Daily Times

Secretary for Transport and Public Works Lau Si Io reiterated that there will be no gaming facility in the Macao Studio City project and that it must adhere to the 2008 development plan that was approved by the government.  The 2008 plan includes a major component of a film production facility but doesn’t contain any gaming elements.

 

FISHERMAN'S WHARF READY AND WILLING Intelligence Macau, Macau Daily Times

David Chow, the boss of Fisherman's Wharf, said his own redevelopment plan has been approved by the Macau government.  Although there was no details on a casino, Chow said he will build a 4-star and a 6-star hotel and he hopes the hotel projects will be done by the end of 2012.


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