Looking at Greece and the Other Dominoes
With the market now saying a Greek default is upon us, we're revisiting a post we first published on July 18 of this year called "European Debt: Where the Bodies are Buried". In that post we reverse engineered the EU stress tests and published the precise sovereign holdings and loan exposure by EU bank across each PIIGS country. We broke this out in a series of tables, which we are republishing below. Bear in mind that a limitation here is that we're looking at holdings as of year-end 2010.
By way of example, one area of market concern this morning is French bank downgrade risk. As the table below shows, both Soc Gen and BNP held approximately 10% of their Tier 1 Capital in Greek Sovereign Exposure as of YE2010, while Credit Agricole holds around 1%. Other highly exposed non-Greek EU banks as of YE10 were Banco Comercial Portugues (Portugal: 60 billion euros RWA) with 21% of its capital directly exposed to Greek sovereign debt, Dexia (Belgium: 140 billion euros RWA) with 20% of its capital directly exposed to Greek sovereign debt, and Commerzbank (Germany: 268 billion euros RWA) with 11% of its capital exposed.
Investors can consider these tables a reasonable starting point in assessing interconnected risk across the EU banking landscape.
Summary Conclusions: 13 of the Top 40 EU Banks Hold Over 200% of their Capital in PIIGS Exposure
We find that there are numerous European banks with over 100% of their Core Tier 1 Capital committed to either PIIGS commercial loans or PIIGS sovereign debt holdings. For example, we found that 18 of the 40 largest European banks held 100% or more of their Core Tier 1 Capital in PIIGS sovereign debt or commercial loans. In 14 of these cases, the banks held more than 200% of their Core Tier 1 Capital in PIIGS sovereign debt or commercial loans.
As a general rule we found that the Nordic banks are the least exposed to PIIGS debt, typically holding less than 20% of their Core Tier 1 Capital, putting them at considerably less risk than the group as a whole.
Joshua Steiner, CFA
POSITION: Long Utilities (XLU), Long Healthcare (XLV)
This morning’s rally “off the lows” didn’t surprise us. Neither did the selloff from the intraday highs. Bottoms, like tops, are processes - not points. And this one looks to be finally establishing a manageable immediate-term TRADE range at higher-lows (versus the YTD closing low of 1119).
To review the lines/levels that matter most across our risk management durations:
- TAIL (long-term) resistance remains up at 1265
- TRADE (immediate-term) resistance is now 1173
- TRADE support = 1135
In other words, trade the 1135-1173 range.
Interestingly, but not surprisingly, pre-market open downside support signaled a line of 1126 and now my immediate-term TRADE line of support is 9 points higher than that at 1135. So even when I really tighten up the duration, volatility, and standard deviation scenarios in my model, I’m coming to the same conclusion.
This is a Short Covering Opportunity, much like the one we called on August 8th, 2011.
Keith R. McCullough
Chief Executive Officer
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"Hide your brightness; bide your time"
On the second day of my trip to Shanghai, I turned to a person sitting next to me and remarked that one can easily lose sight of the fact that China is a communist country. At that point, I was told about Richard McGregor’s book, The Party: the Secret World of China’s Communist Rulers. As Richard McGregor says in his book, China’s economy is one that appears on the surface to be a “uniquely unbridled form of capitalism.” Travel in China with two global restaurant companies and that comment becomes very clear.
There are few companies better positioned than YUM to capture the “unbridled form of capitalism” which is growing rapidly alongside the megatrend of the urbanization of China. This is not new, but it’s also not going to slow down any time soon. Driving away from China’s east coast, as I did last week, presents the chance to witness firsthand the phenomenon of urbanization in the country. YUM and MCD are pointing to the significant number of retail spaces and transportation centers that are going to be built to accommodate the concentrated consumer demand that will partly define this trend.
The “megatrend of urbanization” is a critical aspect of the China story for YUM. YUM’s operations are accordingly focused on the opportunity; the company has roughly 700 people on the development team focused on, among other things, any possible changes that “The Party” may make as they continue to spend on new infrastructure projects. For the time being, 35% of KFC and 25% of Pizza Hut new unit development is coming from the central and west provinces which represents about 50% of the population.
Suffice to say, my first “YUM China” experience was truly eye opening. In a small part, I also feel better about Hedgeye’s macro call to be bullish on China. My view of China is somewhat impacted by two of the biggest restaurant companies there anticipating significant unit growth potential over the next 10 years. In addition to this, the companies will also benefit from a doubling of the minimum wage over the next 5 years. This is a challenge from a P&L perspective, but will certainly help to further efforts of “The Party” to stimulate and diversify the Chinese economy.
The YUM presentation on China was very different from MCD’s, stemming from the face that YUM gives detailed financials every quarter about the trends in the business in China. This point does not make one better than the other, it's just a function of the level of commitment to the country. Looking at the whole, YUM needs China to work now more than MCD does. China is an important part of the MCD story, just less so given the strength of the overall business in nearly every region of the world.
The read on current YUM China trends:
- The company previously stated, “we are experiencing double-digit comps in 3Q11." I believe that commentary still stands today!
- 1H 11 Chinese businesses was strong across all brands and across all tiers; the business is stronger in smaller cities.
- 50% of KFCs units and 73% of Pizza Hut delivery units are being built in T1/T2 cities.
- In 2Q SSS grew 18%, driven by an 21% increase in transactions. KFC was up 17% and Pizza Hut up 22%. System-wide sales growth was 28% with operating profit growth of 25%
- SSS were driven by transaction growth through strategic initiatives like breakfast (13% of transactions), delivery (1,600 units) and 24-hr operations (1,300 restaurants)
- Average guest check in 2Q was RMB 26 ($4) at KFC and RMB 122 ($19) at PH
- Inflation is a net positive for YUM in China as stronger brands flourish in an inflationary environment. For YUM, the ownership of the supply chain gives the company increased flexibility
- YUM experienced inflation of 5% and 6% in Q1 and Q2, respectively. Over Q3 and Q4, the company expects to see inflation of 9% and 12%, respectively, in China. The company has chicken locked for the next three months and expects priced to decline from current levels.
Two decades ago Deng Xiaoping set the tone for how China should enter the world of capitalism - hide your brightness; bide your time. Today, the trends in China are very bright and YUM is extremely well positions to capitalize on the current trends.
Here are some tidbits we've been hearing:
- Singapore: MBS could be tracking for a 30% increase QoQ on RC volume. Through July and August, they may have already made up 2Q volumes and Formula One could provide an extra boost for September.
- Sun City is fairly committed to opening at Venetian.
- Neptune may be getting spread too thin as it struggles to find good room managers and hosts. The junket operator could be overcommitted and may not contribute that much to Venetian.
- Starworld seems to be having some luck issues. Also, some players came across from Galaxy Macau to play at MPEL this past week.
- Wynn had better hold this week but they will have a tough time catching up. September likely to be disappointing
- Moon Festival holiday starts tonight – family time – but tomorrow will be a bit busier than usual on a typical Tuesday
- October Golden Week: starting October 1, we may get a 10BN week
- Wynn Cotai got their land approval. They can start piling work late this year/early next year. They should be open in 3.5 years, at the latest.
- SJM Cotai approval may not come until year end.
- Macau Studio City: The guys at MPEL have gone really quiet due to their potential listing on the exchange.
- A MPEL project in the Philippines looks dead. MPEL may be requiring PAGCOR to maket an MPEL license the last. Also, MPEL would likely require PAGCOR to step down as an operator.
This note was published by Lou Gagliardi, Managing Director of Energy, on Friday afternoon; we think it is pertinent to all Macro clients.
Is it safe to buy oil here? The short answer is NO! Global growth (and demand) continues to slow.
Product demand – globally and in the U.S. – continues to deteriorate; this coupled with the return of Libyan supplies near the end of 4Q11 will dampen crude prices over the intermediate-term TREND duration.
Over the immediate-term TRADE duration, weak demand will be the single major suppressant to crude price, as the summer driving season winds to a close and U.S. liquids production continues unabated. In short, absent any additional monetary stimulus that weakens the U.S. dollar, we don’t see much crude price support.
Crude supplies from Cushing have been declining over the last several weeks due less from demand and more from refiners being opportunistic to run throughputs to capture higher margins driven by the wide WTI/Brent spread that is roughly $26/bbl, though that tailwind is abating as refiners will soon transition to produce more middle distillates before winter. Refiners will begin to shut down for winter maintenance to prepare for the winter heating oil season. Greater refining downtime/maintenance will mean less crude drawdowns, which will be interpreted as even greater demand weakness. But that weakness in demand is real – gasoline demand remains weak into the end of August and early September, down ~3% YoY.
Reports out today, that resumption in Libyan crude exports/production may reach 1 MM b/d within 6 months, with full production of 1.6 MM b/d of production within 15 months. We believe this is slightly on optimistic side, however, directionally correct. We can expect Libyan light/sweet bbl to gather momentum by end of 4Q11 into 1Q12 of several hundred thousand b/d of production and picking up steam from there.
Following close behind is the IEA having recently reduced its forecast for global energy demand; in fact, it has been ratcheting downward since the beginning of the year – no surprise here as they are late movers, and often error on the high side, so conditions may be worse than theirs forecast indicates.
One last data point, when I go through my GDP/global wellhead production model, the gap between the growth in each metric for 2011 and 2012 is well below the marker of 200 bps that has historically indicated tightening upward pressure on crude prices. Simply put, the slope of global GDP growth and wellhead production is decelerating, and the tailwind of monetary stimulus appears to have run out of steam. Indeed, if global GDP is under a 3% per annum clip for 2011 and 2012, which right now it appears to be, demand pressure on price will remain weak into 2012.
From the Oil and Gas Patch,
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