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Greek PSI Is NOT Getting Done

Positions in Europe: Short EUR/USD (FXE); Short France (EWQ)

 

…or at least not anytime soon, like in the next day or two. 

 

Expectations are high, and as the calendar of events below shows, there’s much in the way of a quick sign-off on the PSI. While we ultimately think that some deal will get done, the artificial deadlines will continue to be ignored along the way as multiple parties must be in agreement. Ultimately, the final deadline on PSI must be Greece’s €14.5B debt maturity coming due on March 20th. We think Eurocrats will continue to push out the calendar, and ultimately decide on some 11thhour compromise.  However, expect the goal posts from the relevant parties involved to change in between time, which will continue to influence the EUR/USD.  Again, Eurocrats are suspending reality, which makes us concerned about taking any absolute directional macro bets on the region.

 

That said, Keith shorted France via the etf EWQ today in the Hedgeye Virtual Portfolio, and he re-shorted the EUR/USD (FXE). Below we provided updated levels on the EUR/USD and France’s CAC, and explain our concerns around France’s growth prospects and fiscal outlook.

 

 

The Road to a PSI Deal:


-Unsubstantiated reports continue to swirl and the road to agreement is convoluted with numerous parties that must come to agreement. What’s involved is 1.) the PSI, the terms of which are rumored to include a swap for 30YR bonds with a coupon as low as 3.6% (or approximately a 70% loss), intended to reduce €100B off more than €200B of privately held Greek debt, and 2.) pursuant to the passage of the PSI, further fiscal consolidation measures, including a cut in the minimum wage, lower pensions, and immediate layoffs for as many as 15,000 state employees to put in motion approval for Greece’s second bailout package of €130B+.

 

Here’s the latest:

 

1.  Papademos met with the Troika until 4am this morning and reports indicate that the Greek party leaders have now received their draft document on a loan deal and are reviewing it. Private sector wage and pension cuts appear to remain the key obstacle to gaining support.

 

2.   According to the WSJ, the ECB may now make concessions by exchanging its Greek bonds with the EFSF at below face value if debt restructuring talks are successful, to contribute an estimated € 11B to overall debt reduction. Hedgeye Counter:  up until now the ECB (Draghi) has vehemently stated that it will not participate in the PSI. The logic didn’t make total sense, but the take away is that the ECB did not want to take a loss on its holdings.  Is the ECB really shifting its stance?

 

3.   The leaders will meet around 1pm local time (6am EST) today to discuss and then sit down with Papademos at 3pm (8am EST). 

 

4.  If they can get everyone on board, they can present the plan to the Eurogroup Finance Ministers by the end of the week and Greece’s Parliament can potentially vote on it this Sunday

 

5.   An unconfirmed source says that a formal offer for the debt swap must be made by February 13th to allow all procedures to be completed before the March 20th €14.5B bond comes due.

 

6.   However, even if points 1-4 get a mutual agreement, German lawmakers in particular (and perhaps legislative bodies of other Eurozone countries as well), may well veto it across:

  • The exchange of ECB’s Greek bonds with the EFSF
  • The PSI terms
  • The second Greek bailout package terms

Given, we think the timeline will be pushed out, especially pursuant to how many national parliaments decide to take these measures to vote.

 

 

Shorting France (EWQ):

Today Keith shorted France via the eft EWQ in the Hedgeye Virtual Portfolio. From a long-term TAIL perspective, the French stock market remains bearish. We've waited and we've watched - Greece is not our catalyst—French growth and an expanding public debt (as a % of GDP) are. We think growth will undershoot estimates of 0.0% this year as Sarkozy or the future candidate (based on presidential elections in April-May) struggle to push through budget cuts needed to trim the deficit by 1.4% to put it on target to reach 3% in 2013. Further, we see its debt, which may expand to 90% (of GDP) as a structural impairment to growth, a level that has been proven by economist Reinhart and Rogoff in their seminal book “This Time is Different”

 

Greek PSI Is NOT Getting Done - a. CAC

 


Re-Shorting the EUR/USD (FXE):

Keith re-shorted the EUR/USD pair that it is finally immediate-term TRADE overbought with intermediate-term TREND resistance overhead at $1.34. Given the vast uncertainty surrounding the Greek PSI and the country’s second bailout package, we’d expect more downside in the cross as Eurocrats fumble with an agreement.

 

Greek PSI Is NOT Getting Done - a. EUR

 

Matthew Hedrick

Senior Analyst


MPEL YOUTUBE

In preparation for MPEL's Q4 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

MELCO CROWN EYES $2 BLN DEBT FOR NEW PROJECT Jan 19, 2012

  • MPEL is looking to raise $2 billion for its Macau Studio City project.  The debt funding will feature a loan-and-bond combo with the loan expected to be for around US$1.25BN and the US dollar bond for the remainder, according to another source.  The borrower is in discussions with banks for the loan financing and is seeking underwritten commitments. 
  • Melco's last visit to the loan markets was in May 2011 when it raised US$1.2BN through a dual-tranche financing comprising of an US$800MM term loan and a US$400MM revolver (deal priced all-ins of 208-308bp over LIBOR). The term loan amortizes to 50% and has a two-year grace period. The blended average life is 4.1 years.

 

MELCO CROWN ENTERTAINMENT LIMITED ANNOUNCES DUAL PRIMARY LISTING BY WAY OF INTRODUCTION ON THE MAIN BOARD OF THE HONG KONG STOCK EXCHANGE Nov 29, 2011

 

 

YOUTUBE FROM Q4 2011 CONFERENCE CALL

  • "We continue to see the expected supply outlook for both hotels and tables as supporters of a managed growth profile for Macau, providing an environment for sustainability for the overall gaming sector. However, we believe the regulated table supply outlook will benefit those operators who have exposure and are most leveraged to take advantage of the shift in the gaming epicenter to Cotai."
  • "We continue to see improvements in our key mass market metrics, including our mass table gain in core percentage at City of Dreams where we have revised our expected mass hold percentage to a range of 23% to 26%. This compares to our range in 2010 of 20% to 22%.  We believe this increase is sustainable and reflects various operational initiatives put in place over the last 12 to 18 months."
  • "Total depreciation and amortization expense is expected to be approximately $90 to $95 million, corporate expense is expected to come in at $18 million to $20 million and net interest expense is expected to be approximately $30 million."
  • "We're working closely with the Macau government. We have submitted various documents into the government. And so subject to their approval and going through the regular processes, we hope to restart construction for Studio City in the first quarter. So I think in terms of, from a design standpoint, I think we are quite advanced in the conceptual design space. So we're pretty much ready to go."
  • "What we have to look is actually at the existing liquidity and also the metric that we're building the operation. I don't see any evidence so far, seeing any correlation of the liquidity and problems that we all have heard in China at the moment. In terms of the mass, I think we still see some growth more than the visitation number in Macau and in terms of volume growth there compared to Cotai, I think Cotai will start to pick it up faster than the peninsula side, and I think that will trend for the last one-and-a-half months starting from fourth quarter."
  • [Macau Studio City Capex] "We're in the midst of budgeting for 2012, but I think we should be someplace in the $75 million to $100 million CapEx for 2012."
  • "I think the depth of the market is very, very promising in Macau and we continue to focus on one segment, which is what we are strong at, which is the premium mass and the high end premium mass set."
  • "I think in respect to a few junket operator we are looking to the productivity in a very disciplined way. In terms of ramping up, I think so because we are looking for enhancement on the facility at the moment in COD especially in the VIP Level 2 area. And also we see more enhancement of facilities on this first quarter next year as well."

THE HBM: MCD SALES, PNRA, YUM, GMCR, BWLD

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Comments from CEO Keith McCullough

 

From here, after a 100% rally from the 2009 lows, Larry Fink says go “100% Equities” – interesting concept of real-time risk management:

  1. RUSSIA – Putin loves this Dollar Down = Oil up thing (so does Fink – he wants Geithner’s job and says we need Qe3 if the “dollar gets too strong”); the Russians are running neck and neck w/ the Greeks w/ their stock markets inflating +19.5% and +20.2% respectively for 2012 YTD. We’ve seen this movie before – inflation expectations slow growth, and I expect most who missed that LY to disagree w/ me again.
  2. OIL – ze almighty Petro Dollar makes ze world go round, eh. My oh my, Brent Oil busted a move above my long-term TAIL line of resistance this week and didn’t look back, trading $116.35/barrel this morning = +6.5% since Bernanke’s Policy to Inflate through 2014 was introduced on Jan 25. Wow. Thanking the heavens that I just sucked it up and bought Energy (XLE) and Gold (GLD). This won’t end will for the other 90% of Global Consumers.
  3. SENTIMENT – to a degree, the Fink comment (he was bullish in Feb of last year too) summarizes a lot about where sentiment is going right now – it’s a chase. With the VIX testing 16 (the level selling Equities has paid off for 4yrs) and this morning’s II Bullish/Bearish Spread (survey) hitting its widest Bullish Spread since April of 2011, we can argue about anything in the rear-view here, but +2300 basis points wide (Bulls vs Bears) is very very wide.

 

Santorum Sweep is bullish for Obama, bearish (on the margin) for the US Dollar today too.

KM

 

SUBSECTOR PERFORMANCE

 

THE HBM: MCD SALES, PNRA, YUM, GMCR, BWLD - subsector fbr

 

 

QUICK SERVICE

 

MCD: McDonald’s global same-store sales for January came in at 6.7%.  U.S. comps grew 7.8% in January while Europe and APMEA comps grew 4.0 and 7.3%, respectively.  We would note that the calendar shift/trading day adjustment was -1.9% to -0.5%, varying by area of the world, in January. 

 

THE HBM: MCD SALES, PNRA, YUM, GMCR, BWLD - MCD US

 

THE HBM: MCD SALES, PNRA, YUM, GMCR, BWLD - mcd eu

 

THE HBM: MCD SALES, PNRA, YUM, GMCR, BWLD - MCD APMEA

 

 

MCD: McDonald’s Japan January same-store sales grew 1.3% in January.

 

PNRA:  Panera Bread reported 4Q11 EPS of $1.42 excluding extraordinary items versus $1.42 consensus.  Company comps came in a little light at +5.9% versus consensus of +6.3% in 4Q as operating margins also missed at 20.4% of sales versus 21.3% consensus.  Company-owned comparable net bakery sales in the first 41 days of 1Q were up 8.9%, including roughly 350 basis points from favorable weather comparisons.

 

MCD: McDonald’s is making its Shamrock Shake, a beverage sold around St. Patrick’s day, available nationally this year for the first time. 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

YUM: Yum gained on strong 4Q11 results, as we published on yesterday. 

 

GMCR: This stock has been on a wild ride.  There is still a broad range of opinions on the stock and plenty of unexplained capex being spent by management.  We don’t think this story is resolved.

 

 

CASUAL DINING

 

BWLD: Buffalo Wild Wings reported 4Q11 EPS of $0.73 versus $0.67 consensus.  An artificially low tax rate accounted for 4 cents of the beat but top line strength, including 8.9% company-owned same-store sales and strong year-over-year new unit volumes, helped the company finish out the year strong.  Trends in 1Q to-date show comps up 12.9% versus last year including 3% from an expanded gift card program.  From here, whether or not the company can overcome wing price inflation as the impacts of the gift card program and favorable weather versus a year ago wear off.   While we were looking for the stock to underperform, Keith covered the BWLD short position on red yesterday intraday.  

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

PFCB: P.F. Chang’s gained 2.3% on accelerating volume yesterday. 

 

THE HBM: MCD SALES, PNRA, YUM, GMCR, BWLD - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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THE M3: JAPAN; ZAIA; CHINA LOANS

The Macau Metro Monitor, February 8, 2012

 

 

JAPAN'S OPPOSITION PARTY TO OK CASINO BILL "BY MARCH" Yogonet

According to Gaming Capital Management (GCM), Kenji Tamura, a senior member of the Democratic Party of Japan (DPJ), said, "A [DPJ] sub-committee on this issue has been set up last December, being set to commence activities soon. I heard that in the LDP (Liberal Democratic Party of Japan - Japan's main opposition party), their target is to approve the bill at the end of February or in March."

 

The news of the LDP’s expected backing, following ongoing internal party discussions, emerged after the first DPJ Casino Working Team consultation meeting of 2012 on the integrated resort plan.

 

Issei Koga from the DPJ and the chairman of an all-party group called the Diet Member Alliance for Promotion of Integrated Resort with Casinos (known by its abbreviated title IR Alliance) has indicated his intention to submit an all-party casino bill to the current session of Japan's parliament aka Diet at an appropriate time.

 

ZAIA ENDING 3-YEAR RUN AT VENETIAN MACAO THIS MONTH Macau Daily Times

ZAİA, Cirque du Soleil’s first resident show in Asia based in The Venetian Macao, is staging its final performance after a three year run.  Sands China and Cirque du Soleil announced yesterday that ZAİA, the stage production which has impressed its crowds since opening in August 2008, will be performed for the final time on February 19, 2012.

 

CHINA'S BIG FOUR BANKS MADE CNY320B NEW LOANS IN JANUARY China Securities Journal

China Securities Journal reported that new loans made by the whole banking industry for the month should be around CNY800B.  An industry source also says that due to fears of excessive bank credit, the People's Bank of China chose to maintain the required-reserve-ratio of the big banks.



Too Strong?

“I would think we do a Quantitative Easing 3 if the Dollar gets too strong.”

-Larry Fink

 

Wow. Larry Fink is the CEO of Blackrock – they run $3.5 Trillion in client assets – and after a +101% move in US stocks from the 2009 low, he told Bloomberg yesterday that “investors should be 100% in Equities.”

 

Game on.

 

Fink is probably a good guy. We probably have a few things in common too. For one, we both started our careers at First Boston. He eventually ran their bond department. I eventually left.

 

Evidently, one thing that we do not have in common is the concept of Wall St 2.0 Global Macro Risk Management. There’s tremendous responsibility in being trusted with real-time recommendation. Time and price really do matter. With my own money, I’d never be 100% in anything – never mind stocks, after their best start to a year in decades.

 

The other thing Fink and I don’t have in common are political aspirations. He’d like to replace Geithner as head of the Treasury. I’d rather be a one-legged duck swimming in a circle.

 

When you consider the aforementioned currency quote within the context of where some of this country’s thought leaders are relative to my Strong Dollar = Strong America vote, Fink and I are not even in the same area code of having a debate.

 

Is my opinion Too Strong? After testing 40-year lows during Qe2 of last year, was the US Dollar Too Weak? Is Larry Fink’s view of arresting gravity and not letting America’s currency trade at its non-Fed intervention free-market price Too Strong?

 

So many critical questions. So little time left.

 

Back to the Global Macro Grind

 

With Santorum sweeping 3 states last night, President Obama’s probability of re-election (Intrade contracts) are going up and the US Dollar Index is going down. It sounds like Fink’s goal in advising Obama will be to keep the Dollar down. I guess if you’re in the business of seeing asset prices inflate, that makes some sense.

 

But does it make sense for American Savers and Consumers?

 

You tell me. I’m already telling you what I think. It’s no different than what I thought when Larry Fink was bullish on US Equities in February of last year. US Dollar Debauchery drives inflation. Inflation slows real GDP growth.

 

Now if you take Bernanke or the US government’s word for it, we don’t have inflation. Notwithstanding the fact that Bernanke cites a US inflation calculation that has been changed 9x since 1996, the “deflator” in this past quarter’s US GDP report was only 0.4%.

 

What does that mean?

  1. Q4 US GDP Growth for 2011 was reported at 2.75%
  2. Q4’s “Deflator” (you subtract inflation from the reported number for a real GDP #) was 0.39%
  3. With Consumer and Producer Price inflation running 10x that 0.39% “deflator”, US GDP was grossly overstated

I don’t use the word “grossly” very loosely. Neither does Clarium Capital’s Peter Thiel use the word “fraud” casually. Last night, like two non-Keynesian ships in the night, Thiel (founder of Pay Pal) and I were on separate sides of Yale University’s campus hosting spirited discussions with students and faculty about the alternative debate to currency debasement (he called Keynes a fraud).

 

Back to these feisty little critters called Inflation Expectations that slowed US GDP Growth in its tracks at 0.36% in Q1 of 2011 (yes, before the Europe that every guy who was wrong on his 2011 US GDP forecast by 60-80% blamed), here are some facts:

  1. US stocks haven’t had 1 down day of more than 0.57% in 2012 YTD (yes, stock prices are inflating)
  2. Brent Oil is trading at $116.35/barrel this morning = up +6.5% since Bernanke debauched the US Dollar on January 25th
  3. Gold has gone from $1622 on the morning of January 25th(pre FOMC statement) to $1749 this morning = +7.8%

If someone wants to explain to me that markets aren’t expecting the Chairman of the Federal Reserve to inflate, I’m ready to debate them in any public forum – any time, any place.

 

Russian stocks (driven by expectations of Petro-Dollar prices = Dollar Down, Oil Up) are up another +1.3% and up +19.5% YTD! Both the central banks of Australia and South Korea have come out in the last 48 hours and said no more rate cuts with inflation running higher. India, who is highly dependent on foreign oil, just saw its yield curve go back to flat as inflation expectations ramped.

 

I could (and do) go on, and on, and on about this … because the data that supports it does…

 

The bottom line is that people who get paid (including me because I am long Energy (XLE) and Gold) by inflation expectations rising are the same people who generally say there is no inflation.

 

Calling that out for what it is isn’t Too Strong. It’s called the truth. Respect and leadership in America isn’t allocated by your title. Its earned each and every day. There may be bailouts for people losing client capital. But there is no bailout for losing credibility.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now $1, $112.71-116.85, $1.30-1.32, $78.59-79.09, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Too Strong? - Chart of the Day

 

Too Strong? - Virtual Portfolio


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