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Tight-Lipped Draghi Goes Further Non-Standard

--When questioned on the ECB’s position of taking a loss on its Greek holdings, swapping its Greek holdings with the EFSF, or contributing in some way to “sharing” losses on its Greek holdings, Mario Draghi was tight-lipped, responding that the actions were either a violation (hinting that the ECB’s position against it wouldn’t change) or that he’d reserve a response until after tonight’s Eurogroup meeting (suggesting that a change of position couldn’t entirely be ruled out).  In the last hours, the Greek government has concluded talks with Troika on the issue that “remained open for further elaboration”, according to a press release. Already Germany’s Finance Minister Schaeuble says spending cuts appear to not yet fulfill bailout conditions. Please see our note yesterday titled “Greek PSI Is NOT Getting Done”, for the challenges we see ahead for participating parties to come to “agreement”.  Below we include the key language of the Bank’s interest rate decision today and further below we provide select Q&A from Mario Draghi’s (MD) press conference.

 

UNCH:

 

The ECB’s governing council decided to keep key interest rates unchanged today. The language on its main outlook on the economy was revised to “tentative signs of stabilization in economic activity at a low level” versus “substantial downside risks” in the previous report, however the ECB was quick to cover that “this outlook is subject to downside risks”. On inflation, the Bank holds roughly the same view, namely that inflation is “likely to stay above 2% for several months to come, before declining to below 2%.” 

 

Finally, on the pace of monetary expansion, Draghi noted that annual growth rate of M3 decreased to 1.6% in December 2011, after 2.0% in November. He highlighted that loans to the non-financial corporate sector were “particularly pronounced” and that “there are indications that bank lending conditions tightened further, affecting loan supply in several euro area countries in late 2011. It is not yet possible to draw firm conclusions from these developments, particularly given that the impact of the first three-year LTRO on bank funding is still unfolding and may not have been fully reflected in the most recent bank lending survey.”

 

For more specifics, see this ECB press release:

http://www.ecb.int/press/pressconf/2012/html/is120209.en.html

 

 

ECB Adding Risk to its Balance Sheet:

 

Draghi issued additional non-standard monetary policy measures, including new eligibility criteria for additional credit claims, which can only mean that the ECB will take more risk on its balance sheet.  The specifics were left to the National Central Banks (NCBs) to publish on. Of the NCBs participating (Central Bank of Ireland, Banco de España, Banque de France, Banca d’Italia, Central Bank of Cyprus, Oesterreichische Nationalbank, and Banco de Portugal) that had updated their websites on the measures, here are the changes:

 

Austria’s NCB: “To enable Austrian banks to optimize their liquidity management, the OeNB has decided to lower the minimum credit score for credit claims to a one-year default probability of 1% on the part of the debtor. The related risk of the OeNB will be overcompensated by strongly raised haircuts.”

 

Spain’s NCB: “The Banco de España will accept performing corporate and Public Sector Entity credit claims, other than mortgages, that are denominated in euro or in major foreign currencies and whose estimated credit risk, as assessed by the Banco de España using reliable sources, has a probability of default equal to or lower than 1%, although initially it will accept only collateral with a probability of default equal to or lower than 0.4%. Credit claims not governed by and structured in accordance with Spanish law might be accepted, at a later stage, subject to individual legal assessment. “

 

For the ECB’s press release, see:

http://www.ecb.int/press/pr/date/2012/html/pr120209_2.en.html

 


Top 3 Q&A Responses:

 

-What’s the ECB’s position on Greece?   MD: For some reason, we focus on financing things. But reforms are the most important aspect, and then on the rest. On PSI we’re not a negotiating party. Everyone’s talking about what the ECB could do, however the ECB hasn’t said anything, and I won’t here.

 

-Why can’t you announce the value of the ECB’s Greek holdings?  Will the ECB take haircuts?   MD: I want to wait for the outcome of the Eurogroup meeting. I will not answer if the ECB will take haircuts on its bonds.

 

-You’ve warned against tricks that go around the spirit of the European treaty. Are these tricks legal options for Greece?   MD: Talks about the ECB sharing the losses in Greece is ungrounded and unfounded. The idea that the ECB gives money to a program (country), which is monetary financing, is a violation. But, we will wait to see what comes of tonight’s Eurogroup meeting.  

 

 

Additional Q&A:

 

-In your introductory statement you no longer say that downside risk is “substantial”, does this mean less easing going forward?  MD: we came from a very weak Q4, but see a stream of surveys and hard data of low stabilization. But uncertainty is high, related to global economy, sovereign tensions, credit markets, and global growth.

 

-How big will demand for 2nd LTRO be?   MD: specialists say it should be substantial and around the previous one, but frankly we have no more information to share. The LTRO is a business decision, to lend to the real economy, as we saw tight lending across corporates and households.

 

-Will there be future LTROs?   MD: if the interbank market functions, there’s no need for additional LTROs, which is a temporary, non-standard measure. 

 

-Is the fiscal compact pact a durable quantum leap?  MD: yes, a major event. It testifies to the willingness of member states to partially release sovereignty in the budget area, including the readiness to accept budget changes in primary legislation. It’s a sign that the Euro is a strong reality, and that all participating members can stand on their own, without being subsidized by others.

 

-Will the ECB hold all its bonds to maturity?   MD: No need to change our positioning.

 

-There’s a focus on Target 2. Could claims of the Bundesbank against other countries be a problem for Germany’s credit rating?    MD: Target 2 balances are normal and inherent in a monetary union. Usually you don’t observe high imbalances, because the interbank market functions. But stress will arise when interbank markets don’t function, however there’s no more risk for creditors because there’s a central platform [to backstop] the system, which is the ECB.

 

-The ECB seems less pessimistic about Eurozone growth than the IMF?   MD: this is true.

 

 

Matthew Hedrick

Senior Analyst 


INITIAL CLAIMS: AUTOPILOT ENGAGED

Claims Improvement Begets Further Claims Improvement ....


The headline initial claims number fell 9k last week to 358k (falling 15k after the upward revision to the prior week). Rolling claims fell by 11k WoW to 366k this week. On a non-seasonally-adjusted basis, reported claims fell 24k WoW to 398k.

 

Claims remain on autopilot, for now. While some of the strength here is the byproduct of a seasonal distortion that will roll from tailwind to headwind around the end of February, the underlying trends are still very positive. Our hypothesis has been that falling claims become self-reinforcing once they break through the 375-400k level because that is the rate below which the unemployment rate can decline sustainably. This, in turn, fosters greater confidence among hiring managers and consumers, which begets further reductions in claims. The treadmill has become virtuous. This remains a key theme supporting our bullish stance on the large-cap financials. We expect this trend to continue over the intermediate term. To be clear, we're not suggesting that claims must fall week-in and week-out going forward. That would be ridiculous. Rather, we're suggesting that the general trend lower in the rolling claims series is likely to persist going forward.

 

INITIAL CLAIMS: AUTOPILOT ENGAGED  - chart1

 

 

INITIAL CLAIMS: AUTOPILOT ENGAGED  - chart2

 

 

INITIAL CLAIMS: AUTOPILOT ENGAGED  - chart3

 

 

INITIAL CLAIMS: AUTOPILOT ENGAGED  - chart4

 

 

INITIAL CLAIMS: AUTOPILOT ENGAGED  - chart5

 

 

2-10 Spread


The 2-10 spread widened 12 bps versus last week to 172 bps as of yesterday.  The ten-year bond yield increased 16 bps to 199 bps.

 

INITIAL CLAIMS: AUTOPILOT ENGAGED  - chart6

 

INITIAL CLAIMS: AUTOPILOT ENGAGED  - chart7

 

 

Financial Subsector Performance


The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS: AUTOPILOT ENGAGED  - chart8

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

 

 


INITIAL CLAIMS: AUTOPILOT ENGAGED

Claims Improvement Begets Further Claims Improvement ....

The headline initial claims number fell 9k last week to 358k (falling 15k after the upward revision to the prior week). Rolling claims fell by 11k WoW to 366k this week. On a non-seasonally-adjusted basis, reported claims fell 24k WoW to 398k.

 

Claims remain on autopilot, for now. While some of the strength here is the byproduct of a seasonal distortion that will roll from tailwind to headwind around the end of February, the underlying trends are still very positive. Our hypothesis has been that falling claims become self-reinforcing once they break through the 375-400k level because that is the rate below which the unemployment rate can decline sustainably. This, in turn, fosters greater confidence among hiring managers and consumers, which begets further reductions in claims. The treadmill has become virtuous. This remains a key theme supporting our bullish stance on the large-cap financials. We expect this trend to continue over the intermediate term. To be clear, we're not suggesting that claims must fall week-in and week-out going forward. That would be ridiculous. Rather, we're suggesting that the general trend lower in the rolling claims series is likely to persist going forward.

 

INITIAL CLAIMS: AUTOPILOT ENGAGED - Rolling 2

 

INITIAL CLAIMS: AUTOPILOT ENGAGED - Raw

 

INITIAL CLAIMS: AUTOPILOT ENGAGED - NSA chart

 

INITIAL CLAIMS: AUTOPILOT ENGAGED - S P and claims

 

INITIAL CLAIMS: AUTOPILOT ENGAGED - Fed   Claims

 

2-10 Spread

The 2-10 spread widened 12 bps versus last week to 172 bps as of yesterday.  The ten-year bond yield increased 16 bps to 199 bps.

 

INITIAL CLAIMS: AUTOPILOT ENGAGED - 2 10

 

INITIAL CLAIMS: AUTOPILOT ENGAGED - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS: AUTOPILOT ENGAGED - Subsector performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

 

Having trouble viewing the charts in this email?  Please click the link below.

 


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MPEL 4Q11 CONF CALL NOTES

Strong quarter but the sellside continues to compare the lower of MPEL's actual and "hold adj" EBITDA to the higher of their own nominal and "hold adj" estimate.

 


"The meaningful ramp up in our mass market operations over the past year, which is evident in the sustained improvements in margins and group-wide profitability, is particularly pleasing...we are well positioned to take advantage of the shift of the gaming epicenter to Cotai, particularly in the mass market segments, driving long term profitability and shareholder value."

 

-  Mr. Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment

 

 

CONF CALL NOTES

  • Mass growth and costs control drove their EBITDA this quarter
  • Continue to focus on better yielding their offerings to drive better margins
  • They are optimistic about GGR growth in Macau, in particular, mass market growth
  • Took share in the mass table segment despite new supply in the market
  • $200MM 4Q EBITDA hold adjusted at 2.85%
  • Remained disciplined in junket commissions
  • CoD - hold adjusted EBITDA contribution was 1/3 of total in 4Q11 down from 50% in 4Q10
  • 1Q12 Guidance:
    • D&A: $90-95MM
    • Net interest expense: $25-30MM
    • Corp expense: $18-20MM 

Q&A

  • They have improved their mass productivity per table materially
  • More of their junkets have moved to a revenue share program from a RC program
  • They continue to be optimistic about 2012, which is off to a good start
  • Reduction of tables at Altira/increase at CoD?
    • They may shift some more tables to CoD from Altira
    • They are putting in a program to expand their VIP operations at CoD in the coming months by adding 3 new junkets
  • As a policy, they do not intend to compete on pricing for junkets
  • Hold adjusted margins were 21%
  • Think that Chinese economic growth will continued to be measured.  However, they have seen no slowdown in the consumer discretionary sector.  They project 15-20% GGR growth with GDP growth of 8%.
  • Cash balance and debt situation and funds needed for MSC
    • $1.2BN of cash & equivalents, excluded long term restricted cash
    • They are working through their financing for MSC - bank loans
    • $1.9BN total project cost, equity contribution pro-rata between them and their minority partner
  • Table transition from Altira to CoD?
    • The table productivity at Altira is a little lower than at CoD.  So they are moving more junkets to a revenue share model which attracts more 'larger' and well-capitalized junkets. 
  • Receivables: $307MM; 1/3 related to premium direct and the rest related to junket. The provision for the quarter was $10MM - in-line with the rest of the year
  • What are the milestones for MSC?
    • Their process is a little different. It's really about restarting construction vs. getting brand new approvals
    • Their next announcement would be a restart of construction. They need to 'refresh' several aspects of their initial agreement before they can commence construction.
    • They are not looking to do an equity raise for the project

HIGHLIGHTS FROM THE RELEASE

  • $1,008MM of net revenues and $232MM of Adjusted EBITDA
    • CoD: net revenue of $696MM and $187MM EBITDA 
    • Altira:net revenue of $268MM and $53MM EBITDA 
  • "We have continued to execute on our premium strategy, both in the rolling chip and mass market gaming segments, as well as in our world-class entertainment and other non-gaming amenities. We believe our premium mass market focus at City of Dreams represents one of our key competitive advantages, giving us an ability to capture and leverage a loyal and more profitable customer base."
  • "Our design plans in relation to Studio City are effectively complete and we are undergoing the necessary Government processes to obtain the required approvals to commence construction. At the same time, we are working through our financing plans in relation to this project which will potentially include a bank loan and other debt financing."
  • "We continue to build out our Mocha Clubs network, opening Mocha Macau Tower in September 2011 and Mocha Golden Dragon in January 2012. With 300 gaming machines, the Golden Dragon facility has quickly become one of the best performing clubs in our Mocha portfolio."
  • 4Q Capex: $56MM, of which $14MM was related to design and preliminary costs associated with MSC


AG SETTLEMENT: BAD FOR CREDIT CARDS, GREAT FOR SERVICING BANKS

A Year in the Making ...

The long-rumored servicer settlement details are out at last, with a final announcement expected later today.  We've dug in to the details, and it looks like a strong win for the banks.  Of the $26B total value (per the WSJ), only about $5B is in the form of cash payment.  The balance is from principal write-downs and economic benefit of refinancing. That's a sweetheart deal, especially considering that the principal write-downs can involve mortgages that the servicers don't even own.  For details, see below. 

 

Quick Take on the Details:

- $26 billion settlement, including CA & NY (WSJ)

- $4-5 billion in cash payments by the banks to foreclosed homeowners

- $21-22 billion in principal forgiveness and underwater refinancing assistance

- Of the $21-22 billion, $17 billion will apply to mortgage-backed securities investors, having no impact on the banks.

- The remaining $3-5 billion will be principal forgiveness and underwater refinancing

 

AG SETTLEMENT: BAD FOR CREDIT CARDS, GREAT FOR SERVICING BANKS - servicer settlement share

 

Principal Write-Downs: Banks must effect $17B of principal write-downs for current borrowers.  

Hedgeye: Banks are using the best kind of money to pay for these principal write-downs: other people's money. Yes, this $17B will come out of the pocket of private label MBS investors.  Haven't PLMBS investors suffered enough?  In all seriousness, are there any accusations of wrongdoing against PLMBS investors?  Why are they bearing the cost?  If the argument is to help the broader housing market by helping underwater borrowers, this is a drop in the bucket.  Estimates of the total underwater balance of US borrowers are in the $700B - $750B range.  $17B barely touches that. 


- Payment to borrowers:
 According to the WSJ and FT, borrowers will receive payments totaling $4.2 - $5.0B.  The WSJ reports that $1.5B of that will go to borrowers who were foreclosed between September 2008 and last December.  

Hedgeye: This makes little sense to us. If a borrower wasn't wrongfully foreclosed on, why do they get any monetary settlement?  And if a borrower was wrongfully removed from their home (as happened in certain cases), then a $1,500 payment hardly constitutes justice. What's more, the time frame is odd. Did the banks change their practices at the beginning of 2012?

 

 

Refinancing: Banks must provide $3B worth of benefit to borrowers in the form of refinancing.

Hedgeye: This is once again other people's money, except to the extent that banks are refinancing loans that they own.

 

Liability Waivers: Banks are freed from further liability from the AGs or regulators around foreclosures. However, they don't gain liability waivers around MERS (NY AG Scheiderman's suit will proceed) or around securitization (Schneiderman again, along with the FHFA).   

Hedgeye: That's a pretty good deal on foreclosure wrongs - some states have serious penalties for wrongful foreclosures, and the servicers escape the threat of all of that.  Waivers on other elements would be a real gift.

 

 

Implications of Rising Foreclosures - Bad News For Cards

We wrote extensively on the negative implications of a servicer settlement for the credit card operators back on 7/11/11. But to recap our thoughts we offer the following summary. Clearing the legal morass around foreclosures will cause them to re-accelerate.  The chart below shows the swift drop-off in foreclosure filings when the robosigning scandal broke in October 2010.  While reformed practices may slow the timeline somewhat compared to the pre-scandal time period, and increase in the pace of foreclosures from current levels is very likely.  This has several implications:

 

1) More pressure on home prices: More low-level transactions in the distressed market pulls the home price indicators lower.  Extremely low comps can also pressure non-distressed transactions.

 

2) More bankruptcies: As we showed in a prior research report, foreclosures are highly correlated with bankruptcies.  Although the causality isn't always from foreclosures to bankruptcies, it often is: a bankruptcy filing can serve as a last-ditch effort to save a home.  Increasing bankruptcy filings is a negative for the credit card issuers.  We believe that part of the very low credit costs at the card names for the last five quarters is due to the artificial suppression of foreclosures.  Because bankruptcies flow straight to charge-offs without spending time in delinquent status, the increase in credit costs could hit very quickly.  This would be a negative for the pure-play card names (COF, DFS, AXP) and would slightly offset the benefit for the moneycenters.

 

AG SETTLEMENT: BAD FOR CREDIT CARDS, GREAT FOR SERVICING BANKS - foreclosure filings

 

AG SETTLEMENT: BAD FOR CREDIT CARDS, GREAT FOR SERVICING BANKS - bankruptcies and foreclosures

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky


THE HBM: DNKN, YUM, PNRA, BWLD

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Consumer

 

Initial jobless claims came in at 358k versus expectations of 370k and 373k the week prior (revised from 367k).

 

THE HBM: DNKN, YUM, PNRA, BWLD - initial claim

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: DNKN, YUM, PNRA, BWLD - subsec

 

 

QUICK SERVICE

 

DNKN: Dunkin’ Brands U.S. comparable store sales were up 7.4% and Baskin-Robbins U.S. comparable sales were up 5.8% as the company reported 4Q EPS of $0.30 versus consensus $0.28.

 

YUM: Yum Brands was upgraded to Neutral from Sell at Goldman.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

PNRA: Panera Bread declined 7.2% on accelerating volume following disappointing earnings.

 

 

CASUAL DINING

 

BWLD: Buffalo Wild Wings was cut to Market Perform by Raymond James.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

BWLD: Buffalo Wild Wings led the space, gaining 17%, following much stronger than expected earnings.

 

THE HBM: DNKN, YUM, PNRA, BWLD - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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