European Banking Monitor: Italian and Spanish Swaps Widen

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:

* Italian and Spanish sovereign swaps widened along with European Bank swaps over the week, underscoring increasing risk in the Eurozone.



Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 2 bps to 41 bps.


European Banking Monitor: Italian and Spanish Swaps Widen - 11. Euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis. Banks deposited €778.7 billion in the latest reading. 


European Banking Monitor: Italian and Spanish Swaps Widen - 11. ECB facility


European Financials CDS Monitor – Bank swaps were wider in Europe last week for 35 of the 40 reference entities. The average widening was 3.4% and the median widening was 7.8%.


European Banking Monitor: Italian and Spanish Swaps Widen - 11. Banks


Security Market Program – The ECB's secondary sovereign bond purchasing program purchased no sovereign paper in the week ended 3/30, for a third straight week of zero buying. February-to-date the Bank has purchased a mere €210 Million versus €2.2 BILLION in the week ended 1/20 and €3.8 BILLION in the week 1/12. When questioned on the lack of buying over recent weeks, ECB President Draghi has only answered that the SMP is a non-standard measure that is “neither eternal nor infinite.” Clearly, with the some €1 Trillion injection of liquidity across the LTROs, the Bank is paring back buying and watching the results of sovereign bond auctions. We are far from the opinion that the lack of buying from the ECB’s SMP is a signal that sovereign risk is off the table in Europe.


European Banking Monitor: Italian and Spanish Swaps Widen - 11. SMP


Matthew Hedrick

Senior Analyst


Including slots, Macau gaming revenues came in around HK$24.3 billion, up 24% YoY.



Average daily table revenues (ADTR) for the last week in March increased to HK$749 million, bringing the March average up to HK$745 million.  ADTR was HK$776 million in February.  As a reminder, March 2011 was the lowest hold month of year at just 2.66% (adjusting for direct play volume of ~6.6% or HK$4.5BN), so the comparisons are tougher the rest of the year.  While Sands Cotai Central (SCC) should grow the market, 2011 also had the opening of Galaxy Macau, so the stimulation from new supply could be similar.  We have seen a YoY deceleration play out throughout the last 3 weeks where YoY growth fell from +51% for the week ending 3/11 to +24%, +17%,  and flat for the week ending 3/18, 3/25, and 3/31, respectively.




With the exception of Wynn, market shares were little changed from last week.  Wynn apparently got clocked on hold this past week as full month market share dropped 90bps in only one week.  Relative to the 3 month trend, Wynn and LVS were the losers while Galaxy was the clear winner with MPEL also gaining.  We expect Wynn to continue to lose share while LVS will clearly rebound with the opening of SCC. 



LIZ: Risk/Reward Still Favorable


We think the risk/reward, even after LIZ’s 13% move on the last day of the quarter to $13+, remains favorable. The move certainly begs the question of what to do with the stock here, but we think this is just the latest step function reflecting the realization in value of what continues to be an undervalued portfolio of brands.


The reality is that LIZ is not like most companies whereby discussions with private equity firms or bankers made public will now open the dialog to unlocking significant unrealized value in the stock. Sure, Friday’s news sent the stock up over 10%, but let’s keep in mind that the Board has been talking with bankers and PE firms for the better part of the past 4-years – these discussions aren’t new news.


In the process of selling nearly $500mm in assets over the last 6-months do you think the value of the LIZ portfolio in total didn’t come up? Not a chance. But that doesn’t suggest that the Board is ready to sell at this stage in the process either. If it is to seriously consider offers, we think the $20/sh price tag mentioned sounds about right, if not low (see our sum-of-the-parts table below). As such, despite $1-$3 of near-term volatility that we could see as the company reports results over the next few quarters, we think it’s worth it for the $7+ in upside from current levels. With over 50% upside, LIZ is still one of our top long ideas.


Casey Flavin



LIZ: Risk/Reward Still Favorable - LIZ SOP



The Macau Metro Monitor, April 2, 2012




March gross gaming revenues were up 24.4% YoY to MOP 24.989 billion (HKD 24.26 billion, USD 3.12 billion).



According to the Urban Redevelopment Authority, Singapore home prices fell 0.1% QoQ in Q1 2012.  That is the first drop in prices since June 2009.  Singapore has been attempting to rein in prices since 2009, when it barred interest-only loans for some housing projects and stopped allowing developers to absorb interest payments for apartments still being built.  Foreigners and corporate entities have to pay an additional 10% stamp duty following measures introduced in December.



According to the China Real Estate Index System, housing prices in 100 major cities in China were lower for the seventh consecutive month in March.  Average home prices slipped to CNY 8,741/ sq mt, compared with CNY 8,767 in February and CNY 8,793 in January.  On a YoY basis, the average price of a new home in March climbed just 0.03%, from CNY 8,738/ sq mt, much slower than February's 0.93% rise.






Commentary from CEO Keith McCullough

Plenty were hoping for a “China bounce” this morning, nope:

  1. PMI’s – China had two (1 beat, 1 missed – they probably made up both), but the rest of the world’s PMI prints (other than the UK’s, which beat by a 1 pt) were awful. Germany in particular was bad, down to 48.4 vs 50.2 in FEB (France = 46.7 vs 50 in FEB and Spain was nasty at 44.5); India’s missed too. #GrowthSlowing, globally
  2. GOLD – under pressure again this morning which surprises me given that bond yields stopped going down; Gold has had issues when Commodities broadly weaken – both the CRB Index and Gold are trading below their intermediate-term TREND lines of 312 and $1692, respectively. That’s new. Deflating The Inflation = in motion.
  3. BOND YIELDS – they’ve been the front runner in signaling Spanish credit problems and US Growth Slowing – no need to ignore that until they stop calling the broader intermediate-term TRENDS. UST 10yr yields failed at TAIL line resistance of 2.47% 3 weeks ago and are currently trading 2.22% (below immediate-term TRADE resistance of 2.26%).

Welcome to Q2.











WEN: Wendy’s ran advertisements in eight major U.S. newspapers stating that the chain has never used “pink slime” in its products.  CEO Emil Brolick explained the advertising campaign by saying that the company has only used fresh beef in the 40+ years the company has been in existence.


YUM/MCD: Yum and McDonald’s were two brands named in a study by India’s Center for Science and Environment which alleged that popular “junk food” brands were misleading the public through “wrong health claims and insufficient labeling, according to Forbes. The companies deny that they are misleading the public with their labels.


SBUX: Starbucks is planning a bigger push into smaller cities in China as the world’s largest coffee-shop operator triples stores in the country.  The country is set to become the company’s second-biggest market by 2014, Bloomberg news reports.


GMCR: Green Mountain was mentioned in an interview with Howard Schilit, forensic accountant, published in Barron's this weekend.  On the company's accounting practices, he had the following to say: "When you are telling me the business is still booming, but in order to make that assertion, you changed how you are accounting, that's just not fair play. Is it illegal? No. The auditors signed off on it. But the auditors are part of the problem."





COSI: Cosi declined on accelerating volume.





DENN: Denny’s COO Robert Rodriguez left the company for “unexplained reasons after 18 months, effective immediately”, according to a statement from the company.




BJRI: BJ’s restaurants gained 2.1% on accelerating volume after being rated Overweight at Morgan Stanley.


RRGB: Red Robin Gourmet Burgers declined -1.3% on accelerating volume.  The company is reporting 3QFY12 earnings on Wednesday.





Howard Penney

Managing Director


Rory Green



Tranquil Occupation

This note was originally published at 8am on March 19, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It is neither wealth nor splendor, but tranquility and occupation, that gives happiness.”

-Thomas Jefferson


The first time I made the Inflation Slows Growth call (Q1 of 2008), I was a little stressed out. I was just starting a new company. I had everything to lose. Plenty of people were shooting against me.


The second time (Q1 of 2011), I had a much larger research team working alongside me and our confidence was high that consensus was way too bullish. People started to believe in our process.


This time (Q1 of 2012), from a fundamental Growth and Inflation perspective, very few factors in our risk management model suggest it’s going to be different. Growth continues to slow, globally, as inflation accelerates.


Back to the Global Macro Grind


While the calculus associated with how inflation slows real (inflation adjusted) growth is trivial, consensus calculations addressing this very basic real-world relationship are not.


Let’s look Credit Suisse’s latest “Reasons To Be Positive On Equities”:

  1. “Bond yields could rise further – this might help equities”
  2. “The Macro environment is supportive – Economic momentum indicators suggest global and US growth is still well above consensus”
  3. “The dovishness of central banks and the synchronized QE as the end game”

I’ll stop with their first 3 reasons as the next 6 have to do with the run-of-the-mill bull market thesis that has had people run right over if they bought Equities at the end of Q1 2008 or Q1 2011 (‘the world is awash with liquidity… stocks are cheap… blah, blah, blah’).


First, in addressing reasons 1-3 in order, I always start debates with my analysts with questions:

  1. Does the thesis change if bond yields don’t rise further?
  2. What’s consensus GDP; what’s your outside of consensus forecast; and what track record do you have in making these GDP calls?
  3. What’s different this time about central bank easing that won’t perpetuate inflation and, in turn, slow growth?

So, if you are meeting with Credit Suisse or JP Morgan’s Tom Lee in the coming weeks, see if they can answer those 3 questions.


Facts about reasons 1-3:

  1. Bond Yields rising to their YTD highs in Q1 of 2011 were not a buy signal for stocks – they were a huge head-fake
  2. US GDP growth slowed hard in the face of $120 (Brent) oil  in Q1/Q2 2011 to 0.36% and 1.34%, respectively
  3. On the margin, the only central bank of the 3 majors that can cut rates to 0% from here is the ECB

Furthermore, our risk management models suggest that reasons 1-3 need to be contextualized:

  1. 10-year US Treasury Yield TRADE, TREND, and TAIL lines are 2.12%, 2.03%, and 2.47%, respectively
  2. Our “low” and “high” scenarios for US GDP growth in Q1 and Q2 of 2012 are 0.9% and 1.7% (y/y), respectively
  3. The Sovereign Surprise of 2012 could be Japan, resorting to BOJ money printing, which would be US Dollar bullish (hawkish)

In other words, making a call that everyone is going to dog pile into Equities after this compressed smack-down move in Treasury Bonds is not one that is backed by anything that’s actually been happening in the world since 2008.


In theory, it makes sense. And in actuality, since Equity “fund flows” and volumes are dead, that’s what the Equity market needs (rotation out of bonds into stocks). But, to be clear, what people need in this business and what’s going to occur, can be two very different things.


Because an equity fund manager needs to chase performance or a pension fund needs to target a rate of return, doesn’t mean anything at all really. Markets do not care about what any of us need.


No matter what your successes or failures for 2012 YTD, what you need to get right from here are the slopes of Growth and Inflation. How does accelerating inflation infect growth? What pace of Deflating The Inflation could foster sustainable US Consumption Growth?


My Tranquil Occupation isn’t perma bull or perma bear – it’s perma process. In order to answer all of the aforementioned questions, you need a process that has proven to be both accurate and repeatable.


What would get me on board with some of Credit Suisse’s thoughts on US Equities:

  1. US Dollar Index breakout into the mid-80s (versus $79.81 this morning)
  2. US Treasury Yields (10-year) breaking out > 2.47% and holding there
  3. US Federal Reserve? Get them out of the way

My scenario is at least consistent. The Credit Suisse report wants you to believe that both bond yields and growth expectations can break-out to the upside while maintaining “synchronized QE” from central banks. By definition, all 3 of those things can’t happen at the same time. Unless, of course, the Fed is as conflicted and compromised as the world is beginning to believe it is.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, US Treasury 10-year Yields, and the SP500 are now $1636-1679, $124.69-127.49, $79.55-79.93, 2.12-2.38%, and 1377-1409, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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