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ECB Presser YouTubed

-- At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.00%, 1.75% and 0.25%, respectively, which is in-line with consensus expectations. Draghi did not drift far from his statements last month on growth (expects the Eurozone economy to recover gradually in the course of the year); inflation (close to 2% over the medium term); and money supply (broad stabilization off subdued pace).

 

You can find Mario Draghi’s Introductory Statement to the press conference here:

http://www.ecb.int/press/pressconf/2012/html/is120404.en.html

 

Draghi again stressed the work of the two 36 month LTROs as decisive measures to put Europe back on track, yet (again) wasn’t able to show material evidence that real lending has happened in response to these huge liquidity dumps, and called on governments and banks to continue reforms and repair balance sheets to support recovery. He noted that today’s projections do not take into account the impact of the second LTRO.

 

Draghi did not indicate any intention for a third LTRO, said today’s decision to keep rates unchanged was unanimous, and stressed that the Bank pays particular attention to any signs of pass through from energy prices to wages.  Broadly, Draghi’s answers in the Q&A were vague, including on such questions as Greek bank recapitalization steps, unemployment rate risks in countries like Greece and Spain, and the real impact of the LTRO.

 

Below we present the Q&A highlights:


-When will the LTROs reveal their full force?    MD: I cannot answer when. I can answer what we do and what we watch. We look at consolidated bank balance sheets country by country to see if liquidity creation translates into deposits (banks buy securities, buildings, bonds, for example) and increases in required reserves.

 

-Greek banks were hit hard by the PSI deal. Will the ECB have to drop certain banks as counterparties?   MD: Greek banks capital has been wiped out. A €50 Billion recapitalization fund for Greece has been set up, €25 Billion of which is available immediately. The ECB will decide which banks are viable for counterparties for monetary policy operations, which is still in the works.

 

-Are you stepping up your inflation rhetoric given your new sentence to the introductory statement “have to address inflation pressures in a firm and timely manner”?   MD: Not stepping up rhetoric on inflation. To the extent energy prices rise, pass through pressures must be monitored.

 

-Are banks getting addicted to cheap money?   MD: there’s no sign of addiction to ECB loans. LTROs are a window opportunity for governments to take fiscal consolidation and structural reforms, and benefit from relative peace on financial markets.

 

-On the inflation calculation…   MD: We can have everyone at 2% inflation, without having to have higher inflation rates for the stronger countries.

 

-We see youth unemployment rates in Spain and Greece at extremely high levels; are there damaging effects from fiscal consolidation?   MD: Growth can come from foreign demand and short term interest rates (which are negative at present time). Supply reforms must be taken. High youth unemployment rates develop mostly in countries that have had dual labor markets. Under one wing there are firm laws and benefits; other the other wing there are younger worker that are typically temporary, or hired on a short term basis. So during crisis, the latter group was the first without a job. So we must see reforms to better distribute the weight of labor market movements.

 

--

 

Matthew Hedrick

Senior Analyst



Short Covering Opportunity: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)

 

Our fundamental research call for Global Growth Slowing has not changed. Neither has our risk management process. Prices have.

 

For now, this correction in the SP500 from its YTD high is just that – a correction. A 25 point drop in the SP500 from its YTD closing high of 1419 = -1.8%. That’s only 50% of the YTD drop from the next closest major equity market in the world, so there is plenty of mean reversion risk that remains.

 

Across my core risk management durations (TRADE, TREND, and TAIL), here are the lines that matter to me most: 

  1. Immediate-term TRADE resistance (was support) = 1407
  2. Immediate-term TRADE support = 1392
  3. Intermediate-term TREND support = 1324 

In other words (and I said the same thing yesterday), if 1407 snaps, 1324 is in play over the intermediate-term TREND duration. That’s a big problem for the bulls because the smallest drawdown we saw from the Q1 YTD high in 2008, 2010, and 2011 was just north of 15%.

 

Every draw-down is different, but with this level of dependence on the Fed and easy money inflation policies, they have all certainly rhymed.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Short Covering Opportunity: SP500 Levels, Refreshed - SPX


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

THE HBM: MCD, SBUX, BKC, THI, WEN, PFCB

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Hedgeye Restaurants Alpha – our best fundamental ideas

 

LONGS: SBUX, PFCB, EAT, YUM

 

SHORTS: DNKN, BWLD, WEN

 

RESTAURANT STOCKS IN THE HEDGEYE VIRTUAL PORTFOLIO

 

LONGS: PFCB, EAT, JACK, SBUX

 

SHORTS: MCD

 

MACRO NOTES

 

Commentary from CEO Keith McCullough

 

Oh how quickly the game changes when economic gravity is introduced:

  1. JAPAN – top question from clients is when does the sov debt crisis in Japan find its way into equities. Answer: after currencies. The Nikkei finally snapped its immediate-term TRADE line of 10,105 support last night, trading down a stiff -2.3%, taking its correction to -4% from its March high (to put the asymmetry of the SP500 in context, the US has only had 1 down day of more than -0.7% YTD).
  2. GERMANY – first immediate-term TRADE line break in the DAX too (line was 6998), and the correction in German Equities is now -3.8% from the YTD peak (so keep that in mind w/ the SP500 only -0.4% from its YTD no-volume high). German economic data, like the rest of the world’s, has slowed sequentially in the last 6 weeks.
  3. US DOLLARBernanke’s Bubbles are vast. All we need to see is the confluence of UST yields rising alongside the USD and Gold will come down in a hurry. Intense selling in the last 48hrs in Gold and Silver. Bernanke’s War is on. Remember, we’re explicitly fighting the Fed having a 0% asset allocation to Commodities and Treasuries right now.

 

Watch 1407 on the SPX. That line breaks and 1388 is next support.

KM

 

SUBSECTOR PERFORMANCE

 

THE HBM: MCD, SBUX, BKC, THI, WEN, PFCB - subsector

 

 

QUICK SERVICE

 

MCD: McDonald’s was removed from the Conviction Buy list at Goldman Sachs.  It remains rated Buy.

 

BUX: Starbucks was added to the Conviction Buy list at Goldman Sachs.

 

BKC: Burger King is coming public again.  Burger King will sell a 29% or $1.4 billion stake to Ackman via Justice Holdings, a UK investment vehicle.  The company says its international growth plans will benefit from better visibility as a public company.  It expects its shares to be relisted on the NYSE within 3 months.

 

THI: Tim Hortons was downgraded to Neutral from Buy at Goldman Sachs.

 

WEN: Wendy’s is meeting with lenders in New York tomorrow to discuss $1.325 billion in loans the company is seeking to refinance debt.  The financing will include a $1.125 billion term loan B maturing in seven years and a $200 million revolving line of credit due in five years.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

GMCR: Green Mountain declined 2.2% on accelerating volume.

 

 

CASUAL DINING

 

PFCB: P.F. Chang’s on Monday revealed its faster service, lower-priced Pei Wei Asian Market, a fast-casual spin-off of its 173-unit Pei Wei Asian Diner concept.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

KONA: Kona Grill gained 7.1% on accelerating volume.

 

PFCB: P.F. Chang’s gained 2% on accelerating volume.

 

 

THE HBM: MCD, SBUX, BKC, THI, WEN, PFCB - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


(CORRECTED) TODD JORDAN: IGT: OHIO SLIPS BUT WHO CARES?

We’re 2c below the Street for FQ2 but 3c above for FQ3.  Focus should be on international.

 

 

Fiscal 2Q is likely to be a quarter of record deferrals for IGT.  We already knew that IGT would not be able to recognize their shipment to Revel and now are pretty sure that Ohio will also be deferred.  With over 2,300 units deferred, our F2Q estimate is $0.24 but our FQ3 estimate is $0.30, 3c above the Street.

 

While the deferral of the Ohio and Revel units have been well telegraphed, most sellside analysts have yet to lower their numbers.  Consensus still reflects over 6k units being shipped to NA in the F2Q.  We don’t think that investors will really care about a quarter of deferrals especially if the rest of the business is humming along. 

 

We think that will be the case, especially on the international side where 11% top line growth should provide some visibility on IGT’s positive long-term outlook for the market and market share growth.  We’re still skeptical that IGT can reach its 30% market share goal but 25% or even 20% share does not appear to be discounted in the stock at this level.  Any progress in the international arena should outweigh the slippage issue.

 

 

F2Q Detail

 

We estimate that IGT will report F2Q results of $504MM of revenue and $0.24 of EPS.  At $215MM of product sale revenue, we’re 9% below the Street.  Our game operations estimate of $289MM is in-line with sell-side estimates.

 

Domestic product sale revenue of $120.7MM and gross margin of $68.5MM

  • Box sales of $68MM
    • $14.5k ASP
    • Recognized units 4.7k
      • We project that replacements should be up YoY, at 4,000
      • New unit sales of approximately 700
  • Lots of deferred unit sales:
    • IGT shipped ~950 games to Revel, but won’t get recognized until the June Q.  The server based component in the games makes it difficult to separate the system from the unit sales.
    • Approximately 1,425 units were shipped to Penn and CZR in Ohio but will not be recognized until the June quarter.  While the operators have “provisional licenses”/ “letters of acceptance” which give them authorization to receive slot machines, IGT is taking a conservative approach to revenue recognition.  One of the revenue recognition rules requires all consequential obligations to have been fulfilled at the time of recognition.  The way various operators interpret “consequential” will determine whether they recognize the units in the March or June quarter.  Having a license to open can be determined as consequential by IGT.
  • ASP’s will be down QoQ given the lower mix of MLDs this quarter compared to last, but margins should be up
  • Non-box sales of $54MM, down 5% YoY, due to lower conversion kit sales

International product sale revenue of $94.4MM at a 50% margin

  • $72.4MM of box sales
    • 4,450 unit sales (up 24% YoY)
    • $16.3k ASP
  • We believe that most of the unit growth will be driven by share gains in Macau and placements at SCC opening on April 11th
  • While we expect a decline QoQ in ASPs, margins on box sales should be up sequentially
  • We project international non-box sales of $22MM up YoY and QoQ

Gaming operations revenue of $289MM at a 60% gross margin

  • We estimate and ending install base of just 55.9k units.
  • The March quarter should benefit from a full quarter of a fully open and ramped Resorts World NY and some contribution from Double Down.
  • The strong regional results this quarter should benefit IGT’s largely variable average win per day

IGT: OHIO SLIPS BUT WHO CARES?

We’re 2c below the Street for FQ2 but 3c above for FQ3.  Focus should be on international.

 

 

Fiscal 2Q is likely to be a quarter of record deferrals for IGT.  We already knew that IGT would not be able to recognize their shipment to Revel and now are pretty sure that Ohio will also be deferred.  With over 2,300 units deferred, our F2Q estimate is $0.24 but our FQ3 estimate is $0.30, 3c above the Street.

 

While the deferral of the Ohio and Revel units have been well telegraphed, most sellside analysts have yet to lower their numbers.  Consensus still reflects over 6k units being shipped to NA in the F2Q.  We don’t think that investors will really care about a quarter of deferrals especially if the rest of the business is humming along. 

 

We think that will be the case, especially on the international side where 11% top line growth should provide some visibility on IGT’s positive long-term outlook for the market and market share growth.  We’re still skeptical that IGT can reach its 30% market share goal but 25% or even 20% share does not appear to be discounted in the stock at this level.  Any progress in the international arena should outweigh the slippage issue.

 

 

F2Q Detail

 

We estimate that IGT will report F2Q results of $504MM of revenue and $0.24 of EPS.  At $215MM of product sale revenue, we’re 9% below the Street.  Our game operations estimate of $289MM is in-line with sell-side estimates.

 

Domestic product sale revenue of $120.7MM and gross margin of $68.5MM

  • Box sales of $68MM
    • $14.5k ASP
    • Recognized units 4.7k
      • We project that replacements should be up YoY, at 4,000
      • New unit sales of approximately 700
  • Lots of deferred unit sales:
    • IGT shipped ~950 games to Revel, but won’t get recognized until the June Q.  The server based component in the games makes it difficult to separate the system from the unit sales.
    • Approximately 1,425 units were shipped to Penn and CZR in Ohio but will not be recognized until the June quarter.  While the operators have “provisional licenses”/ “letters of acceptance” which give them authorization to receive slot machines, IGT is taking a conservative approach to revenue recognition.  One of the revenue recognition rules requires all consequential obligations to have been fulfilled at the time of recognition.  The way various operators interpret “consequential” will determine whether they recognize the units in the March or June quarter.  Having a license to open can be determined as consequential by IGT.
  • ASP’s will be down QoQ given the lower mix of MLDs this quarter compared to last, but margins should be up
  • Non-box sales of $54MM, down 5% YoY, due to lower conversion kit sales

International product sale revenue of $94.4MM at a 50% margin

  • $72.4MM of box sales
    • 4,050 unit sales (up 24% YoY)
    • $16.3k ASP
  • We believe that most of the unit growth will be driven by share gains in Macau and placements at SCC opening on April 11th
  • While we expect a decline QoQ in ASPs, margins on box sales should be up sequentially
  • We project international non-box sales of $22MM up YoY and QoQ

Gaming operations revenue of $289MM at a 60% gross margin

  • We estimate and ending install base of just 55.9k units.
  • The March quarter should benefit from a full quarter of a fully open and ramped Resorts World NY and some contribution from Double Down.
  • The strong regional results this quarter should benefit IGT’s largely variable average win per day

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