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MCD: WHERE TO FROM HERE?

McDonald’s continues to be the de facto safety trade of the restaurant space.  Our opinion at this point is that there are some subtle changes taking place as the new Chief Executive Office takes over that are worth noting.

 

On Friday we took the opportunity to ask Don Thompson what he thinks his legacy will be when he finds himself – hopefully long from now – closing in on retirement as Jim Skinner currently is.  His response was, in our view, interesting in that he mentioned the “Plan to Win” but also spoke of the importance of growing organically and building new restaurants coincidentally.  Specifically, Thompson stated that “we are much smarter now” and that McDonald’s “can walk and chew gum at the same time” [organic unit growth].  We do not view this as a negative for the company but it does represent a lower return growth profile for the company than we have seen over the past five years.

 

Thompson’s three “global priorities” are:

  1. Optimizing the menu [transitioning from dollar menu]
  2. Modernizing the customer experience [remodel/reimage program]
  3. Broadening accessibility to Brand McDonald’s [unit growth]

Unfortunately, the McDonald’s conference call was littered with headwinds facing the company that are, on a relative basis, greater than those facing competitors such as Yum Brands.  McDonald’s highlighted three major hurdles facing the company in 2012.  Firstly, the economic climate remains challenging, particularly in Europe.  Secondly, consumer confidence remains varied across markets.  Finally, the company highlighted “economic pressures and inflationary costs”.  Beef has been a key driver of these cost pressures.

 

Simply comparing McDonald’s to Yum Brands under the specter of these three factors paints McDonald’s in an unfavorable light relative to its rival. Yum has shrugged off concerns related to China’s rate of growth but McDonald’s’ exposure to Europe seems to be causing some concern among management personnel and investors alike. 

 

 

WHAT WAS NOT SAID

 

Changes on the margin are all-important and we see the decrease in emphasis on beverages as a strategy going forward as being important.  While management said that “the U.S. also continues to strengthen its position as a as a beverage destination”, total beverage units were only up 6% versus up 20% in 4Q11, 16% in 3Q11, and 29% in 2Q11.  In fact, the word “beverage” was only mentioned twice on the 1Q12 call.  The 4Q11, 3Q11, and 2Q11 calls included 4, 8, and 18 mentions of the word “beverage”, respectively.  The word “McCafé” was mentioned twice on the 1Q12 call.  The 4Q11, 3Q11, and 2Q11 calls included zero, 7, and 11 mentions of the word “McCafé”, respectively. 

 

The evidence suggests that beverages are increasingly becoming a less important part of the vocabulary from McDonald’s’ management team.  With that in mind, foremost in our thoughts is what the company’s strategy will be to maintain top-line momentum over the next few months.

 

MCD: WHERE TO FROM HERE? - mentions mcd

 

UNITED STATES

 

The beverage initiative last year clearly helped McDonald’s take share from competitors.  Don Thompson did provide an interesting take on the industry when he said, “around the world we continue to gain market share in an industry with minimal-to-negative growth”.  For a frame of reference, the Justice Holdings presentation touting the upcoming Burger King presentation cited an industry growth number of +6%!

 

For McDonald’s, one of the core initiatives in the U.S. this year is an attempt to evolve the company’s value proposition with the new Extra Value Menu and, in doing so, turn away from the existing dollar menu.  Beginning in April, McDonald’s is focusing the menu on four tiers (excluding combo meals):

  1. Premium ($4.50-5.50)
  2. Core ($3.50-4.50)
  3. The new Extra Value Menu ($1.20-3.50)
  4. The Dollar Menu

Given that the company is guiding to 4.5-5.5% inflation in the U.S. in 2012, we believe that management is attempting to manage check and margin by forcing customers to trade up to the Extra Value Menu from the Dollar Menu.  This belief is supported by the fact that one of the biggest changes that the company is undertaking is the addition of fresh baked cookies and ice cream cones to the Dollar Menu in place of small drinks and small fries. 

 

Our view remains that this is a big risk for McDonald’s.  If this change goes against consumer preference, there is a

possibility that satisfaction scores will be negatively impacted.  When we spoke to the company in March when the menu changes were first announced, we learned that a “mini-combo meal” offering may bundle the fries, burger, and drink but a decision has not been made on that yet.  Still, ordering the $1 items individually is no longer an option. 

 

MCD: WHERE TO FROM HERE? - mcd us

 

 

EUROPE

 

Turning to Europe, McDonald’s has been significantly impacted by the macroeconomic environment there, more so than any other multi-national restaurant company due to its relatively larger exposure to the region.  Europe represents 40% of total revenues for McDonald’s and 39% of operating profit.  As Don Thompson said, Europe is a region that “continues to experience unprecedented economic challenges from widespread austerity measures, concerns over the sovereign debt crisis and unemployment levels averaging about 10%”.

 

The company has long been focused on upgrading the customer experience; 80% of the system’s interiors have been refreshed as well as 50% of the exteriors.  Roughly 150 McCafés will be added to the Europe system in 2012.

 

MCD: WHERE TO FROM HERE? - mcd eu

 

 

APMEA

 

In APMEA, McDonald’s called out the challenging economic conditions in China (8.5% same-store sales), ongoing “tightening” in Australia, and uneven results in Japan.  Again, the company is looking to value as a strategy with the recent launch of the Loose Change Menu in Australia last month.

 

We think that APMEA is an important component of the long-term strategy for McDonald’s but, given that it only comprises 18% of EBIT, the near term story will be dictated far more by business in the US and Europe, which account for 43% and 38% of EBIT, respectively.

 

MCD: WHERE TO FROM HERE? - mcd apmea

 

 

CONCLUSION

 

McDonald’s trends are not disastrous but going forward, we see plenty to be concerned about.  Specifically, lapping the outsized performance of the U.S. business last summer, which was driven by impressive beverage sales, and maintaining momentum in Europe are two key issues.  As we wrote earlier, beverage unit growth is sequentially slowing so we believe that catalyst is no longer a major factor. 

 

Given the pending IPO of Burger King and our view that the brand is “too big to fix”, it struck a chord when McDonald’s management emphasized that it is “willing and able to invest for continued growth and to widen our competitive advantages”.  In reimaging 2,400 restaurants globally (800 U.S., 900 Europe, and 475 APMEA) and rebuilding 200 U.S. locations, the company is clearly in a position of strength versus its closest rivals.  The longer-term outlook for McDonald’s is positive, with competitors like Wendy’s and Burger King floundering, but growth in that segment of quick service pales in comparison to fast casual/specialty.  We would look elsewhere for top long QSR ideas at this price.  Jack in the Box is one company that we believe has upside potential from here.

 

Globally, the price factor flowing through the company’s income statement is roughly 3%.  With inflation pressuring margins, particularly in the U.S., sales trends will take on an increased importance.  Given the difficult top-line compares and uncertainty around the transition from Dollar Menu to Extra Value Menu, our conviction on the top-line continuing to meet consensus is tenuous at best.

 

MCD: WHERE TO FROM HERE? - mcd quadrant

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

  


European Banking Monitor: More Euro-Carriage Spokes Snap

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:

 

* Spanish and Italian swaps continue to rule the day with Italian swaps, in particular, climbing higher. French and German CDS widened by 15 and 12 bps, respectively on concerns around the ongoing deterioration in economic conditions across the Continent, and expectations that the bailout will further encumber both countries. French elections are adding further uncertainty to the economic outlook. EURIBOR-OIS continues to drift sideways as the ECB’s overnight deposit facility holds elevated, near all-time highs. 

  

* EU financial companies were mixed last week, but French banks saw their swaps widen noticeably. BNP Paribas (+25 bps to 263 bps), Credit Agricole (+31 bps to 320 bps), Societe Generale (+24 bps to 339 bps) all widened meaningfully. Recall that there was concern around the counterparty exposure to French banks in 2H11 that principally weighed on US banks, so it's interesting to note the current, short-term divergence.

-------------

 

Security Market Program – For the sixth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 4/20; the total program remains  at €214B.

 

The standstill comes as market risk returns across Europe.  While there are other channels to suck up sovereign bond issuance, including through funding from the two 36-month LTRO programs, the SMP’s lack of buying may send a negative signal to market participants that are already weary of the sovereign and bank risks bubbling in Spain. Add to that uncertainty around the Dutch government as PM Rutte handed over his resignation this AM after failure over the weekend to agree on budget cuts and the unexpected performance of far-right and anti-Eurozone National Front leader Marine Le Pen, who despite a third place finish behind Socialist Francois Hollande (28.5%) and Nicolas Sarkozy (27.1%) in Round 1 of the French Presidential elections, took a record high 18.2% of the vote.

 

European Banking Monitor: More Euro-Carriage Spokes Snap - 11. SMP

 

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 1 bps to 40 bps.

 

European Banking Monitor: More Euro-Carriage Spokes Snap - 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’s response to the crisis.  The latest overnight reading is €775.7B.

 

European Banking Monitor: More Euro-Carriage Spokes Snap - 11. facility

 

European Financials CDS Monitor – Bank swaps were wider in Europe last week for 23 of the 39 reference entities. The average widening was 0.3% and the median widening was 4.2%. French banks, in particular, saw their default probabilities rise notably week over week.

 

European Banking Monitor: More Euro-Carriage Spokes Snap - 11. banks

 

Matthew Hedrick

Senior Analyst


EZPW: IS THE PAWN BORROWER RUNNING OUT OF GOLD?

We thought the note below form our Financials Team highlighted an interesting data point related to gold from our Financials Team.  In effect, the largest pawn operators in the United States are reporting that their clients are basically running out of gold to pawn.  Cash America (CSH) reports this Thursday and will likely provide further confirmatory evidence of this trend (as well as disappointing earnings).

 

A New Issue in Pawn Lending: Clients Running Out of Gold

An ominous trend emerged from EZ Corporation's F2Q12 earnings report last week.  The company reported slowing growth in their U.S. pawn operations and lowered their guidance for FY 2012 by 6%.  Management said the reason for the decrease was a mix shift among pawn borrowers towards general merchandise and away from gold.  In other words, gold pawning is declining.  This manifested for EZPW in the form of a 14% decline in same store sales in retail jewelry in the U.S. (as distinct from scrap sales) and a 15% decline in gold volume overall.  

 

We saw a similar pattern out of FCFS earlier last week:  In the U.S., scrapping rose just 3% YoY, a decline of 11% on a per-store basis.  In Mexico, the story was similar, with -2% YoY total scrapping revenue and -20% on a per-store basis.  

 

EZPW management made three comments on the call that gave us pause:

- They noted that gold volume declines have been ongoing for at least three quarters (in terms of scrapping volumes, there have been four consecutive quarters of decline), but the revenue impact has been masked by rising gold prices.

- "Absolutely gold has been priced to some degree out of the range of some of our customers" - increasing gold prices are pushing retail gold out of reach for some borrowers.  The knock-on effect is that this gold is not recycled back into the community for use in future pawn transactions, so the available collateral in the community is diminished.

- The pawn customer is running out of gold: "Frankly, yes, their piggy banks are certainly emptier than they've been and what they have, they're hanging on to."  This implies higher redemption rates of pawn collateral as well as lower overall volume.  We find this quite plausible - while there are no hard statistics available, we expect that much of the gold that has been purchased by pop-up gold buyers and the like ends up as scrap and doesn't find its way back to the low-income borrower.  

 

Implications for the Industry

In our recent black book on this space, our primary concern with gold was a decline in the price of the commodity, not a decline in volume. However, from a revenue perspective, a volume decline has nearly the same effect. Margins would be unaffected, but revenue growth is directly linked to expanding volume.  We estimate the following as a rough heuristic for top line growth. Gold CAGR, store growth, and total revenue growth are actual values, leaving the 3% long-term same store sales estimate.  

Gold CAGR (tailwind): 9.6%

Store growth (tailwind): 5%

Same Store Sales (including gold volume increase): ~3%

-----------------------------------------

Total revenue CAGR: 18%

 

For gold-sensitive lenders, this tailwind appears to be set to become a significant headwind. Ongoing gold price increases mask the effect, but should the commodity reverse (as we believe is ultimately likely) then the problems compound.  

 

Where does this leave investors?  We return to our original conclusion, published with our Black Book on April 11th.  The best-positioned name, DFC Global (DLLR) has the least exposure to gold while still sharing the aggressive growth profile of the rest of the industry. Overall, we see Cash America (CSH) as being the worst posiitoned of the group through the combination of their high pawn (gold) exposure coupled with the highest relative exposure to US payday lending, where we see considerable regulatory risk. On the gold front, however, as the chart below shows, EZPW and FCFS are the two names with the highest gold exposure. Despite CSH's decline following the EZPW report (the stock was down roughly 5% compared to EZPW down 14%), we would still carry a short bias into the quarter. We are currently expecting $1.16 in EPS compared to consensus of $1.18.  

 

EZPW: IS THE PAWN BORROWER RUNNING OUT OF GOLD?  - chart1

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

THE HBM: MCD, DPZ, EAT, CAKE

THE HEDGEYE BREAKFAST MONITOR

 

HEDGEYE VIRTUAL PORTFOLIO POSITIONS

 

LONGS: JACK, SBUX

 

SHORTS:

 

MACRO NOTES

 

Commentary from CEO Keith McCullough

 

I believe my competitor at ISI is calling it a “Growth Problem Alert” today – we’ve been calling it #GrowthSlowing since Feb:

  1. GROWTH SLOWING – when we say that, we mean it globally. The words USA “de-coupling” is an Old Wall St word that has not worked in the last 5yrs. The world is as globally interconnected as it’s ever been and what policy does to the world’s reserve currency has very consequential impact on the intermediate-term slopes of growth and inflation.
  2. EUROPE – Spanish stocks are crashing again (down -23% since Growth Slowing started, globally in Feb – Hong Kong and India stock markets stopped going up in Feb too). The French Services PMI print for April was awful (46.1 vs 50.1 MAR) and Italian consumer confidence just hit a record low. Central planning not working. DAX snapping TREND support (6689).
  3. COPPER – the Doctor is getting tagged this morning, down -1.7% and in a Bearish Formation (bearish TRADE, TREND, and TAIL in our model). Commodity prices (or Bernanke’s Bubbles) look a lot like US Treasury Yields again. 10yr yield getting smoked to a fresh 2mth #GrowthSlowing low of 1.93%.

 Next SP500 support = 1356.

 

SUBSECTOR PERFORMANCE

 

THE HBM: MCD, DPZ, EAT, CAKE - subsector1

 

QUICK SERVICE

 

MCD: McDonald’s CEO Jim Skinner highlighted jobless claims during the conference call on Friday as being indicative of the soft macro environment.

 

DPZ: Domino’s holder Trian reported a passive stake of 4.4% down 7.2% in value at the end of 2011.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

YUM: Yum Brands traded up 3.5% on accelerating volume. 

 

CMG: Chipotle traded down -2.7% on accelerating volume.

 

 

CASUAL DINING

 

EAT: Impressive numbers out of Brinker today.  3QFY12 EPS came in at $0.60 versus $0.56 consensus and company-owned comparable restaurant sales at Chili’s came in at 4.6% versus 2.3% consensus.  As the charts below illustrate, Chili’s made significant progress on the top line.  Two-year average trends improved significantly on a sequential basis despite the more difficult compare and lapping of the introduction of the lunch promotion in January 2011.  How much of that successful lapping was due to weather is the question of the day.  Any forward looking commentary from management pertaining to April trends will likely have a significant impact on where the stock ends up at the close today.  From what we know, it seems that traffic slowed over the duration of the quarter at Chili’s; traffic was up 1.8% for the quarter but March came in at +0.5%. 

 

THE HBM: MCD, DPZ, EAT, CAKE - chilis pod1

 

THE HBM: MCD, DPZ, EAT, CAKE - chilis comps detail

 

CAKE: Cheesecake Factory’s CEO, David Overton, was paid $4.1m for FY11, according to filings made with the SEC.  In 2010, he received $3.7m total compensation.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

CBRL: Cracker Barrel bounced back after a soft day’s trading on Thursday.  Shareholder Sardar Biglari is trying to shake things up at the company.  Friday the stock closed above Thursday’s high.

 

BJRI: BJ’s Restaurants traded down on accelerating volume on Friday.  The stock received an upgrade on April 12thbut has sold off since. 

 

THE HBM: MCD, DPZ, EAT, CAKE - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN

Key Takeaways:

* Spanish and Italian swaps continue to rule the day with Italian swaps, in particular, climbing higher. Italy's sovereign CDS climbed 31 bps vs. last week to 473 bps and are now almost in-line with Spanish sovereign CDS (510 bps, down 12 bps week over week). Meanwhile, French and German CDS widened by 15 and 12 bps, respectively on concerns around the ongoing deterioration in economic conditions across the Continent, and expectations that the bailout will further encumber both countries. French elections are adding further uncertainty to the economic outlook. 

 

* US financial companies saw their swaps mostly tighten, with the notable exception of Genworth (GNW), which postponed the IPO plans for its Australian mortgage insurance unit to early 2013 from 2Q12. Swaps on GNW rose 140 bps week over week. Among the large cap US Financials, only Morgan Stanley (MS) is currently trading above 300 bps (366 bps, down 13 bps week-over-week).

 

* EU financial companies were mixed last week, but French banks saw their swaps widen noticeably. BNP Paribas (+25 bps to 263 bps), Credit Agricole (+31 bps to 320 bps), Societe Generale (+24 bps to 339 bps) all widened meaningfully. Recall that it was concern around the counterparty exposure to French banks in 2H11 that principally weighed on US banks, so it's interesting to note the current, short-term divergence.

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged  

• Intermediate-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged  

• Long-term(WoW): Neutral / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - summary 2

 

1. US Financials CDS Monitor – Swaps tightened for 19 of 26 major domestic financial company reference entities last week. While trend was overall positive, there were notable negative divergences like Genworth (GNW).  

Tightened the most WoW: C, COF, ACE.

Widened the most WoW: MTG, RDN, GNW.

Tightened the most MoM: AXP, COF, MBI.

Widened the most MoM: BAC, MS, GNW.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - 4 23 2012 8 04 04 AM US CDS 3

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 23 of the 39 reference entities. The average widening was 0.3% and the median widening was 4.2%. French banks, in particular, saw their default probabilities rise notably week over week.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - 4 22 2012 EURO CDS

 

3. European Sovereign CDS European Sovereign Swaps mostly widened over last week. Portuguese sovereign swaps tightened by 6.4% (-71 bps to 1036 ) and German sovereign swaps widened by 15.6% (12 bps to 88).

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - Sov Table

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates were roughly flat last week, ending at 7.37.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.3 points last week, ending at 1656.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - LLI

 

6. TED Spread Monitor – The TED spread rose 1.5 points last week, ending the week at 39.70 this week versus last week’s print of 38.23.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC index fell 1.5 points, ending the week at -10.13 versus -8.7 the prior week.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - JOC

 

8. 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 1 bps to 40 bps.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - Euribor OIS

 

9. 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.  

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - ECB

 

10. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads widened nominally, ending the week at 120 bps versus 119 bps the prior week.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - MCDX 2

 

11. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index rose 95 points, ending the week at 1067 versus 972 the prior week.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - Balticc Dry

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 170 bps, 2 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.3% upside to TRADE resistance and 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - XLF

 

Margin Debt - February: +0.85 standard deviations 

We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did last April, it has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May 2011. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move. Overall, however, this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.  

 

The chart shows data through February.

 

MONDAY MORNING RISK MONITOR: FRENCH BANK SWAPS, THE BANE OF 2H11, ARE MOVING HIGHER AGAIN - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link below to view in your browser.   

 


BYD YOUTUBE

In preparation for BYD's FQ1 2012 earnings release Tuesday, we’ve put together the recent pertinent forward looking company commentary.

 

 

YOUTUBE FROM Q4 CONFERENCE CALL

  • "We are confident that 2012 will see Las Vegas set a record and surpass the 40 million visitor mark."
  • "We are confident that even with new competition entering the market, Borgata will remain the leading resort in the region."
  • "While we made progress toward that goal in 2011, reducing our overall leverage by almost full turn, we know we must continue this effort during 2012."
  • "We made great strides in 2011 creating efficiencies and improving our margins. We will stay focused on this in 2012."
  • "We saw encouraging strength in our Hawaiian customer segment, as both visitation and play from Hawaiians
    increased significantly from last year. There are a number of reasons to be optimistic about the future of Downtown. A number of new non-gaming businesses have been moving into the area. Development along the Fremont Street East district continues and The Smith Center, a 2,000 seat, world-class performing arts center will open its doors Downtown next month. These developments will bring new jobs, new visitors and new residents to Downtown Las Vegas. And we are already benefiting from the energy and excitement coming into the area, as visitor traffic has grown substantially on the Fremont Street Experience, helping to drive our strong results. The outlook for Downtown is bright and with one-third of the total market, Boyd Gaming will benefit from the area's renaissance." 
  • "We're on target to roll out B Connected at the IP during the second quarter, which will allow us to capitalize on the busy summer season and accelerate growth in the year ahead."
  • "We are working hard to ensure that Borgata's team members continue to deliver the best possible service to our customers. And the hotel room redesign already underway, will be completed by midyear, helping to keep our product at the top of the market. Based on the feedback we've received so far, the refreshed rooms have been well received by our guests."
  • "When it launches in the second quarter, we are confident that B Connected Online 2.0 will further enhance the exceptional, personal experience our customers have come to expect from Boyd Gaming."
  • "For 2012, we expect corporate expense to be approximately $44 million."
  • "For 2012, we expect consolidated depreciation expense to be approximately $200 million to $205 million, about $135 million to $140 million of which is attributable to Boyd and the remaining to Borgata."
  • "We expect share-based comp to be approximately $10 million in 2012. Pre-opening expense, before the consolidation of Las Vegas Energy was $4 million in the fourth quarter and that is a good quarterly run rate estimate for 2012"
  • "Using the current forward curve for LIBOR, we expect interest expense to be approximately $160 million for Boyd in 2012 and approximately $85 million for Borgata." 
  • "For guidance purposes, we are assuming a 35% tax rate for 2012."
  • "For 2012, at Boyd, we expect to spend approximately $100 million and at Borgata, approximately $60 million, which includes $35 million related to the room project that was started last year and is expected to be completed in the middle of this year."
  • "We expect wholly owned EBITDA, including IP and after the deduction for corporate expense, to be in the range of $88 million to $93 million. We expect Borgata to generate EBITDA of $32 million to $34 million. With this range of EBITDA guidance, including a full quarter of IP, adjusted EPS for the first quarter is expected to range from $0.05 to $0.09 per share."
  • [LV Locals growth] "I guess it's coming in both sides [gaming/non-gaming]. So we've turned the corner, we think it's low single-digits for 2012, but it's certainly higher than what you've seen in the last couple of quarters."
  • "We can see $0.60 on the dollar plus or minus flow through off of any revenue increases." 
  • [IP synergies] "We definitely feel very comfortable with the $5 million and we think there's pretty good upside to that number. As it relates to things like property insurance, utilities, savings on the procurement side by just being part of a much larger organization and buying at, frankly, just better rates because of volumes, are all starting to fold in now. We'll be completed with our insurance renewal in the second quarter and I think you'll see a full year of 2012 that reflects some healthy synergies, certainly well in excess of the $5 million that we have targeted."
  • [Margaritaville competition] "Relatively small project, no hotel rooms. Really I guess the best way to describe it, is a locals-oriented property with relatively tough location from an access perspective. Really don't see that impacting our business at all."

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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