ECB Overnight Deposits Plummet!

No Current Positions in Europe

Conclusion: the deposit level inflection is noteworthy, yet a long way from a signal of credit expansion


There was a notable inflection in deposits held at the ECB’s overnight window yesterday, the first day the central bank’s recently announced 0.00% deposit rate went into effect. As we show in the chart below, deposits fell from €808.5B on Tuesday to €324.9B on Wednesday (down -60%), according to the most recently reported figures from the ECB.


ECB Overnight Deposits Plummet! - aa. overnight


As a reminder, on 7/5 the ECB also cut the interest rate on the main refinancing operations by 25bps to 0.75% and the interest rates on the marginal lending facility by 25bps to 1.50%.


While on the margin, the decline in deposits, if sustained, could be a positive signal that funds are being “put to work” for broader public and private lending, we think the "pass-through" is inconclusive and that collectively the rate cuts issued by the ECB offer little incremental stimulus given how low rates already are. 


Our view is that encouraging more borrowing through cheaper money is not the solution to Europe's problem of over-indebtedness.


To this end, we see the EUR/USD cross challenged over the intermediate term as there are no major planned catalysts on the calendar. Our call-out in the chart below is that the cross just broke through our TREND support line of $1.22. While we don’t see the cross going to parity, as we’d expect Eurocrats to step in to prevent it, the most recent news that Germany’s Constitutional Court could push out a ruling on the ESM and the fiscal pact until the fall (versus the original target of July 1), could add much consternation to the cross and European capital markets over the intermediate term. Our immediate term TRADE range is $1.21 - $1.24.


ECB Overnight Deposits Plummet! - aa. eur



Matthew Hedrick

Senior Analyst

The End Game




The End Game - client talking points




Since we’re not a prop shop, bank or broker-dealer, we can say what we want. Since 2007, people have been complaining about “the machines.” Yes, we live in an era of electronic trading. If you’re sick of getting smoked by the competition, we recommend hiring brilliant people to help build machines that can front run the “other” machines. Seriously – think about it.



Mario Monti is basically bailing on Italy and wants no part of the tidal wave of bailouts that are about to engulf the nation. Can you blame him? Politicians love this sort of short term accountability game. Italy makes Spain look like a walk in the park and will really be the country that makes headlines.



The 10-Year Treasury yield is astonishing. People cannot get enough of this thing. Yields hit a fresh new low of 1.49% this morning and that sucks for financials.



The End Game - asset allocation



The End Game - assets July11



<chart 4>



The bulk of the bad news is on the table following disappointing F2012. Rebased F2013 estimates far more reasonable, and revenues should be supported by our expectations for rising physician utilization, and in the near-term, a flu season that is shaping up as a considerable tailwind.







SS volume accelerated in 1Q12 and employment remains a tailwind to both admissions & mix. We expect acuity to stabilize and births and outpatient utilization to accelerate out of 1Q12, while supply cost management continues as a margin driver and acquisition opportunities remain a source for upside.







The company continues to control its own destiny through investments in all the right areas. We think 30%+ top line and EPS growth for 5+ years. One of its failures, however, has been in penetrating markets outside the US. That will happen. But for now, its failure is a competitive advantage in the face of a strengthening dollar. We like it in sympathy with a LULU sell-off.






The End Game - three for the road


Tweet of the Day: “Can you do math? @Wolfrum Spain GDP Sept 2010 +0.4% vs -0.4% March 2012 --- Ireland GDP Sept 2010 +1% vs +1.2% March 2012 #Bloomberg”          -@Convertbond       


Quote of the Day: “The We do not write because we want to; we write because we have to.” –W. Somerset Maugham


Stat of the Day:  Greece Unemployment Rate 22.5% APR vs 21.9% MAR






MAR’s quarter and guidance shows why we are more cautious on hotels over the near-term but also why we like MAR’s business model.





MAR’s quarter was in-line but low quality in our opinion.  Guidance on recurring EPS was weaker than expected.  While management may or may not be a little conservative, there are real issues with the world economy and this is an economically sensitive business.  Moreover, our math suggests a sequential slowdown in YoY RevPAR growth in July without even considering a Macro slowdown.  These factors could weigh on the sector over the near-term and MAR which have both otherwise performed relatively well. 


The relative strength of MAR’s business model was and will be evident particularly if the economy worsens.  MAR bought back an astounding $400 million worth of stock in the quarter.  The company is a cash generating machine, especially since the spin of the capital intensive timeshare business.  The company’s cash flow is more insulated from softening demand trends due to the almost exclusive fee-based model.  While we are not recommending purchase of any lodging stocks right now, if you have to own one, MAR would be it.  Longer term, this is a great business with favorable supply/demand trends. 


We’re hoping for a significantly better entry point.





Marriott reported an in-line quarter that was low quality.  The $400MM buyback in the quarter was impressive though and exceeded our estimate.


Q2 would’ve been a miss if not for:

  • Higher termination fees and unusually high increases in branding and credit card fees
  • A $2MM receipt of business interruption insurance related to the Japanese Tsunami.    
  • The $400MM buyback in the quarter was impressive though and exceeded our estimate.

Somewhat offsetting the non-recurring positives above was higher SG&A that had $7MM of “one time charges” and $5MM of higher reserves. 


On the surface, it looks like MAR raised EPS guidance, but when you exclude the $40MM gain on the sale of the Courtyard JV guidance for 3Q12, EPS would have been about 8 cents lower and below consensus. Offsetting the gain on the Courtyard JV sale could be the loss of income from the sale of the corporate housing business which MAR has yet to quantify.


Some takeaways:

  • Room growth was disappointing in the quarter.  Excluding the sale of the Courtyard JV, rooms at the end of 2Q were still 5k lower than we estimated.  System-wide room growth was only 1.7%.  Gross room additions for the year were reduced by 5,000 at the midpoint due to opening delays.
  • On the positive side, absolute dollar ADRs were higher than we modeled
  • Fee income of $342MM came in $8MM below the midpoint of MAR’s guidance
    • Base fees only grew 4.4%.  Base fees as a % of estimated managed room revenues decreased to 4.7%, down 20bps YoY.  2Q was the 3rd consecutive quarter of declines.
    • Incentive fees increased 12%, below the 20% growth annual rate given on the last call.  NA fees grew 15% and International fees increased 10.4% - both slowed sequentially.  The % of hotels paying incentive fees increased by 1% QoQ.
    • Excluding fees on timeshare, which we estimate at $15MM in 2Q, franchisee fees grew 8.4% YoY.
  • For owned, leased, corporate housing and other gross margin came in $23MM above the midpoint of MAR’s guidance
    • Termination fees were up $12MM YoY
    • We believe that the $9MM jump in branding and credit card fees include some one-time items and do not expect to see this type of growth for 2H12
    • Benefit of $2MM of business interruption related to the Tsunami in Japan
    • Excluding branding and termination fees, we believe that gross margin would have been $22MM, which still represents a nice 5% increase in margin to 10% YoY.
    • Marriott mentioned that it sold its corporate housing business as one of the reasons for lowering guidance but made no further mention of the transaction in the release
  • SG&A would have increased 6% if not for some one-time charges and higher reserves for guarantees in the quarter.  MAR’s full year guidance for a 3.4% increase SG&A implies a YoY decrease in SG&A for the 2H12.

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The Macau Metro Monitor, July 12, 2012




Singapore's Casino Regulatory Authority (CRA) probe against Resorts World Sentosa (RWS) is underway over alleged reimbursements of casino entry levies.  The investigation, which started almost a year ago, is understood to allegedly involve hundreds of incidences of these illegal reimbursements.  The probe is believed to have prompted RWS to take the decision to suspend several senior executives, including one Senior Vice-President. 


Breaches of the Act can result in the following disciplinary actions: Cancel or suspend the casino license, vary the terms of the license, issue a letter of censure, or impose a financial penalty up to S$1 million.  Multiple reimbursements can constitute just one breach.  


In May 2011, RWS was fined S$200,000 for illegal reimbursements of casino entry levies.  The penalty was for an incident in July 2010 when a senior management staff member paid for the entry levies of more than 10 reporters and photographers covering the launch of the casino's Ladies Club.



According to Melina Leong, a spokeswoman for Sands China, the company is in talks to get an extension of the April 2013 time limit the government set to develop Parcel 3.  The company said in a May SEC filing that it planned to seek the extension.  If the extension is not approved, the company could have to take a charge for some or all of its $96.7 million in capitalized construction costs and land premiums as of March 31, 2012.



The Taiwanese government awarded regulatory powers on casino gambling to the Ministry of Transportation and Communications.  

Euro Yank

This note was originally published at 8am on June 28, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Go ahead, yank.”

-Margaret Hastings


So, I’m bearish. And I really want to know why the bulls are still bullish. If the bull case at  the Q1 top was ‘growth is back, earnings are good, and stocks are cheap’, their entire thesis has to have changed.


Sadly, with Growth Slowing, earnings at risk (73 of the S&P’s 500 companies have already guided lower), and “cheap” getting cheaper, we all know what the bull case is now – bailouts. When centrally planned, those are bearish long-term, too.


If you are like me, publically admitting you are bearish on both the immediate and long-term durations, why wouldn’t you have a big Cash position here? Even for central planners in the post 49BC era, economic gravity has proven to be hard to stop.


Back to the Global Macro Grind


On the morning of the 19th European Bailout Summit, Global Equity and Commodity markets are red and the Euro is getting yanked right back to $1.24.


Imagine that, after 18 attempts these people think we are all dumb enough to believe that this is going to be resolved. *Long-term Risk Manager Note: piling more debt and leverage on top of this sick puppy is only going to prolong the pain.


That’s what she said.


Corporal Margaret Hastings is one of the American heroes in the book I am finishing this week, Lost in Shangri-La – “The True Story of Survival, Adventure, and The Most Incredible Rescue Mission of World War II.”


The aforementioned quote comes from the point in the story where she was down to weighing about 90lbs, badly burned, and dealing with life threatening gangrene. The paratrooper medic was babying her wounds and she promptly reminded him that “If I were back at Fee-Ask, the GI medic would yank the bandages off and then scrub my legs with a brush.”


God Bless America’s bravest.


The world can learn a lot from realists who aren’t trying to prolong the inevitable. If you can’t handle the idea of letting free-market prices clear, the market’s underlying wounds do not care. Eventually, they need to be addressed. At this point, doing more of the same to perpetuate debt mounting and Growth Slowing has reached the height of political cowardice.


Stock, Commodity, Currency, and Fixed Income markets get that. That’s why, when I take a step back and look at the context of these no-volume rallies like we had yesterday, I get more concerned, not less.


Looking at the internals of the SP500 yesterday, here are the key points:

  1. PRICE – both TRADE (1336) and TREND (1365) lines of resistance remained intact
  2. VOLATILITY – both TREND (18.22) and TAIL (14.26) lines of support remained intact
  3. VOLUME – yesterday’s volume was one of the worst (on up days) of the year

On that last point, I have been measuring average down day volume versus up day volume in Q2 as a proxy for both conviction and money flows. Yesterday’s volume was down a shocking -28% versus the average down day volume of the last 6 weeks.


The other obvious point about yesterday’s rally was that the nasty stuff was up the most. In other words, the worst performing Sector (Energy is down -7.4% YTD) led low-volume gainers, whereas one of the best performing Sectors (Consumer Discretionary is +10.5% YTD) led decliners.


This daily observation is very short-term, but it certainly rhymes with my basic long-term conclusion that bailouts will only structurally slow growth at an accelerating rate. Up Energy/Food price days slow real (inflation adjusted) economic growth.


Whether central planners targeting “asset price inflation” get that or not yet remains the most obvious question Romney should be asking Obama, repeatedly, during the Presidential Debate. If I were Romney, I’d label Bernanke as Obama (and Bush’s) guy. I’d also constantly pound on the point that the Europeans are now behaving like Hank Paulson and Bernanke did.


What happens when the Europeans eventually release their Paulson/Geithner “bazooka” anyway?

  1. The Euro could easily snap $1.22 and put “parity” back in play
  2. On that, the US Dollar is going to rip – say $84-85 on the US Dollar Index
  3. Commodity prices (and the equity markets priced off their top-line assumptions) will keep getting rocked

Maybe we get that at the 23rd Summit?


This folks is what Paulson/Geithner/Bush didn’t understand about free market prices in 2008, so don’t expect Geithner/Hollande/Obama to get it now. After the 2008 $800B Bazooka was deployed, that’s why Paulson yanked himself towards a garbage can for immediate-term relief.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1545-1593, $88.16-93.39, $82.23-82.91, $1.24-1.26, 6085-6259, and 1320-1336, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Euro Yank - Chart of the Day


Euro Yank - Virtual Portfolio


TODAY’S S&P 500 SET-UP – July 12, 2012

As we look at today’s set up for the S&P 500, the range is 21 points or -0.63% downside to 1333 and 0.94% upside to 1354. 











    • Up versus the prior day’s trading of -955
  • VOLUME: on 07/11 NYSE 767.99
    • Increase versus prior day’s trading of 5.55%
  • VIX:  as of 07/11 was at 17.95
    • Decrease versus most recent day’s trading of -4.11%
    • Year-to-date decrease of -23.29%
  • SPX PUT/CALL RATIO: as of 07/11 closed at 1.10
    • Down from the day prior at 1.69 


10YR – fresh new #GrowthSlowing lows for the 10yr yield at 1.49% this morning and that’s really bad for the Financials, as the Yield Spread (10s/2s) also hits new lows at +123bps wide; not clear if Dimon’s fireside chat w/ the sell side’s finest tomorrow will change the economic gravity of the matter – the Yield Spread has never not gone back to flat in a big cycle (see 60yr chart from our deck yesterday). 

  • TED SPREAD: as of this morning 36
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.48%
    • Decrease from prior day’s trading at 1.52%
  • YIELD CURVE: as of this morning 1.23
    • Down from prior day’s trading at 1.26 

MACRO DATA POINTS (Bloomberg Estimates): 

  • 8:30am: Import Price Index M/m, June, est. -1.8% (prior -1%)
  • 8:30am: Initial Jobless Claims, July 7, est. 370k (prior 374k)
  • 9:45am: Bloomberg Consumer Comfort, July 8 (prior -37.5)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas change
  • 11am: Fed to sell $7b-$8b coupon securities in 7/15/2013 to 1/31/2014 range
  • 1pm: U.S. to sell $13b 30-yr bonds (reopening)
  • 2pm: Monthly Budget Stmt, June, est. $60b (prior $43.1b)
  • 2pm: NAHB midyear forecast
  • 3:40pm: Fed’s Williams speaks in Portland, Ore. 


    • House, Senate in session
    • Senate Energy meets to review progress on eliminating environmental hazards at abandoned National Petroleum Reserve oil wells in Alaska, 9:30am
    • House Energy panel holds hearing on proposed legislation to limit government programs backing alternative energy, 9:15am
    • House Science panel holds hearing on spurring economic growth through NASA-derived technologies, 10am
    • Dept. of Labor to announce settlement with BP regarding 2005 explosion at Texas City refinery, 11am


  • Yahoo! holds annual meeting today
  • Yahoo! expected to name Levinsohn CEO: LA Times
  • Blackstone teams up with investors for ING Asia insurance bid
  • Supervalu sinks on strategic review, dividend suspension
  • Peregrine customers’ claims priced at 25 cents on dollar
  • ECB says overnight deposits fall to lowest in 7 mos.
  • Maple, TMX Group obtain recognition orders from BCSC, ASC
  • Dentsu buys Aegis in $4.9b deal to create global media, marketing network
  • Peugeot shuts France plant, cuts extra 8,000 jobs; GM owns 7% of Peugeot
  • JPMorgan is No. 1 stock picker in buy-side survey
  • CFTC poised to adopt client-fund safeguards after MF Global
  • DirecTV, Viacom talks continue as channels stay dark 


    • Cogeco Cable (CCA CN) 6am, C$1.06
    • Cogeco (CGO CN) 6am, C$0.99
    • Corus Entertainment (CJR/B CN) 7am, C$0.49
    • Fastenal (FAST) 7am, $0.37
    • Astral Media (ACM/A CN) 7:55am, C$1.01
    • Progressive (PGR) 8:30am, $0.27
    • Commerce Bancshares (CBSH) 9am, $0.72
    • Novagold (NG CN) 9:15am, $(0.06)
    • Resources Connection (RECN) 4pm, $0.72
    • Bank of the Ozarks (OZRK) 6pm, $0.52 


  • Gold 22% Rally to Record Seen by Sprott Amid Debt: Commodities
  • Refineries Doubling Shutdowns Signals Oil Slide: Energy Markets
  • Oil Falls on Signs Faltering Economy Is Eroding Fuel Consumption
  • Cocoa Declines After Drop in European Cocoa Grind; Sugar Gains
  • Goldman Lifts Grain-Price Forecasts as Drought Withers Fields
  • Gold Retreats as Fed’s Minutes Lack Additional Stimulus Signal
  • South African Platinum Output Falls for 11th Month on Prices
  • Aid Welcomed by Drought-Stricken States as Losses Seen Worsening
  • China Crushers Buy More Local Soybeans as Cost of Imports Jumps
  • Cooking-Oil Imports by India Fall as Rupee Drop Deter Buyers
  • Palm Oil Drops for a Third Day on Concern Slowdown Curbs Demand
  • Sandfire Proves Cheapest Copper Target on First Profit: Real M&A
  • Russia’s Stavropol Region Is Seen Reaping 40% to 45% Less Grain
  • IEA Sees Global Oil Demand Growth Pickup in 2013 on Economy
  • Copper Seen Falling Amid Further Signs of Worldwide Slowdown
  • Corn Advances After USDA Cuts Outlook on U.S., World Harvests 










ITALY – Mario wasn’t kidding; it’s time to get out – the MIB Index -1.1% leads losers this morning and moves right back into crash mode (> 20% peak/trough decline YTD); Italy looks more suspect here than Spain – we went through why its size concerns us on our Q3 Macro Themes Call yesterday – email us if you missed the call and want the replay/slides.






KOSPI – continues to be one of our most stealth leading indicators for Global Growth (particularly for Industrials and Tech), and apparently the South Koreans agree w/ us – they cut rates for the 1st time in 3yrs last night – and, contrary to popular #BailoutBull beliefs, that was not good for Asian stocks; KOSPI down hard on that -2.3% (Bearish Formation).










The Hedgeye Macro Team

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