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European Banking Monitor: QE3 has Landed... Now What?

Takeaway: We caution against riding Bernanke and Draghi's coattails. We view fiscal integration and slow growth as risks ahead.

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:

 

*QE3 has landed, what now? - Banks swaps and sovereign swaps in America, Europe, and Asia all tightened WoW, benefitting from the Fed's QE3 announcement on Thursday. Now what?

 

We caution that there is risk in simply riding Bernanke and Draghi’s coattails. We stand by the view that European economies have a lengthy runway to get out from under the debt traps that many have created over the last five years. We continue to view the Eurozone experiment as flawed and see headwinds ahead in creating a fiscal union. Finally, rising commodity costs and sticky to rising inflation rates should present further near-term pressures.

 

Today’s equity markets show that despite all the optimism behind Draghi’s unlimited sovereign bond purchasing program (OMTs) and Bernanke’s to” infinity and beyond” low interest rates over the last two weeks, European equities are selling off as the realities of the challenges and risks ahead for the Eurozone project return to focus.

 

On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated.

 

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If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

(o)

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European Financials CDS Monitor – French, German, Italian, Spanish, and Greek bank swaps all traded lower last week. Spanish banks were notably improved last week, with some reference entities seeing swaps decline by more than 20%.

 

European Banking Monitor: QE3 has Landed... Now What? - 33. banks

 

Euribor-OIS spread – The Euribor-OIS spread tightened by 1 bps to 17 bps. We're not sure how much lower this series can go from here.  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.

 

European Banking Monitor: QE3 has Landed... Now What? - 33. 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.  

 

European Banking Monitor: QE3 has Landed... Now What? - 33. facility


IDEA ALERT: SHORT BLMN

Takeaway: $BLMN is immediate-term TRADE overbought.

Today, Keith shorted the BLMN love-fest we are seeing from the sell-side at $15 today post IPO initiations of coverage. Management is confident in its ability to achieve its stated goals and the sell-side seems convinced also.  

 

As we see it, there has clearly not been much progress in fixing this company since it was taken private in 2006.  The primary difference in the company's position, from our purview, is that casual dining now faces a more uncertain outlook dictated by demographic and economic headwinds.  To achieve its goals, the company requires strong sales and management attacking the middle of the P&L.  The macro environment will hamper BLMN's efforts and ultimately, we believe, actual results are likely to come in below where expectations currently sit.  Among the macro issues we see as relevant for BLMN are the following:

  • Accelerating food inflation
  • Soft labor market
  • Rising gas prices
  • Long-term demographic headwing

To conclude, we do not subscribe to the emerging consensus that daypart expansion, enhanced marketing, or other "easy" drivers of earnings growth are ready-to-go, sure-fire winners for BLMN.  As we've said before, Don Corleone would wonder why such generosity is being afforded the investment community.  Why weren't these initiatives undertaken prior to the company coming public? 

 

We do not believe that a lot has changed since 2007 where BLMN is concerned.  The stock is immediate-term TRADE overbought.

 

IDEA ALERT: SHORT BLMN - BLMN levels1

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 


AN EVEN STRONGER WEEK IN MACAU

Takeaway: Raising our Sept GGR growth forecast to 14-21%

Table revenues were very strong this past week in Macau averaging HK$868 million per day.  Average daily table revenues increased 26% YoY, 10% over the prior week, and was 12% higher than August.  We must caution that business typically slows in the last week of September as we approach Golden Week.  This year, however, Sands Cotai Central will open Pacific and the Sheraton rooms which could offset some of the seasonal slowdown. 

 

We are raising our full month September GGR forecast to HK$23.5-25.0 billion which would represent YoY growth of 14% to 21%.  We continue to be bullish on the Macau stocks.

 

AN EVEN STRONGER WEEK IN MACAU - macau1

 

After a hold impacted start to the month, LVS’s share climbed back towards normal while WYNN moved lower but still way above trend.  SJM and MGM are both having above trend months.  However, it’s still too early in the month to reach any definitive market share conclusions.

 

AN EVEN STRONGER WEEK IN MACAU - macau2


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Burning The Buck

BURNING THE BUCK

 

 

CLIENT TALKING POINTS

 

BURNING THE BUCK

Debasing the dollar is the name of the game these days. With the growth slowing, we’ve increased our fixed-income asset allocation and have it nearly maxed out at 30%. Why? We’re buyers of the TLT ETF on red. Stocks and commodities may get a short-term jolt when Bernanke comes out swinging, but after the party dies down, it’s time to reconsider what to do with your portfolio. You can’t just keep holding on to longs and praying for more Jackson Hole-esque speeches. Yields on the 10-year are up, commodities are up and oil is up with gasoline approaching $4 a gallon (it’s already here in New York). These shenanigans will continue week after week as the US dollar is destroyed by the Fed as It tries to inflate our economy. But things change – remember that.

 

 

CHINA CONTINUES TO DETERIORATE

Chinese stocks have been getting smoked and are down nearly -16% since May. And overnight, stocks dropped -2.1%. If this isn’t a sign that China growth is slowing, then we don’t know what is. People still keep warning of a coming “crash” in China. That crash has already happened and is a thing of the past. The crash is continuing, not beginning. And with China down, copper continues to head lower with futures falling -1% this morning and failing March highs. “If you build it, they will come,” worked well for Kevin Costner in Field of Dreams but it doesn’t work for the Chinese housing market. There won’t be any kind of stimulus a la Bernanke anytime soon because they realize the repercussions of higher oil prices and food prices.

 

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  DOWN

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE INC (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“Overheard on Wall and Broad: "Is this an Occupy protest or are they filming the sequel to Newsies?”” -@ReformedBroker

 

 

QUOTE OF THE DAY

“A superstition is a premature explanation that overstays its time.” –George Iles

                       

 

STAT OF THE DAY

Italy’s short selling ban expired Friday night. Have at it.

 

 

 


THE M3: LAND FREEZE/MSC; SJM COTAI; GUANGZHOU-ZHUHAI RAILWAY; GONGBEI PORT; S'PORE HOME SALES; VISA

The Macau Metro Monitor, September 17, 2012

 

 

LAND FREEZE FOR CASINOS STILL ON: FRANCIS TAM Macau Business

Secretary Tam said that the freeze on new land for casinos continues to remain in place.  In 2008, Macau CEO Edmund Ho Hau Wah announced a freeze on new land for casinos but pledged to honour existing agreements with operators.  That included all casino projects filed before 2008 and still under consideration. But Mr Tam said that any gaming operator could still file requests to the gaming regulator to open new casinos, if it didn’t involve a land grant.

 

According to some analysts, this is how MPEL is likely to include a casino at its Studio City project in Cotai. This method has previously been allowed for gambling facilities in new hotel-casinos that are not fully-owned by a gaming operator, as it is the case of Studio City.  Because the land is granted to companies that don’t have a casino licence (or are not fully-owned subsidiaries of a concessionaire), the inclusion of gaming facilities in the land contract could raise legal issues.


In such cases, the request to include a casino is therefore made separately from the land concession request, and by a licenced gaming operator. The gaming licence holder requests government approval to operate gambling facilities as a service provider at those properties.  This is the kind of arrangement that allowed the Ponte 16 and L’Arc casino-hotels to accommodate gaming facilities.

 

SJM WANTS TO HAVE 600 TABLES IN COTAI Macau Business

CEO Ambrose So said SJM wants to have up to 600 live gaming tables in Cotai.  

 

GUANGZHOU TO ZHUHAI RAILWAY COMMENCED IN OCTOBER Macau Daily News

The Guangzhou-Zhuhai Intercity Railway between Jinding and Gongbei, will be operational in October.  The extension connecting Gongbei and Hengqin will open by the end of 2012.  Guangdong and Macau has reached an agreement on the route design so that the extended section will have a seamless connection with Macau's light rail system. The next extension project will connect Hengqin with the Zhuhai Airport.

 

GONGBEI PORT EXPANSION TO BE COMPLETED BY END OF 2012 Macau Daily News

Phase I of the Gongbei port expansion project is expected to be finished in early 2013, expecting to handle a daily passenger capacity of up to 350,000 and when the entire project is completed, the clearance capacity can be raised to 500,000 people daily.

 

SINGAPORE PRIVATE HOME SALES DOWN 27% IN AUGUST Reuters

Developers in Singapore sold 1,421 residential units last month excluding executive condominiums (EC), a category of apartments reserved mainly for Singaporeans, down from 1,946 in July, but higher than 1,371 in June.  Including ECs, August home sales was 1,539 units, down 25.7% from July.  The decline in home sales in August could have been partly due to the Hungry Ghost Month which typically sees fewer buyers in the market. 

 

MAINLAND CONSIDERING MULTI-ENTRY VISA FOR ZHUHAI CITIZENS Macau Daily News

Beijing is considering to grant Zhuhai citizens multi-entry visa to Macau, however, a timetable for such is yet to be confirmed.  Responsible authorities are still studying on the feasibility and consulting the Macau government to assess whether the checkpoint could handle the passenger capacity and also whether Macau can handle an increase in tourist arrivals.  Qualified permanent residents account for 1 million.

 


MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT?

Takeaway: Impressive rallies around the globe. Yield spreads rose as default risk plunged. Even Chinese steel caught a bid.

Key Takeaways

*QE3 has landed, what now? - Banks swaps and sovereign swaps in America, Europe, and Asia all tightened WoW, benefitting from the Fed's QE3 announcement on Thursday. Where do we go from here? We've profiled how the components and subsectors of the financial space in the United States have acted during the last 2 quantitative easing programs in a note entitled "Quantitative Easing Redux: Winners and Losers". In this note we provide a framework for positioning in the months ahead. The note can be found here.

 

*Commodity prices up, junk bond yields down - The JOC commodity index rose again WoW, marking only the second consecutive positive week for the index since the middle of 2011. Meanwhile, junk bond prices continue to make new highs. 

 

* The 2-10 spread widened sharply WoW. Finally, some reprieve for bank margins, though it seems counterintuitive to think this can last given the amount of firepower the Fed is aiming at the long end of the curve.

 

* High Yield rates fell 36 bps last week, ending the week at 6.51% versus 6.86% the prior week.

 

* MCDX: Last week municipal default swaps tightened 16 bps, ending the week at 136 bps.  

 

* Even Chinese steel gets a little lift - Chinese steel rose 2.6% WoW.

 

* Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 3.2% downside to TRADE support. 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Positive / 11 of 12 improved / 0 out of 12 worsened / 2 of 12 unchanged

• Intermediate-term(WoW): Positive / 9 of 12 improved / 2 out of 12 worsened / 2 of 12 unchanged  

• Long-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - Summary2

 

1. American Financials CDS - QE3 lifts all boats.  

 

Tightened the most WoW: MS, RDN, GS

Tightened the least WoW: COF, MBI, CB

Tightened the most WoW: BAC, GS, MS

Tightened the least MoM: COF, MBI, JPM

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - American CDS

 

2. European Financials CDS -  French, German, Italian, Spanish, and Greek bank swaps all traded lower last week. Spanish banks were notably improved last week, with some reference entities seeing swaps decline by more than 20%.

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - European

 

3. Asian Financial CDS - The global enthusiasm made it all the way to Asia, where Japanese, Chinese and Indian banks all saw default swaps tighten.

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - Asian

 

4. Sovereign CDS – Sovereign Swaps tightened around the globe last week. As the table below shows, the market thinks the ECB and Fed have driven global risk to the lowest levels this year.  

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - Sov table

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - Sov 1

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 36 bps last week, ending the week at 6.51% versus 6.86% the prior week.

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - HY

 

6. Leveraged Loan Index Monitor The Leveraged Loan Index rose 12.3 points last week, ending at 1728.

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - LLI

 

 

7. TED Spread The TED spread fell 2 bps last week, ending the week at 28.6 bps this week versus last week’s print of 30.4 bps.

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - TED

 

8. Journal of Commerce Commodity Price IndexThe JOC index rose 4.3 points, ending the week at 5.34 versus 1.0 the prior week.

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - JOC 2

 

9. Euribor-OIS spread –  The Euribor-OIS spread tightened by 1 bps to 17 bps. We're not sure how much lower this series can go from here.  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.

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - Euribor OIS

 

10. 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: QE3 HAS LANDED ... NOW WHAT? - ECB

 

11. Markit MCDX Index Monitor – Last week spreads tightened 16 bps, ending the week at 136 bps versus 152 bps the prior week. 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 16-V1. 

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - MCDX

 

12. Chinese Steel - Steel prices in China rose 2.6% last week, or 89 yuan/ton, to 3477 yuan/ton. In the last four months, Chinese construction steel prices have fallen ~16%. The trend in this series reflects significant weakness in China's construction market. Chinese steel rebar prices have been generally moving lower since August of last year. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - CHIS

 

13. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 161 bps, 20 bps wider than a week ago.

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 3.2% downside to TRADE support. 

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - XLF

 

Margin Debt - July: +0.61 standard deviations 

NYSE Margin debt fell  to $278 billion in July from $285 billion in June. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. Overall 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 July. 

 

MONDAY MORNING RISK MONITOR: QE3 HAS LANDED ... NOW WHAT? - NYSE margin debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser.   

 


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