Betting On Banks

Financials have been one of the best performing sectors in the S&P 500 this year. Looking specifically at the big banks out there, one can see that many of them have done quite well with some exceeding expectations and one name in particular that’s struggling to catch up to their peers.


The Financials SPDR ETF (XLF) is up +22.2% year-to-date and while that's an excellent return by any investor's standards, buying individual names pays off in the long run with the likes of Bank of America (BAC) and Goldman Sachs (GS) up +66.4% and +55.5%, respectively. The biggest loser of the bunch is Morgan Stanley (MS), whose +15.4% year-to-date performance doesn’t hold a candle the broader market or other banks.


Betting On Banks - BANKSchart


Takeaway: Casual Dining same-restaurant sales data for September was not positive for stocks in that category. We are bearish on $TXRH and $BLMN

Casual Dining trends do not seem to be supportive of consensus expectations; we are bearish on the casual dining space and see Texas Roadhouse (TXRH) and Bloomin’ Brands (BLMN) as the best opportunities on the short side.


Knapp Track


According to Malcolm Knapp, estimated Casual Dining comparable restaurant sales growth for September 2012 was -0.8%.  The sequential change, in terms of the two-year average trend, was -5 bps.  This implies 3Q comps of 0.4% for casual dining.


Guest counts declined -2.5% versus September 2011.  The sequential change, in terms of the two-year average trend, was flat.  This implies 3Q traffic of -1.8% for casual dining.  





We continue to believe that consensus is far too bullish on casual dining top-line trends.  Anemic real wage growth is just one of many macroeconomic headwinds that we believe merit caution going forward.  The Restaurant Value Spread, as we wrote about here, is suggesting that inflation at restaurants outstripping inflation at grocery stores may be having an adverse impact on same-restaurant sales growth this year. 


The casual dining sales index shown below is a simple average of a broad selection of restaurant companies’ same-restaurant sales data.  The Knapp Track Index, which we are not permitted to illustrate directly in chart form, leads the index depicted below (correlation=0.96). 




Howard Penney

Managing Director


Rory Green





OFS: Energy Expectations

The onshore oilfield services (OFS) industry has weaker fundamentals than the consensus currently believes and valuations are still too high for companies like Baker Hughes (BHI) and Flotek Industries (FTK). Coinciding with our #EarningsSlowing theme, as OFS companies report for Q3, they could guide lower for 2013. Energy Analyst Kevin Kaiser lays out his case:


Nearly every business line that services the North America land oil and natural gas E&P sector is oversupplied due to equipment overbuild and slowing demand.  The industry could face years of excess capacity and weak profit margins.  Capacity utilization for high end drilling rigs and hydraulic fracturing equipment is now in the mid-80’s by our estimates, down from the high-90’s in 4Q11 and 1Q12.



OFS: Energy Expectations  - energyslowing



As you can see in the above chart, revenue growth expectations are lower for 2012 and 2013 compared with 2011. Margin compression and negative top line growth will likely continue for these companies. We’re not ready to get long these stocks yet, even after post-earnings pullbacks. When consensus estimates come down,

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Upping forecast to 3-9% growth for September


As expected, average daily table revenues dropped off considerably following Golden Week, but is still up 20% over last year.  We are now projecting YoY GGR growth of 3-9% for the full month of October.  Remember that October of 2011 was a monthly record and up 42% over October 2010.  Hold was also above normal last year.  This is a much more difficult comparison than either November or December so we are expecting sequentially accelerating growth. 




For market share, MPEL, Galaxy, and LVS seem to be enjoying the strongest month relative to trend.  WYNN recovered somewhat but still remains well below trend.  MGM has also lost share.



European Banking Monitor: European Financial Swaps Mostly Tighter

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:


*Sovereign Swaps around the world were largely flat week-over-week with the largest single move coming from Ireland, where swaps tightened 28 bps to 253 bps. Spain and Portugal saw their swaps widen by 4 and 8 bps, respectively, while France and Italy saw their swaps tighten by 4 and 8 bps, respectively.


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 to date.



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





European Financials CDS Monitor – It was a fairly uneventful week for default swap action on European banks. The trend was broadly lower (swaps tightened) with a median improvement of 10 bps WoW, and an average decline of 6 bps. Overall, 28 out of 37 European reference entities we track tightened.


European Banking Monitor: European Financial Swaps Mostly Tighter - 11. banks


Euribor-OIS spread – The Euribor-OIS spread tightened by 1 bp to 12 bps, and continues to make new, multi-year lows. 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: European Financial Swaps Mostly Tighter - 11. euribor


ECB Liquidity Recourse to the Deposit Facility – This series has been generally trending lower since July of this year. 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: European Financial Swaps Mostly Tighter - 11. facility

Taking Risks







When Felix Baumgartner dove from the edge of space yesterday for the Red Bull Stratos event, he certainly knew the risks involved and how to manage them accordingly. Risk management is a process that can be applied outside of financial markets and Baumgartner’s endeavor is indicative of that. 


Looking at our signals for the various asset classes we cover this morning, we’ll continue to trade things like gold in the $1 range and the S&P 500 between 1. Staying within your parameters is the key to success - be it the market or jumping out of a balloon 24 miles high in the sky.




As we’ve said before: get the US dollar right and you’ll get a lot of other things right. That is the case early this morning as the US dollar made a move to the upside, taking commodity prices down with it. Oil, gold and the euro have all fallen materially and should the dollar have some more chutzpah in it to travel higher, expect more downside for commodities. After all, some commodities took a beating last week with copper down -2.2% and gold down -1.4%. Remember the Bernanke Correlation. The Fed is busy devaluing the dollar and driving up commodity prices. When the Fed is out of bullets and pondering what to do next and if Mitt Romney is elected President, there's a chance we could actually get back to strengthening our currency on a long-term basis.






Cash:                Flat


U.S. Equities:   DOWN


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  UP


Int'l Currencies: Flat  








Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TAIL:      LONG            



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.

  • TAIL:      LONG



While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

  • TAIL:      LONG







“What have we learned? Deadly beast? $222 trillion notional derivatives now held by FDIC insured US banks vs $201 trillion when Lehman failed” -@Convertbond




“Silent gratitude isn't very much use to anyone.” -Gertrude Stein




128,000 feet above earth. The distance Felix Baumgartner jumped from his capsule setting new world records in the Red Bull Stratos event.



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