The Economic Data calendar for the week of the 19th of November through the 23rd is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Takeaway: No great compromise or roadmap in Euro-land ahead.
Positions in Europe: Short EUR/USD (FXE)
Asset Class Performance:
EUR/USD: Keith added FXE to our Real-Time Positions at $127.06. Our EUR/USD TRADE range is $1.26 – 1.28 with a TREND resistance of $1.31.
R is for Recession:
It came as little surprise this week but the Eurozone officially moved into recession with preliminary Q3 GDP showing a -0.1% contraction quarter-over-quarter following a -0.2% contraction in Q2.
Now the task is sorting through the timing of an eventual recovery, which we think could have a long runway.
Where We Are At?
Eurozone Finance Ministers agreed to allow Greece to implement its austerity program over 4 years instead of 2 years this week but postponed a decision on the next tranche of Greek aid (€31.5B) until either next Monday’s Eurozone Finance Ministers Meeting or Thursday’s EU Summit. A big point of contention is the rift between the IMF and Eurogroup over Greece’s debt reduction schedule. The IMF wants Greece’s debt to fall to 120% of GDP by 2020 while the Eurogroup says by 2022. While cohesion is needed, what’s more disturbing is both parties will set a target that they both know Greece has no chance of attaining.
Further, the IMF continues to push for an official debt restructuring, while the Eurogroup has rejected the haircut option. It appears the path of least resistance might be improving financing rates and lengthening the maturity of the loans.
Longer-term we believe there is a high likelihood that no significant policy action comes in the remaining weeks of 2012. As a reminder, some of the main topics that Eurocrats are wrestling with are:
In terms of setting up a Banking Union and Fiscal Union, we believe the two are dependent on each other. While more attention has been given to a Banking Union recently, we believe Eurocrats reaching an agreement on a Fiscal Union over the near term is incredibly unlikely as countries are unwilling to part with their fiscal sovereignty. This could be one factor to put downside pressure in the cross.
On Spain, we think the sovereign asking for a bailout is a question of when and not if. The recent rumor that Spain may look to the IMF for a loan would reflect the likelihood of more favorable terms versus the European Commission and ECB’s ‘conditionality’ for aid via the ESM or OMT.
Beyond the headline news, and broader negative data out this week (see below in the section “Data Dump”), there were a couple of charts that caught our attention this week:
The European Week Ahead:
Sunday: Nov. UK releases Rightmove House Prices
Monday: Eurozone Finance Ministers Meeting; Sep. Eurozone Construction Output; Sep. Italy Industrial Orders and Sales; Sep. Greece Current Account
Tuesday: Oct. Germany Producer Prices
Wednesday: BoE Minutes; Oct. UK Public Finances, Public Sector Net Borrowing; Sep. Spain Trade Balance
Thursday: EU Summit and ECB Governing Council Meeting; Nov. Eurozone PMI Composite, Manufacturing and Services – Advance, Consumer Confidence – Advance; Nov. Germany PMI Manufacturing and Services – Advance; Nov. UK CBI Trends Total Orders and Selling Prices; Nov. France PMI Manufacturing and Services - Preliminary
Friday: Nov. Germany IFO Business Climate, Current Assessment and Expectations; 3Q Germany GDP – Final, Domestic Demand, Exports, Capital Investment, Government Spending, Construction Investment, Imports, Private Consumption; Oct. UK BBA Loans for House Purchase; Nov. France Production Outlook Indicator, Business Confidence Indicator; Oct. Spain Producer Prices; Sep. Italy Retail Sales
NOV 26 – Finance Ministers may sign off on Greece’s next bailout tranche, 31.5B EUR
NOV 27 – AFME 4th Annual Spanish Funding Conference in Madrid
DEC 1 – Beginning of the Russian Presidency of G20
DEC 3 – Eurogroup Meeting in Brussels
DEC 6 – ECB Governing Council Meeting
DEC 12-13 – First public consultation between the Russian government, B20 Coalition and international civil society representatives on G20 agenda for 2013 (in Moscow)
DEC 20 – ECB Governing and General Council Meeting
APR 2013 – Parliamentary elections in Italy
MAY 2013 – Presidential elections in Italy
European Day of Action and Solidarity – unprecedented and coordinated cross-border protests against austerity measures on Wednesday with 40 unions participating across 23 countries (strikes mainly in Italy, Spain, Greece, and Portugal).
Spain - El Confidencial, without citing sources, reported that Spain is considering requesting a credit line from the IMF as an alternative to a European bailout. The paper highlighted the support for Spain recently expressed by both President Obama and IMF leaders, along with concerns about Germany's resistance to additional funding for Spain and its continued insistence on austerity prescriptions.
Spain - the government passed a decree to prevent low-income families being evicted for defaulting on their mortgages, and plans to create a stock of homes that can be rented out cheaply.
Banking Union - some hawkish comments on the proposed banking union from ECB governing council member (and Bundesbank President) Jens Weidmann in a guest column in the German financial daily Handelsblatt. He said that establishing the ECB as the single supervisory mechanism risks compromising the central bank's primary goal of price stability. He also noted that a banking union should not be rushed, while adding that it would need a resolution mechanism that should be funded by the banks themselves, and not by European taxpayers. In addition, he argued that legacy risks should be the responsibility of respective member states.
Preliminary Q3 GDP:
Eurozone -0.6% Y/Y (inline) vs -0.4% in Q2 [-0.1% Q/Q (inline) vs -0.2% in Q2]
Germany 0.9% Y/Y (exp. 0.8%) vs 1.0% in Q2 [0.2% Q/Q (exp. 0.1%) vs 0.3% in Q2]
France 0.2% Y/Y (exp. 0.0%) vs 0.1% in Q2 [0.2% Q/Q (exp. 0.0%) vs -0.1% in Q2]
Italy -2.4% Y/Y (exp. -2.9%) vs -2.4% in Q2 [-0.2% Q/Q (exp. -0.5%) vs -0.7% in Q2]
Netherlands -1.6% Y/Y (exp. -0.5%) vs -0.4% in Q2 [-1.1% Q/Q (exp. -0.2%) vs 0.1% in Q2]
Czech Republic -1.5% Y/Y (exp. -1.2%) vs -1.0% in Q2 [-0.3% Q/Q (exp. -0.2%) vs -0.2% in Q2]
Hungary -1.5% Y/Y (exp. -1.3%) vs -1.5% in Q2 [-0.2% Q/Q (exp. -0.1%) vs -0.4% in Q2]
Romania -0.6% Y/Y (exp. 0.0%) vs 1.1% in Q2 [-0.5% Q/Q (exp. -0.4%) vs 0.5% in Q2]
Eurozone ZEW Economic Sentiment -2.6 NOV vs -1.4 OCT
Europe27 New Car Registration -4.8% OCT Y/Y vs -10.8%
Eurozone Industrial Production -2.3% SEPT Y/Y (exp. -2.2%) vs -1.3% AUG [-2.5% M/M vs 0.9% AUG]
Germany Wholesale Price Index 4.6% OCT Y/Y vs 4.2% SEPT
Germany ZEW Current Situation 5.4 NOV (exp. 8) vs 10 OCT
Germany ZEW Economic Sentiment -15.7 NOV (exp. -10) vs -11.5 OCT
UK PPI Input 0.1% OCT Y/Y (exp. -0.5%) vs -1% SEPT
UK PPI Output 2.5% OCT Y/Y (exp. 2.5%) vs 2.5% September
UK Retail Price Index 3.2% OCT Y/Y vs 2.6% September
UK ILO Unemployment Rate 7.8% SEPT vs 7.9% AUG
UK Jobless Claims Change 10.1K OCT vs 0.8K September
UK Retail Sales w/ Auto Fuel 0.6% OCT Y/Y (exp. 1.6%) vs 2.4% SEPT
France Prelim. Q3 Wages 0.4% Q/Q vs 0.5% in Q2
Spain Q3 GDP Final -1.6% Y/Y (inline)
Spain House Transactions 0.9% SEPT Y/Y vs 3.0% AUG
Portugal Prelim Q3 GDP -0.8% Q/Q (exp. -0.6%) vs -1.1% in Q2 [-3.4% Y/Y (exp. -3.2) vs -3.2% in Q2]
Portugal Unemployment Rate 15.8% in Q3 vs 15.0% in Q2
Switzerland Producer and Import Prices 0.4% OCT Y/Y vs 0.3% September
Switzerland Credit Suisse ZEW Survey Expectations -27.9 NOV vs -28.9 OCT
Ireland PPI 2.9% OCT Y/Y vs 2.2% SEPT
Greece Prelim Q3 GDP -7.2% Y/Y vs -6.3% in Q2
Sweden Unemployment Rate 7.1% OCT vs 7.4% SEPT
Netherlands Retail Sales -0.1% SEPT Y/Y vs 0.9% AUG
Iceland Unemployment Rate 5.2% OCT vs 4.9% SEPT
Russia Producer Prices 8.8% OCT Y/Y vs 11.6% SEPT
Russia Industrial Production 1.8% OCT Y/Y vs 2.0% September
Russia Preliminary Q3 GDP 2.9% Y/Y vs 4.0% in Q2
Estonia Preliminary Q3 GDP 1.7% Q/Q vs 0.5% in Q2 [3.4% Y/Y vs 2.2% in Q2]
Estonia Unemployment Rate 5.8% OCT vs 5.7% SEPT
Estonia Unemployment Rate 9.7% in Q3 vs 10.2% in Q2
Latvia Unemployment Rate 13.5% in Q3 vs 16.1% in Q2
Hungary Industrial Production 0.6% SEPT Y/Y vs 1.8% AUG
Slovenia Unemployment Rate 11.5% SEPT vs 11.6% AUG
Turkey Consumer Confidence 85.7 OCT vs 88.8 September
Turkey Unemployment Rate 8.8% AUG vs 8.4% JUL
Interest Rate Decisions:
(11/14) Iceland Sedlabanki Interest Rate HIKED 25bps to 6.00%
Takeaway: We are likely to hit the Debt ceiling right around Christmas day; that may be used politically to hamper or delay Fiscal Cliff negations.
While much Manic Media attention has been given to Fiscal Cliff negotiations in recent weeks (and rightfully so), we on the Hedgeye Macro Team continue to warn clients that the timing of the Debt Ceiling breach dramatically lowers the probability of a “grand compromise” that we think the throng of investors that remain bullish on the equity market is likely hoping for.
As an aside, per the latest BofA/ML fund manager survey, hedge fund net exposure to equities at 40% is the highest since JUN ’07 – coincidentally right around the last time we saw the corporate earnings cycle roll over like we are seeing today (refer to our Q4 Macro Theme of #EarningsSlowing for more details).
Per everyone’s favorite Treasury Secretary Tim “The ‘Tools’ Man” Geithner, “the government could bump into its borrowing limit before the end of the year”, though he was quick to remind the audience that “the Treasury has enough tools to keep the government afloat into early 2013”.
We’ll take his word on the latter part of his statement, as we learned from MAY 16, 2011 to AUG 2, 2011 (~2.5 months) that the Treasury Secretary does indeed have a robust bag of tricks to help the government stave off a technical default. As a reminder, those tools include (but are not limited to):
It’s worth noting that each of these steps is overwhelmingly benign as it relates to any implications for the economy and/or financial markets. To the extent you’re interested, however, or would like to brush up on historical Debt Ceiling impasses for any clues as to how this one may play out (1985, 1995-96, and 2002-03), please review our MAY 11, 2011 note titled: “FEAR MONGERING MEETS BRINKSMANSHIP: A COMPREHENSIVE GUIDE TO NAVIGATING THE DEBT CEILING DEBATE”. The conclusion of that note was as follows:
“We expect the current debt ceiling debate to heat up substantially in the coming weeks, resulting in a measured pickup in volatility across global financial markets, primarily as a result of increased volatility in the US Dollar being driven by the whims of D.C. politicking. Further, we expect the debt limit to be increased prior to any sort of default on any of the federal government’s obligations. And within that legislation, we would expect to see the groundwork laid for potentially meaningful fiscal reform ahead of the FY12 budget debate – an event that is likely to prove dollar bullish when it’s all said and done.”
With the looming Fiscal Cliff (inked back in late JUL ’11; ~$8 TRILLION in tax hikes and spending cuts over the long term) posing as “the groundwork laid for potentially meaningful fiscal reform” and the US Dollar Index up about +8% since publication (in spite of now-perpetual QE and Bernanke perpetually kicking the can down the road on interest rate hikes), that call has proved to be rather prescient.
Jumping ahead to the current Debt Ceiling showdown, we do not take Geithner’s words on the timing of the upcoming breach at face value. Rather, we conducted our own analysis that suggests we are likely to hit the Debt ceiling right around Christmas day. More specifically, the US Treasury is on pace to breach the Debt Ceiling on 12/24 in Scenario A (the average pace of daily net debt issuance for business days during FY13) and on 12/26 in Scenario B (the average pace of daily net debt issuance for business days during FY11-FY13).
It may be that the Treasury dramatically slows or stops issuing new debt altogether around Christmas time, but the point remains: the US government is likely to breach its Congressionally-imposed $16.394 TRILLION Debt Ceiling right around then. Notably, this late-DEC estimate is a bit shy of our previous projection of JAN ’13.
The paramount implication of a late-DEC Debt Ceiling breach is that it would likely give the GOP – particularly House Republicans – bargaining leverage in any fiscal cliff negotiations. To some extent, one could’ve argued that the public handed the leadership conch to the Democrats based on the recent election results, but a renewed Debt Ceiling impasse could actually strengthen the Party’s resolve in any Fiscal Cliff negotiations. On the margin, that would be negative for US GROWTH over the intermediate term to the extent any cliff resolution is delayed and/or thwarted outright.
Per House Minority Leader Eric Cantor this week:
“Resolving the issues surrounding the fiscal cliff, especially the replacement of the sequester, and the next debt limit increase will require that the president get serious about real entitlement reform.”
Moreover, House Speaker John Boehner was out earlier in the week saying he would not allow Congress to duck tough decisions with another round of short-term measures. To the extent he holds the GOP true to his words, we could be looking at one messy political showdown in the coming weeks – especially if the Republican Party continues balk at any revenue increases outside of “dynamic scoring” (i.e. closing loopholes and reducing deductions).
As if Washington D.C. wasn’t messy enough…
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PENN’s transaction has implications for most gamers – all positive – but none potentially more significant than for ASCA.
Obviously from our comments today, we think ASCA is the most likely pursuer of PENN’s real estate strategy. In fact, we think it is actually likely – only the timing is uncertain. Even if it’s not for two years – following the opening of Mojito Point in Lake Charles – the market is right for ascribing value now. While the stock is already up 16% today, we don’t think the market has gone far enough today. We project total company value at $49 to $70 with a $59 midpoint in two years. Discounted, the midpoint value is still $47. And that’s with EBITDA/EPS projections below Street consensus.
Why does it make sense for ASCA? While leverage is not necessarily low, ASCA generates a huge amount of free cash flow. The balance sheet is in good shape. ASCA owns a lot of real estate. The only development is Mojito Point in Lake Charles which will open in 2014. That is probably the only real hold up and the reason why we are projecting a 2 year timeline of consummation. ASCA’s management team is up there with PENN as the two most focused on creating shareholder value and they are great operators. Leverage, while somewhat high at 5.5x will drop considerably following the opening of Mojito Point.
Even if ASCA decides against this strategy, investors should and will likely focus on free cash flow rather than EV/EBITDA following the PENN announcement. This bodes well for ASCA’s valuation. Even after the big move today, the FCF yield for 2013 is still 18%. The stock could support a yield that is half that in our opinion. So without a transaction (and our $47 valuation), ASCA could still be worth $35-40 with the re-value. We're not ready to go quite that high but the theoretical case can be made. Stay tuned.
Assuming a structure similar to PENN’s OPCO/PROPCO design, we came up with a value of $49-70/share off of our 2015 projections.
With Foot Locker (FL) putting up a solid quarter this week, Wall Street's concerns over slowing sales have been put to rest. Hurricane Sandy has affected inventories as well as future comp prospects, but we think Foot Locker still has potential for further upside in performance through year-end. We’re targeting $3 earnings per share for next year and think it’s entirely possible for Foot Locker to do that while still growing margins. We remain bullish on FL.
Takeaway: ASCA, PNK, and BYD are the only other candidates in our universe. unlikely for MGM, CZR, LVS, and WYNN
$53 per share is the midpoint of our value range
CONF CALL NOTES