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Bearish Notes In Energy

In addition to Techology and Utilities, Energy is one of three sectors that is bearish on our TRADE (3 weeks or less) and TREND (3 months of less) durations. The Energy Select SPDR ETF (XLE) continues to fall from September with a dead cat bounce occurring late last month. Our key levels to watch are Trade resistance at $71.64 and Trend resistance at $72.09. Our adage of “get the dollar right and you get a lot of other things right” applies to energy too. Watch the aforementioned levels as they get tested with the strengthening USD.

 

Bearish Notes In Energy - xle


IGT: UPGRADE LOOKS RIGHT

DB upgrades IGT ahead of Thursday’s analyst day

 

 

We take some flak for being critical of some of our competitors' research but we try to limit our criticism to times when we think it could affect a stock price and we disagree.  It’s only fair, however, that we give credit where credit is due.  We agree with DB’s upgrade of IGT.  It probably comes as no surprise to our clients as we’ve been consistently positive on the stock since our management visit and 10/1/12 post “IGT: IMPROVING 2013 EARNINGS VISIBILITY."

 

Here are the DB thesis points that we agree on (5 out of 6):

 

1) accelerating earnings and beatable Consensus numbers, which has historically correlated strongly with stock price performance

2) real free cash flow relative to peers which allows for accretive buybacks

4) two years of solid expansion demand which is likely to curb “earnings cliff” fears that center around F2014

5) a relatively free option on expansion in the social gaming segment

6) a historically inexpensive valuation and inexpensive valuation relative to peers despite the most stable outlook and most ample liquidity

 

To be fair, we are less confident on thesis point #3:

3) a gaming ops yield inflection in the F2H13 which should curb the primary bear case in the stock

 

We think gaming ops yield could stabilize but wouldn’t go so far as call it an inflection point.  Yield is still at risk but this is well-known so even stabilizing yield would probably be good for the stock.


The Good Fight

Client Talking Points

Tax Battles

As we head into December, the number one issue for America’s political class is the Fiscal Cliff. We have about three weeks until we hit our federal spending limits; can Congress get its act together to come to a compromise that will fix everything without kicking the can down the road? We don’t recommend holding your breath. Both Democrats and Republicans are battling over taxes and if they can’t form an agreement, everyone in the country suffers as tax cuts expire. Simply put: it doesn’t look good.

Dollar Debauchery

Years of devaluing the US dollar has had a material effect on everyone. You see it when you pay $6 for gas in California and you see it when you go to the supermarket to buy groceries. Don’t like it? Tough. Thank the Federal Reserve for its Keynesian actions and constant quantitative easing. With the dollar under pressure recently, we’ve seen precious metals and wheat spike considerably with wheat futures contracts jumping +35% week-over-week alone. That’s not a laughing matter. Remember: get the dollar right and you get a lot of other things right.

Asset Allocation

CASH 58% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 9%
FIXED INCOME 21% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
YUM

New unit openings in China and strength in YRI and US should offset China weakness in 1H13. China SRS growth is sensitive to the economy but new unit growth and ROIIC are likely to be supported by continuing growth of the consuming class in China. Looking at operating income by geography for YUM/MCD/SBUX, we can see that YUM is the most geographically diverse. This is manifest in YUM’s more stable EPS growth and price performance over the last 10 years.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

ASCA

We believe ASCA is greatly undervalued due to its potential to follow a OPCO/PROPCO model like PENN in two years or so. A high FCF yield and a healthy balance sheet make this gamer an attractive investment.

Three for the Road

TWEET OF THE DAY

“Sell on the news? Spanish 10 year bond up 5 points since Nov 20th near 105, +17 since July 20th, 5.16% yield” -@Convertbond

QUOTE OF THE DAY

“You can never underestimate the stupidity of the general public.” -Scott Adams

STAT OF THE DAY

Greece initiates a $13 billion bond buyback program to help stabilize its debts.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

European Banking Monitor: Swaps Tighter on Greece

Takeaway: Bank swaps reflect Greek news.

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:

 

European Swaps: European bank and sovereign swaps tightened last week as Europe reached some consensus on a debt deal for Greece.

 

ESM - Moody’s downgrades ESM to Aa1 from Aaa (Friday after the close), saying the decision was driven by the recent downgrade of France to Aa1 from Aaa and the high correlation in credit risk which it believes is present among the entities' largest financial supporters.

 

ECB and OMT-  Over the weekend Spanish PM Rajoy said it may be “very complicated” to achieve 6.3% deficit to GDP target in 2012 given revenue problems and high financing costs. He reiterated that if an intervention request is in Spain's interest in the future, he would not have any doubts about turning to the ECB for help.

 

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.

 

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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 – European banks were generally tighter WoW with the exception of Greece, where bank swaps rose significantly. Overall, 32 of 37 financial reference entities in Europe were tighter last week on the heels of Monday's Greek debt announcement. 

 

European Banking Monitor: Swaps Tighter on Greece - ff. banks

 

Euribor-OIS spread – The Euribor-OIS spread widened by less than a basis point to 12.6 bps. 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: Swaps Tighter on Greece - ff. 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: Swaps Tighter on Greece - ff. facility


THE M3: MACAU GGR, BROKEN TOOTH

The Macau Metro Monitor, December 3, 2012

 

 

MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE IN 2012 AND 2011 DSEC

Macau gross gaming revenues rose 7.9% YoY to 24.882 MOP BN (3.12 USD BN, 24.15 HKD BN).

 

OUT OF JAIL, 'BROKEN TOOTH' PROMISES "NO TROUBLE" Macau Daily Times

Wan Kuok-koi, aka ‘Broken Tooth’, once accused of plotting to kill the local police chief, was released on Saturday after more than 14 years of imprisonment.  Wan was convicted of loan sharking and triad membership in 1999, a year after he was arrested during an investigation into a car bomb attack on then-Judiciary Police chief António Marques Baptista.  “It definitely won’t happen,” Wan said from the passenger seat of a car when asked whether his release would affect Macau’s law and order, according to footage broadcast by Hong Kong’s Now TV. “Nobody is causing trouble so why would there be any trouble?”


MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL

Takeaway: The Greek debt deal tightened bank and sovereign swaps globally while U.S. high yield followed suit, but Chinese steel continues to sink.

Key Takeaways

 

* Still Positive. Overall, there was more positive than negative again last week in our risk monitor. We saw short term improvements from 4 of the 13 metrics we track (EU Financials CDS, Asia Financials CDS, EU Sovereign CDS, and High Yield). Meanwhile, we saw deterioration in 2 of the 13 metrics (Chinese Steel and U.S. Financials). On an intermediate term basis, the positives (5) narrowly outweigh the negatives (3), while on a longer-term basis, there are decidedly more positives (6) than negatives (2).

 

* European Swaps: European bank and sovereign swaps tightened last week as Europe reached some consensus on a debt deal for Greece. Our European Analyst, Matt Hedrick, wrote the Early Look last Thursday, providing insight into the pros and cons of the deal.   


* U.S. Bank CDS: Swaps tightened for 16 out of 27 domestic reference entities. The majority of the widening week-over-week took place in insurance companies. The money center banks, large brokers, and consumer finance companies mostly tightened.

 

High Yield:  The average rate on high yielding corporate debt fell 22 bps from 6.78% to 6.56%.

 

* Chinese Steel: Chinese steel declined another 107 yuan/ton (or 2.9%). Over the last several weeks, steel prices in Chine have resumed their decline. This comes after a brief rally which peaked on October 10th, 2012. Chinese steel prices are now 7% lower than they were on October 10th. 

 

* Quantitative Setup: Our Macro team’s quantitative setup in the XLF shows 0.8% upside to TRADE resistance and 0.3% downside to TRADE support.

 

Financial Risk Monitor Summary

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

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

 • Long-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - Summary3

 

1. American Financial CDS –  There was very little movement in money center bank swaps or major investment bank swaps last week. The largest moves came from GS (-2 bps) and MS (+2 bps). This was the case for the rest of the U.S. financial sector as well, with the exception of the mortgage insurers and MBIA, where there were large declines in swaps. 

Tightened the most WoW: MBI, MTG, SLM

Widened the most WoW: ACE, HIG, AON

Tightened the most MoM: JPM, GNW, C

Widened the most MoM: RDN, AIG, ACE

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - American

 

2. European Financial CDS – European banks were generally tighter WoW with the exception of Greece, where bank swaps rose significantly. Overall, 32 of 37 financial reference entities in Europe were tighter last week on the heels of Monday's Greek debt announcement. 

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - Europe  2

 

3. Asian Financial CDS – Swaps were notably tighter in Asia last week with all reference entities we track in China, Japan and India showing improvement. 

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - Asia

 

4. Sovereign CDS – European sovereign swaps posted another week of significant tightening, led by Spain (-34 bps) and Portugal (-26 bps). Italy was close behind at -22 bps. The only major country that widened last week was the U.S., higher by 1 bp. 

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - Sov Table

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - Sov 1

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - Sov2

 

5. High Yield (YTM) Monitor – High Yield rates fell 22 bps last week, ending the week at 6.56% versus 6.78% the prior week.

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 7 points last week, ending at 1731.

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - LLI

 

7. TED Spread Monitor – The TED spread rose 0.9 bps last week, ending the week at 23 bps.

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 2.2 points, ending the week at 0.39 versus -1.8 the prior week.

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread widened by less than a basis point to 12.6 bpsThe 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: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - 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: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - ECB

 

11. Markit MCDX Index Monitor – Last week spreads widened by ~3 bps, ending the week at 133 bps versus 130 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: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - MCDX

 

12. Chinese Steel – Steel prices in China fell 2.9% last week, or 107 yuan/ton, to 3566 yuan/ton. Since their recent highs on Oct 10, Chinese construction steel prices have fallen ~7%. The broader downward trend, which started August of last year, remains intact and is a sign of ongoing weakness in the Chinese construction market. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - CHIS

 

13. 2-10 Spread – Last week the 2-10 spread tightened 5 bps to 137 bps. We track the 2-10 spread as an indicator of bank margin pressure.  

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.8% upside to TRADE resistance and 0.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - XLF

 

Margin Debt  – October: +1.19 Standard Deviations

NYSE Margin debt rose to $318 billion in October from $315 billion in September. 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 October. 

 

MONDAY MORNING RISK MONITOR: MOST METRICS POSITIVE, BUT WATCH CHINESE STEEL - NYSE margin debt

 

Joshua Steiner, CFA

 

Robert Belsky


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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