Changing Tides In Europe

Looking at the Eurozone, risk decreased across several nations while Germany and Italy saw a slight uptick in yield. Greece declined -1.54% to 12.92%, Portugal fell -47 basis points to 7.09% and Spain dropped -8 basis points to 5.38%. Geramany and Italy rose +6 basis points and +5 basis points, respectively. Yields have fallen considerably since highs made in April of this year but have yet to reach levels seen in 2009/2010.


Changing Tides In Europe - 22. yields

Good News For The OFS

With the price of oil having declined significantly over the last six months, there’s some modestly bullish news for the oilfield services (OFS) sector. Drilling and services pricing declined in November but equipment prices inflected higher. Drilling PPI was +5.4% year-over-year versus +5.9% in October. Machinery and Equipment PPI was +2.5% year-over-year versus +2.3% in October. That’s a positive for the OFS sector as the rate of change in price declines slows down.


Good News For The OFS - OFS


Macau generated average daily table revenue of HK$775 million in the past week, down from HK$930 million in the first 10 days.  ADTR actually fell 1% from the similar week of 2011.  As we learned from our Macau trip last week, hold percentage ran high in the first 10 days (with the exception of Wynn) but seems to have been normal in the past week.  Our YoY projection is for GGR (including slots) YoY growth of 10-14%.




While still above trend, LVS’s share has moderated to where we would project it to be.  Absent hold fluctuations, we believe LVS will be a consistent market share gainer over the next 12 months.  MPEL’s share has also moderated but still above trend.  MPEL remains on track for an estimated beating Q4, in our opinion.  Surprisingly, Wynn picked up very little share in the past week and remains >200bps below trend.  Galaxy is almost back to normal while MGM is definitely having a good month.



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.


Major Takeaways from meetings in Macau last week: 

  1. We continue to believe that Macau could be under a bit of pressure relative to expectations in Q1.  While some of our contacts were not concerned about the smoking ban, a few were.  We tend to agree with the latter opinion although there is a chance that the government provides a grace period.  However, we don’t think the risk is necessarily factored into the stocks.  At least one astute market observer feels that ultimately, the restrictions will be forced on a table basis rather than square footage. 
  2. A lot of the discussions related to the recent corruption crackdown.  We think that there may be another shoe to drop for Macau as the investigations continue and there is risk of further Macau connections.
  3. As you know, Macau GGR increased 33% YoY in the first 10 days of December.  However, most of the growth was likely due to high hold.  Wynn is probably the only operator holding below normal.  Indeed, the numbers we received today moderated significantly from the first 10 days and were actually down 1% YoY.
  4. MPEL and LVS look like the stocks that could hold up the best over the near-term:  LVS because of market share gains and MPEL due to a big Q4
  5. Wynn, Galaxy, and MGM could be under pressure although MGM's December share is trending high


Please review the following detailed notes from our trip to Macau.


Smoking Restrictions

  • Three concessionaires think this will have very limited impact
  • One thinks a -3% GGR impact and another felt that a double-digit impact could be experienced for a few months
  • LVS probably went all out for square footage split – department of health wasn’t happy
  • WYNN probably went the other way and offered up more non-smoking tables
  • Galaxy is somewhere in the middle
  • Following submissions from each operator of their plans for compliance, it doesn't appear that the government has yet made a decision as to the exact specifications - the uncertainty is likely to create problems and could impact margins
  • January 1 looking like the date for required implementation
  • One operator thinks that the Government could give a last minute grace period of up to 6 months
  • Mass hold is likely to be negatively impacted
  • Good luck trying to enforce it in the VIP rooms
  • Government banned the comping of cigarettes and cigars recently
  • Smoking regulations are probably not done – it is an election year and the dealers have a lot of power – they have the most to gain with a full smoking ban
  • Lower end more at risk because higher end players will always get a seat at a smoking table if they want it
  • MGM – 28% of Mass players are smokers, MPEL – 30-40% are smokers

China Corruption Crackdown

  • Given the early December results, it doesn’t look like it's having an impact
  • The corruption crackdown not focused on Macau but rather an investigation into Bo Xilai, who is suspected of funneling money through Macau
  • One astute contact thinks that there will be a delayed impact and there still is risk because investigations are ongoing and there may be more ties between some indicted individuals and Macau
  • Government handover isn’t complete until March so investigations will go on
  • Contacts in Beijing say big players are being monitored and will likely stay away from Macau
  • David Star junket rep at Four Seasons was one of the ones arrested

December MTD

  • GGR for the first 10 days was up 33% YoY but down 1% in the second week
  • Hold played a huge role and volumes may have only been up single digits
  • Wynn seems to be the only operator holding below normal here in December

WYNN and SJM at capacity but SJM still has a year of growth

  • Wynn can’t do anything meaningful since they are running at a higher level of capacity
  • Some operators believe the gap between what Wynn offers the junkets in terms of commissions and credit and the competition is just too high
  • SJM added some VIP rooms which is growing their market share and should lead to YoY growth over the next 3 or 4 quarters 

Mass Marketing

  • Galaxy Mass advertising program doing well - their recent market share struggles have been in the VIP 
  • Mass business very competitive which is impacting margins – could be some relief next year if Galaxy or MPEL pull back


  • Galaxy may have pulled back a little on junket comps
  • City of Dreams will likely follow suit

MPEL and the Philippines

  • MPEL can bring smaller Southern China and other Macau junkets to Philippines without hurting existing business
  • Worst case scenario:  Belle Casino in Manila will do $150MM in EBITDA
  • Philippines could ultimately be a US$5 billion market
  • Just got 2 helicopters to bring VIPs from HK airport directly to Macau
  • We remain comfortable with our Street high $255 million EBITDA estimate for MPEL

Back To Growth?

Client Talking Points

Shifting Gears

The fiscal cliff is the one catalyst that can really mix things up, but take that out of the equation and you can see the markets are experiencing a change. We’re slowly moving from #GrowthSlowing to #GrowthStabilizing. The commodity super-cycle is beginning to deflate with total net long commodity contracts falling -11% week-over-week and sugar, wheat and oil all dropping double digit percentages over the same time period. One exception is gold as bets that it’ll go higher continue to increase. With gold at $1690/oz right now, watch out for our TAIL line of support of $1670. If that breaks, look out below.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.


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.


Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road


“Tepper says markets are going up and everybody buys $AAPLpremarket” -@harmongreg



“There are some that only employ words for the purpose of disguising their thoughts.” -Voltaire


Federal Reserve’s Empire State Index declines for fifth straight month to -8.1 in December from -5.2 in November.

European Banking Monitor: Globally Bank Swaps Tighten

Takeaway: Globally bank swaps tightened last week.

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:


** Bank CDS in Europe was mostly tighter week-over-week. German and British banks tightened, while Spanish and Italian bank swaps were generally wider. Greek bank swaps were flat, even after Greece received a disbursement of €34.4B tranche of bailout funding last week. The Euribor-OIS fell 2 bps.


** 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 – Swaps tightened for 24 out of 37 European reference entities last week. German and British banks tightened broadly, French banks were mixed - half tightening, half widening - and Spanish banks along with Italian banks generally saw swaps widen.


European Banking Monitor: Globally Bank Swaps Tighten - 55. banks


Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 13 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: Globally Bank Swaps Tighten - 55. 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: Globally Bank Swaps Tighten - 55. facility

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