European Banking Monitor: Risk Measures Remain Broadly Bullish

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 .


* 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 – EU Financial swaps were mixed this past week, with German and French swaps nominally higher while Spanish and Italian swaps continued to tighten. 


European Banking Monitor: Risk Measures Remain Broadly Bullish  - yy. banks


Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 11 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: Risk Measures Remain Broadly Bullish  - yy. 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: Risk Measures Remain Broadly Bullish  - yy. facility

FDX: Dynamite Deals

UPS (UPS) has announced it will withdraw its $7 billion bid for shipping company TNT due to European antitrust concerns. There is now a clear road for an acquisition by FedEx (FDX). What’s interesting is that UPS was likely trying to work out a deal for TNT’s European assets with FedEx to get the deal done. FDX may have wanted no part in that and thus, now has all options on the table for a TNT acquisition. 


With UPS gone, FDX is likely the only TNT buyer around. They could buy the entire company on the cheap and integrate pieces that fit well with their existing structure. TNT may have to sell or risk dying out slowly. We’ll have to wait and see what happens for now, but expect a bid for TNT from FDX sooner rather than later. 


FDX: Dynamite Deals   - eu1 normal


FDX: Dynamite Deals   - asia2 normal


Another good week in Macau but 2nd half of Jan comps are tough



Macau had another solid week here in January.  While the smoking restrictions may have an impact on margins, it does not appear to be affecting demand yet.  Average daily table revs this past week were HK$899 million, up 64% over last year.  Remember that last year’s comp is a little skewed since business levels usually wane ahead of the Chinese New Year.  Indeed, we still expect a slowdown in the back half of January this year due to the calendar shift of the Chinese New Year celebration into February this year.  Our full month projection is for YoY growth of 8-13%.  


For market shares, MPEL and Galaxy continue to trend above normal while MGM, SJM, and LVS are below.  








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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

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Still Overbought: SP500 Levels, Refreshed

Takeaway: Mr. Market doesn’t seem too excited about shooting above the intraday high of Bernanke’s Top (SEP14, 2012 = 1474) and staying there.



The immediate-term TRADE overbought signal I issued on Friday was based on a signal for lower-highs. This morning’s price/volume/volatility data is giving me another lower high.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1474
  2. Immediate-term TRADE support = 1464
  3. Intermediate-term TREND support = 1421


In other words, Mr. Market doesn’t seem too excited about shooting above the intraday high of Bernanke’s Top (SEP 14, 2012 = 1474) and staying there. At least not yet. And with a lot of people forced to chase last week’s highs, I think that matters.




Keith R. McCullough
Chief Executive Officer


Still Overbought: SP500 Levels, Refreshed - SPX

FNP: Gaming Expectations

Takeaway: 2013 outlook looks conservative and the divestiture of Juicy more likely - both positive for FNP.

We're booking the gain in our #Real-Time Alerts on $FNP, which we added last week on the long side into ICR as TRADE factors were aligning nicely. We remain big bulls on FNP across our TREND and TAIL durations, and think that this stock should approach $20 over 12-18 months. 


Following a checkered history of guiding Street expectations, it looks like FNP is off to a constructive start to fiscal 2013. The company’s preliminary results for Q4 and initial 2013 outlook out this morning are in-line and appear conservative respectively. The biggest delta relative to 2013 expectations is at Juicy – little surprise there. Kate and Lucky are right on track in terms of growing both revenues and expanding profitability. This is the core consideration driving FNP’s value as we remain confident that Juicy will divested at some point in 2013 uncovering the underlying value of these brands in the process.

Here are a few highlights from the morning’s release:

  • Q4/F12 update – check. Results came in towards the lower-end of previously revised guidance on 10/1 including a $3mm hit from Sandy. FY12 adj. EBITDA of $100-$105mm at the low-end of prior $100-$115mm outlook; Q4 update of $63-$68mm at the low-end of implied $64-$79mm. Given largely disappointing results out of peers driven by weak holiday sales, we view these results a net positive.
  • Kate Spade – check. Comp growth outlook in the low-teens is consistent with how management has approached prior years. In F11 & F12, management has admittedly outperformed their initial targets for the brand by a wide margin. We expect this year to be no different. We’re modeling 16% comp growth this year, which does not require a heroic performance in order to achieve.
  • Lucky – check. Looks solid and 2013 profitability is coming in higher than we expected.
  • Juicy – fail. Revenues remain challenged significantly impacting profitability for the foreseeable future. While Kate and Lucky adjusted EBTIDA each came in $1-$3mm above previously revised expectations for the quarter, Juicy contributed $5-$15mm less than expected as performance deteriorated across all business channels  (DTC, wholesale, and outlet). This is not a cost issue, it’s about strategy/execution. We’re sure that new CEO of the brand Paul Blum has some great ideas about how to turn the brand around in 2013, but time is running out with the brand not only not keeping pace with Kate and Lucky, but generating a negative incremental $20-$30mm hit to EBITDA in 2013.
  • It's also worth highlighting CEO Bill McComb's closing remarks in the release which underscore the potentail for a divestiture:

"The management team and Board of Directors of Fifth & Pacific are committed to delivering value to our shareholders. This includes making resource allocation decisions today that support strong long term growth within our current strategy as well as being thoughtful regarding alternatives to our current multi-brand portfolio approach that unlock value."

  • Hosting FNP Dinner Jan 16th: We will be hosting a dinner with the management (CEO Bill McComb, CFO/COO George Carrara, and SVP of Finance Bob Vill) on the night of Wednesday the 16th. Clients who are interested can contact .

All in, initial guidance is roughly $25mm below our expectations. We expected management to set guidance near the Street’s $160mm view and it came in lower at $120-$150mm reflecting Juicy’s $20-$30mm delta compared to our base-line expectations (we expect Kate Spade to generate at least $160mm in EBITDA alone). The implied EPS range is $0.00-$0.15 in FY13 EPS compared to our $0.35 number (we also assumed lower interest expense). While we think upside at both Kate and Lucky will ultimately account for that differential at year-end, the bigger call here is that there is little question that Juicy is impacting FNP’s value – investors know this and our sense is that if the Board/management isn’t willing to accelerate action here, investors likely will.


(1/14/13 F12 Update):


FNP: Gaming Expectations - FNP 12 resutls


(10/1/12 revision announcement):


FNP: Gaming Expectations - FNP 12 prelim outlook


Initial 2013 Outlook:


FNP: Gaming Expectations - FNP 13OUtlook


FNP Quantitative Risk Management Levels:


FNP: Gaming Expectations - FNP TTT




STZ/BUD - Reaching for the Crown, Part II

As a rule, we aren’t a big fan of commenting on speculation but the article in the New York Post warrants some clarification if there is any truth to the rumblings it suggests are coming from the Department of Justice regarding potentially “major concessions” it might be seeking from Anheuser-Busch InBev (ABI BB, BUD) as it pursues its acquisition of Grupo Modelo (GMODELOC.MM).

We reference our note published on January 2nd (“Reaching for the Crown”) where we highlighted the DOJ’s response to InBev’s acquisition of Anheuser-Busch as a template for looking at this acquisition.

To review, Anheuser-Busch held an approximate 48.5% share of market at the time it was acquired by InBev.  As part of the judgment of the Department of Justice consenting to the transaction, InBev was required to divest the Labatt’s business in the United States – the business was part of Labatt Brewing Co. Ltd., which was a partially owned subsidiary of InBev based in Toronto.  While Labatt’s held a less than one percent share of the total market (0.8%) in the United States, more than half its sales were in upstate New York, where the DOJ was concerned that, when combined with Anheuser-Busch’s share of market in that region, the new entity would enjoy a market share over 75%.


The solution was the mirror image of the proposed Crown transaction – InBev was required to grant an exclusive license to brew, market, sell and distribute the brands in the United States.  Labatt’s Canada agreed to brew the brand during an interim period (three years).   The rights in the United States were eventually sold to North American Breweries.


In the case of Constellation Brands and Crown, STZ will be purchasing the same rights (distribution, marketing, promotion, and, importantly, pricing) as those acquired by North American Breweries with two key differences.  The first difference is that ABI will continue to be responsible for continuity of supply (brewing) as well as brand innovation.  The second difference is that ABI has the right to exercise a call option on Crown and purchase the business at 13x EBIT every ten years. 


Based on the commentary in the Post article, it appears that the first key difference that we highlighted is what the DOJ may be examining – the DOJ is uncomfortable with ABI continuing to control the supply of Corona (and other brands) to Crown.  This doesn’t make a whole lot of sense to us, as it is essentially a contract brewing agreement, with Crown controlling all the important aspects of brand management.  Regardless, if the DOJ were to insist on such a concession, we strongly suspect that it is a measure that ABI would agree to (the Post article suggests likewise).


Keep in mind that the value of this transaction to ABI should not in any way shape or form be measured with respect to the degree that ABI remains involved in the U.S. market through Corona.  The value to ABI is the synergies that it is able to extract from an inefficient, family-owned business in Mexico and the ability of the company to grow the Corona (and other) brands globally.


Note that there is some historical precedent for multiple layers of control over Corona in the United States.  At one point, Gambrinus and Barton had east/west geographic control over the distribution and Modelo managed the distribution relationships through a U.S. subsidiary - Procermex Inc. (going to back to 2006).  Also, forcing the creation of (or shifting the volume to) another brewer might be what passes for job creation these days, so we wouldn’t be at all surprised to see the DOJ go down that path.


We continue to believe that the ABI would be willing to agree to the concessions that were speculated in the article given the potential value creation associated with the Modelo transaction.  We also note that someone else brewing the beer in no way diminishes the potential value creation of the deal to STZ.


Have a good week,




Robert  Campagnino

Managing Director




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