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Dovish Setup - ECB & BOE and EU Summit

There’s been much noise on the Euro in recent days, perhaps the loudest from France’s President, Francois Hollande, who said that “a monetary zone must have an exchange rate policy or else it ends up being subjected to a rate that does not fit with the true state of the economy.” How do you say currency manipulation in French? As the global currency wars heat up we note our currency outlook below going into this Thursday’s ECB and BOE policy rate decisions and the beginning of the European Union Summit.

  • ECB Meets: Thursday the ECB’s governing council convenes. We expect no change to the main interest rates. This position is grounded in recent data that is supportive of an “accommodative” hands off approach from Draghi – CPI came down 20bps to 2.0% Y/Y in JAN, exactly at the ECB’s targeted level; PMIs across the region looked broadly better, and importantly showed improvement in the Eurozone average and in Germany; and while the unemployment rate remains nominally high (10.7%), it saw no increase in the DEC reading. We think investors are beginning to price in much of the bad ‘crisis’ news, in that case what’s left in play is a long runway of slow, low growth and unexpected sovereign/banking flair-ups across the periphery.

We see a heavy immediate TERM resistance level in the EUR/USD around $1.36/7 and intermediate term TREND support at $1.31. 

 

As we continue to show in our research, CFTC data shows decidedly that market participants have anchored on Draghi’s all hands on deck approach to save the common currency via the introduction of the OMT bond purchasing program in early August 2012. While we don’t expect this momentum to erode materially, we do think that the cross will fade at our resistance level as the underlying data in the region is still coming off very low levels of improvement and a muted outlook.

 

Dovish Setup - ECB & BOE and EU Summit  - bb. eurusd

 

Dovish Setup - ECB & BOE and EU Summit  - bb.cftc

 

  • BOE Meets: Thursday the BOE convenes. The BOE is widely expected to keep its current policy stance, however former MPC member John Gieve suggested that he sees a “substantial chance” that the Bank will expand monetary policy further due to weakness in the economy. Remember that the final UK Q4 GDP came in lower than expectations on a Q/Q basis -0.3% (exp. -0.1%) and a Y/Y basis 0.0% (exp. +0.2%), which could encourage a step-up in action. However, with CPI currently running at 2.7% Y/Y (above the 2% target) the Bank must also be careful to not stoke more inflation pressures through monetary financing. Should we see even a hint of acceleration in asset purchases we’d expect perversely for the GBP/USD and GBP/EUR to run higher.

 

  • EU Summit: European politician meet this Thursday and Friday to agree on the EU's 2014-2020 budget, the so-called multi-annual financial framework (MFF). We’d suggest you don’t hold your breath that leaders will reach a unanimous agreement. Talks were suspended at the last summit on 22-23 November and will now pick up from that point. The agenda is to find a budget for growth, however this time, we’re following UK PM Cameron’s call for a referendum on the country staying or leaving the EU – this in and of itself should bring more disunity to the table. Herman van Rompuy has said that the budget should focus on jobs, innovation, and research and would like to see that spending on competitiveness and jobs represent more than a 50% increase from the previous budget period of 2007-2013. While we do not expect a unanimous decision, one crafted to throw heavy funding at job creating could put further support in the cross as the region slowly repairs growth.  As always, the devil is in the details.

Matthew Hedrick

Senior Analyst


Still Bullish: SP500 Levels, Refreshed

Takeaway: We’re not blindly buying on the overbought signals (1515), but we aren’t freaking out on controlled corrections either.

POSITIONS: 13 LONGS, 6 SHORTS @Hedgeye

 

Higher-lows and higher-highs as the economic data continues to stabilize. This morning’s employment component of the ISM non-manufacturing survey was the best print since 2006.

 

That’s bearish for Treasuries and bullish for stocks. Don’t fight the data.

 

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

 

  1. Immediate-term TRADE overbought = 1515
  2. Immediate-term TRADE support = 1490
  3. Intermediate-term TREND support = 1442

 

In other words, if you bought/covered yesterday’s close, you are smiling. We’re not blindly buying on the overbought signals (1515), but we aren’t freaking out on controlled corrections either.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Still Bullish: SP500 Levels, Refreshed - SPX


Golden Days Are Over?

As growth continues to stabilize in the United States, stocks are ripping to the upside while bonds and gold are getting creamed. Gold has taken quite a beating over the last six months as you can see in the chart below. Furthermore, with the US dollar starting to strengthen, gold will likely see further downside. Strong dollar = Strong America. The goldbugs can't always be right.

 

Golden Days Are Over? - GOLDUSD


Early Look

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1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE

Takeaway: C&I loan demand picks up sharply in 1Q13 while prime resi loan standards ease. Auto loan demand rises while card demand falls.

Loan Underwriting Standards Continue to Ease. Demand is Heating Up.

The Fed released its 1Q13 Senior Loan Officer Survey yesterday afternoon. The survey, which contains data on lending standards and loan demand across asset classes, was conducted between December 27th, 2012 and January 15th, 2013. Overall, the results were positive again this quarter with a few categories showed significant sequential improvement. We look at the results for each loan category below.

 

C&I Loans - Posting a Strong Sequential Improvement

Demand for C&I loans surged in the latest Senior Loan Officer Survey. Banks reporting an increase in C&I loan demand from large and mid-size firms rose to +19.1% from -6.2% in 4Q12. C&I loan demand among small firms was reported to have risen to +15.4% from +4.5% last quarter. Underwriting standards for C&I loans continued to ease at a rate comparable with what we saw in 4Q12. The same can be said for banks spreads: spreads are flat to down at a net 54.4% of banks on large firm C&I loans and 50.8% for small borrowers.

 

C&I lending remains the strongest area of growth for banks since the recovery began. In fact, C&I loans outstanding recently eclipsed their pre-crisis high. As such, this sharp increase in demand in the first quarter is a positive sign. 


1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 1

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 2

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 3

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 4

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 5

 

Commercial Real Estate - Demand Remains Strong As Standards Are Relaxed Further

Commercial real estate loan demand continues to heat up as debt maturities remain very high again this year, following a record year last year. Interestingly, you would think that all that demand would lead banks to be more choosey, but in fact the opposite has happened. CRE lending standards have eased each quarter since 2Q11 and this quarter was no exception.

 

Commercial real estate loans outstanding have finally begun to increase after posting years of decline following the bust of the real estate market. This is a significant inflection point, and should become a material driver of bank loan growth going forward. 

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 6

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 7

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 8

 

Residential Mortgage Loans - Prime Standards Easing

Banks reported a modest further net easing of standards on prime mortgage loans. On balance, 4.6% of banks reported flat to lower standards on prime resi loans. That is up from 1.6% last quarter. While not a huge change sequentially, the emerging trend of banks easing prime resi standards is a very important development that will continue to reinforce the recovery in residential real estate as additional cohorts of buyers find their way into the market.

 

It's also notable that Nontraditional resi loans saw standards tighten modestly (+2.9%), and that subprime loan standards were reported again. Bear in mind that the Fed hasn't reported a response on subprime resi loans since Q1 of 2009, so the fact that banks are even commenting on it is an indication that subprime loans are starting to re-emerge. That said, on the margin, 20% of banks reported tightening standards on subprime loans, likely in response to the recently issued new QM rules.

 

On the demand front, however, borrowers continue to show greater interest. 1Q13 marked the sixth consecutive quarter of banks reporting QoQ growth in prime residential mortgage demand. Naturally, much of this is refinancing demand.

 

Two other noteworthy callouts are that demand for credit card loans took abrupt downturn in 1Q13 falling to -4% from +8.5% in the prior quarter. This is notable in that the prior six quarters were all positive. On the auto finance front, standards continue to ease while demand accelerated.

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 9

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 10

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 11

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 12

 

1Q13 SENIOR LOAN OFFICER SURVEY - LOAN GROWTH SHOULD START TO ACCELERATE - 13

 

 

Joshua Steiner, CFA

 


MPEL YOUTUBE

In preparation for MPEL's 4Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

MCE FINANCE LIMITED ANNOUNCES PRICING OF SENIOR NOTES OFFERING Jan 29

  • US$1,000 million aggregate principal amount of 5.00% senior notes due 2021 priced at 100.00% of par
  • Use of proceeds (i) to repurchase in full MCE Finance's US$600 million 10.25% senior notes due 2018 issued on May 17, 2010 and fund the related redemption costs, and (ii) the entire remainder of the net proceeds thereafter for the partial repayment of RMB2.3 billion (equivalent to US$364.9 million) 3.75% bonds due 2013 issued by Melco Crown Entertainment on May 9, 2011.

 

YOUTUBE FROM Q3 CONFERENCE CALL

  • "City of Dreams continues to maintain its market-leading mass market yields when compared to all other major mass-focused properties in Macau, while at the same time, it has delivered strong improvements in rolling chip table yields over the prior period."
  • "Altira Macau has also delivered substantially improved per table operating metrics compared to the previous quarter, which we are confident can be further built from here."
  • "Studio City is moving ahead on its expected timetable, with the majority of the piling and foundation work now complete. We have also recently engaged on a fixed price lump sum contract basis, our main contractor, providing us greater clarity and certainty around Studio City's design and construction costs. We remain on track to open this property around mid-2015."
  • [Manila] "With our current expected investment upon opening of both Phase 1 and 2 of the project expected to be around US$600 million, we believe this venture offers the company an opportunity to deliver strong returns on invested capital while also providing us with a platform for future expansion throughout Asia. We currently expect those Phases to open together by the first half of 2014."
  • "Total depreciation and amortization expense is expected to be approximately $90 million to $95 million. Corporate expense is expected to come in at $18 million to $20 million, and net interest expense on MCE's existing debt is expected to be approximately $23 million to $25 million."
  • "So heading into next year and hoping that some of the global headwinds like the European – people get used to the European debt crisis and there's less headwinds, and eventually, I think the Chinese leadership, they've had a very tight grip on the various sectors such as the real estate sector which has impacted asset prices. But once those things are behind and with the new leadership in place, I'm quite optimistic about next year."
  • "We feel no pressure in terms of the credit as well as the liquidity."
  • "We do need more rooms at City of Dreams, and Macau in general. We continue to believe it's a supply-driven market."
  • "City of Dreams, Phase 3, the additional tower – we're going through the formal government approvals because we have upgraded the building and included more amenities. So assuming it gets approved, we are hoping that we could get started on that project, probably the middle or the later half of next year."
  • "In terms of the yield on the VIP side... we are a little bit discount to the leading property at the moment. So I guess we have put plans in the optimizing process during the last three quarters in both Altira and CoD. This is a ongoing process, and we hope that we could be able to stabilize Altira at the moment, but we are still continuing to put the effort in CoD. So you will see some improvement in the next few quarters."
  • "We would love a dividend, but at the same time, I think the Board concluded that recently that we do want a very exciting development pipeline with Manila, Studio City, City of Dreams, Phase 3, to be on its way first....But I think for the next year, it's really about getting built-up on Studio City and Manila as quickly as possible and also getting City of Dreams Phase 3 started."
  • "In terms of the mass and VIP mix, I think it's a ongoing process and you'll see some margin-based improvement if we are doing this new performance in the next few quarters."
  • "In addition to the Studio City numbers that we've already discussed, we anticipate spending approximately $600 million in Manila upon opening. And as we said, we anticipate having $325 million of that funded through a local loan. So, you can back into our equity component there. And you're correct on Phase 3 of City of Dreams, that will be funded by cash and internally generated cash flow."

Troubled Times

Client Talking Points

Flash In The Pan

One day, things are groovy, the next, they aren’t. Case in point: the stock market. Yesterday’s sell off was a reminder that markets just don’t go up and to the right in a continual, straight line. People sell ‘em on some days and yesterday was one of those days. But seeing as how we are in a bull market, the sell off was short-lived. Today, the futures are back up and ready to rocket higher. Fund flows are still headed to US equities and bonds continue to get crushed.

Problematic Politicians

Europe is back in focus with the Spanish 10-year bond offering up a yield of 5.44%, up from 4.95% on January 14. European debt markets are getting shaky again as more problems arise in the Eurozone. Between allegations that the Prime Minister of Spain has been taking kickbacks for ten years and French President Francois Hollande saying that the markets shouldn’t dictate the price of  the Euro, there is much to be worried about. Throw in Japan and Taro Aso’s mission to destroy the Yen and you’ll realize that the currency wars are in full effect.

Asset Allocation

CASH 42% US EQUITIES 18%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“The concept of #timestamps means you don't have to lie about your positions - everyone knows them” -@KeithMcCullough

QUOTE OF THE DAY

“Society, my dear, is like salt water, good to swim in but hard to swallow.” -Arthur Stringer

STAT OF THE DAY

Redbook Retail Sales w/e Feb 3rd: 1.5% y/y prior; Jan MTD: -0.6% m/m prior, Jan MTD: 1.8% y/y prior


Hedgeye Statistics

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

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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