European Banking Monitor: Periphery Widening

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 .




European Financial CDS - European financials swaps widened considerably, increasing by a median of 18 bps. The U.K., Spanish and Italian banks widened sharply. Italian banks, in particular, were materially wider.


European Banking Monitor: Periphery Widening - ww. banks


Sovereign CDS – Sovereign swaps were wider around the globe with the sole exception of Germany, which tightened 3 bps to 24 bps., and now trades inside the U.S. by 4 bps. The biggest movers were Portugal, Spain and Ireland at +16, +12 and +8 bps, respectively. 


European Banking Monitor: Periphery Widening - ww. sov 1


European Banking Monitor: Periphery Widening - ww. sov 2


European Banking Monitor: Periphery Widening - ww. sov 3


Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 12 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: Periphery Widening - ww. euribor png


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: Periphery Widening - ww. facilty



KMB – Removing From Our Best Ideas List

On February, 11th, 2012 our Consumer Staples team added Kimberly-Clark (KMB) to the Hedgeye Best Ideas list and we are officially removing it this morning, June 10th, 2013.  The sell-off in KMB from May 28th at a price of $104.28 to Friday’s close of $97.87 - a decline of just over -6.5% - is an opportune time for us to remove KMB as a short.  For much of that period, the idea had been solidly against us, but we are now removing it at a price where it underperformed the SP500 during the same period.


Just to rewind from a fundamental perspective, KMB had a very solid Q1, which was reported in mid-April.  The key attributes of the quarter included:

  • Big beat and flow through on full-year guidance (Q1 EPS of $1.48, well ahead of consensus of $1.33 and guidance for the full year going up $0.10)
  • Solid performance against difficult comparisons on revenue and gross margins
  • Superb operating leverage with +15.6% EBIT growth on 1.5% sales growth
  • Company overcame $35 million of commodity inflation in the quarter
  • Well-managed balance sheet as accounts receivables (+1.7% year over year) and inventories (+0.4%) increased in line with sales growth

In hindsight, the quarter was much better than we expected. As noted in the chart below, KMB reported one of the better quarters in the consumer staples sector.


KMB – Removing From Our Best Ideas List	 - vv. staples


The question, as always, is what to do with the KMB stock from here?  Since we are officially removing KMB as a short idea; does that make it a long from here? On the long side, there are some worthy points, including the following:


1)      Expectations are low – Even though the company adjusted earnings guidance higher after the Q1 beat, it really only accounted for the beat in the quarter and, as a result, earnings for the remainder of the year appear low.  For starters, the current EPS estimate for Q2 2013 is $1.39, which implies 7% y-o-y growth in earnings.   Last quarter’s EPS was up 19% y-o-y . . .


2)      Commodities have been stable – In its Q4 2012 results presentation, in February 2013, KMB gave its planning assumption of northern bleached pulp at $890 - $910 per metric ton and oil at $90 - $100 per barrel. In total, the Company guided to $150 - $250 million in cost inflation.  So far, commodities are in those ranges with WTI oil trading at $95.00 per barrel and northern softwood pulp at $930 in the U.S. and $857 in Europe. 


3)      Returning capital aggressively – KMB guided to $1.0 - $1.2 billion in share purchases for all of 2013 and repurchased a total of $500 million in Q1 alone.   From 2004 – 2012, KMB repurchased more than $10.5 billion in shares.  In that period, shares outstanding have declined from 502 shares outstanding to 384.7 million at the end of Q1 2013.


4)      Valuation is reasonable – With a dividend yield of 3.3% and P/E of 16.8x on 2013E and 15.8x P/E of 2014E, valuation seems reasonable, especially with a likely upward bias in numbers in the short term.  At this valuation, KMB is basically just below its average P/E of the last 2-years.


The biggest issue facing KMB, and Consumer Staples in general, is the potential for a continued shift away from high yielding stocks to those stocks with higher organic growth. In fact, in the year-to-date, based on our Macro team’s factor analysis, low dividend yielding stocks are up +20.9% and high dividend yielding stocks are up +12.0%.  In the same vein, utilities have been underperforming the market dramatically this year.


If treasury yields continue to tick higher, this macro headwind is likely to continue for slower growing and higher yielding staples names like KMB.  But at 15 -16x earnings with a 3.3% dividend and an aggressive buy-back (oh and an upward bias in numbers), we at the very least wouldn’t be short the name here.


Daryl G. Jones

Director of Research



Macau is off to a slow start in June with average daily table revenues up “only” 5% from the comparable week last year.  June is typically a much slower month than May.  Last year, June GGR fell 12% MoM and 15% the year before.  For the full month June 2013, we are projecting YoY GGR growth of 8-14% which implies a MoM decline of 10-16%.  We’d be happy with double digit YoY growth as we move into July which should be a huge month.  July could be up as much as 20% YoY.




In terms of market share, MGM continues to impress.  While share north of 11% is probably not sustainable for the month, we continue to be impressed with that property’s operations.  MGM Macau is doing a terrific job in the face of the Cotai onslaught.  LVS was the big loser although it’s only been 9 days so not much to worry about.



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One thing that has USD up is Yen down. Of course, Yen down equals Weimar Nikkei up (even though in the end it's likely going to blow them up). That’s the central planning plan and they’re sticking to it! Nikkei surged +4.9% overnight, recapturing 13,081 TRADE support as the Yen fails at 96.05 TREND resistance (vs USD).


Copper was smoked yet again on the potent cocktail of #StrongDollar and bad China data this morning. Chinese Export data got royally crushed to just +1% in May vs +14.7% April (They made up the number in April). Copper remains in a Bearish Formation with immediate-term TRADE resistance = 3.38/lb.


The 10yr is holding last week’s gains at 2.16% this morning; still looks great to us (Treasury Bonds look bad – Financials look great, XLF). Meanwhile, there’s really no US economic data that matters until Thursday when Retail Sales will show that they grew again sequentially in May. US #GrowthAccelerating and no immediate-term resistance in the 10yr to 2.22%, then 2.41% on the TREND duration

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Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.


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.

Three for the Road


If Jimmy Paulsen is out, does that make us the only hyper US stock market bulls left?



"If they hate, then let 'em hate and watch the money pile up"

- 50 Cent


20% of all divorce cases in the United States cite evidence found on Facebook as grounds for the disillusion of marriage






Macau Legend Development Ltd is looking to raise up to US$786 million (MOP6.3 billion) in its upcoming HK IPO.  Previous reports said the company was looking to secure US$600 million from the operation.  The company and shareholders Lam Fong Ngo and Grand Bright are selling 2.05 billion shares in the offering, of which 86.2% are new shares issued by Macau Legend, and the remainder existing stock from the two shareholders.

Macau Legend is offering the shares in an indicative range of HK$2.30 (US$0.3) to HK$2.98 each.  The listing is scheduled for June 27.  The proceeds will go to financing the redevelopment of the Macau Fisherman’s Wharf theme park.



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