prev

ECB Presser: Lots of Words, No Action, Markets Calm

As expected, this morning the ECB announced no change to its main interest rates.

 

ECB President Mario Draghi reiterated much of the same policy stance and outlook since his December meeting of last year. The EUR/USD rallied throughout the conference.

 

Draghi again stressed that the Eurozone may experience a “prolonged period of low inflation”, that the Bank would maintain accommodative monetary policy for “as long as is necessary”, and to expect that key rates would remain “at present or lower levels for an extended period of time.”

 

What was not spoken?   Draghi did not include measures to suspend sterilization of the SMP, leaving it as an instrument for future consideration. He also spoke of no concrete plans to free up credit to the “real” economy (SMEs in particular).  Draghi gave the following reasons on why the ECB took no action today:

  • Baseline forecast confirmed, with modest economic recovery
  • News out since last meeting, by in large on the positive side
  • PMI data is strongest in 2.5 years
  • PMI services a huge component of job in the region, very positive
  • Metric gaps between Germany and Spain &Italy narrowing
  • Unemployment high, but stabilized

 

Updated Staff Projections for March versus December moved ever so slightly on the 2014 outlook, boosting GDP 10bps higher, and inflation 10bps lower:

 

GDP Staff Projections:  1.2% in 2014 (+10bps vs DEC); 1.5% in 2015; 1.8% in 2016

CPI Staff Projections:  1.0% in 2014 (-10bps vs DEC); 1.3% in 2015, 1.5% in 2016

 

 

Other Key Takeaways from Draghi:

  • Eurozone government deficit is expected to have declined to 3.2% of GDP in 2013 and is projected to be reduced to 2.7% of GDP in 2014
  • Eurozone government debt is projected to peak at 93.5% of GDP in 2014
  • Emerging Market impact on Eurozone has so far been muted.  In fact there have been flows into Europe that have helped to narrow the spreads between countries
  • On Ukraine: Draghi said he does not suggest strong contagion. But geopolitical risks could become substantial and generate significant consequences. The Bank has not assessed scenarios.
  • On the Eurozone slipping into Japan-like Deflation: Draghi said ECB has taken early and decisive action on monetary policy to prevent anything like Japan’s situation. He remains confident in the 2% inflation anchor.
  • To read a copy of Draghi’s prepared remarks click here.

 

Investment Positioning:

  • We remain marginal European equity bulls of US equities. Our preferred investment in the region is long German and UK equities (EWG and EWU) and long the Pound/USD (FXB) – note that today the BOE also left the main interest rate unchanged (at 0.50%) and maintained the asset purchase target (as expected), which is supportive of our long call. The GBP/USD is up +2.4% in the last month.
  • Broadly, we believe Draghi’s continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market.
  • EUR/USD: we expect Yellen to likely pull back on the tapering program to a more dovish position that should weigh on the USD to the downside. See our levels below. 

ECB Presser: Lots of Words, No Action, Markets Calm - zz. EURo

 

Matthew Hedrick

Associate


INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST

Takeaway: We continue to see a gradual, but steady, deterioration in the rate of improvement in the labor market that began seven weeks ago.

The Labor Market Continues its YTD Cooling Trend

Labor market data continued its deteriorating trend this past week, bringing to almost seven the number of consecutive weeks this has been happening. Notwithstanding a brief studder-step two weeks ago the progression of the labor market data has been progressively negative every week for almost the last two months, or, alternatively, since the start of the year. As a reminder, we look at the year-over-year rate of change in the rolling NSA initial claims. Specifically, we look for inflections in the trendline rate of improvement as the series naturally converges towards zero as the economy reaches full steam. Here are the last seven data points with the most recent data point first: -3.5%, -4.4%, -5.6%, -5.1%, -5.7%, -7.3%, -7.9%, -8.5%. Since we're looking at the rate of change in year-over-year initial jobless claims a more negative number is better as it implies a faster rate of improvement. 

 

To be clear, we're not yet sounding the alarm on the labor market, but it's important to note that the rate of improvement is decelerating steadily and if that trend continues then we could see, in the not too distant future, the labor market reverse course, i.e. claims begin to rise.

 

The Numbers

Prior to revision, initial jobless claims fell 25k to 323k from 348k WoW, as the prior week's number was revised up by 1k to 349k.

 

The headline (unrevised) number shows claims were lower by 26k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2k WoW to 336.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -3.5% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -4.4%

 

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 1

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 2

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 3

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 4

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 5

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 6

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 7

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 8

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 9

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 10

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 11

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 12

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 13

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 19

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 14

 

Yield Spreads

The 2-10 spread rose 4 basis points WoW to 238 bps. 1Q14TD, the 2-10 spread is averaging 242 bps, which is higher by 1 bps relative to 4Q13.

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 15

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Blue Skies On the Horizon For Carnival?

Takeaway: In our most recent cruise pricing survey, Carnival (CCL) emerges as the standout, while Norwegian (NCLH) is still struggling a bit.

Editor’s Note: This is part of a research piece originally published on March, 5 2014 at 3:40 PM in Gaming, Lodging & Leisure. For more information on how Hedgeye can help you, click here.

 

Blue Skies On the Horizon For Carnival?  - carnival

 

Have you been outside lately? It’s been a brutal winter for most Americans. But now, with snowstorms abating, are consumers still booking vacation cruises to sunnier destinations?

 

In the Caribbean, we saw discounting across the board among the lower priced itineraries in the Caribbean in mid-February, but the Carnival (CCL) brand pricing stood out in March, outperforming its peers.

 

Carnival sequential pricing picked up among the Eastern Caribbean itineraries. More importantly, sequential pricing rose among the Western Caribbean itineraries for 2H 2014.

 

Blue Skies On the Horizon For Carnival?  - cruise

 

This is encouraging given that Western Caribbean pricing has lagged. While Caribbean pricing overall remains sluggish and pricing has been quite volatile in the busy, promotional period of Wave Season, we continue to see Carnival as best positioned due to easy comps and low Street expectations.

 

Not surprisingly, the picture is starkly different in Europe. The Royal Caribbean (RCL) brand and Norwegian (NCLH) are leading the charge in a rosy booking and pricing environment. CCL has the most exposure to Europe but it is still trying to find a solid footing there with mixed pricing performance in March.

 

The Ukraine-Russia situation could be a wild card.

 

So far, no Black Sea sailings have been rescheduled or canceled on RCL and CCL brands. There’s speculation that Baltic Sea itineraries could eventually be impacted; that would be significant for CCL and RCL if it happens.

 

Alaska will be the weakest market pricing wise in 2014 – who wants to go somewhere cold nowadays?

 

While our study focused on sequential pricing trends and pivots, we would point out that YoY pricing for Carnival is up significantly due to the lapping of the Triumph fire incident in 2013. RCL and NCLH face more difficult comparisons in the Caribbean.

 

The Street is finally catching onto the low bar set by Carnival as even the most bearish sell-side have been raising yield and EPS estimates for CCL before they report earnings in three weeks. According to Factset, recent FY2014 estimate changes have trended around the $1.75 EPS range (at the upper end of CCL’s $1.40-$1.80 guidance). Our $1.90 EPS and 0.3% yield forecast for FY2014 remains unchanged from our note in December “CCL: $2 ON THE HORIZON.”

Join the Hedgeye Revolution.


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


THE LEISURE LETTER (3/6/2014)

LVS, WYNN, MGM, MPEL, CZR, MTN, H, HLT

EVENTS TO WATCH:  UPCOMING EARNINGS/CONFERENCES 

 

TODAY, March 6

  • Todd in Boston       

Friday, March 7

  • Employment Report for February 

Monday-Thursday, March 10-13

  • 2014 Cruise Shipping Miami Conference

Monday, March 11

  • CZR 4Q 2013 conference call

Tuesday, March 12

  • MTN FY2Q 2014 conference call

Friday, March 14

  • Hyatt Investor Day

COMPANY NEWS

LVS:  Las Vegas Sands executive Chris Cahill resigning 
LVS executive vice-president of global operations, Chris Cahill, is resigning.  Cahill oversees the company’s property operations, corporate marketing and human resources, among other things.  LVS gave him a 5-yr contract in April 2012. 

 

Takeaway: We're not reading anything into yet but other companies seem to be poaching some LVS personnel.  

 

OEH: Selling an asset 

The Inn at Perry Cabin, featuring 78 rooms, will be sold for $39.7 million. 

 

Takeaway:  We applaud managements efforts to sell an asset, not officially listed for sale, and we expect any cash proceeds will be used to reduce outstanding debt. 

 

HLT: Announced additional hotel in Saudi Arabia

Hilton Worldwide announced a signing agreement with Al Jazeera Group, for a new 180-room Hilton Al Ahsa, Kingdom of Saudi Arabia is expected to open in 2016.

 

Takeaway:  Continues the company's plan to increase the non-US hotels and room count. 

 

 

INDUSTRY NEWS

JAPAN:  Bill delayed 
One of the legislators, Takeshi Iwaya, spearheading the bill to legalize casinos in Japan says passage might be delayed.  Iwaya said he is extremely worried the bill might not get passed mid-year despite cross-party support because of procedural issues.  Iwaya did comment on potential projects, saying ideally foreign casino operators would join forces with local Japanese companies on projects.   Japan needs the expertise and knowledge of foreign companies, but foreign operators might have trouble adapting to Japan’s particular characteristics, he said.

 

Takeaway:  We believe such statements are merely efforts by Japanese officials to "save face" while also reaffirming the keiretsu business structure.  However, it seems that Japan is a huge focus for investors and expectations are high for passage of favorable legislation this year.

 

MACAU:  Work on new border crossing to start in 2015
Work on the new border crossing in Ilha Verde will start halfway through next year and should be complete in 2016.  The new crossing will be open 24 hours a day. 

 

Takeaway:  One of many transportation infrastructure developments that should help the Mass business 

 

BERMUDA: May pursue online gaming

Finance Mister David Burt suggested Bermuda establish a legislative committee to examine rules and laws for creating an on-line gaming industry.  Bermuda, home to many corporate headquarters as well as the reinsurance industry, is a preferred corporate domicile due to its favorable tax laws and positive business environment.  

 

Takeaway:  Bermuda with its strong infrastructure (telecom and data centers), coupled with favorable tax laws has the potential to become the next Cyprus for online gaming.  Additionally, the easy air travel access is a major advantage as compared to Cyprus.  

 

MACRO 

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


Sell Baby, Sell

Client Talking Points

RUSSIA

The bear is back in Russia. That one day bounce for Vladimir Putin’s stock market? It has ended. Abruptly. That puts the Russian Trading System down -1.6% this morning to -19.5% year-to-date. Policies have consequences.

UST 10YR

Both the US currency and bond markets are baking in US #GrowthSlowing. The 10-year yield of 2.70% this morning is A) bearish versus our Hedgeye TREND resistance of 2.80% and B) has an immediate-term downside to 2.59%. What does this mean? Buy bonds.

FINANCIALS

If you agree with our macro call (inflation slowing US growth), then you sell Financials (XLF) on the open. Any downside pressure on bond yields from here on out pressures the Yield Spread, (10s minus 2s) which is signaling lower-highs. Incidentally, despite another US #GrowthSlowing data point yesterday (ISM non-manufacturing), we’re still at all-time highs on the S&P 500. #Sell.

Asset Allocation

CASH 31% US EQUITIES 3%
INTL EQUITIES 10% COMMODITIES 16%
FIXED INCOME 20% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

LVS

Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike. The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet. The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%. And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

FX: Euro and Pound continue to signal solid vs Burning Buck @KeithMcCullough

QUOTE OF THE DAY

“An intellectual is someone whose mind watches itself.” - Albert Camus

STAT OF THE DAY

Wal-Mart just announced price cuts on the Samsung Galaxy S4, as well as Apple's 16-gigabyte iPhone 5s and 5c, for customers signing two-year contracts with AT&T and Verizon. A Galaxy S4 is now $49, down from $99. The 16-gigabyte 5s is dropping from $145 to $119, while the 5c is now $29, down from $45. In addition, customers who purchase any Samsung phone with a two-year contract between March 9 and March 22 will receive a free $50 Wal-Mart gift card. The move will fuel speculation Apple is planning a new iPhone release this spring, rather than its usual fall launch. (CNN)


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next