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European Banking Monitor: Russia The Big Mover | $RSX

Editor's Note: This is a complimentary research note from Hedgeye Analyst Matthew Hedrick published on March 10, 2014 at 12:00 PM. 

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 sales@hedgeye.com. And, for more information on our services, click here.

 

European Banking Monitor: Russia The Big Mover | $RSX - 3 13 2014 12 11 10 PM

 

European Financial CDS - The big mover in European swaps last week was Sberbank of Russia, which widened 72 bps to 286 bps from 214 bps. Russia's largest bank has often been a good indicator on geopolitical as well as commodity pressures. Elsewhere across Europe, the Financials were much more sanguine with broad-based improvement.

 

European Banking Monitor: Russia The Big Mover | $RSX - zz. banks large

 

Sovereign CDS – Sovereign swaps were tighter across the globe last week with the sole exception of the US, where swaps were unchanged at 30 bps. Europe put up broad-based improvement in spite of turmoil in peripheral Ukraine.

 

European Banking Monitor: Russia The Big Mover | $RSX - z. sov1M

 

European Banking Monitor: Russia The Big Mover | $RSX - z. sov2

 

European Banking Monitor: Russia The Big Mover | $RSX - z. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 3 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: Russia The Big Mover | $RSX - z. euribor

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Retail Callouts (3/12): RH, WSM, AMZN

Takeaway: McGough on the road - Richards pinch-hitting...WSM strong rev #'s bullish for RH, AMZN announces prime $ increase, Alibaba recruiting

EVENTS TO WATCH

 

THURSDAY

  • ARO - Earnings Call: Thursday 3/13, 4:15pm
  • ZUMZ - Earnings Call: Thursday 3/13, 5:00pm
  • ULTA - Earnings Call: Thursday 3/13, 5:00pm

 

FRIDAY

  • ANN - Earnings Call: Friday 3/14, 8:30am
  • BWS - Earnings Call: Friday 3/14, 9:00am
  • BKE - Earnings Call: Friday 3/14, 10:00am
  • HIBB - Earnings Call: Friday 3/14, 10:00am

 

COMPANY NEWS

 

WSM - 4Q13 Earnings

 

Takeaway: 10.4% comp was driven by a big beat from DTC, with considerable strength coming from the furniture concepts. This is the first meaningful beat we've seen this quarter and it was possible for two reasons; 1) e-commerce penetration offset weather induced traffic declines and 2) furniture sales are more immune to inconsistent traffic patterns than impulse categories. Great read through for our favorite name, RH, who also leans heavily on the direct channel.


Retail Callouts (3/12): RH, WSM, AMZN - chart1 3 13

 

AMZN - Amazon Prime and Amazon Student Prime Membership Fee Changes

(http://www.amazon.com/gp/help/customer/display.html?ascsubtag=bmTVAqqiEeOhW9pxbuniXwcv01_kac.3_0_0_0&nodeId=201482600)

 

  • "For the first time since it was introduced nine years ago, the price of Prime is going up. Existing Prime members will pay $99 per year on their annual renewal date and Amazon Student members will pay $49."
  • "The Prime Fresh membership fee will remain unchanged at $299."

 

Takeaway: Step 1 for AMZN was to get users hooked on its Prime service, now it's trying to take price. That being said, 9 years is a long time to hold price steady and one could argue that AMZN should have done this a long time ago. Prime is a sticky enough service that the $20 price hike won't chase many away.

 

 Alibaba - Alibaba Ramping Up Efforts to Sell U.S. Brands in China

(http://blogs.wsj.com/digits/2014/03/11/alibaba-ramping-up-efforts-to-sell-u-s-brands-in-china/)

 

  • "Chinese e-commerce giant Alibaba Group is ramping up efforts to bring U.S. brands to consumers in its home country. Alibaba...says it will offer U.S. companies several ways to get their merchandise to China, including through its Alipay payments subsidiary and sophisticated shipping methods. It is also getting closer to launching a new U.S. online marketplace called 11Main.com for small- and medium-sized brands and manufacturers."
  • "ChannelAdvisor...has partnered with Alibaba to help U.S. companies sell into mainland China using its software. Its clients will be able to more easily list, sell and deliver items on Alibaba’s Tmall.com site. U.S. e-commerce companies have struggled to gain a foothold in China, in part because of Alibaba’s headstart with Tmall and its eBay-like site Taobao."

 

Takeaway: A number of US companies already use Tmall as a platform in China. NKE, Addy, New Balance, etc. with many more to come. Alibaba takes a lot of the guess work out the equation allowing brands to set up localized brand shops that Chinese consumers can identify with. Definitely a good starting point for brands who have struggled to gain a foothold in the Chinese marketplace.

 

OTHER NEWS

 

What's Selling: Running

(http://www.wwd.com/footwear-news/retail/whats-selling-running-7587138)

 

MAINE RUNNING CO., Portland, Maine 

  • Brooks Adrenaline GTS
  • Asics GT-2000
  • Saucony Guide 7

Top trend: “Definitely the more cushioned options for us are getting a lot of attention,” said Ben Webber, assistant GM. “People are asking about shoes that have a lower offset but with more cushioning. It’s crazy how the pendulum swings.”

 SALT LAKE RUNNING CO., Draper, Utah

  • Altra Superior and Olympus (tie)
  • Hoka One One Stinson Trail 
  • Adidas Supernova Glide Boost

Top trend: “Trail shoes are working with all the trails opening back up,” said manager David Buckle. 

 FITRIGHT NW, Portland, Ore. 

  • Brooks Adrenaline GTS
  • Saucony Guide 7 and Ride 6 (tie)
  • Asics GT-2000 

Top trend: “Color is still a big push. People really enjoyed when color started to show up on the wall. It rains here a lot and when it’s colder, people want [nice] things to look at,” said co-owner Robb Finegan. “White is trending with a lot of the vendors, but we got a big shock this spring with people wanting more color and not the white mesh.”

 

DDS - Moody's Lifts Dillard's Rating

(http://www.wwd.com/business-news/financial/moodys-lifts-dillards-rating-7587468)

 

  • Moody’s Investors Service Wednesday upgraded Dillard’s Inc.’s corporate family rating one notch to 'Ba1'…"
  • "Moody’s also raised the...retailer’s probably of default rating one notch to 'Ba1' and its senior unsecured notes a tick to 'Ba2'…"
  • "In assigning the ratings, Margaret Taylor, vice president and senior credit officer at Moody’s, noted the retailer’s 'ability to maintain its operating margin above 5.5 percent [of sales] despite gross margin erosion in the fourth quarter.'"

 

TGT - Target Apologizes for Photoshop Gaffe

(http://www.wwd.com/media-news/fashion-memopad/off-target-7587760)

 

  • "...Target apparently ran Photoshopped images of overly skinny teens wearing bathing suits on its Web site. The images received sharp criticism from national media and there was anger throughout the blogosphere as the photos went viral."
  • "Target was apologetic on the matter. 'In response to your query about the swimsuit image on target.com, this was an unfortunate error on our part and we apologize. We have removed the image from our Web site,' a company spokesman said. Asked how the mistake occurred, 'It was the result of a photo editing error on our part.'”

 

BEBE - Bebe Entering Eyewear Market

(http://www.wwd.com/accessories-news/eyewear/bebe-entering-eyewear-market-7584901)

 

  • "Bebe is entering the eyewear market with a new collection of sunglasses for spring."
  • "The range, which includes a variety of styles done in mixed metal and plastic, retails for $68 to $88 and will be sold in-store and online."

 


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THE LEISURE LETTER (3/13/2014)

Takeaway: Another article focusing on money laundering in Macau

TICKERS:  SGMS

EVENTS TO WATCH:  UPCOMING EARNINGS/CONFERENCES 

TODAY

  • JP Morgan Gaming, Lodging, Restaurant & Leisure Forum
    • FCH, PNK, PENN, BYI, CCL, SGMS, GLPI, SHO, MCRI

Monday-Thursday, March 10-13

  • 2014 Cruise Shipping Miami Conference (CSM)

Friday, March 14

  • Hyatt Investor Day

COMPANY NEWS

SGMS:  missed 4Q EBITDA expectations but raised its 2014 WMS synergy guidance.  Yields also held up better than expected thanks to WAP outperformance.

  • Takeaway:  Cautious on the stock over the intermediate and long term given the lack of cash flow and slot headwinds over the next two years.

Starwood Capital – acquired U.K. hotel and conference center operator De Vere Venues from the De Vere Group for approximately $385 million. The transaction includes a collection of 23 owned and leased hotels, mostly in and around London, such as Wokefield Park, Horsley Park and Latimer Place.

 

Takeaway:  Could Barry Sternlicht be reuniting the band and will he make one more run at another lodging IPO?  We'd like to see it - Sternlicht is a money maker.  No we're not kissing arse for a piece of the underwriting - we only do research!  Stay tuned…

 

TUI Cruises (CSM):  When asked about the higher fuel prices for 2015 due to the implementation of the  more expensive low-sulphur fuel (MGO), TUI Cruises CEO Richard Vogel responded, 'We are certainly not going to stop cruising in Northern Europe but we will just have to see just how much extra passengers will be willing to pay to cruise there."  Vogel added he was confident Germany would finally overtake the UK this year and said that reaching 3m passengers is a feasible target for the future.  His brand and AIDA combined are adding 37% capacity with their four newbuilds and—assuming they fill them—this alone would bring the German total to 2.2m.

 

Takeaway:  Strong forecast for Germany this year but we see mixed pricing for the AIDA brand

 

INDUSTRY

Authorities announce first local avian flu case Macau Daily Times, Macau Business 

The Civic and Municipal Affairs Bureau (IACM) and the Health Bureau (SSM) have announced that a sample taken yesterday from live chicken imported from the mainland has tested positive for the bird flu virus. It is the first time an H7-type avian influenza virus has been detected in Macau since the latest outbreak of bird flu began in the mainland early last year.  While still early, the Health Bureau stressed that none of the workers who were in contact with the poultry have displayed any flu-like symptoms. 

 

Takeaway:  A small risk but our studies have shown bird flu have not impacted Mass revenues in the past. Only time will tell if the bird flu jumps from the avian to humans. 

 

Macau – Reuters published a story about how Chinese citizens are using their Union Pay bankcard (a Chinese government backed financial institution) to funnel money out of China and into other foreign countries – including Macau.

 

Takeaway: The article is actually informative and a little troubling.  It goes through the UnionPay structure and how it is being used to launder money and contribute to Macau’s gaming success.  We all know this goes on but the article could really raise some eyebrows here.  There seems to be an increasing amount of talk recently regarding Macau money laundering.  We commented yesterday on the US State Department asking for increased junket oversight and a lowering of the threshold for reportable transactions.

 

Some of it could be politically motivated – Steve Wynn and Sheldon Adelson are publicly not fans of Obama’s policies and the Administration has been accused of using the IRS and other government agencies against their political enemies.  Whatever the agenda, the realities of the Macau gaming business seem to be coming to light in the US public domain.  Definitely something to pay attention to with the stocks up and sentiment running high and analysts saying there are no risks.

 

Cruises set new record in Europe with 6MM passengers Hosteltur 

President of CLIA Europe, Pierfrancesco Vago said the persisting economic weakness in Europe remains a challenge but he is optimistic that hte cruise industry will continue to grow in 2014.  In 2013, 475k Spaniards chose a cruise to enjoy their holiday -similar levels to 2008.

  • 6.35MM European cruise passengers in 2013
  • 4/5 Europeans decided to enjoy cruise around Europe (Mediterranean - most popular)
  • Spain remains top 5 source market for Europe
  • In response to national economic indicators, Spain could improve their results in 2014

 Takeaway:  Can 2014 surpass 2013's good year?  So far, agents are optimistic.

 

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.


ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam

Takeaway: Although equity inflow was stronger than fixed income inflow during the week, the positive rate of change is stronger in bonds

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, equity mutual funds had another solid inflow albeit just inline with the year-to-date averages with bonds funds showing improving subscriptions, well above the year-to-date mean:

 

Total equity mutual funds produced another strong week of inflow with $5.3 billion of net subscriptions, a slight acceleration from the $4.9 billion inflow the week prior. The $5.3 billion inflow had an international fund bias during the most recent 5 day period, with $3.4 billion flowing into international equity funds and $1.9 billion flowing into domestic stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.9 billion, an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual funds also had net inflows during the 5 day period ending March 5th with $3.7 billion flowing into all fixed income funds. The breakout of improving bond fund inflow amounted to $2.9 billion into taxable products and a $756 million inflow into tax-free or municipal products, the 8th consecutive week of inflow into munis after 33 consecutive weeks of outflow. The 2014 weekly average for fixed income mutual funds now stands at a $1.0 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).

 

ETFs had mixed trends during the week, with a strong week of subscriptions in stock ETFs with $8.8 billion in net inflow with bond ETFs experiencing a sharp $7.2 billion outflow, the biggest bond ETF withdrawal in our 18 month data set. The 2014 weekly averages are now a $978 million weekly outflow for equity ETFs and a $1.0 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $17.7 billion spread for the week ($14.2 billion of total equity inflow versus the $3.5 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.4 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Continued positive equity mutual fund inflow currently supports our long recommendation on T Rowe Price (TROW) which benefits from this trend with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the nascent trends on the institutional side of the industry, which is seeing a shift in asset allocation into fixed income and alternatives as pensions de-risk away from equities  (see our Legg report here).

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 1

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 2

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 3

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 4

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 5

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 6

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 7

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 8

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 9

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $17.7 billion spread for the week ($14.2 billion of total equity inflow versus the $3.5 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.4 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

 

ICI Fund Flow Survey - Fixed Income Momentum Picking Up Steam - ICI chart 11 

 

 

Continued positive equity mutual fund inflow currently supports our long recommendation on T Rowe Price (TROW) which benefits from this trend with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the nascent trends on the institutional side of the industry, which is seeing a shift in asset allocation into fixed income and alternatives as pensions de-risk away from equities  (see our Legg report here).

 

 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


Not Good

Client Talking Points

USD

The world woke up this morning to new year-to-date lows for the U.S. Dollar. Monetarily or fiscally, it’s clear the U.S. has no policy to protect the purchasing power of its People. Down Dollar, Down Rates is a flat out policy to inflate asset prices, and its slowing real (inflation adjusted) growth. Not good.

GOLD

Well, Gold loves the Down Dollar, Down Rates -> Stagflation expectation. It’s up another +0.4% this morning to +14.1% year-to-date with the Dow down YTD and SP500 treading hard to stay up for the year. This is definitely not what growth investors want to see.

SECTORS

From an S&P Sector Style perspective, unless you are long Utilities (XLU), Healthcare (XLV) or Materials (XLB) - i.e., long slow-growth-inflation, and short the consumer stocks - this is not where you want the major index performance divergences tracking into Q1 end. Utilities being up +6.1% year-to-date is pretty much the same thing as being long Gold. What we’re looking at is the same playbook as Q1 of 2011.

Asset Allocation

CASH 34% US EQUITIES 6%
INTL EQUITIES 7% COMMODITIES 13%
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.

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

TREASURIES: 10yr 2.73% straight down since the jobs rpt as #InflationAccelerating slows US growth @KeithMcCullough

QUOTE OF THE DAY

"A stumbling block to the pessimist is a stepping-stone to the optimist." - Eleanor Roosevelt

STAT OF THE DAY

Cornerback Darrelle Revis and the New England Patriots have reached agreement on a one-year, $12 million deal, according to league sources. Revis still needs to pass his physical and sign his contract. Once he does, it will continue Revis' reign as the NFL's highest paid cornerback and gives the Patriots the player they needed to replace cornerback Aqib Talib, who unexpectedly bolted for the Denver Broncos late Tuesday night. (ESPN)


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