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Senator Durbin Back at It With FDA E-Cig Recommendations – The Industry Is Already Prepared

Massachusetts Senator Dick Durbin (Dem.) – who most recently was a mouthpiece for Bill Ackman’s claim that HLF is a pyramid scheme – was joined by Senators Waxman, Harkin, Rockefeller and members of Congress in releasing a report this morning titled “Gateway to Addiction? A Survey of Popular Electronic Cigarette Manufacturers and Targeted Marketing To Youth”.

 

Lorillard (LO) remains our preferred name in tobacco and we believe the contents of this report have already been priced into the tobacco stocks . Why?

 

The report says nothing new about the industry’s own stance on the likely “deeming” regulation that the FDA will hand down on e-cigs.

 

In the conference calls we’ve held with the CEOs of e-cig companies, including with NJOY, LOGIC, Ballantyne Brands, and Victory – they’ve all suggested to us that they’re bracing for FDA regulation, including:

 

  • A ban of online commerce
  • Age verification standards at retail
  • Flavor limitations (beyond tobacco and menthol)
  • Health/safety certifications
  • Labeling and marketing requirements

Directly below are the key recommendations from the Durbin & Co. report, which show great overlap between its call for regulation and those that are being braced for/expected and encouraged from the industry. 

 

Senator Durbin Back at It With FDA E-Cig Recommendations – The Industry Is Already Prepared - a. durbin ecig recs

 

Note that the group solicited information via surveys sent to 9 e-cig manufacturers last September, including to MO (Mark-Ten), RAI (Vuse), LO (blu), NJOY, Eonsmoke, LOGIC, VMR, Green Smoke, and Lead by Sales. It reported that all the companies responded to the survey except for Lead by Sales.

 

The report’s loudest call, to keep e-cigs out of the hands of children (no marketing of them, no attractive properties like flavors, no ease to purchase via strict age restriction), again echoes the industry’s leaders’ expectations and desires for the category, and we believe that the FDA, when it chooses to act, is likely to carve out similar standards so as to treat e-cigs similar to traditional cigarettes in terms of sales and marketing.

 

Call with questions,

Matt

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES

Takeaway: Tech Wreck + So-So FIG Earnings. The silver lining is that the short-term setup looks asymmetrically bullish for XLF.

Key Callouts:

What a difference a week makes. The ongoing collapse of high-flying social media tech names coupled with weaker-than-expected earnings from JPMorgan on Friday led to a 4.0% rout in the XLF last week. That makes Financials the second-worst performing sector YTD behind only consumer discretionary (down 2.65% through Friday's close). Utilities, for reference, are the best performing sector at +9.80% YTD. 

 

Earnings thus far have been a mixed bag. Though we only have a handful of reports in hand at this point, three of the four "big uglies" have reported. Two of the three, Citi and Wells, have come in better than expected, while JPMorgan was a disappointment. We'll get results from the fourth horseman, BofA, on Wednesday morning. 

 

As far as the risk monitor is concerned, we continue to see a fairly benign backdrop characterized by modest widening in sovereign and bank-specific swaps, but no real change in interbank systemic risk measures. Some of the main callouts are:

 

* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 4.4% upside to TRADE resistance and 0.7% downside to TRADE support.

 

* TED Spread – The TED spread fell 1.7 basis points last week, ending the week at 18.8 bps this week versus last week’s print of 20.46 bps.

 

* U.S. Financial CDS -  Swaps widened for 21 out of 27 domestic financial institutions. The Global US banks were all wider, by an average of 4 bps w/w, but remain tighter by 4 bps on a m/m basis. The specialty finance companies we track were wider on the week and on the month with the biggest moves coming from the mortgage insurers, MTG & RDN and Sallie Mae. The US insurers were little changed aside from the bond guarantors, MBIA and Assured Guaranty, where swaps widened out 60 and 32 bps, respectively w/w and are now wider by 106 and 62 bps m/m.

 

* European Financial CDS - Swaps across Europe's banking system were little changed (median change = 0 bps), but the Greek banks continue to tighten notably, dropping an average of 40 bps in the past week and 185 bps in the past month. This morning's news that GS & MS will be leading a secondary offering for National Bank of Greece doesn't hurt either.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 13 improved / 2 out of 13 worsened / 7 of 13 unchanged

 • Intermediate-term(WoW): Positive / 8 of 13 improved / 2 out of 13 worsened / 3 of 13 unchanged

 • Long-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 15

 

1. U.S. Financial CDS -  Swaps widened for 21 out of 27 domestic financial institutions. The Global US banks were all wider, by an average of 4 bps w/w, but remain tighter by 4 bps on a m/m basis. The specialty finance companies we track were wider on the week and on the month with the biggest moves coming from the mortgage insurers, MTG & RDN and Sallie Mae. The US insurers were little changed aside from the bond guarantors, MBIA and Assured Guaranty, where swaps widened out 60 and 32 bps, respectively w/w and are now wider by 106 and 62 bps m/m.

 

Tightened the most WoW: AON, CB, AIG

Widened the most WoW: MBI, WFC, AGO

Tightened the most WoW: MET, GNW, UNM

Widened the most MoM: MBI, AGO, TRV

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 1

 

2. European Financial CDS - Swaps across Europe's banking system were little changed (median change = 0 bps), but the Greek banks continue to tighten notably, dropping an average of 40 bps in the past week and 185 bps in the past month. This morning's news that GS & MS will be leading a secondary offering for National Bank of Greece doesn't hurt either.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 2

 

3. Asian Financial CDS - It was a mixed bag for Asian financials last week as Chinese banks tightened nominally while Japanese and Indian financials were generally wider.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week. Irish sovereign swaps tightened by -2.7% (-2 bps to 71 ) and Spanish sovereign swaps widened by 7.1% (6 bps to 93).

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 18

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 3

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 1.7 bps last week, ending the week at 5.65% versus 5.63% the prior week.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1855.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 6

 

7. TED Spread Monitor – The TED spread fell 1.7 basis points last week, ending the week at 18.8 bps this week versus last week’s print of 20.46 bps.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 7

 

8. CRB Commodity Price Index – The CRB index rose 2.7%, ending the week at 309 versus 301 the prior week. As compared with the prior month, commodity prices have increased 2.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-over-week at 13 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. 

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 2 basis points last week, ending the week at 2.74% versus last week’s print of 2.76%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened -4 bps, ending the week at 57 bps versus 61 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 11

 

12. Chinese Steel – Steel prices in China rose 2.2% last week, or 74 yuan/ton, to 3,367 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 227 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 4.4% upside to TRADE resistance and 0.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: WHAT A DIFFERENCE A WEEK MAKES - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


YELP: Does Europe Even Matter?

Takeaway: The US is the much bigger story, but there are some who believe the EU opportunity is a big deal. Below we explain why it's not

RECAP: YELP'S US TAM 

During our Best Ideas Short Call, we broke down YELP's US Total Addressable Market TAM).  The analysis was fairly simple.  YELP's addressable market needs to fit two criteria:

  1. Retail (vs. B2B)
  2. Affordability

YELP has suggested that its US TAM is 27M. Our analysis of the US market, using the above criteria, suggested it is only 3.4M.  We also explained why we don't believe YELP can ever penetrate more than 170K of that.  For more detail, see link at end of note. 

DISSECTING YELP'S EU TAM

We didn't touch upon YELP's international market during our Best Ideas Call because the headwinds in the US are too severe for international to compensate.  However, we decided to extend our TAM analysis to the EU to prove this point.

 

CRITERIA 1: RETAIL

There are 21M non-financial establishments in the EU, however the majority (65%) cater to the B2B market (vs. Retail, which is YELP's core user).  YELP's EU TAM (according to Criteria 1) is 7.4M, but that doesn't consider affordability

 

YELP: Does Europe Even Matter? - YELP   EU TAM by Sector

 

CRITERIA 2: AFFORDABILITY

This one is tougher to back into since we can't pull business segmentation by revenue/income bracket as we did with the US market.  But we do have "Value Added" (essentially EU version of NOPAT) by firm size, which gives us a proxy for affordability.

 

YELP: Does Europe Even Matter? - EU   Value added by firm size

 

Micro firms (less than 10 employees) represent over 94% of YELP's EU TAM, but represent a disproportionately smaller portion of Value Added.  While we can't segment YELP's EU TAM with the same granularity as we did with the US market, we broke it down by average Value Added (think NOPAT) across the Micro firms in the Yelp's applicable markets.  

 

YELP: Does Europe Even Matter? - YELP   EU TAM Micro

 

The data suggests that average firm in YELP's EU TAM produces Value Added of $77K.  In turn, the cost of Yelp Advertising would be prohibitive at YELP's average ARPU (YELP suggests its typical local ad spend is $4.2K year).  It's important to note that these are averages, so YELP should be able to gain some penetration among the above-average Micro firms.  The question is how much?

CONCLUSION

In summary, the data suggests YELP's Total Addressable EU market (7.3M) is much smaller than many expect, and given that 94% of this market is composed of micro firms producing less than $77K of Value Added on average, we suspect the road to penetrating this market will be challenging.

 

We provide more detail on our short thesis in the note below, and far more detail in our YELP Short Best Ideas Slide Deck.  For a copy, or to discuss our thesis in more detail, let us know.

 

YELP: Death of a Business Model

04/04/14 10:05 AM EDT

http://app.hedgeye.com/feed_items/34518

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 


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MACAU: ANOTHER SOFTIE

Expecting only single digit YoY GGR growth for April due to sluggish VIP volumes and low hold

 

 

Daily table revenues averaged only HK$927 million, up 7% WoW but flat YoY.  MTD, the average is only up 1%.  April is certainly coming in slower than even we thought, although we believe low hold is partly responsible.  Mass headcounts appeared to be reasonably strong over the weekend but VIP volumes may have been a little weak.  For the full month of April including slots, we are now projecting YoY GGR growth of only +4-8%.  That’s probably slow enough to provide more downside on the Macau stocks.  The good news is that we expect 20%+ YoY GGR growth in May but we have to get through April and only a reasonably in-line earnings season first.

 

Could China Macro finally be impacting Macau?  The operators and junkets we've talked to say no.  They generally view the weakness as a temporary break from the gangbusters pace Macau has experienced since January.  Nevertheless, the Macro hasn't been great.  Most recently, last week IMF called for China to rein in credit growth, especially outside of the banking sector, increased scrutiny of junkets and players, as well as travel warnings for Chinese tourists to Malaysia.


In terms of market share, MPEL and LVS are the market share winners MTD relative to trend at the expense of Galaxy.  We continue to view LVS as a market share gainer for the rest of 2014.  Keep an eye on Wynn for evidence that the property has made moves to bolster its VIP share.  We believe management there may be contemplating a more aggressive commission advancement strategy. 

MACAU: ANOTHER SOFTIE - m1

 

MACAU: ANOTHER SOFTIE - m2


Fund Flows, Refreshed

Takeaway: In the most recent week, absolute money flow into mutual funds was balanced but fixed income continues to display relatively better trends.

Fund Flows, Refreshed - wallstreet2

 

Investment Company Institute Mutual Fund Data & ETF Money Flow

 

In the most recent week, absolute money flow into mutual funds was balanced between fixed income and equity products but bond trends continue to display improving rates of change versus decreasing momentum in equities.

 

Total equity mutual fund flow improved sequentially week-to-week but produced a tally below the 2014 year-to-date weekly average. The $3.1 billion that came into all equity mutual funds during the most recent 5 day period ending April 2nd was split between a fairly weak $949 million inflow into U.S. equity funds versus the $2.1 billion that moved into international stock funds. This higher demand for foreign equity products has been consistent over the past two years with international stock fund inflow having averaged $2.8 billion per week this year and $2.6 billion per week last year in 2013 with domestic fund products averaging an inflow of just $1.2 billion thus far in '14 and a $451 million inflow last year in comparison. The 2014 running weekly average inflow for all equity mutual funds is now $4.0 billion, still an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual fund flow improved sequentially week-to-week and the 12 week linear trend lines in the product graphs below display improving momentum for bond funds versus equity funds. For the week ending April 2nd, $3.3 billion flowed into all fixed income funds, an improvement from last week's $1.2 billion inflow. The breakout of improving bond fund inflow amounted to $3.1 billion into taxable products and a $202 million inflow into tax-free or municipal products. The inflow into taxable products this week was the 8th consecutive week of positive flow and the inflow into municipal or tax-free products was the 12th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 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).

 

Exchange traded funds (ETF) experienced positive trends during the week, with a very strong week of subscriptions into stock ETFs with $4.1 billion in net inflow with bond ETFs experiencing a slightly above average inflow of $1.6 billion for the most recent 5 day period. The 2014 weekly averages are now a $421 million weekly inflow for equity ETFs and a $946 million 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 $2.3 billion spread for the week ($7.3 billion of total equity inflow versus the $4.9 billion inflow 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 $7.2 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week). 

 

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. 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.   

 

Fund Flows, Refreshed - ICI chart 1

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product

 

Fund Flows, Refreshed - ICI chart 2

 

Fund Flows, Refreshed - ICI chart 3

 

Fund Flows, Refreshed - ICI chart 4

 

Fund Flows, Refreshed - ICI chart 5

 

Fund Flows, Refreshed - ICI chart 6

 

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


Fund Flows, Refreshed - ICI chart 7

 

Fund Flows, Refreshed - ICI chart 8

 

Net Results

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $2.3 billion spread for the week ($7.3 billion of total equity inflow versus the $4.9 billion inflow 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 $7.2 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week).

 

Fund Flows, Refreshed - ICI chart 9 

 

Editor's Note: This is a research note originally published April 10, 2014 by Hedgeye’s Financials team Jonathan Casteleyn & Josh Steiner. Follow Jonathan & Josh on Twitter @HedgeyeJC and @HedgeyeFIG.

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