prev

European Banking Monitor: Credit Risk Widens Substantially

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 - Swaps were notably widener in Europe last week but remain modestly tighter month-over-month.  Greek banks, which have seen their swaps tighten steadily for months now widened sharply. 

 

European Banking Monitor: Credit Risk Widens Substantially - chart 1 european financials CDS

 

Sovereign CDS – Sovereign swaps widened last week. Italian sovereign swaps widened by 11% (11 bps to 113) and Portuguese sovereign swaps widened by 18% (27 bps to 180).

 

European Banking Monitor: Credit Risk Widens Substantially - chart 2 Sovereign CDS

 

European Banking Monitor: Credit Risk Widens Substantially - chart 3 Sovereign CDS

 

European Banking Monitor: Credit Risk Widens Substantially - chart 4 sovereign CDS

 

Euribor-OIS Spread – 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. The Euribor-OIS spread widened by 2 bps to 19 bps.

 

European Banking Monitor: Credit Risk Widens Substantially - chart 5 Euribor OIS Spread

 

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 


Just Charts: Slow Growth Yield Chasing Remains The Rage

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 1

 

Consumer Staples mildly underperformed the broader market last week, falling -0.52% versus the S&P500 at -0.03%. XLP is up 3.0% year-to-date vs the SPX at 1.6%.

 

Earnings Calls (in EST):

Monday (5/19):  CPB (8:30am)

Wednesday (5/21):  HRL (9am)

 

BMO Capital Markets Farm To Market Conference (in EST):

Wednesday (5/21):  TSN (8am); SAFM (9am); HAIN (11am); SMG (1:30pm); HRL (4pm)

 

For the last 2+ months, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 2

 

The Hedgeye U.S. Consumption Model has shown steady improvement over the past three weeks, with 5 of the 12 metrics flashing green.

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 3

 

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

 

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.6x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and fell to 34.9 versus 37.1 in the prior week

Just Charts: Slow Growth Yield Chasing Remains The Rage - 4

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 5

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 6

 

Top 5 Week-over-Week Divergent Performances:

Positive Divergence:  DF 5.8%; MNST 5.3%; STZ 4.6%; DEO 4.5%; BNNY 4.0%

Negative Divergence:  RDEN -26.8%; PG -2.5%; POST -2.2%; LNCE -1.9%; ENR -1.8%

 

 

Last Week’s Research Notes

 

Quantitative Setup

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

 

BUD – remains bullish TREND as it carried most of the slow-growth-big-cap-low-beta style factors the market is chasing right now; TREND support = $106.65

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 7

 

DEO  - finally joins the slow-growth-low-beta party, breaking out above TREND line resistance of $125.93

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 8

 

KO – same as BUD – the market’s style factor appetite for an equity with these characteristics changed in April; TREND bullish, $34.79 support

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 9

 

PEP – looks just like KO right now; bullish intermediate-term TREND with $83.71 TREND support

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 10

 

GIS  - still one of the best looking names on this list; TREND support = $51.44

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 11

 

MDLZ – big TREND breakout on big volume in the early part of May #confirmed; TREND support building a big base at $35.59

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 12

 

KMB – if I had to buy one name on this sector on the open this week, it would probably be KMB; TREND support = $108.65

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 13

 

PG – doesn’t look as solid as BUD, KO, and PEP (as it broke its immediate-term TRADE line last week); TREND support of $80.0

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 14

 

MO  - slow-growth-yield-chasing remains the rage; bullish intermediate-term TREND breakout from March intact, support = $37.92

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 15

 

PM – no change as the bearish to bullish TREND reversal of the last 6 weeks is confirmed; TREND support = $83.91

 

Just Charts: Slow Growth Yield Chasing Remains The Rage - 16

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst



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.

MACAU: HK$6.2B IS A "PLACEHOLDER" WEEK

This past week's numbers look unreliable.

 

 

The numbers are in and last week generated HK$6.2 billion in table revenues for the Macau casinos, as reported.  HK$6.2 billion is one of the “placeholder” numbers we’ve written about extensively and cannot be relied upon (see our note, "WE'VE BEEN PLACEHOLDERED!" on 4/29/2014).  In fact, the 3rd week of May last year also generated exactly HK$6.2 billion of table revenue.  Moreover, month to date table revenues totaled HK$18.6 billion - divided by the 3 weeks equates to, you guessed it, HK$6.2 billion per week.  Come on, can we be at least a little creative? 

 

We expect a positive catch up in next week’s data or the subsequent week that could push YoY growth close to our 20% estimate.  In fact, our sources on the ground are indicating they are pleased with both VIP and Mass volumes and hold percentage seems to be tracking close to normal.  The UnionPay issue, junket incidents, and China Macro do not appear to be having much of a negative impact on the market.

  

MACAU: HK$6.2B IS A "PLACEHOLDER" WEEK - m1

 

 For market share, Galaxy is the only company tracking meaningfully above its recent trend, at the expense of SJM.

 

MACAU: HK$6.2B IS A "PLACEHOLDER" WEEK - m2


Retail Callouts (5/19): TGT, Adi, WMT

Takeaway: TGT CMO responds to scathing employee letter. Adi CEO talks succession plan. WMT won't oppose minimum wage hike.

HEDGEYE RETAIL IDEAS LIST
 

Retail Callouts (5/19): TGT, Adi, WMT - ideas

 

EVENTS TO WATCH

 

MONDAY (5/19)

  • URBN - Earnings Call, 5:00pm

 

TUESDAY (5/20)

  • DKS - Earnings Call, 10:00am
  • TJX - Earnings Call, 11:00am

 

WEDNESDAY (5/21)

  • TIF - Earnings Call, 8:30am
  • PETM - Earnings Call, 10:00am
  • TGT - Earnings Call, 10:30am
  • AEO - Earnings Call, 11:00am
  • WSM - Earnings Call, 5:00pm

 

THURSDAY (5/22)

  • BKE - Earnings Call, 10:00am
  • BONT - Earnings Call, 10:0am
  • ARO - Earnings Call, 4:15pm
  • ROST - Earnings Call, 4:15pm
  • GPS - Earnings Call, 5:00pm

 

FRIDAY (5/23)

  • FL - Earnings Call, 9:00am

 

COMPANY NEWS

 

TGT - The Truth Hurts

(https://www.linkedin.com/today/post/article/20140513221110-3501295-the-truth-hurts)

 

Target CMO, Jeff Jones, in response to the article posted by an anonymous employee on gawker: (http://gawker.com/target-headquarters-in-desperate-need-of-help-says-e-1573101642)

 

  • "You’d think that these two incidents alone [Data Breach & CEO resignation] would create enough pain to last a brand a lifetime but one of the most challenging things that has happened, in my opinion, have been reports, some attributed to unnamed team members, that paint a picture of a culture that is in crisis. When a recent post on a well-known blog called me out by name, it only felt right that I should respond."
  • "While we would have preferred to have a conversation like this with the team member directly, speaking openly and honestly, and challenging norms is exactly what we need to be doing today and every day going forward."

 

Takeaway: Normally we wouldn't characterize the opinion of one disgruntled employee as indicative of the corporate culture, but the fact that TGT's CMO, Jeff Jones, personally addressed the anonymous letter in public is telling. Jones was actually the only person called out as being a positive influence in the executive ranks. He's speaking up on behalf of the executive officers of Target, most of whom are afraid for their jobs.  They should be.

 

ADDYY - Adidas CEO Herbert Hainer to prepare succession in coming years: Report

(http://economictimes.indiatimes.com/news/international/business/adidas-ceo-herbert-hainer-to-prepare-succession-in-coming-years-report/articleshow/35263715.cms)

 

  • "The long-serving chief executive of Germany's Adidas said preparing the sportswear giant for a change at the top when his contract ends in 2017 will be among his biggest priorities, Sueddeutsche Zeitung reported on Saturday."
  • "I will not stay forever...One of my key tasks in the next three years will be to initiate the change at the top and to escort it." 

 

Takeaway: Not a big shock given that Hainer has started to divert his attention towards other interests including the role of President and Business Chairman of the Bayern Munich football club. That, and the fact that he's been unable to consistently grow the core brand in key markets on a sustainable basis without relying on acquisitions.

 

WMT - Wal-Mart Says It Won't Oppose Increase in Minimum Wage -- Update

(http://www.nasdaq.com/article/walmart-says-it-wont-oppose-increase-in-minimum-wage--update-201406)

 

  • "Wal-Mart Stores Inc. said it wouldn't oppose an increase in the federal minimum wage, its most explicit comment yet on the controversial debate to move past the $7.25-an-hour minimum."
  • "'We are not opposed to minimum wage increase, unless its directed exclusively at us,' said Wal-Mart U.S. President Bill Simon, referring to an attempt by the District of Columbia city council to require big retailers to pay starting wages that are higher than Washington's minimum wage."
  • "Wal-Mart spokeswoman Brooke Buchanan said the company's official position hasn't changed and it remains neutral on whether or not the minimum wage should be increased. 'Just because we don't oppose it, doesn't mean we support it,' she said."

 

Takeaway: WMT supporting a hike in the minimum wage law is like AMZN supporting a federally imposed online sales tax. Intuitively it doesn't make sense, but it does level the playing field. WMT and AMZN are big enough to handle the fallout from these respective changes in policy, but its competition would be much harder pressed because of the disparity in scale.

 

INDUSTRY NEWS

 

comScore Reports $56.1 Billion in Q1 2014 Desktop-Based U.S. Retail E-Commerce Spending, Up 12 Percent vs. Year Ago

(https://www.comscore.com/Insights/Press_Releases/2014/5/comScore_Reports_56_1_Billion_in_Q1_2014_Desktop_Based_US_Retail_ECommerce_Spending_Up_12_Percent_vs_Year_Ago)

 

  • "comScore, Inc...today released its estimates of Q1 2014 U.S. digital commerce sales. Q1 2014 saw desktop e-commerce spending rise 12 percent year-over-year to $56.1 billion, marking the eighteenth consecutive quarter of positive year-over-year growth and fourteenth consecutive quarter of double-digit growth. M-commerce spending on smartphones and tablets added $7.3 billion for the quarter, up 23 percent vs. year ago, for a digital commerce spending total of $63.4 billion in the first quarter."
  • Other highlights from Q1 2014 include:
    • The top-performing online product categories were: Apparel & Accessories, Consumer Packaged Goods, Sport & Fitness, Digital Content & Subscriptions, and Home & Garden. Each category grew at least 13 percent vs. year ago.
    • Desktop E-commerce accounted for 11.7 percent of consumers’ discretionary spending, the highest first quarter share on record.
    • Of the additional $7.3 billion in mobile commerce (m-commerce), purchasing using smartphones accounted for 62 percent vs. 38 percent from tablets.

 

Retail Callouts (5/19): TGT, Adi, WMT - chart2 5 19

 

What's Selling: Women's

(http://www.wwd.com/footwear-news/retail/whats-selling-womens-7683956)

 

STELLA MAE, Burlington, Vt.

  • Frye Sabrina boot
  • Clarks Caslynn Cheryl wedge sandal
  • Victoria Classico sneaker

Spring trend: “We have a big assortment, so really there isn’t one trend that people will come in to find. For summer, we’ve been selling a lot of sneakers and wedges — both high and low,” said store manager Laura Cunningham. 

 

GOODMAN’S SHOE STORE, Indianapolis

  • Naot Kirei Mary Jane shoe
  • Mephisto Helen sandal
  • Bernie Mev Comfi slip-on

Spring trend: “We’re custom-oriented, so most of our clients are more focused on fit and foot problems, but when we get into spring and summer, we really sell Naot more than anything,” said manager Matt Ivan.

 

SCARPA, Charlottesville, Va.

  • Coclico Sela sandal
  • Attilio Giusti Leombruni oxfords
  • Lola Cruz Toe-Ring Sandal

Spring trend: “Clients are buying more Birkenstocks than they were a few years back, and more people are picking up lace-up oxfords than in years past,” said merchandising and store manager Susie White.

 

DEBRAS BOUTIQUE, Mobile, Ala.

  • Pura Lopez wedges
  • Rag & Bone Wyatt bootie
  • Dolce Vita Nona heel

Spring trend: “Funky shoes that aren’t so matchy-match are very popular,” said store associate Chad Chappell. “And things that are versatile sell well.”

 

OTHER NEWS

 

SCC, SHLD - Sears Canada Announces Sale of its Minority Interest in Trois-Rivières Joint Arrangement

(http://phx.corporate-ir.net/phoenix.zhtml?c=117881&p=irol-newsArticle&ID=1932027&highlight=)

 

  • "Sears Canada Inc. announced today that it has entered into an agreement for the sale of its 15% minority ownership interest in the Centre commercial Les Rivières shopping centre in Trois-Rivières, Quebec, a joint arrangement the Company holds with affiliates of Ivanhoé Cambridge, for pre-tax consideration of $33.5 million. Ivanhoé Cambridge is purchasing the 15% interest that it does not already own from Sears. The transaction is subject to customary closing conditions and is scheduled to close on June 2, 2014."
  • "Sears will continue to operate its department store in the shopping centre, and Ivanhoé Cambridge will continue to manage the property."

 

BRBY - Burberry Renews Part of Japanese License With Sanyo

(http://www.wwd.com/markets-news/designer-luxury/burberry-renews-part-of-japanese-license-with-sanyo-7685645)

 

  • "...Burberry has inked a new license with Sanyo Shokai Ltd. for its Blue and Black label collections."
  • "As reported, Burberry plans to take its Japanese business in-house next year when its current license with Sanyo expires. The move is aimed at bringing the Japanese offer upmarket and in line with Burberry’s worldwide distribution."
  • "On Monday, Burberry and Sanyo announced a new, three-year agreement that sees the British brand licensing its sporty, premium Black and Blue lines, which are both aimed at a younger audience, to Sanyo. Those lines will no longer carry the Burberry name, but will continue to be owned by the British brand."

TWTR: What the Street is Missing

Takeaway: Monetization has been TWTR's largest growth driver, but will soon emerge as its biggest headwind as the runway is shorter than most think

NOTE SUMMARY

  1. WHAT'S DRIVING TWTR'S GROWTH: Monetization has been TWTR's largest source of growth since 3Q13.
  2. WHAT'S DRIVING MONETIZATION: We believe it is increasing supply more than anything else.
  3. WHAT ABOUT INDUSTRY-LOW AD LOAD: That is inclusive of desktop, which it is barely monetizing.
  4. WHEN DOES MONETIZATION TURN: Growth begins decelerating in 2H14/2015 when it starts comping against the 2Q13 supply shock.

 

WHAT'S DRIVING TWTR'S GROWTH?

TWTR has received a string of upgrades as of late, largely on the basis of valuation. However, we do not believe the sell-side is giving due consideration to what is really driving the TWTR's growth trajectory.  

 

TWTR defines its three growth drivers as:

  1. User Growth: Monthly Active Users (MAUs)
  2. Engagement: Timeline Views/MAU
  3. Monetization: Ad Revenue/Timeline View

 

Over the last two earnings releases, the Street has soured over waning trends in MAUs and engagement.  However, Monetization has been firing on all cylinders, driving accelerating growth dating back to 1Q13.  The question is why?  

 

We could just assume that TWTR enhanced its ad targeting ability, which drove the surge in ad engagements (which is how TWTR gets paid).  However there's a more plausible and tangible explanation, which is increasing supply.

 

 

TWTR: What the Street is Missing - TWTR   Growth Drivers

WHAT'S DRIVING MONETIZATION?

The metrics in the chart below are the sequential change in ad engagement and ad pricing as reported by management (-.86 correlation dating back to 2Q12).  We believe the ongoing deceleration in pricing is a reflection of an accelerating level of available ad inventory (supply).  

 

Twitter's ads are purchased through its self-service ad exchange, where the price is determined through a bidding process.  We estimate the average cost/ad engagement (price) has cumulatively declined 85% over the last 2 years.  We believe a surge of increasing ad inventory led to this decline;  The tight correlation between ad engagements and pricing during the period suggests rising supply has been its largest source of monetization growth.

 

TWTR: What the Street is Missing - TWTR   Ad Engagement vs. Pricing

BUT WHAT ABOUT ITS INDUSTRY-LOW AD LOAD?

This may be true, but this statement is inclusive of the desktop, which TWTR is barely monetizing.  The overwhelming majority of its revenue and growth has been driven by mobile.  In 1Q14, desktop revenue grew only 15% y/y (vs. 197% on mobile).  The relatively sluggish desktop growth reinforces our view that TWTR's desktop UI is poorly designed for monetization.  That said, mobile will likely remain its key source of revenue growth.

 

However, the very important distinction between mobile and desktop is screen size. TWTR can only add so much ad inventory on its mobile platform before pushing users away.  

 

TWTR: What the Street is Missing - TWTR   Mobile vs. Desktop Rev

WHEN DOES MONETIZATION TURN?

It's hard to pinpoint the quarter, but we're expecting monetization growth to decelerate meaningfully beginning in 2H14 and into 2015.  That is because of what happened during 2Q13; the quarter that TWTR saw its sharpest drop in ad pricing (-46% q/q), which we believe corresponds with its sharpest surge in supply.

 

TWTR has benefited from the 2Q13 supply shock in each subsequent quarter since on a y/y basis.  And while pricing has continued to decelerate each quarter since (hence supply has risen), it hasn't been to the same magnitude as 2Q13.  

 

When we look out to 2015, consensus is assuming 61% revenue growth (on top of the 91% consensus growth in 2014).  We've already seen waning growth in Users and Engagement, which means monetization needs to pick up more of the slack next yeart. 

 

That said, it will only get tougher to comp against that 2Q13 supply shock in 2H14/2015, because the more supply TWTR introduces moving forward, the more likely they are to push mobile users away.  

 

TWTR: What the Street is Missing - TWTR   Rev Trajectory

TWTR: What the Street is Missing - TWTR   HRM vs. Cons 2Q14

 

If you have any questions, or would like to discuss in more detail, let us know. 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 

 


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