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European Banking Monitor: Portuguese Swaps Widen Amid Probe

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 .

 

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European Financial CDS - Swaps were generally wider across the board in Europe's banking system, but were acutely wider in Portugal. Portugal's largest bank, Banco Espirito Santo, is being probed by Luxembourg's justice department. The swaps widened to 318 bps (+130 bps w/w).

 

European Banking Monitor: Portuguese Swaps Widen Amid Probe  - chart 1 financials CDS

 

Sovereign CDS – Sovereign swaps were generally little-changed on the  week, though Portugal was +9 bps to 154 bps in response to concerns over the probe into its largest bank, Espirito Santo, by Luxembourg's justice department. 

 

European Banking Monitor: Portuguese Swaps Widen Amid Probe  - chart 2 sovereign CDS

 

European Banking Monitor: Portuguese Swaps Widen Amid Probe  - chart 3 sovereign CDS

 

European Banking Monitor: Portuguese Swaps Widen Amid Probe  - 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 tightened by 1 bps to 15 bps.

 

European Banking Monitor: Portuguese Swaps Widen Amid Probe  - chart 5 Euribor OIS

 

 

Matthew Hedrick 

Associate

 

Ben Ryan

Analyst

 

 

 


Macau: Weakness Prevails into Month End

The latest Macau figures show table revenues average of HK$764 million per day for last week (HK$5.348 billion for the week), down 14% year/year and down 6% month-to-date vs June 2013.  As such June will finish down 5% to 7%.  This will be the 1st monthly decline since June 2009.

 

MGM, Galaxy and SJM are outperforming thus far in June in terms of market share while Wynn and MPEL remain below trend.  MPEL may have more exposure to squeezed junkets than the other concessionaires which could be contributing to its weak share.  Wynn looks to remain conservative in its commission approach given the uncertain environment.  

 

Macau:  Weakness Prevails into Month End - macau234

 

Macau:  Weakness Prevails into Month End - macau2


Monday Mashup: DNKN, NDLS and More

Investment Ideas

The table below lists our Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

 

Monday Mashup: DNKN, NDLS and More - chart1

Recent Notes

06/23/14  Monday Mashup: DRI, SBUX and More

06/24/14  DRI: Management’s Perpetual, Misguided Vision

06/25/14  Restaurant Value Spread In Unfamiliar Territory

Events This Week

No events scheduled for this week.

Chart of the Day

Feeling the squeeze? Gasoline prices are up +5.3% YoY and +10.6% YTD.

 

Monday Mashup: DNKN, NDLS and More - chart2

Recent News Flow

Monday, June 23rd

  • DFRG dismissed Ernst & Young LLP as its independent auditor.
  • RRGB is two weeks away from opening its first restaurant in Orlando, Florida.
  • BOBE named former SVP and CFO of the Brown Shoe Company, Mark Hood as CFO, effective immediately.

 

Tuesday, June 24th

  • CMG announced plans to serve more than 20 million pounds of locally grown produce in 2014, up from 15 million pounds in 2013.

 

Wednesday, June 25th                                

  • DNKN named Jeff Miller as Executive Chef and VP of Product Innovation.  Mr. Miller, who has been with Dunkin’ Brands for 11 years, will head the company’s 22-person culinary team.

 

Thursday, June 26th

  • RRGB appointed Cammie Dunaway to its Board of Directors.  Dunaway currently serves as the U.S. President and Global Chief Marketing Officer for KidZania.  Prior to KidZania, Dunaway served as Executive Vice President for Nintendo, Chief Marketing Officer for Yahoo as well as in various other roles.
  • RT CFO Michael Moore announced his retirement.  The company appointed Jill Golder as CFO, effective immediately.  Ms. Golder has served as Ruby Tuesday’s Senior Vice President of Finance since April 15, 2013.  Moore will remain with Ruby Tuesday as an advisor and help assist in Ms. Golder’s transition until his retirement in August.
  • DNKN promoted Roxanne Bensason to Vice President of International Field Marketing.  Ms. Bensason, who has been with the company for the past 12 years, will report directly to John Costello.
  • NDLS appointed Johanna Murphy to its Board of Directors and a member of its Audit Committee.  Ms. Murphy currently serves as CMO and Director of Digital for Ivanka Trump International.

 

Friday, June 27th

  • GMCR was upgraded to buy at Argus Research with a $140 PT.

Sector Performance

The XLY (+1.0%) outperformed the SPX (-0.1%) last week.  Both casual dining and quick service stocks underperformed the narrower XLY index.

 

Monday Mashup: DNKN, NDLS and More - chart3

 

Monday Mashup: DNKN, NDLS and More - chart4

U.S. Macro Consumption

The Hedgeye U.S. Consumption Model continues to signal bearish, flashing red on 7 out of 12 metrics.

 

Monday Mashup: DNKN, NDLS and More - chart5

XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.

 

Monday Mashup: DNKN, NDLS and More - chart6

Casual Dining Restaurants

Monday Mashup: DNKN, NDLS and More - chart7

 

Monday Mashup: DNKN, NDLS and More - chart8

Quick Service Restaurants

Monday Mashup: DNKN, NDLS and More - chart9

 

Monday Mashup: DNKN, NDLS and More - chart19

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst

 


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MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US

Takeaway: Portugal is in turmoil over Espirito Santo allegations. Meanwhile, the domestic yield spread continues its tailspin, shedding another 8 bps.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 19

 

Key Callouts:

 

* European Financial CDS - Swaps were generally wider across the board in Europe's banking system, but were acutely wider in Portugal. Portugal's largest bank, Banco Espirito Santo, is being probed by Luxembourg's justice department. The swaps widened to 318 bps (+130 bps w/w).

 

* 2-10 Spread – Last week the 2-10 spread tightened to 207 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 0 of 12 improved / 6 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Negative / 4 of 12 improved / 5 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 15

 

1. U.S. Financial CDS -  Swaps widened for 21 out of 27 domestic financial institutions. The Global US Banks were wider by an average of 5 bps on the week while the bond guarantors, MBIA and Assured, widened by 97 and 59 bps, respectively, on the week. Mortgage insurers, MGIC and Radian, also widened on the week by 5 and 17 bps, respectively.

 

Tightened the most WoW: TRV, SLM, MMC

Widened the most WoW: MBI, AGO, MET

Tightened the most WoW: ALL, TRV, GS

Widened the most MoM: WFC, MBI, HIG

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 1

 

2. European Financial CDS - Swaps were generally wider across the board in Europe's banking system, but were acutely wider in Portugal. Portugal's largest bank, Banco Espirito Santo, is being probed by Luxembourg's justice department. The swaps widened to 318 bps (+130 bps w/w).

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 2

 

3. Asian Financial CDS - Bank swaps across Asia were flat to wider last week rising an average 3 bps. Chinese banks saw the largest w/w increase, while Japanese swaps were little changed.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 17

 

4. Sovereign CDS – Sovereign swaps were generally little-changed on the  week, though Portugal was +9 bps to 154 bps in response to concerns over the probe into its largest bank, Espirito Santo, by Luxembourg's justice department. 

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 18

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 3

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 2.0 bps last week, ending the week at 5.32% versus 5.30% the prior week.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1881.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 6

 

7. TED Spread Monitor – The TED spread fell 0.6 basis points last week, ending the week at 21.2 bps this week versus last week’s print of 21.8 bps.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.5%, ending the week at 311 versus 309 the prior week. As compared with the prior month, commodity prices have increased 1.1% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 8

 

9. 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 tightened by 1 bps to 15 bps.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 22 basis points last week, ending the week at 2.97% 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: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 10

 

11. Chinese Steel – Steel prices in China fell 0.4% last week, or 13 yuan/ton, to 3124 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: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 207 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 1.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: RISK RISES IN EUROPE WHILE YIELDS FALL IN THE US - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


Just Charts – Summer Swings

INVESTMENT IDEAS

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 – Summer Swings - 1

EVENTS THIS WEEK

7/2/14 STZ Earnings Call 10:30am EST

WEEK-OVER-WEEK PERFORMANCE

Consumer Staples fell -1.2% week-over-week versus the broader market (S&P500) down -0.1 %.  XLP is up 3.9% year-to-date versus the SPX at 6.1%.

 

Positive Divergence:  THS 4.5%; BNNY 3.0%; CAG 2.8%; TSN 2.7%; KO 1.2%

Negative Divergence:  SODA -7.9%; PM -6.9%; LO -5.6%; MNST -4.7%; NUS -3.8%

RECENT NOTES 

 

XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

Just Charts – Summer Swings - 2

 

The Hedgeye U.S. Consumption Model shows 5 of the 12 U.S. Economic Indicators flashing green.

Just Charts – Summer Swings - 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 19.9x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and remained unchanged at 37.1 versus the prior week

Just Charts – Summer Swings - 4

Just Charts – Summer Swings - 5

Just Charts – Summer Swings - 6

QUANTITATIVE SETUP

In the charts below we look at the largest companies by market cap in the Consumer Staples space from a quantitative perspective.

 

BUD – bullish TRADE and TREND w/ TREND support = 108.55

Just Charts – Summer Swings - 7

 

DEO – bearish TRADE and TREND w/ TREND resistance = 126.86

Just Charts – Summer Swings - 8

 

KO – bullish TRADE and TREND w/ TREND support = 40.22

Just Charts – Summer Swings - 9

 

PEP – bullish TRADE and TREND w/ TREND support = 85.61

Just Charts – Summer Swings - 10

 

GIS – bearish TRADE and TREND w/ TREND resistance = 53.61

Just Charts – Summer Swings - 11

 

MDLZ – bullish TRADE and TREND w/ TREND support = 36.25

Just Charts – Summer Swings - 12

 

KMB – bullish TRADE and TREND w/ TREND support = 109.41

Just Charts – Summer Swings - 13

 

PG – bearish TRADE and TREND w/ TREND resistance = 80.40

Just Charts – Summer Swings - 14

 

MO – bullish TRADE and TREND w/ TREND support = 39.67

Just Charts – Summer Swings - 15

 

PM – bearish TRADE (88.39 resistance); bullish TREND (84.72 support)

Just Charts – Summer Swings - 166

 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


LEISURE LETTER (06/30/2014)

Tickers: BYI, IGT, IKGH, LVS, PENN, PNK, CCL

COMPANY NEWS

PENN (WFMZ) withdrew its proposal for a $480M Hollywood Casino Philadelphia at 700 Packer Avenue in the City's Sports and Entertainment District, which has been pending with the Pennsylvania Gaming Control board (PGCB) since November 2012.  CEO Wilmott said, "A contributing factor in our decision to withdraw our proposal was the city of Philadelphia's vocal support for a center city casino location, despite the fact that 2/3 of the profits from our proposed casino were dedicated to the city's education and pension fund liabilities."

Takeaway:  PA is reaching saturation so the opportunity would have been small.   A positive for shareholder ROIC. 

 

BYI – unveiled its newest slot machine offering "The Magic of David Copperfield"

 

BYI – announced it cut 270 jobs as part of a reorganization effort, half of the jobs eliminated were located outside the United States. 

Takeaway:  There will be a one-time reorganization charge in the quarter.

 

BLOOM:PM – Bloomberry Resorts and Solaire Resorts and Casino unveiled its latest marketing strategy the "Billboard in the Sky" - a brightly painted, logo-adorned Air Asia Airbus A320 which will traverse the skies over Malaysia, China and South Korea

Takeaway: A creative way to advertise gaming, without really advertising gaming - similar to Southwest Airlines fleet of "Shamu" aircraft.

 

IGT – signed an agreement with DLV to install IGT systems in 50 slot halls connecting approximately 1,000 machines in locations throughout Latvia over the next two years

Takeaway:  Good systems win for IGT

 

IHG.LN – the Board of Directors approved the payment of a special dividend of $2.93 (174.9p) per share or per ADS (as applicable) to shareholders on the Register as at 18:00 BST today (30-Jun) in pounds sterling and to ADR holders on the ADR register as at 16:00 ET today, in US dollars. The dividend is payable on July 14. 

Takeaway: Curious and interesting timing of the special dividend, especially in light of the recent takeover commentary.

  

IKGH (Macau Business) says it has applied to list its shares on the main board of the Hong Kong Stock Exchange. The company announced the exchange will review the application for three days, and if the HKSE accepts IKGH's application, the HKSE will pose post additional information on the exchange’s website.

Iao Kun has VIP gaming rooms in the StarWorld, Galaxy Macau, Sands Cotai Central, City of Dreams Macau and Le Royal Arc casinos.

Takeaway: The next step in the listing by introduction. 

 

PNK – L'Auberge Casino Resort unveiled 60 refurbished suites last week with the completion of phase two of its $20-million renovation project. The renovated rooms include spruced up Luxury Rooms and the newly added Royale Suites and Marquis Suites, which offer views of the resort's golf course.  In September, L'Auberge completed renovations of 754 of its almost 1,000 rooms. 

Takeaway:  L'Auberge is preparing for increased competition as this winter will mark the opening of the new Golden Nugget Casino and Hotel immediately adjacent to L'Auberge.

 

CCL Westerdam sailing resumed (Seatrade Insider)

Holland America Line's Westerdam sailed at 10 a.m. Sunday after returning to Seattle Saturday night following a boiler room fire that was quickly put out.  No injuries were reported.  The fire broke out in one boiler room at approximately 5:15 p.m. Saturday, after Westerdam had departed at 4 p.m.  As a result, Westerdam will miss its planned call in Sitka.  Passengers will receive an on-board credit of $250 per stateroom as well as a future cruise credit equal to 25% of the cruise fare.

Takeaway:  An unfortunate event over the weekend 

INDUSTRY NEWS

Package Tours and Hotel Occupancy Rate for May 2014 (DSEC)

Visitor arrivals in package tour increased by 21% YoY to 925,000 in May 2014.  Attributable to the Labour Day holidays, visitors from Mainland China (734,000) recorded an increase of 25%, with 240,000 coming from Guangdong Province.  Visitors from Taiwan (62,000) surged by 50% and those from Hong Kong (33,000) increased by 3%; meanwhile, visitors from the Republic of Korea (27,000) decreased by 2%. 

 

There were 99 hotels and guesthouses operating at the end of May 2014, providing 28,000 guest rooms, down by 1% YoY; 5-star hotels accounted for 66% of the total supply, with 18,000 rooms.  The average length of stay of guests was 1.4 nights, up by 0.1 night YoY.  The average occupancy rate of hotels and guesthouses increased by 7% points YoY to 86%, with 4-star hotels leading at 88%. 

Takeaway:  Hotel visitation, occupancy steady

 

Okada in talks with possible partners for $2b casino (Reuters)

Okada is in talks with several listed companies as a possible local partner for its $2 billion casino project in the Philippines.  

 

New Jersey Sports Betting – the State legislature passed bills allowing sports betting at casinos and racetracks. Gov. Chris Christie now has 45 days to sign or veto the bills. They would take effect immediately upon his signature.

Takeaway:  Long shot

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.


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