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Draghi Dangles QE Carrot; On Hold for Now

Investment Recommendations:  short Eurozone equities (EZU) and EUR/USD (FXE)


Key Take-Aways:

  • Draghi policy outlook remains dovish and accommodative - QE remains dangled like a carrot
  • Hedgeye reiterates our bearish recommendation on European equities (EZU); quantit. broken TRADE and TREND
  • Hedgeye’s bearish outlook on the EUR/USD persists; quantit. broken TREND and TAIL
  • European fundamental weakness to persist over (at least) intermediate term; geopolitical tensions heightens

I encourage you to review my colleague Darius Dale’s 50 page deck titled What’s Next For Global Financial Markets? for a comprehensive overview of our investment playbook across global asset classes, including a shift in our thinking on a US dollar breakout.

 

Today’s ECB statement:  the bank remains on hold since its big move in its June meeting when it:

  • Cut interest rates, and
  • Issued the Targeted Longer Term Refinancing Operations (TLTRO), a new lending program intended to reach the “real” economy (see second chart on stalled lending), due to take place in September and December.

New commentary from today’s conference:  Draghi offered a bearish outlook on the EUR in suggesting that rates will remain low in the Eurozone for an extended period of time, whereas he sees divergent monetary policies in the US and UK (suggesting US will taper and may hike rates while the UK continues strong Pound policy).

 

Draghi and staff are conducting preparatory work on buying ABS (the Bank is even hiring a consulting firm to help augment its work).  While Draghi didn’t indicate any timing on a potential ABS program, such a program seems inevitable and portends QE-lite (namely without government bond and public asset purchases).

 

Draghi tried to focus today’s meeting on optimism around the TLTROs boosting lending to the real economy (that he expects will lead to inflation). We have our doubts on the success of the TLTROs (after the failure of the LTROs to reach the economy), however reading the tea leaves of today’s conference call Draghi looks to be buying time for the Bank to figure out how to counter the declining rate of inflation (currently at 0.4%) and muted to weak growth outlook for the region. 

 

With August largely a month of holiday for the ECB (and much of Europe), it’s likely the ECB will not be in a position to act at its next meeting on 9/4, and will opt to monitor the “waters” (data and markets).

 

That said, risks can come swiftly, and all at once, with recent examples including sanctions against Russia and contagion flair-up risk over financial issues at Banco Espirito Santo. 

 

We’ll be monitoring developments closely, in particular the Eurozone inflation number for August (initial estimate is out on 8/29) – anything below 0.4% should push Draghi’s hand on issuing QE-lite.

Draghi Dangles QE Carrot; On Hold for Now - a . ecb main rates

Draghi Dangles QE Carrot; On Hold for Now - a. ecb loans

 

European Equities:  bearish recommendation on European equities (EZU) remains intact. 

 

Our quantitative lines of support have been broken across European equities for over a month.  The move lower has been driven on such factors as slowing fundament data (more below); EU sanction against Russia; and contagion flair-up risks like the financial issues at Banco Espirito Santo.

 

From here our propriety GIP model (growth, inflation and policy) for assessing economies suggests the Eurozone economy will land in the ugly quad #3 in 2H, representing growth slowing as inflation accelerates.

 

In 2H we expect inflation to move higher on easier year-over-year comparisons (after remarkable moves Y/Y shown in the chart below) and heightened prospects for QE-lite.

Draghi Dangles QE Carrot; On Hold for Now - EUROZONE

Draghi Dangles QE Carrot; On Hold for Now - a. CPI Eurozone 12M chg

Draghi Dangles QE Carrot; On Hold for Now - a. CPI Mario

 

QE-lite Variable on Intermediate term equity view:  should weakness in fundamentals and the markets persist, we’d anticipate expectations for QE-lite (ABS) or a more robust QE program to ramp – this could serve to develop a floor in European equities, and with it we’d shift our positioning.  As we note in the chart below, the ECB has reduced its balance sheet (down -14% Y/Y and -33% since it topped in AUG 2012), which affords necessary powder to fund any QE program.

Draghi Dangles QE Carrot; On Hold for Now - a. BS ECB

 

EUR/USD short on strength:  the EUR/USD is also broken across our intermediate term TREND and long term TAIL lines (at a near 9 month low).  Beyond a continuation in dovish policy that we expect from the ECB, we’re signaling a breakout in the US Dollar above its TRADE and TREND levels. For more please see Darius’ deck What’s Next For Global Financial Markets? )

Draghi Dangles QE Carrot; On Hold for Now - a. eur usd

 

 

Charts That Matter


Below is a refresh of charts that demonstrate the recent turn lower in data, and are contributing to the drag in European equities.

  • DAX – down -9% since on topping July 3rd and -4.5% ytd, and broken across its TREND and TAIL durations.  Every major European equity index is down over the last month ranging from the U.K. down -3% to Russia down -17%. Italy’s MIB is -13% since its June top and its recent Q2 GDP print is far from encouraging: -0.2% Q/Q (vs exp. +0.1%) or -0.3% Y/Y (vs exp. +0.1%).

Draghi Dangles QE Carrot; On Hold for Now - a. DAX

  • Sovereign Bond Yields – yields continue to moderate with significant drops on Y/Y comparisons (10YR yields listed below). We expect geopolitical tension like EU sanctions against Russia to encouraging buying in safe haven credit markets like Germany.  Of note, this week the 2YR Bund touched down below the 0% bound. 

Draghi Dangles QE Carrot; On Hold for Now - aa. european yields

  • PMIs – across the major western economies Services got a lift in the most recent print (JUL) M/M, whereas Manufacturing fell off.  However the trend clearly suggests a moderation in the improvement seen in the early part of the year.  A sideways move of fits and starts is likely over the next months; we expect France to continue to underperform the group.

Draghi Dangles QE Carrot; On Hold for Now - a. PMIs

  • Eurozone Confidence – follow the red arrows down…

Draghi Dangles QE Carrot; On Hold for Now - a. eurozne cons conf

Draghi Dangles QE Carrot; On Hold for Now - a. Eurozone bus conf

Draghi Dangles QE Carrot; On Hold for Now - a. eurozone manu and serv confid

  • German Factory Orders – were an unmitigated disaster for June.  Consensus expectations for an increase of 0.9% from May and the actual number came in at -3.2%.  On a year-over-year basis, the numbers were just as abysmal, down -2.4%.  This recent move marks the largest decline since September 2011!

Draghi Dangles QE Carrot; On Hold for Now - a. Germany Factory Orders

  • German Confidence – if Germany is the EU’s economic engine, the more recent turn in these confidence charts are far from encouraging.

Draghi Dangles QE Carrot; On Hold for Now - aaa. Germany IFO

Draghi Dangles QE Carrot; On Hold for Now - a. germany ZEW

  • Industrial Production – an ugly chart, enough said! Today’s print of German Industrial Production was also a disaster: 0.3% JUN M/M (1.2% est.) vs. -1.8% prior (revised -1.7%) or -0.5% JUN Y/Y (0.3% est.) vs. 1.3% prior (1.1% revised)

Draghi Dangles QE Carrot; On Hold for Now - a. indust production

 

For those joining Draghi on vacation in August, enjoy!

 

Matthew Hedrick

Associate

 

 

 


INITIAL CLAIMS - CONTEXT IS KING

Takeaway: Using claims to triangulate where we are in the cycle.

Context is King

Claims are now running at sub-300k on a rolling SA basis for the second week in a row. Based on the chart below, in the past two instances (1 & 2006-2007) the market went on to advance for 12-18 months after rolling initial claims first dropped below 300k. We're not suggesting that history will repeat exactly; rather, we're just offering this as context.

 

Initial claims are a leading indicator for the economy, whereas the unemployment rate is a lagging indicator. The market is also a leading indicator for the economy. As such, we use claims principally as a leading indicator for the economy and as a coincident indicator for the market. We think that by looking at both the aboslute level and the trend (and inflections therein) in claims in real time and evaluating it relative to past cycles we can have a decent bearing on where we are in the current cycle. 

 

INITIAL CLAIMS - CONTEXT IS KING - 20

 

The Data

Prior to revision, initial jobless claims fell 13k to 289k from 302k WoW, as the prior week's number was revised up by 1k to 303k.

 

The headline (unrevised) number shows claims were lower by 14k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4k WoW to 293.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -12.1% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -12.6%

INITIAL CLAIMS - CONTEXT IS KING - 1

 

INITIAL CLAIMS - CONTEXT IS KING - 2

 

INITIAL CLAIMS - CONTEXT IS KING - 3

 

INITIAL CLAIMS - CONTEXT IS KING - 4

 

INITIAL CLAIMS - CONTEXT IS KING - 5

 

INITIAL CLAIMS - CONTEXT IS KING - 6

 

INITIAL CLAIMS - CONTEXT IS KING - 7

 

INITIAL CLAIMS - CONTEXT IS KING - 8

 

INITIAL CLAIMS - CONTEXT IS KING - 9

 

INITIAL CLAIMS - CONTEXT IS KING - 10

 

INITIAL CLAIMS - CONTEXT IS KING - 11

 

INITIAL CLAIMS - CONTEXT IS KING - 12

 

INITIAL CLAIMS - CONTEXT IS KING - 19

 

 

Yield Spreads

The 2-10 spread rose 2 basis points WoW to 202 bps. 3Q14TD, the 2-10 spread is averaging 204 bps, which is lower by -17 bps relative to 2Q14.

 

INITIAL CLAIMS - CONTEXT IS KING - 15

 

INITIAL CLAIMS - CONTEXT IS KING - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 



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LEISURE LETTER (08/07/2014)

Tickers: PENN, NCLH

EVENTS

  • Aug 7:
    • Revel Auction Proceedings (POSTPONED)
  • Aug 8:
    • CHH 2Q 10am: , pw: 30848466
    • DRH 2Q 10am: , pw: 153358818
    • AHT 2Q 11am:
    • SHO 2Q 12n:
  • Aug 11:
    • HPT 2Q 1pm:
    • CZR 2Q 4:30pm: 844.231-441, pw: 55917191
    • STN 2Q 430pm
    • HTHT 2Q 9pm: , pw 7103 4558
  •  Aug 12:
    • HMIN 2Q 9pm: , pw HOME INNS

  • Aug 14:

    • Revel Auction Proceedings

COMPANY NEWS

PENN – Hollywood Gaming at Mahoning Valley Race Course to open Sept 17

  • The $250 million development

  • 850 VLTs

  • Will celebrate a second grand opening on Monday, Nov. 24, when thoroughbred racing begins on the new one-mile all-weather racetrack. 

  • Will be open 24/7

Takeaway:  Opening on schedule. Should open much stronger than PNK's Belterra Park. PENN's new racinos are located in much less competitive areas than BP. CEO buying stock this week a good sign of management's faith in new properties.


CWN:AU – (Bloomberg) Crown's new Las Vegas Strip development with Andrew Pascal will potentially cost as much as $4 billion.  Beyond the Las Vegas development, Crown is currently pursuing a AUD1.3 billion casino hotel in Sydney scheduled to open in 2019 while also working on projects in Brisbane and Sri Lanka.  

Takeaway: Costly development. New supply as a positive is being rolled out again as an investment positive by MGM management.

 

GENT:MK – Despite the unsuccessful attempts by Resorts World Miami to secure a gaming license (whether a transferred slots license or a newly issued license), redevelopment of the Miami Herald site continues. Malaysia-based Genting Group purchased the 14-acre newspaper site in 2011 for $236 million. Genting also purchased surrounding properties, including the Omni Mall, and announced plans for a sweeping $3 billion Resorts World Miami luxury casino with multiple towers, stores and an elevated beach and lagoon.

Takeaway:  Until gaming is approved, Genting will use its Miami foothold as a stepping point for its growing Resorts World Bimini casino operation.

 

NCLH (Seatrade Insider) – No Pride of America change so far as Hawaii readies for 2 hurricanes 

INDUSTRY NEWS

Revel Atlantic City – (Bloomberg) The auction proceeding for Revel AC Inc was postponed one week - from today until August 14.  The delay is to allow time to analyze the "multiple purchase offers".  As a result, Revel will also likely postpone the August 8 hearing for sale approval until August 18.

 

SLS Las Vegas – the operators of the north Strip hotel-casino were recommended for licensing approval by the Gaming Control Board. The 1,600-room resort, a redevelopment of the Rat Pack-era Sahara, is scheduled to open Aug. 23.  Gaming regulators approved the license application for Stockbridge Real Estate of San Francisco and SB Gaming, a subsidiary that will manage the SLS Las Vegas. The Nevada Gaming Commission will make a final ruling on the application on Aug. 21.

Takeaway: Another private equity firm recommended for a Nevada gaming license.  The list of licensed private equity firms is growing.

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.


Hedgeye Financials Speaker Series Call Today - Is FICC Fixable? A View From The Trading Desk

Takeaway: Please join us today, August 7th at 11 am EST for a call with the Head of Credit Trading at TCW to discuss bond trading trends.

Our financials team led by Josh Steiner and Jonathan Casteleyn is hosting a conference call today, August 7th at 11 am EST with Jerry Cudzil, the Head of Credit Trading at TCW. This call aims to help us understand, from the view of a major buy-side trading desk, the trends in Fixed Income, Currency, and Commodity trading (FICC). Specifically, we'll be focusing on:

 

  1. Cyclical or Secular?: The buy-side's perspective on whether FICC weakness is secular or cyclical.
  2. Share Shifts: Market share shifts that are occurring amongst the broker-dealer community in various markets.
  3. The Fed: How a post-QE bond market may look and the risk/reward setup in fixed income currently.

 

This call will be helpful to investors in broker dealer stocks and volume-related market structure companies: GS, MS, JPM, BAC, C, PJC, RJF, CME, ICE, NDAQ

 

CLICK HERE to add this call to your Outlook Calendar or simply dial:

 

Toll Free Number:

Direct Dial Number:

Conference Code: 919219#

 

Jerry Cudzil's Bio:

Mr. Cudzil is head of U.S. Credit Trading at the Trust Company of the West (TCW), overseeing the U.S. Fixed Income group’s trading of corporate and high-yield securities and derivatives. Prior to joining TCW in 2012, Mr. Cudzil was a high yield bond trader for Morgan Stanley and Deutsche Bank, specializing in project finance, aviation, and energy securities. He was previously a portfolio manager for Dimaio Ahmad Capital, managing the multi-strategy credit fund and aviation fund and leading the firm’s risk management team. Mr. Cudzil began his career as a corporate bond trader for Prudential Securities and has also traded investment and high yield debt for Credit Suisse and Goldman Sachs. Mr. Cudzil earned a BA in Economics from the University of Pennsylvania.


MPEL 2Q 2014 CONFERENCE CALL

Another Macau company reports a disappointing quarter. Stock buyback announcement a positive but not enough.

 

 

CONF CALL

  • 2Q Luck-adjusted property EBITDA:  $345m 
    • CoD:  +$20m, brings margins to 31%
    • Altira: +$10m, brings margins to 13-13.5%
  • Expanded market share in mass segments in 2Q
  • Started large development (luxury precinct) on CoD; will be ready in 2016
  • MSC:  will open in mid-2015; will top off the hotel in September
  • CoD Manila:  will open later in 2014
  • Approved $500m stock repurchase program and will be able to pay out special dividends
  • 2Q EBITDA margin:  26.4%
  • CoD:  Unfavorable revenue mix btw revenue and rc sharing programs. 
  • EBITDA margin impacted by $10m due to wage increases
  • Additional labor expense in $10m in 3Q and 4Q 2014
  • Draw down studio city term loan in July
  • 3Q guidance:  D&A: $95-100m; corp expense: $30m; consolidated net interest expense: $35m ($10m CoD Manila, $24m cap interest)

 

Q & A

  • 2Q CoD:  low hold and negative VIP mix.  Utility/maintenance fees of $5m that was not capitalized.
  • Mass slowdown:  mass has held up relatively well; but perfect storm coming - harder comps
  • Feel better about August - early August compared with early July, there is definitely an uptick - Hedgeye notes that August is a seasonally stronger month than July
  • Blames July performance on World Cup
  • No issues on filling up their rooms
  • Premium mass:  healthy business
  • Volumes:  not overly promotional but operate in highly competitive environment.  
  • $500m stock buyback:  similar to how US companies have operated this type of program
  • Investigation: Taiwan branch indicted for banking/foreign related offenses. Will defend vigorously.
  • MSC:  have received construction permits.  Do not need any other construction permits.  Firing at full speed.
  • MSC tables:  will get fair share, may find out table count 9 months ahead of opening; can accomodate 500 tables

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