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LM: Removing Legg Mason from Investing Ideas

Takeaway: We are removing Legg Mason (LM) from our high-conviction stock idea list.

Jonathan Casteleyn, co-head of Financials, explains the decision below.

 

We are removing shares of Legg Mason (LM) from our Investing Ideas list. The combination of a change in quantitative signal as well as the lack of forward fundamental catalysts are the reason for this change. Legg Mason stock has moved from Bullish to Bearish Trend duration during the course of this week and in combination with the company having made an acquisition announcement of Martin Currie two weeks ago, the potential to roll in new assets accretively via deal making has now been discounted in the stock.

 

LM: Removing Legg Mason from Investing Ideas - Legg Mason

 

Since adding LM to our Investing Ideas newsletter on the week of March 25th, shares have appreciated by 3.0% versus the Asset Management Group return of -1.0%. Thus the combination of this excess return and also the stock starting to change quantitative signals as well as now a lack of fundamental catalysts, lead us to remove the stock from our Investing Ideas newsletter. 

 


FLASHBACK | Schiff & McCullough on 'Absurdity' of U.S. Inflation Calculations

Euro Pacific Capital CEO Peter Schiff discusses how ridiculous the U.S. government's inflation numbers are with Hedgeye CEO Keith McCullough on HedgeyeTV's "Real Conversations." Other topics include gold, interest rates, and reckless Fed policy.



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Germany Under Pressure: ZEW Tanks

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

 

Germany’s Expectations of Economic Growth (as surveyed by ZEW) tanked in today’s release of August data – the 6 month forward looking indicator fell -68% M/M! Similarly, Eurozone Expectations fell -51% M/M. The data further confirms our investment recommendations to be short Eurozone equities (EZU) and EUR/USD (FXE).

  • Germany - ZEW Survey Expectations 8.6 AUG (17.0 est.) vs. 27.1 prior
  • Germany - ZEW Current Situation 44.3 AUG (54.0 est.) vs. 61.8 prior
  • Eurozone - ZEW Survey Expectations 23.7 AUG vs. 48.1 prior

Germany Under Pressure: ZEW Tanks - z. zeww

 

The weakness in the survey mirrors declines/misses in more recent German high frequency data:

  • German Factory Orders dropped -3.2% in July M/M (vs expectations of +0.9%) and fell  -2.4% Y/Y (vs exp. +1.1%) and +7.7% in June
  • German IFO Business Confidence Expectations fell to 103.4 in July versus 104.8 in June
  • German Industrial Production rose +0.3% in June M/M (vs exp. +1.2%)

Germany Under Pressure: ZEW Tanks - a. Germany Factory Orders

Germany Under Pressure: ZEW Tanks - aaa. Germany IFO

Germany Under Pressure: ZEW Tanks - a. indust production

 

From a quantitative perspective, both the DAX and EUR/USD remain broken across our intermediate term TREND and long term TAIL lines.

Germany Under Pressure: ZEW Tanks - zz. dax

Germany Under Pressure: ZEW Tanks - z. eur usd

 

We believe our investment recommendations are grounded in a few key points:

  • Draghi will be on hold to issue outright QE – in the Fall Draghi may begin issuing QE-lite (ABS buying) to follow on his June announcement of the TLTROs (a new lending program intended to reach the “real” economy). We don’t expect these programs in and of themselves to reverse what’s been slowing economic data and expect the inflation rate will be the big tell – if CPI doesn’t bounce off its current 0.4% Y/Y level, we think market expectations of QE will be put into motion.
  • EUR/USD weakness – a more dovish ECB and beginning signs of a quantitative breakout in the US Dollar may continue to drive the cross lower.
  • Geopolitical risks clear and present – regionally we expect tensions with Russia over Ukraine and threats of contagion flair-ups (like the financial issues at Banco Espirito Santo) to persist.  Further we expect risk premium to remain elevated as conflicts, like the war between Israel and Palestine and US involvement in Iraq, to play into downside risks in equities, globally.

For a more nuanced view of EU regional data and policy dynamics see our note titled Draghi Dangles QE Carrot; On Hold for Now

 

Matthew Hedrick
Associate

 


LEISURE LETTER (08/12/2014)

Tickers: 8198.HK

EVENTS

  •  Aug 12:
    • Stations Casino 430pm:  
    • HMIN 2Q 9pm: , pw HOME INNS
  • Aug 14:
    • GENTING SINGAPORE 2Q earnings
    • Revel Auction Proceedings

COMPANY NEWS

8198:HK – MelcoLot Ltd awarded Lawrence Ho and seven directors share options in the firm.  Ho was awarded 4,384,000 MelcoLot shares at the exercise price of HKD1.14 per share, which was also the closing price of the shares on Monday.  Seven directors shared options on a further 67,744,000 shares. MelcoLot closed at HKD1.14 per share today.  MelcoLot Ltd is a 50/50 investor in a joint venture (BCN Integrated Resorts 2 SA) with Veremonte Espana SL to operate a casino at BCN World.

Takeaway: Laurence Ho's new growth vehicle emerges.  

INDUSTRY NEWS

Japan Gaming Expansion(Bloomberg) USJ Co, the operators of Osaka's Universal Studios Japan is holding partnership discussions with MGM Resorts International, Caesars Entertainment and Genting Bhd for a possible joing bid to operate a casino resort. 

Takeaway: As a Gaijin, if you can't beat 'em, join 'em. 

 

South Korea Gaming Expansion – South Korea's Ministry of Culture, Sports and Tourism South Korea will reduce regulatory barriers for the development of integrated resorts that contain gambling facilities. The country is hoping to defend against potential competition from Japan, which may open to casino gambling by 2020, coinciding with the Summer Olympics in Tokyo.  South Korea may has processes in place by the first half of 2015, including a bidding system for awarding casino licenses. 

Takeaway:  South Korea is trying to capture its fair share of foreigners gaming revenue.

 

Revel Auction Likely – According to Philadelphia's NBC 10, no "qualified bids" were received ahead of Revel's scheduled auction.  As a result, Revel's Board of Directors will meet to determine the next steps and whether or not the property will close.  CZR CEO Gary Loveman also indicated Revel has not received any qualified bidders - even at the minimum price.

Takeaway: Once hailed as the savior and turnaround for Atlantic City, Revel is quickly becoming a white elephant.

 

New Jersey Casino Closures – The New Jersey Casino Control Commission said it cannot force owners (Showboat, Trump Plaza and potentially Revel) to require the casinos to remain open past their expected closing dates. 

Takeaway: Capitalism and Laissez-faire economics at their best.

 

Upstate New York Casinos (NY Times) Criticism is mounting over Governor Cuomo's plan to award up to four additional casino licenses in upstate New York. Despite hopes to increase employment and taxes, critics argue the Governor's plan is 15 years too late as the Northeastern States are already suffering the effects of fierce competition as well as potentially saturation.

Takeaway: Built it and the gamblers may not come.

MACRO

Singapore Economy - during Q2 2014, Singapore GDP unexpectedly increased at a meager 0.1% annualized rate versus -0.8% forecast and +1.8% for Q1 2014. Manufacturing contracted 15.2% in Q2 2014 versus the prior quarter. Services rose 4.5% while construction increased 0.3% also during Q2 2014. 

Takeaway:  Flat growth in 2Q

 

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.


MACAU FLAT AS EXPECTED

Full month GGR projected to be flat to slightly up.

 

 

Flattish growth in average daily table revenues (ADTR) is in line with our expectations. We would note that the ADTR of the first 11 days summed to HK$10,075 million, EXACTLY the total of the first 11 days of last year.  Table revenues averaged HK$916 million per day through the first 11 days of August – flat with the comparable period last year but up seasonally from July’s weak ADTR.

 

 MACAU FLAT AS EXPECTED - 1

 

Sources indicate that Mass revenues are trending in the low-mid 20s mtd and our full month projection stands at 22% mass growth.  The VIP picture remains cloudy with volumes down significantly on normal hold.  For the full month of August, we are projecting gross gaming revenue (GGR) growth of flat to slightly positive.

 

Our sources confirm the competitive pressures on the premium mass market remains a risk going forward, particularly with the Mass slowdown.  While our Mass Decelerating theme, first espoused in June, remains intact, August's likely Mass bounce back should be judged more on the weakness in July rather than a reversal of trend.  We expect high mid to high teens YoY Mass growth beyond August.

 

For the concessionaires, LVS leads the way with high VIP hold driving market share well above recent trend, completely at the expense of SJM.  All other operators are at slightly above trend shares. LVS has consistently been lucky this year while MPEL has been much less fortunate in the past 6 months.  CoD is holding poorly again in August on lower volumes we think. 

 

MACAU FLAT AS EXPECTED - 2


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