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8 Quick Takeaways on #Nike's Gut Punch to #UnderArmour (Courtesy of #KevinDurant)

Takeaway: UA will come back heavy within six months' time and endorse someone big.

8 Quick Takeaways on #Nike's Gut Punch to #UnderArmour (Courtesy of #KevinDurant) - kd1

 

NKE, UA - Durant spurns Under Armour to return to Nike

  • "With Durant's seven-year contract with Nike expiring, Under Armour offered him a 10-year deal worth $265 million to $285 million. According to ESPN, Nike exercised its right to match any rival shoe company's offer to the All-Star guard. Nike officials told Durant and his representatives at Jay Z's Roc Nation Sports on Saturday that they would match Under Armour's offer."
  • "Based on the ESPN report, Durant stands to make more money from Nike over the next two years than the $41.2 million the Thunder will owe him during that span."

 8 Quick Takeaways on #Nike's Gut Punch to #UnderArmour (Courtesy of #KevinDurant) - niked

8 Quick Takeaways on the Nike/Durant deal:  

 

  1. The extra $20 million dollars in endorsement spend per year needs to generate an incremental $150mm in footwear sales in order to make it margin accretive for NKE. 
  2. In other words, KD needs to eclipse King James as the leader in the basketball footwear marketplace. 
  3. For NKE that translates to 0.9% growth in its footwear business - for UA to make the $28.5mm deal margin accretive it would need to grow the footwear category by 76%. 
  4. Uner Armour's bid did not have much to do with ROI. 
  5. The reality is that Under Armour is big enough now that it probably needs a mega-star to grow its footwear business and elevate its brand. 
  6. Tom Brady (UA's biggest name currently) won't cut it. 
  7. When the brand was in its infancy, it could simply put basketball shoes on "C" players in the NBA, and it was enough to boost the brand. Those days are over. 
  8. Our sense on this loss is that UA will come back heavy within six months' time and endorse someone big. It already has Board approval for the capital outlay, and it won't let that money go unspent.  

Nike's video "THE BADDEST" from this spring.


Retail Callouts (9/2): NKE, UA, LULU, DG, FDO, DLTR, JCP

Takeaway: NKE gut punches UA by overspending on KD. Latest DG bid still too little. Interesting insight on Yoga/ LULU addressable market in China.

HEDGEYE RETAIL IDEA LIST

 

Retail Callouts (9/2): NKE, UA, LULU, DG, FDO, DLTR, JCP - chart1 9 2

 

EVENTS TO WATCH

 

Wenesday (9/3)

  • GII - Earnings Call: 8:30am
  • VNCE - Earnings Call: 9:00am

 

Thursday (9/4)

  • PVH - Earnings Call: 9:00am
  • BEBE - Earnings Call: 4:30pm
  • ZQK - Earnings Call: 4:30pm
  • ZUMZ - Earnings Call: 5:00pm

 

COMPANY HIGHLIGHTS

 

NKE, UA - Durant spurns Under Armour to return to Nike

(http://www.baltimoresun.com/business/bs-bz-kevin-durant-nike-20140901,0,5469465.story)

 

  • "'Excited and humbled to sign back with the swoosh!' Durant tweeted late Sunday, referring to the Nike logo."
  • "'We are pleased to extend our relationship with Kevin Durant, one of the most exciting players in the game,' said Heter Myers, a spokesman for Nike."
  • "With Durant's seven-year contract with Nike expiring, Under Armour offered him a 10-year deal worth $265 million to $285 million. According to ESPN, Nike exercised its right to match any rival shoe company's offer to the All-Star guard. Nike officials told Durant and his representatives at Jay Z's Roc Nation Sports on Saturday that they would match Under Armour's offer."
  • "Based on the ESPN report, Durant stands to make more money from Nike over the next two years than the $41.2 million the Thunder will owe him during that span."

 

Takeaway: Going from $8.5mm to $28.5mm per year is a nice pay day for KD. The extra $20 million dollars in endorsement spend per year needs to generate an incremental $150mm in footwear sales in order to make it margin accretive for NKE. Meaning KD needs to eclipse King James as the leader in the basketball footwear marketplace. For NKE that translates to 0.9% growth in its footwear business - for UA to make the $28.5mm deal margin accretive it would need to grow the footwear category by 76%. But for UA, its bid did not have much to do with ROI. The reality is that the company is big enough now that it probably needs a mega-star to grow its footwear business and elevate its brand. Tom Brady (UA's biggest name currently) won't cut it. When the brand was in its infancy, it could simply put basketball shoes on C players in the NBA, and it was enough to boost the brand. But those days are over. Our sense on this loss is that UA will come back heavy within six months' time and endorse someone big. It already has Board approval for the capital outlay, and it won't let that money go unspent. 

 

DG - Dollar General Enhances Proposal to Acquire Family Dollar

(http://investor.shareholder.com/dollar/releasedetail.cfm?ReleaseID=868438)

 

  • "Dollar General Corporation today announced that it has sent an enhanced acquisition proposal to the Board of Directors of Family Dollar Stores, Inc. Under the terms of the revised proposal, Dollar General would increase its all-cash proposal for all outstanding shares of Family Dollar to $80.00 per share."
  • "To provide even greater certainty of consummation to the Family Dollar Board, Dollar General also increased the number of stores that it would be willing to agree to divest to 1,500 if ordered by the Federal Trade Commission and, as further evidence of its confidence in its ability to obtain antitrust approval, has agreed to pay a $500 million reverse break-up fee to Family Dollar relating to antitrust matters. All other terms and conditions of the proposal remain unchanged."

 

Takeaway: At $80 the new offer is now a 7.5% premium to the DLTR offer on the table up from 5.5%. To us, these seem like baby steps. In addition, DG's comment that it will divest up to 1,500 stores if required to do so by the FTC seems pretty ridiculous. It will divest EVERY store that the FTC mandates. It should have said what it means, which is that "we won't walk away form this deal as long as the FTC mandates 1,500 stores or less."

 

On the whole topic of anti-trust, we're sticking to what we said when the bid was announced. We can debunk FDO's reasoning with just one word: Walmart. We have a hard time seeing how the FTC would be overly concerned with a dollar store monopoly. First, there's not a single thing inside a Dollar Store that is proprietary to that format. Second, FDO and DG have both been shifting increasingly to consumables. The combined company could not have monopolistic qualities in that regard even if it tried. But most importantly, as noted above, all DG's lawyers have to do is utter one word to the FTC -- WalMart. Even if WMT wasn't rolling out a neighborhood market concept, it would be so hard to prove that a merged DG/FDO is bad for the consumer. FDO's tactics are a head-scratcher if it's goal is to maximize shareholder value.

 

We still think DG wins at a price of $85 or more, implying 12.5x LTM EBITDA. #expensive (even more so if it includes shrinking its core -- which will presumably be among its better locations)

 

LULU - Lululemon's Asian Push

(http://www.wwd.com/markets-news/intimates-activewear/lululemons-asian-push-7855149)

 

  • "Lululemon Athletica Inc.’s new general manager for Asia said this year and next will lay the groundwork for the yogawear company’s global expansion plans as the brand tries to tap into China’s growing interest in the sector."
  • "The brand already has seven 'showrooms' in Asia — four in Hong Kong, two in Singapore and one in Shanghai…the brand is looking to open its first full-fledged store in Asia, either in Hong Kong or Singapore, possibly as soon as the end of this year. The company is also working on rolling out a Chinese-language Web site by mid-2015. After the Chinese site’s launch, Lee hopes to set up a shop in Alibaba’s Tmall."
  • "Lee said there are feasibility studies under way for Japan and South Korea but the company’s focus is setting up shop in China. He declined to give sales figures, but said that Lululemon’s China sales have the potential to double those of the brand in America, adding that the profile of the company’s typical customer in China is a professional woman aged 25 to 40."
  • "Unofficial estimates suggest 10 million people are practicing yoga in China...Yan said China’s yoga industry is growing three times faster than the U.S. and she is optimistic that foreign labels such as Lululemon will do well if their marketing is done right."

 

Takeaway: Some interesting color on the Yoga market in China. According to this article, about 10mm people practice Yoga in China (0.7% of the population) compared to 20mm in the US (6.5% of the population). In the US, the average Yogi spends on average $505 per year on yoga - $325 of which is spent on apparel and equipment. If we do some back of the envelope math and extrapolate that to China we get to a $3.25bil addressable market, which according to the owner of the largest studio network in the country is growing at a clip 3x that in the US. LULU is in print saying it would have 20 stores in Asia by 2017, but perhaps the more interesting play here is the online T-Mall store. Brands like NKE, AdiBok, and GPS already have store fronts on Alibaba's marketplace giving the brands a reach far beyond what current retail footprints allow. LULU would be wise to follow suit.

 

OTHER NEWS

 

JCP - J.C. Penney Opens Brooklyn Store

(http://www.wwd.com/retail-news/mass-off-price/jc-penney-opens-brooklyn-store-7855184)

 

  • "'We’ve got to keep evolving this company. We are not going back to 2011,' Ullman said during an interview at the grand opening of Penney’s in Brooklyn on Friday, showcasing the company’s most advanced vision on interior design and merchandise display."
  • “'Despite all the turnaround issues, we are using this store as a laboratory,” Ullman said. 'By far, this is the most impressive and best expression of J.C. Penney.'”
  • "Ullman said he expects the Brooklyn store to rank among the chain’s top 10 performers...Ullman made the decision to open at Gateway during his first stint at Penney’s. He declined to project a volume for the store, though one official said that, since the soft opening a week before the official opening, business was 12 percent ahead of plan."

 

Retail Callouts (9/2): NKE, UA, LULU, DG, FDO, DLTR, JCP - chart2 9 2

 

LUX - Luxottica CEO Guerra Departs After Differences With Founder

(http://www.bloomberg.com/news/2014-09-01/luxottica-ceo-guerra-leaves-ray-ban-maker-after-decade-at-helm.html)

 

  • "Luxottica Group SpA, the world’s largest eyewear maker, said Andrea Guerra stepped down as chief executive officer after a decade at the helm following differences with founder Leonardo Del Vecchio."

 

APP - S&P Downgrades American Apparel

(http://www.wwd.com/retail-news/financial/sp-downgrades-american-apparel-7854436)

 

  • The ratings agency lowered its corporate credit rating on the Los Angeles-based vertical retailer to 'CCC-minus' from 'CCC' and its rating on the company’s $200 million in senior secured notes due in 2020 to 'CC' from 'CCC-minus.'"

Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    

------

 

1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close) and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “large speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative  positions.

 

  • The Sugar, Copper, and Coffee markets experienced the most BULLISH relative positioning change in the CRB week-over-week.

 

Spot Coffee contracts increased +7.8% last week and are currently +3.7% today in New York. We hosted an expert call with Judith Gaines of J. Gaines Consulting on July 21st. A replay and call summary is included via the link below:

 

Coffee Outlook in 2015 and Beyond

 

To Judy’s credit, front-month Arabica contracts are +11% since we hosted the call:

  • Her thesis is that Brazil, which accounts for more than 1/3rd of global production, is in the middle of a two year- production deficit for the first time ever
  • Price estimate for coffee into next year is a relative range of +40-100% from here
  • The severity of the crop devastation should be realized by the market near-term (next several weeks) into next spring
  • Estimate for aggregate production in Brazil for 2015 is 27M bags vs. 34M from consensus

The CFTC data report shows the market is +5/12/11% longer than its 1/3/6-month averages with the longest overall positioning since March 25th when coffee was previously near YTD highs. The market is net long about 1.7x average 6-month daily trading volume (z-score of +1.5x --> See below).

 

  • The Gold, Soybeans, and RBOB Gas markets experienced the most BEARISH relative positioning change in the CRB week-over-week

 

Because the CFTC data released on Friday reflects those holders through Tuesday, the change in the positioning of the gold market as reported last Friday reflected the market’s reaction post-Jackson Hole Commentary from the BOJ, ECB, and Federal Reserve two weeks ago:

  • Market as a whole took Draghi’s commentary as more dovish than Yellen’s on the margin.   
  • ECB policy statement will come on Thursday and the market is positioned for a pullback in the Euro out of the meeting:
  • Short position in the Euro is -2.6 standard deviations from its trailing 12-month average.

 

Commodities Weekly Sentiment Tracker - chart 1 CFTC Positioning

 

 

2.       Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.

  • The sugar, coffee and wheat markets are positioned for HIGHER PRICES near-term
  • The lean hogs, soybeans, and live cattle markets expecting LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart 2 spot 2nd year basis

 

 

3.       Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring in approximately 1-year.

 

  • The sugar, corn, and wheat markets are positioned for HIGHER PRICES in 1-year  
  • The lean hogs, live cattle, and soybeans markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart 3 spot 1 year basisvf

 

4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.

 

Commodities Weekly Sentiment Tracker - chart 4 Open Interest         

 

Ben Ryan

Analyst

            


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Fund Flows, Refreshed (2-to-1 Demand for Fixed Income over Equities)

Takeaway: Despite a slight rebound in equity fund flow trends last week, fixed income demand still outpaced stocks by a 2-1 ratio.

This note was originally published August 28, 2014 at 12:01 in Financials. Click here for more information about our services.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent 5 day period ending August 20th, equity fund flow trends rebounded marginally with domestic stock funds breaking a 16 week running outflow. However intermediate term trends are still intact with aggregate fixed income netting $4.9 billion in net new flow in the most recent five day period, nearly a 2-1 ratio versus the $2.6 billion allocated to equities. Defensive positioning by the investment community continues with taxable bonds having inflow in 26 of the past 28 weeks. Domestic stock funds conversely have had outflow in 16 of 17 weeks and continue to be mired in the seasonally weakest part of the year. We recommend that investors avoid Janus Capital (JNS) and T Rowe Price (TROW) during this time and into 2015 based on this challenging industry data.

 

Fund Flows, Refreshed (2-to-1 Demand for Fixed Income over Equities) - cast1

 

 

Total equity mutual funds had inflow in the most recent 5 day period ending August 20th with $2.6 billion coming into all stock funds as reported by the Investment Company Institute. The composition of the inflow continued to be weighted towards International stock funds with $1.9 billion coming into foreign funds making it a perfect 33 for 33, i.e. inflows in every week of 2014 for the category. While domestic stock funds last week had a marginal $738 million subscription and snapped 16 consecutive weeks of redemption, over $40 billion has been redeemed from U.S. stock funds over the past 4 months. We don't categorize a drawdown sequence as having been broken until there are 4 consecutive weeks of inflow and thus we are still looking for weak domestic fund trends for the rest of the year, especially entering the seasonally weak fourth quarter. The running year-to-date weekly average for equity fund flow is now a $1.5 billion inflow, which is now well below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual funds had another positive week of production with $4.9 billion coming into the asset class. The inflow into taxable products of $4.1 billion made it 26 of 28 weeks with positive flow. Municipal or tax-free bond funds put up a $814 million inflow, making it 31 of 32 weeks with 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 still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

 

ETF results were broadly positive during the week with inflows into both equity funds and fixed income products. Equity ETFs put up a $8.8 billion subscription while fixed income ETFs put up a $2.7 billion inflow. The 2014 weekly averages are now a $1.5 billion weekly inflow for equity ETFs and a $995 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 $3.7 billion spread for the week ($11.5 billion of total equity inflow versus the $7.7 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 $4.0 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 -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income. 

 

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. Exchange traded fund (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 (2-to-1 Demand for Fixed Income over Equities) - chart 1

Fund Flows, Refreshed (2-to-1 Demand for Fixed Income over Equities) - chart 2

 

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

Fund Flows, Refreshed (2-to-1 Demand for Fixed Income over Equities) - chart 3

 

Fund Flows, Refreshed (2-to-1 Demand for Fixed Income over Equities) - chart 4

 

Fund Flows, Refreshed (2-to-1 Demand for Fixed Income over Equities) - chart 5

 

Fund Flows, Refreshed (2-to-1 Demand for Fixed Income over Equities) - chart 6

 

Fund Flows, Refreshed (2-to-1 Demand for Fixed Income over Equities) - chart 7

 

 

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

 

Fund Flows, Refreshed (2-to-1 Demand for Fixed Income over Equities) - chart 8

 

Fund Flows, Refreshed (2-to-1 Demand for Fixed Income over Equities) - chart 9

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $3.7 billion spread for the week ($11.5 billion of total equity inflow versus the $7.7 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 $4.0 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 -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income.

 

Fund Flows, Refreshed (2-to-1 Demand for Fixed Income over Equities) - chart 10 

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com


TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT

Takeaway: Rising expectations for EU QE are squeezing risk premia across the EU banks complex. Meanwhile, the market continues to fade Russia/Ukraine.

Current Best Ideas:

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 19

 

Key Callouts:

 

* European Financial CDS - Rising expectations for EU QE seem to be driving enthusiasm across the complex as all but a handful of EU bank swaps were tighter on the week. Meanwhile, Sberbank of Russia continues to tighten as well (-7 bps w/w). We've been using Sberbank's CDS as our market proxy for the geopolitical risk premium of the Russia/Ukraine situation.

 

* High Yield (YTM) Monitor – High Yield rates fell 2.0 bps last week, ending the week at 5.59% versus 5.61% the prior week. More notably, high yield rates are down 38 bps on a m/m basis.

 

* 2-10 Spread – Last week the 2-10 spread tightened to 185 bps, -6 bps tighter than a week ago and down 18 bps on a m/m basis.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 3 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 15

 

1. U.S. Financial CDS -  Swaps were little changed, for the most part, across the US Financials complex. Overall, swaps tightened for 19 out of 27 domestic financial institutions. 

 

Tightened the most WoW: LNC, AXP, PRU

Widened the most WoW: UNM, ACE, JPM

Tightened the most WoW: RDN, MTG, WFC

Widened the most/ tightened the least MoM: GNW, UNM, MS

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 1

 

2. European Financial CDS - Rising expectations for EU QE seem to be driving enthusiasm across the complex as all but a handful of EU bank swaps were tighter on the week. Meanwhile, Sberbank of Russia continues to tighten as well (-7 bps w/w). We've been using Sberbank's CDS as our market proxy for the geopolitical risk premium of the Russia/Ukraine situation.

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 2

 

3. Asian Financial CDS - Asian financial swaps were generally tighter on the week, compressing by an average of 3 bps with the largest move at Japan's Daiwa (-10 bps to 79 bps).

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. French sovereign swaps tightened by -10.8% (-5 bps to 40 ) and Irish sovereign swaps widened by 3.2% (2 bps to 54).

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 18

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 3

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 2.0 bps last week, ending the week at 5.59% versus 5.61% the prior week. More notably, high yield rates are down 38 bps on a m/m basis.

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1882.

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 6

 

7. TED Spread Monitor – The TED spread fell 0.7 basis points last week, ending the week at 21.1 bps this week versus last week’s print of 21.8 bps.

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 7

 

8. CRB Commodity Price Index – The CRB index rose 1.6%, ending the week at 293 versus 288 the prior week. As compared with the prior month, commodity prices have decreased -0.6% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 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 widened by 1 bps to 16 bps.

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 3 basis points last week, ending the week at 2.87% versus last week’s print of 2.84%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 10

 

11. Chinese Steel – Steel prices in China fell 1.0% last week, or 32 yuan/ton, to 3060 yuan/ton. Prices are lower by 2.3% on a m/m basis. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 185 bps, -6 bps tighter than a week ago and down 18 bps on a m/m basis. We track the 2-10 spread as an indicator of bank margin pressure.

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.2% upside to TRADE resistance and 1.0% downside to TRADE support.

 

TUESDAY MORNING RISK MONITOR: EU QE TAKES THE SPOTLIGHT - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


NCLH: PRESTIGE ACQUISITION CALL

Bigger may be better. Highly accretive - similar to most acquisitions these days - the deal looks like a big positive for NCLH. The $25m synergy target seems conservative.


  • Prestige:  49% market share of upscale market
  • Broad portfolio of products and experiences:  Oceania- country club environment, Regent - luxury-focused, NCL- family-based 
  • Multiple:  11x adjusted EBITDA (estimated 2014 earnings before synergies)
  • $50m bonus may be paid to Prestige shareholders based on reaching 2015 financial targets
  • Prestige:  formed in 2008.  Shielded from recession and economic downturn. 
  • Prestige: have invested $125m in refurbishments
  • Pro-forma Combination: (TTMJune 30 2014):  +43% revenue, +18% in net yield, +33% in adjusted EBITDA (includes $25m synergies) 
  • Pro-forma leverage at end of 3Q:  5.3x
    • Soon after, they expect leverage to go back to 4x

 

Q & A

  • Prestige net yield guidance:  business continues to be strong; long forward bookings curve
  • Prestige 2015 deployment:  similar to 2014
    • Mid- April to mid-Nov:  2 ships in Europe, 2 ships in Alaska
    • Mid Nov- Mid-April:  2 ships in Miami, 1 ship in South America, 1 ship in Australia, 2 ships in Asia, 1 ship (180 day- around the world cruise)
  • $25m cost synergies:  getting into luxury/upper end agent community; merging customer databases; fuel/marketing cost synergies
    • Conservative target?  It's early to say.  Feel very comfortable with '1st $25 million' for 2015.
    • NCL:  Can do much better job on front-loading the business.  Prestige will finish 2014 50% booked more than NCL
    • Will affect interest expense (more efficient on margin basis), D&A will be better as well
  • Prestige's highest yielding ship is their oldest ship.
    • Focus on customer service and fine dining
  • Genting's thoughts on deal:  complicated situation but sees enormous value from deal.
    • Believe lock up in shares until end of 2015
  • Will not be surprised if private equity guys continue to sell.
  • Prestige:  on the cost side, could do better given their small scale.
  • For every $ of synergy on cost, double/triple that on the revenue side
  • 7,000 people on combined basis
  • Prestige:  CEO Frank committed to stay until end of 2015
  • Will set up a investor meeting in NYC in November

Early Look

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