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Draghi Surprises With A Rate Cut! QE Ahead?

EUR/USD falls on the announcement of rate cuts and credit easing programs. However, it’s not clear to us that this will necessarily be a catalyst to ignite European economic activity.  

 

Investment Recommendations:  short EUR/USD (FXE); Long GBP/USD (FXB)

 

Key Take-Aways from today’s ECB Meeting:

  • ECB Head Mario Draghi surprised the market with rate cuts and the EUR/USD is trading sub $1.30 intraday. We remain short the cross via the etf FXE - quantit. broken TREND ($1.33) and TAIL ($1.34)
  • Draghi’s policy outlook remains dovish and accommodative
  • The market’s QE expectations remain elevated, however Draghi’s focus in today’s meeting (and perhaps to reset accelerated QE timing expectations following Jackson Hole) included announcing the ECB’s intention to purchase ABS (no formal size mentioned) and issuing a covered bond purchasing program (details on this program will be announced after the ECB’s next meeting on October 2nd)
  • Draghi signaled he wants to return the ECB balance sheet to 2012 -  the package to “lever up” now includes today’s policy program announcements, the previously announced TLTROs (scheduled for issuance in late September and December), and eventually QE?
  • ECB staff macroeconomic projections for September show downward revisions to the GDP and inflation outlook for the Eurozone (and in-line with our expectations and building on  downward revision in the June outlook)
  • Despite cutting main rates to near zero and deposit rates to negative first in June, the policy move has not lead to increased lending to businesses that are willing to invest in and grow the European economy. This will remain Europe’s great challenge over at least the medium term

Draghi Surprises With A Rate Cut!  QE Ahead? - T. EUR USD

Draghi Surprises With A Rate Cut!  QE Ahead? - t. BALANCE SHEET


What was delivered in cuts? The cuts to the main interest rate were largely unexpected by the market. In the Q&A Draghi attempted to anchor expectations that there would be no further cuts over the medium term (also not a big surprise since we’re already at or below the zero bound) to encourage participation in upcoming bond purchasing programs.

  • Benchmark Rate: cut from 0.15% to 0.05% (0.15% est.)
  • Marginal Lending Facility: cut from 0.40% to 0.30% (0.40% est.)
  • Deposit Facility: cut from -0.10% to -0.20% (-0.10% est.)

Draghi Surprises With A Rate Cut!  QE Ahead? - t. RATES

 

The updated [SEPT] ECB Staff Macroeconomic Projections show further slowing to the outlook (vs JUN):

 

Growth Projections:  +0.9% in 2014 vs +1.0% in June; +1.6% in 2015 vs +1.5% prior; +1.9% in 2016 vs +1.8% prior

 

Inflation Projections:  +0.6% in 2014 vs +0.7% June; +1.1% in 2015 (in-line); +1.4% in 2016 (in-line)

 

 

Other Press Conference Mentions

  • QE was discussed – some council members in favor of doing more, others doing less
  • BlackRock has been hired by the ECB to help structure an ABS purchase program. No size was mentioned, and Draghi did not substantiate a leaked report earlier in the week that called for a program worth up to €500B
  • Draghi underlined the drag from Unemployment across the region  (currently at 11.5%) and highlighted the slack in the economy as a drag on ECB staff projections
  • He stressed the importance of fiscal consolidation at the state level

 

Hedgeye’s Bearish Bias Remains

  • Weeks and months of declining data across the region continue to fuel our bearish outlook on the Euro area
  • While QE has proven to put a floor in equities in the past, QE is far from the elixir to inflect weak and declining fundamentals across the region.  Witness Japan’s failed efforts with QE!
  • While on the margin Draghi’s credit easing programs should help to encourage lending and therefore growth to the real economy, the failure of past LTROs to improve lending conditions are fresh in memory. This time may in fact not be different
  • We reiterate that inflation (via currency debasement) is not growth, even if Draghi showers us with QE
  • From here our propriety GIP model (growth, inflation and policy) for assessing economies suggests the Eurozone economy will land in the ugly quads #3 and #4 in 2H, representing growth slowing as inflation decelerates/accelerates.

Draghi Surprises With A Rate Cut!  QE Ahead? - T. loans

Draghi Surprises With A Rate Cut!  QE Ahead? - EUROZONE

 

Matthew Hedrick
Associate

 


INITIAL CLAIMS - AUGUST WEAKENS RELATIVE TO JULY

Takeaway: Labor market data softens a bit sequentially (ADP & Claims) and likely augurs for a miss on tomorrow's payroll number.

Still Good, but Less Good

The rate of improvement in the labor market slowed slightly in the latest week as initial jobless claims (NSA, 1-wk) were lower by 7.7% y/y vs an 11% improvement in the prior week. On an NSA rolling basis (4-wk), the rate of improvement slowed to 8.6% from 10.3%. Recall that claims tend to bottom out around 300k (SA), which is roughly where they are now (302k). As such, we expect to see the rate of y/y improvement converge toward zero.

 

Tomorrow 

The slightly weaker than expected ADP number this morning (204k vs 218k last month) coupled with August SA rolling claims being ~8k higher than July suggests there's a good chance that tomorrow's labor market report for August comes in light, especially considering expectations are for a sequential acceleration to 230k from 209k.

 

The Data

Initial jobless claims rose 4k to 302k from 298k WoW. There was no revision to the prior week number. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3k WoW to 302.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.3%

 

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Yield Spreads

The 2-10 spread fell -3 basis points WoW to 188 bps. 3Q14TD, the 2-10 spread is averaging 199 bps, which is lower by -21 bps relative to 2Q14.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 




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LEISURE LETTER (09/04/2014)

Tickers: BYI, GLPI, CHSP, HOT, HLT, PEB, CCL, NCLH

EVENTS

  • Sept 4:  MGM at Mizuho Investment Conference
  • Sept 6-8: China/Macau - Mid-Autumn Festival
  • Sept 8: MAR Analyst Meeting
  • Sept 9: 
    • BofAML Gaming & Lodging Conference
    • GLPI & HPT at Wells Fargo Net Lease REIT Forum
    • EXPE & OWW at DB Technology Conference

COMPANY NEWS

BYI – announced an agreement with the Ontario Lottery and Gaming Corporation (OLG) to provide the central casino gaming system solution throughout the province. According to Bally, in conjunction with the system modernization, the OLG will implement Bally’s system technology to align and comply with “Conduct and Manage” responsibilities under Canada’s Criminal Code, and implement enhanced responsible gambling tools to the casino gaming facilities and operations across Ontario.

Takeaway:  This is an important win for Bally, I mean SGMS. 

 

IGT – Wheel of Fortune Spins its Way to Mobile and Desktop on IGT's DoubleDown Casino

Today marks the first time IGT's Wheel of Fortune Double Diamond slot game is available across all platforms including social and mobile devices.  Today's announcement is the first in a series of Wheel of Fortune titles to launch as part of the multi-year agreement with Sony Pictures Consumer Products.  

 Takeaway:  Long-awaited moment for Wheel of Fortune on DoubleDown.

 

GLPI – declared a cash dividend of $0.52 per share on common stock for the third quarter of 2014. The dividend will be payable on September 26, 2014 to shareholders of record at the close of business on September 15, 2014

Takeaway: Important because it signals a status quo pay-out ratio.

 

CHSP – announced several transactions, including:

1) entered into an agreement to acquire the 337-room JW Marriott San Francisco Union Square located in San Francisco, California, for a purchase price of $147.2 million, or approximately $437,000 per key; 

2) entered into an agreement to sell the 153-room Courtyard Anaheim at Disneyland Resort located in Anaheim, California, for a sale price of $32.5 million, or approximately $212,000 per key. Both transactions are expected to close within 45 days; and,

3) announced 4.2 million share common share offering and intends to use the proceeds from the offering and hotel sale to fund the acquisition of the JW Marriott.

Takeaway:  CHSP adding to its San Francisco platform while upgrading the quality of its portfolio.  Thayer Lodging Group purchased the JW Marriott Union Square from Ashord Hospitality Trust in March 2011 for $96 million.

 

HOT & HLT– Thayer Lodging Group closed on its purchase of the Westin Diplomat Hotel (oceanfront), Westin Diplomat Golf & Tennis Club and adjacent open land parcels for $535 million. The seller was The United Association, a 370,000-member plumber and pipefitters union.  Thayer plans a $100 million capex renovation of the property.  Thayer will likely name a developer in the coming weeks to build three to five towers for a total of 1,500 rooms on open land

Takeaway: Most importantly, Thayer will deflag the Westin brand and rebrand the property Diplomat Resort & Spa and will join Hilton Worldwide's newest brand, Curio - A Collection by Hilton.  HOT would lose the 998 rooms and associated fees from its managed/franchised segment, while HLT would gain the incremental fees.  Neither HOT nor HLT have confirmed the re-flagging.

 

IHG – sold 19 Holiday Inn hotels to Kew Green, an owner/operator of high quality limited and full service branded hotels (Holiday Inn, Crowne Plaza, Holiday Inn and Days Hotels) in prime locations throughout the UK. The 19 hotel portfolio acquistion increases Kew Green’s portfolio of Holiday Inns up to 38.

Takeaway: IHG continuing its Holiday Inn asset sales.

 

PEB – announced 3 million share secondary offering and which will use the net proceeds to repay the approximately $91.0 million outstanding on the company’s senior unsecured revolving credit facility and the balance for general corporate purposes

Takeaway: Small equity raise at a 52 week high share price while preserving dry powder for opportunistic, value creating acquisitions.

 

CCL – Princess '3 For Free' sale Seatrade Insider

Running through Nov 20, Princess Cruises has three offers for travelers booking Alaska, Europe or Japan cruises and cruise-tours sailing in 2015. The '3 For Free' sale gives stateroom location upgrades, a free shore excursion credit and on-board credit, and also features a refundable deposit of $100 per person.     

Takeaway:  Princess has been leading the promotional charge.

 

NCLH – Regent Seven Seas has canceled calls to Cabo San Lucas (scheduled for Thursday, September 4) and Puerto Vallarta (Friday, September 5) to avoid the harsh weather conditions from Hurricane Norbert.

INDUSTRY NEWS

Macau Customs Bust (Macau Daily Times) During an inspection on August 26 at the cargo terminal of the Macau International Airport, the Macau Customs Service (SA) found a consignment of counterfeit watches that was to be re-exported to South East Asian countries. The thirty-four boxes that contained more than five thousand watches were spotted alongside goods that had been declared to the SA. Most of them were later confirmed to be counterfeit products, with a total street value of more than MOP20 million. The SA has arrested the manager of the logistics company involved, as well as a cargo truck driver. They will be handed over to the Public Prosecution Office and may face a jail time of up to six months.

Takeaway: The crackdown on illegal activities continues.

 

Macau Airlift Contraction (Macau Business Daily) Low cost carrier AirAsia Zest reduced the frequency of its flights for the Macau-Manila run from daily to three times a week in mid-August, an adjusted schedule that is likely to remain for the rest of the year.

Takeaway: Interesting schedule contraction since AirAsia just recently  expanded its Macau/Manila/Macau schedule to daily service on July 1. 

 

Lodging Industry Outlook – PKF Hospitality Research forecasts the lodging industry in 2015 will achieve a record 65% occupancy (up 0.9% YoY) coupled with ADR growth of 5.7% for an overall RevPAR increase of 6.7%, according to the firm's Sept 2014 "Hotel Horizons" industry report. Additionally, PKF-HR believes that hoteliers will be able to increase their ADRs at an average annual pace of 5.7% from 2015 through 2017. 

Takeaway: Strong lodging industry trends prevail. 

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.


Arrest Economic Gravity

Client Talking Points

DRAGHI

Since both the Fed and BOJ have proven that Policies To Inflate do not perpetuate sustainable economic growth (Kuroda acknowledged Japan’s slowdown last night, but blamed the “weather”, lol), the ECB definitely has to double down on that – or will he? He will. Draghi cut rates this morning.  Easing #expectations were huge ahead of this morning’s announcement.

VOLUME

The good news is that on yesterday’s AAPL down move, some U.S. equity volume came back (the bad news is that, in rate of change terms, it only comes back on down days); Total U.S. Equity Market Volume = +8% vs. the 1 month average, flat vs. the 3 month average.

UST 10YR

One down day for yields does not a trend make, but Old Wall media keeps writing about the “risk of rising rates” (our 2013 call) when the real risk is not buying the long bond on dips; UST 10Yr Yield 2.40% after failing @Hedgeye 2.46% TRADE resistance; no support to 2.33%.

Asset Allocation

CASH 52% US EQUITIES 0%
INTL EQUITIES 18% COMMODITIES 2%
FIXED INCOME 24% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

BOBE

The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last month. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road

TWEET OF THE DAY

$MCD preparing for launch of NFC-based mobile payments system and making a bet $AAPL IPHONE6 has NFC http://www.mobilecommercedaily.com/mcdonalds-preparing-for-launch-of-mobile-payment-system-memo-shows

@HowardPenney

QUOTE OF THE DAY

Once you say you’re going to settle for second, that’s what happens to you in life.

-John F. Kennedy

STAT OF THE DAY

Aggregate coffee demand next year is expected to be around 34 million bags. Due to a current stock deficit and severe crop damage, Brazil’s production yield will be just 27 million bags in 2015.



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