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[PODCAST] KEITH HEADS NORTH OF THE BORDER

 

From the outdoor ice hockey rinks of Thunder Bay, Canada, to inside the boardroom of an NHL owners' group. CBC's Lisa Laco catches up with Hedgeye CEO Keith McCullough, partner in the new NHL ownership group in Phoenix.


Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on Hedgeye's radar screen.

Keith McCullough – CEO

Prosecutors and F.B.I. Examine JPMorgan Over Losses (via DealB%k)

Google, Facebook among toughest interviewers: Their questions revealed (via Silicon Valley Business Journal)

Recognize the name on this building? > Moving to the Taft Mansion, a Yale Conservative Group Seeks a National Presence (via New York Times)

 

Morning Reads on Our Radar Screen - jpm

 

Daryl Jones – Macro

Gold Shorts Cover At Fastest Pace In 13 Years (via Zero Hedge)

 

Josh Steiner – Financials

Bill Miller's fund is beating the market once more (via Baltimore Sun)
U.S. Said to Plan Charges Against Ex-JPMorgan Employees (via Bloomberg)

 

Tom Tobin – Healthcare

The new normal? Shift to outpatient care, payer pressure hit hospitals (via ModernHealthcare.com)

 

Matt Hedrick - Macro

Greece will need more bailout loans by 2014, Bundesbank believes (via The Guardian)

 

Howard Penney – Restaurants

McDonald's franchisees not leaving brand despite tension (via NRN.com)


MNST – Softness, But Energy Outperformance over Beverage and Litigation Headlines Quieter

MNST’s Q2 2013 EPS came in 2 cents lighter than consensus ($0.62 vs $0.64), while revenue increased +6.6% Y/Y and  gross profit margins expanded to 53.3% versus 51.8% in the prior-year period.   While we continue to see softness in the beverage market with CSD volumes lower in Q2 2013 vs Q2 2012 and similar softening trends in the energy drinks market, especially in Europe, energy drinks continue to outperform the beverage category.

 

We continue to like the growth in the energy category. MNST is seeing strong sales performance from Ultra -- a lighter flavor that appeals to diet drinkers and those looking for a less traditional energy drink taste profile -- but at the cost of some cannibalization to its base Monster.

 

The company said it does not forecast raw material costs going up in the back half of the year and management appears optimistic that despite the possibility of future litigation costs, it has addressed existing concerns.   On Monday and Tuesday of last week MNST sat before the  U.S. Senate Committee on Commerce, Science, and Transportation in a hearing titled “Energy Drinks: Exploring Concerns About Marketing to Youth” (Red Bull and Rock Star also testified). The company did not update any of its language in the hearing, and said it will continue to defend its products as safe for consumers.

 

The FDA has stated that available studies do not indicate any new or previously unknown risks associated with caffeine consumption, though the agency continues to explore if additional research on caffeine or energy drinks is needed.

 

MNST is in a bullish formation across our immediate term TRADE and intermediate term TREND durations, which we outline in the chart below.  

 

MNST – Softness, But Energy Outperformance over Beverage and Litigation Headlines Quieter - zz. mnst

 

Matthew Hedrick

Senior Analyst


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European Banking Monitor: Eerily Quiet?

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 - The median European bank tightened by 6 bps last week and is tighter by 16 bps vs the previous month. 

 

ECB data showed that banks cut 5,500 branches across the EU last year, representing 2.5% of the total, after 7,200 branches were closed in 2011. The region has 20K fewer branches than it had when the financial industry was hit by the crisis in 2008.  5.7% of Greek bank branches were closed in 2012, while 4.9% were eliminated in Spain, -3.3% in Ireland, and -3.1% in Italy. The contraction was partially offset by branch increases in some eastern European countries. 

 

Overall, the EU banking system continues to slowly heal. Systemic risk measures of Europe's banking system, such as Euribor-OIS, have been benign now for almost a year having fully renormalized back in Sep/Oct 2012.

 

European Banking Monitor: Eerily Quiet? - zz.banks

 

Sovereign CDS – Sovereign credit default swaps were mixed, though largely uneventful last week. Italy and Spain tightened by 7 and 9 bps, respectively, while Portugal widened by 4 bps. Elsewhere there was very little movement. 

 

European Banking Monitor: Eerily Quiet? - zz. sov1

 

European Banking Monitor: Eerily Quiet? - zz. sov2

 

European Banking Monitor: Eerily Quiet? - zz. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-oer-week at 12 bps. 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. 

 

European Banking Monitor: Eerily Quiet? - zz. euribor


MACAU WEEKLY - SOLID START

With table revenue per day over HK$900m (HK$916m, up 29% YoY), Macau is indeed off to a strong start.  Our full month projection remains in the range of +14-18% in terms of YoY growth.  Our process is to project revenues prior to the start of the month using a sequential, seasonally adjusted model and then again using a weekly model.  Both approaches are producing the same growth rate.  While the growth rate is slower than the past few months, the underlying demand fundamentals are consistent.  Hold, comparisons, and the calendar always impact YoY growth differently each month.

 

In terms of market share, the biggest takeaways (albeit early to make any definitive conclusions) are that MPEL is back on track after a couple of share loss months and MGM and LVS have resumed their upward share momentum.  We’ve been assured that MPEL’s recent VIP volume share declines are not sustainable and August’s start is certainly a first step in proving that theory out.  MGM continues to impress us with improving operations.  The ramp of SCC is mostly responsible for LVS’s ascension. 

 

In terms of stocks, we remain bullish on MGM (Trade and Trend), MPEL (Trade, Trend, and Tail), and LVS (Trade, Trend, and Tail).  Despite a slower start to August, we are warming up to Galaxy as well.

 

MACAU WEEKLY - SOLID START - macau111

 

MACAU WEEKLY - SOLID START - macau222


MONDAY MORNING RISK MONITOR: EERILY QUIET?

Takeaway: The short-term upside in XLF trumps downside 4 to 1 this morning. The risk measures we track continue to point onward and upward, for now.

Key Takeaways:

In summary, thus far August remains a remarkably quiet month. Too quiet? Perhaps, but it's hard to put a finger on what the market could be missing with its extreme calm. Risk gauges at the Sovereign, bank and systemic banking levels all remain benign globally. The only red on our summary screen below is the WoW move in High Yield rates (+12 bps) and the upward sloping longer-term trendline in the Shifon Index (Chinese overnight lending rate). 

 

US financial credit default swaps were modestly tighter. European financial swaps were also broadly, though narrowly, improved (average -6 bps). High yield rates posted another modest up week, rising 12 bps, following a +5 bps WoW change in the previous week. That said, MoM, rates are still down by 3 bps. The TED spread was lower (-2 bp), Euribor-OIS was flat and the Shifon Index tightened by 9 bps.

 

* European Financial CDS - Overall, the EU banking system continues to slowly heal. Systemic risk measures of Europe's banking system, such as Euribor-OIS, have been benign now for almost a year, having fully renormalized back in Sep/Oct 2012. The median European bank tightened by 6 bps last week and is tighter by 16 bps vs the previous month. 

 

* XLF Macro Quantitative Setup – Short-term XLF upside trumps downside by 4 to 1. Our Macro team’s quantitative setup in the XLF shows 2.8% upside to TRADE resistance and 0.7% downside to TRADE support.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged

 • Intermediate-term(WoW): Positive / 7 of 13 improved / 0 out of 13 worsened / 6 of 13 unchanged

 • Long-term(WoW): Positive / 2 of 13 improved / 1 out of 13 worsened / 10 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 15

 

1. U.S. Financial CDS -  Credit default swaps for U.S. financials were broadly, but narrowly, lower last week. The average and median decline was 1 and 3 bps, respectively. The two companies that posted increases were Assured Guaranty (AGO) and MBIA (MBI). Overall, swaps tightened for 23 out of 27 domestic financial institutions.

 

Tightened the most WoW: AON, AXP, WFC

Widened the most WoW: MBI, AGO, PRU

Tightened the most MoM: MTG, GS, MS

Widened the most MoM: AGO, MBI, MMC

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 1

 

2. European Financial CDS - The median European bank tightened by 6 bps last week and is tighter by 16 bps vs the previous month. Overall, the EU banking system continues to slowly heal. Systemic risk measures of Europe's banking system, such as Euribor-OIS, have been benign now for almost a year having fully renormalized back in Sep/Oct 2012.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 2

 

3. Asian Financial CDS - Chinese and Indian bank swaps moved wider last week by an average of 12 bps and 18 bps, respectively. Japanese banks swaps tightened by an average of 3 bps.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 17

 

4. Sovereign CDS – Sovereign credit default swaps were mixed, though largely uneventful last week. Italy and Spain tightened by 7 and 9 bps, respectively, while Portugal widened by 4 bps. Elsewhere there was very little movement. 

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 18

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 3

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 12.1 bps last week, ending the week at 6.35% versus 6.23% the prior week.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -0.3 points last week, ending at 1805.56.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 6

 

7. TED Spread Monitor – The TED spread declined 2.2 bps last week, ending the week at 21.2 bps this week versus last week’s print of 23.4 bps.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.5%, ending the week at 285 versus 284 the prior week. As compared with the prior month, however, commodity prices are down -0.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-oer-week at 12 bps. 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. 

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 9 basis points last week, ending the week at 3.1641 bps this week versus last week’s print of 3.2539 bps. 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: EERILY QUIET? - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened by 1 bp, ending the week at 96 bps versus 95 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 11

 

12. Chinese Steel – Steel prices in China rose 2.0% last week, or 70 yuan/ton, to 3517 yuan/ton. Since the start of July, Chinese steel prices have been gradually grinding higher. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 228 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.8% upside to TRADE resistance and 0.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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