Takeaway: It's tough to make money when rates are falling. Why is that?
The long end of the yield curve is seemingly at odds with most of the rest of the data YTD. While long-term interest rates continue to fall, most other risk measures we track show signs of ongoing stability across markets and geographies. Why is this? We suspect it has to do with the Fed's tapering, which is causing the bond market to follow the same course it has taken after the end of both QE1 and QE2. We'll have a note out later today walking through this dynamic in greater detail.
Unfortunately, while the "coast is clear" from the standpoint of risk, the reality is that much of the Financials sector is highly positively correlated to long-term interest rates, and so it's tough to make money on the long side when the 10-Year yield is falling. Finding ways to do so will also be explored in our note coming out later today.
* High Yield (YTM) Monitor – High Yield rates fell 4.1 bps last week, ending the week at 5.58% versus 5.62% the prior week.
* Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.0 points last week, ending at 1862.
* 2-10 Spread – Last week the 2-10 spread tightened to 216 bps, -7 bps tighter than a week ago.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Positive / 6 of 12 improved / 3 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Positive / 4 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged
1. U.S. Financial CDS - Swaps tightened for 25 out of 27 domestic financial institutions. The Global US banks (with the exception of BAC, which widened by 1 bps) were tighter, by an average of 2 bps w/w, and 5 bps on a m/m basis. The specialty finance companies we track were tighter on the week and on the month, with the biggest move coming from the mortgage insurer RDN, which tightened by 10 bps w/w. The bond guarantors saw w/w improvements across the board. Notably improved were AGO, whose swaps tightened by 10 bps w/w, and MBI, whose swaps tightened by 6 bps w/w.
Tightened the most WoW: MET, HIG, AIG
Widened the most/ tightened the least WoW: BAC, UNM, AON
Tightened the most WoW: AIG, XL, PRU
Widened the most MoM: MBI, SLM, BAC
2. European Financial CDS - All European swaps, with the exception of the Greek banks and three Swedish banks, tightened over the past week. Most of the 31 swaps that tightened did so by a notable amount. On average, French swaps tightened by 7 bps, German by 8 bps, Italian by 9 bps, Portuguese by 14 bps, Scottish by 16 bps, Spanish by 9 bps, and UK by 6 bps. In contrast to the past couple of weeks, Greek banks widened considerably w/w, by an average of 48 bps. The widening of Swedish banks was nominal, with three banks widening by 1 bps each, and the fourth tightening by 1 bps.
3. Asian Financial CDS – Last week Chinese and Indian banks tightened notably, by averages of 4 bps and 9 bps, respectively. Japanese banks were a mixed bag, with Nomura Holdings tightening by 5 bps w/w and Daiwa wideneing by 2 bps on a weekly basis.
4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Italian sovereign swaps tightened by -3.9% (-4 bps to 111 ) and American sovereign swaps widened by 0.7%.
5. High Yield (YTM) Monitor – High Yield rates fell 4.1 bps last week, ending the week at 5.58% versus 5.62% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.0 points last week, ending at 1862.
7. TED Spread Monitor – The TED spread fell 0.9 basis points last week, ending the week at 20.5 bps this week versus last week’s print of 21.36 bps.
8. CRB Commodity Price Index – The CRB index fell -1.4%, ending the week at 307 versus 311 the prior week. As compared with the prior month, commodity prices have increased 1.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
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 2 bps to 16 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 19 basis points last week, ending the week at 2.5% versus last week’s print of 2.31%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Chinese Steel – Steel prices in China rose 0.2% last week, or 5 yuan/ton, to 3337 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
12. 2-10 Spread – Last week the 2-10 spread tightened to 216 bps, -7 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
13. XLF Macro Quantitative Setup – Our Macro team's quantitative setup in the XLF shows 0.7% upside to TRADE resistance of $22.14 and 1.2% downside to TRADE support of $21.73.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
TICKERS: LVS ,WYNN, SGMS, NCLH
EVENTS TO WATCH:
Tuesday, May 6
• RHP Q1 earnings – 10am , Passcode: 25122491
• SHO Q1 earnings – 12pm
• TRIP Q1 earnings – 4:30pm
• DIS FQ2 earnings – 5pm , Passcode: 36995300
Wednesday, May 7
• STAY Q1 – 830am
• STN Q1 – 4pm
• CZR Q1 – 5pm , Passcode: 20337702
Thursday, May 8
• PCLN Q1 – 730am
• MPEL Q1 – 830am , Passcode: MPEL
• CAR Q1 – 830am , Passcode Avis Budget
• BEE Q1 – 10am , Passcode: 10895989
• HOT – 10:10am presenting at Baird's 2014 Growth Stock Conf
• SGMS Q1 – 430pm , Password: SGMS
Friday, May 9
• HLT Q1 earnings – 10am , Passcode: 25981567
• AHT Q1 earnings – 11am
LVS - announced that it intends to keep Sands Bethworks, which was rumored to be for sale $1 billion. Additionally, the Company announced it will continue to invest in several property level projects. Finally, the Company appointed Mark Juliano as president of Sands Beth. Juliano previously ran Marina Bay Sands following the departure of Tom Arasi, who departed in February 2011.
TAKEAWAY: A strong talent transfer from MBS to Bethworks. We wonder who will back fill Juliano's vacate MBS role?
WYNN - (Reuters) A Nevada judge ruled that a civil suit between Wynn Resorts and Kazuo Okada could continue and rejected the U.S. government's request to postpone it for another six months to conceal the identity of witnesses in a criminal investigation into Okada's business in the Philippines
TAKEAWAY: The saga continues...
Genting Singapore (G13) - announced it "organized a dedicated project team"
as it relates to a potential new integrated resort development in Japan. Genting Singapore noted Japan may pass the casino bill in the Lower House by the end of the month.
TAKEAWAY: This fits with our expectation for the Casino Introduction Bill to be vetted in the days following the Japanese Gaming Congress (see our conf notes for more details).
Iao Kun Group - Junket Iao Kun Group Holding Company Limited announced unaudited Rolling Chip Turnover for April at US$1.72 bn, up 17% YoY. Win rate was 1.90%.
TAKEAWAY: A very low hold % at this junket could've contributed to lower than normal hold for the market in early April.
SGMS - announced it signed an amendment to its contract with Loteria Nacional de Beneficencia of Panama to provide the country’s first online lottery game, Pega 3. Created by Scientific Games, Pega 3 is scheduled to launch in June 2014 as a standard Pick 3 game.
NCLH - (Cruise Critic) the Norwegian Breakaway was directionless for several hours on Sunday in the Hudson River after one if its side thrusters malfunctioned and left the ship wallowing in the Hudson from 7:45 a.m. until it docked at Pier 88 at 10 a.m. Prior to the breakdown, NCL had planned to celebrate the ship's one year anniversary. The Breakaway was scheduled to depart at 5 p.m. for a cruise to Bermuda.
NCL spokeswoman AnneMarie Mathews said there was no real propulsion problem. Only a "small, technical maintenance item on one of the two azipods." "We were closely monitoring the currents in the river and being very cautious. We don't expect it to have any affect on the next sailing," she said.
TAKEAWAY: Yet another media black-eye for the cruise industry.
Macau April Market Share - according to LUSA, Macau's April GGR market shares were:
TAKEAWAY: Wynn Macau had the best month in terms of share relative to recent trend and Galaxy the worst. The others were generally in line with their 3 month moving average.
Macau Visitation Scrutinized - During 2013, approximately 2.64 million Chinese visitors entered Macau from the mainland using visas for overseas journeys. But little over 20%of them exited Macau. The Macau Government suspects many of the mainland visitors used transit visa to Macau as a means of avoiding the regular IVS entry permit which limits frequency of visitation.
TAKEAWAY: We are hearing the Macau government will study terms of restricting the stay period that mainland visitors can enjoy when transiting Macau - the related restriction measure may be put
forward in July.
Macau May Day March - This year’s Labor Day march demonstrated a wider variety of concerns and larger participation of casino workers. While gaming industry employees united to urge for a full smoking ban in casinos, youth groups appealed for a reshaping of the living space for residents. Additionally, an unprecedented motorcade of 31 cars and nine motorcycles was organized by four casino workers groups under the Macau Federation of Trade Unions (FOAM). Departing from Taipa,they eventually handed in a petition letter to the Legislative Assembly against the importation of foreign labor, while demanding a fair promotion system.
TAKEAWAY: The locals are getting restless as YoY growth in GGR strongly outpaces casino wages.
Macau Airlift - Macau International Airport handled 10% more passengers during April 2014 versus the prior year. The airport welcomed about 450,000 passengers last month, versus nearly 409,000 in the same month of the previous year.
TAKEAWAY: Positive for the premium mass and VIP segments.
Macau Hotel Construction - There are a total of 18 hotels currently being constructed in Macau, with an additional 25 development projects being appraised. All 43 projects together could mean up to 25,600 new hotel and guestrooms. Currently under construction are 18 hotels encompassing 9,800 guestrooms. Ten of the properties are being built on the Macau side and will offer about 1,000 guestrooms altogether; five are being built in Cotai and could offer as many as 7,500 guestrooms, while two are under construction in Taipa and will offer 1,000 rooms. A hotel is also being built in Coloane, which will offer up to 200 rooms.
TAKEAWAY: We hope supply creates demand...
Hard Rock Hotel & Casino Sioux City - speculation regarding the opening date is increased as Warner Gaming announces concert bookings for the new, yet to open property. Thus far the earliest concert is scheduled for August 7th, followed by Quiet Riot on August 15, and the Goo Goo Dolls and Daughtry on Aug 30.
TAKEAWAY: Given the increasingly pugnacious comments from PENN regarding Argosy Sioux City, the last weeks of July and first weeks of August will be a media frenzy.
Atlantic City - Mayor Don Guardian proposed a large outdoor stage to help increase visitation to Atlantic City. Thus far, two Atlantic City beach concerts are planned – the first in July 31 featuring Blake Shelton. A second concert is planned for Sunday, August 3 for a yet unnamed headliner.
TAKEAWAY: First, we recall concerts being a foundational pillar of The Revel's differentiated programming as well as Showboat's House of Blues, so how is this different - except for the potential to become a drunken beach brawl...Second, we go out with an early call and our $$ is on The Boss.
Airbnb - (Reuters) Buffett endorses Airbnb to combat hefty Omaha hotel prices
Buffett said it is understandable that rates might rise, given that Berkshire's annual meeting now attracts some 38,000 shareholders - roughly two-thirds from outside the area - for what is Omaha's largest annual tourism event other than the baseball College World Series. "Since we want to increase the demand ... that's why we have encouraged Airbnb to come in," he said.
Critics say Airbnb takes away business from legitimate hoteliers, and deprives municipalities of tax revenue. New York Attorney General Eric Schneiderman last month said he is examining whether the service violates state laws on subletting.
TAKEAWAY: We don't see it as a threat to the hotel companies.
Alaska cruising - Port Metro Vancouver’s 2014 Alaska cruise season looks to be on par with a strong 2013. Some 812,000 passengers on 243 calls by 29 ships are forecast. This compares to 812,398 passengers on 235 calls by 29 ships last year, a 22% increase in passengers over 2012.
TAKEAWAY: This data point suggests a slight decline in Alaska demand for 2014.
China Economy - HSBC China April manufacturing PMI 48.1 vs 48.3 flash, 48.0 in March - new orders and new export orders decrease.
TAKEAWAY: China macro continues to signal weakness
Las Vegas Housing Recovery - recently developers laid out plans to build the long-delayed, bankruptcy-plagued Park Highlands community, with 15,000 homes built in two phases starting by early 2015. The 2,700 acre project near Aliante Parkway and the 215 Beltway is expected to cost $3.2 billion over 15 years of construction.
TAKEAWAY: While an optimistic plan, recent data indicate Southern Nevada new home sales were down 22% YoY during Q1 2014, with about 1,300 home sold. Also, approximately 40% of all Las Vegas home owners remain underwater.
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.
the macro show
what smart investors watch to win
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
*Reminder: We’re hosting a call with Pat Grismer, CFO of Yum! Brands, on Tuesday, May 6th at 11am EST to talk succession planning, Taco Bell breakfast and China.
The table below lists our current Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating. We intend to update this table regularly and will provide detail on any material changes.
BOBE – We’re adding Bob Evans to our Investment Ideas list as a long. Activist Sandell Asset Management has identified significant opportunities for value creation at the company. We, here at Hedgeye, tend to think BOBE would also benefit from a transition to an asset light model.
04/30/14 PNRA: Much Noise, Little Clarity
05/02/14 New Best Idea: Long BOBE
Earnings Calls This Week
05/05/14 TXRH earnings call 5:00pm EST
05/06/14 TAST earnings call 8:30am EST
05/06/14 ARCO earnings call 10:00am EST
05/06/14 FRGI earnings call 4:30pm EST
05/06/14 PBPB earnings call 5:00pm EST
05/06/14 CHUY earnings call 5:00pm EST
05/07/14 PZZA earnings call 10:00am EST
05/07/14 THI earnings call 2:30pm EST
05/08/14 WEN earnings call 10:00am EST
05/08/14 JMBA earnings call 5:00pm EST
05/09/14 BLMN earnings call 9:00am EST
Chart of the Day
Recent News Flow
Monday, April 28th
- PNRA downgraded to underperform at Longbow Research with a $138 PT.
- BOBE appointed new independent directors Kevin Sheehan, Kathy Lane and Larry McWilliams to its Board of Directors. Gordon Gee stepped down from the board effectively immediately, while Larry Corbin and Robert Lucas will be retiring from the board when their terms expire.
- BOBE Sandell essentially deemed BOBE’s announcement inadequate, calling it a “knee-jerk reactionary step.”
- PZZA Papa John’s aired a TV commercial featuring NBA All-Star Paul George of the Indiana Pacers promoting its new Sweet Chili Chicken Pizza.
Tuesday, April 29th
- THI launched its newest drink, Frozen Hot Chocolate, across all U.S. restaurants.
- PZZA declared a quarterly dividend of $0.125 per common share payable May 23, 2014 to shareholders of record at the close of May 12, 2014.
- DRI announced that Chief Restaurant Operations Officer, Dave Pickens, will retire effective May 23. DRI will not replace Pickens and plans to eliminate the position altogether.
Wednesday, April 30th
- RRGB announced it has signed purchase agreements to acquire 32 franchised restaurants in the U.S. and Canada for approximately $40M.
- NDSL announced the opening of its first MA location in Shrewsbury with franchisee operator, Hamra Enterprises.
Thursday, May 1st
- PNRA was upgraded to positive at Susquehanna with a $184 PT.
- YUM announced that Chairman and CEO David Novak will become Executive Chairman on Jan. 1, 2015, transitioning from his current role. At this time, Greg Creed, Preisdent of Taco Bell, will become the next CEO of Yum! Brands. Novak will then form the Office of the Chairman, which will include Sam Su (YUM Vice-Chairman and Chairman/CEO of the China Division) and Greg Creed. According to the press release, "This new Office of the Chairman will partner as a triumvirate on overall corporate strategy and leadership development to propel continued growth."
- JMBA is re-introducing its Fruit Refreshers with coconut water for the summertime. The Fruit Refreshers are available in three flavors: Pina Colada, Tropical Mango and Island Strawberry.
- KKD upgraded to buy at Sidoti.
Friday, May 2nd
- BAGL board authorized a $20M repurchased program.
- WEN new product team was honored with the Hot N’ Juicy Award for its Pretzel Bacon Cheeseburger.
- FRSH Papa Murphy’s IPO priced at $11.00 per share, at the low end of the expected $11.00 to $13.00 range and had an underwhelming day trading, up only +0.46% at the close.
U.S. Macro Consumption
It was a bit of a bounce back week for consumer discretionary stocks. Following several weeks of underperformance, the XLY (+1.3%) outperformed the SPX (+1.0%) last week. In aggregate, casual dining stocks outperformed the broader index, while quick service stocks underperformed. The Hedgeye U.S. Consumption Model reverted back to neutral, now flashing green on 6 out of 12 metrics.
XLY Quantitative Setup
From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.
Casual Dining Restaurants
Quick Service Restaurants
Client Talking Points
Did the 10-year US Treasury Yield just go over the waterfall of interconnected risk? After one of the more epic 2 hour moves I’ve ever seen for the 10-year yield (between 8:30-10:30am on Friday), my long-term TAIL risk line of 2.60% broke (2.58% this morning). Gold is breaking out again and European stocks don’t like it inasmuch as high multiple US Growth Stocks won’t.
After frustrating people who missed the rip higher to $1380 in early March, Gold has been consolidating and finally broke out above my immediate-term TRADE momentum line of $1292 on Friday. There is 0% coincidence in that after the 10-year yield gave it direction. Gold loves falling bond yields.
Europe is down hard this morning (Germany's DAX -1.3%) after most European Equity markets failed to make higher-highs last week. While EuroStoxx600 was up +1.3% last week to +2.9% beats being long the Russell2000 (down -3.0% YTD), it is May… and I’m not into the "Buy in May and Pray" thing.
|FIXED INCOME||18%||INTL CURRENCIES||18%|
Top Long Ideas
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.
Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.
Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.
Three for the Road
QUOTE OF THE DAY
"Courage is fear holding on a minute longer." -General George Patton
STAT OF THE DAY
Sorry, Vladimir. The Russian stock market continues to crash. It is down 20.7% year-to-date.
Consumer Staples traded in-line with the broader market last week, rising 0.9%. XLP is up 2.8% year-to-date versus the SPX at 1.8%. The coming week is marked by a number of earnings releases.
Earnings Calls (in EST):
Monday (5/5): TSN (9am)
Tuesday (5/6): IFF (10am); HSH (10:30am); NUS (11am)
Wednesday (5/7): BUD (9am); MDLZ (10am); TAP (11am and 2pm)
Thursday (5/8): HAIN (8:30am); DF (9am); THS (9am); LNCE (9am); MNST (5pm)
Friday (5/9): POST (9am)
For the last two months, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.
The Hedgeye U.S. Consumption Model shows a muted outlook over recent weeks, with 6 of the 12 metrics flashing green (up from only 3 two week ago).
Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:
- U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
- The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
- The sector is loaded with a premium valuation (P/E of 19.4x)
- Less sector Yield Chasing as Fed continues its tapering program
- The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, but improved to 37.9 versus 37.3 in the prior week
Top 5 Week-over-Week Divergent Performances:
Positive Divergence: ENR 17.3%; LO 8.6%; EL 4.7%; DPS 4.5%; HLF 3.7%
Negative Divergence: AVP -8.6%; BG -6.1%; BNNY -4.5%; NWL -4.0%; BUD -2.6%
Last Week’s Research Notes
- Just Charts: The Slow Grind Continues
- Marijuana Legalization: Facts & Figures
- LO Buyout Rumors Persists; Deal Has Challenges
- SAM: Impressive Results on Easy Comp; 2H More Challenging
- The State of E-Cigs; Updates From Industry and Big Tobacco
In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one. As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).
BUD – stiff selloff on a bearish volume signal, but didn’t quite break 105.23 TREND support yet
DEO – still bearish TREND (despite the entire world chasing low-beta consumer staple yield); TREND resistance = $125.33
KO – slow-growth-yield-chasing remains in vogue; TREND support = $39.81
PEP – low-volume ramp as of late, but the bullish TREND breakout remains intact with $84.18 support
GIS – still one of the best looking charts on this list; bullish intermediate-term TREND support = $50.73
MDLZ – held its recent breakout from its TREND base ($34.42 support)
KMB – in spite of the scare a few weeks back, the stock has held $107.62 TREND support
PG – correction late last week but still holding intermediate-term TREND support of $80.73
MO – big bullish-yield-chasing remains a big time bullish TREND = $37.94 support
PM – recipient of the style factors the market is paying for (big cap, low beta with yield); TREND support now $83.42
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