prev

Video | McCullough on Fox: European Currencies Look Fantastic Relative to Burning Buck

Hedgeye CEO Keith McCullough shares his outlook for the ECB with host Sandra Smith, filling in for Maria Bartiromo, on Fox Business' Opening Bell.

SUBSCRIBE TO HEDGEYE.


Video | McCullough on Fox: If Euro Bounces, Buy Gold

Hedgeye CEO Keith McCullough discusses the state of the gold market on Fox Business' Opening Bell.

SUBSCRIBE TO HEDGEYE.



Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER

Takeaway: Junk bond rates look set to re-test the Spring 2013 lows. Meanwhile, 2-10 yield spreads continue to drop and take bank stocks with them.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 19

 

Key Callouts:

The rise in yield spreads was short-lived as last week we saw the 2-10 spread collapse another 9 bps, bringing the spread down to 210 bps. The pressure on bank stocks is growing as the KRE regional bank ETF is down ~9% vs its early April closing price. Separately, Euribor-OIS continues to widen out, slowly but steadily. Historically, rising Euribor-OIS has coincided with rising stress in the  EU banking system so we're keeping one eye on it even though individual EU bank swaps are signaling ongoing improvement. Finally, high yield rates dropped sharply on the week, coming in by 8.3 bps last week and ending the week at 5.53%. This puts high yield on track to re-test the lows (in yields) seen in May of 2013.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 12 improved / 1 out of 12 worsened / 7 of 12 unchanged

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

 • Long-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 15

 

1. U.S. Financial CDS -  Swaps tightened for 25 out of 27 domestic financial institutions. While the moves were small, -2 bps on average, the direction of the move was broad-based. The only outlier this week was Assured Guaranty (AGO), which rose by a modest 5 bps w/w.

 

Tightened the most WoW: GS, MS, UNM

Widened the most/ tightened the least WoW: AGO, XL, AON

Tightened the most WoW: AXP, MBI, SLM

Widened the most MoM: GNW, WFC, HIG

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 1

 

2. European Financial CDS - Swaps mostly tightened in Europe last week outside of Greece, where swaps widened notably at two of the three banks we track. Overall, 36 European banks were tighter on the week while just 4 were wider.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 2

 

3. Asian Financial CDS - There was material tightening of Chinese bank swaps last week with an average decline of 21 bps. Meanwhile, the tightening in Indian banks continued again last week, tightening a further 7 bps, on average. Japanese financials were nominally wider on the week.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 17

 

4. Sovereign CDS – Sovereign swaps were tighter across the board last week except for in the US, where they widened by 1 basis point to 17 bps. Portugal and Italy tightened the most, falling by 21 and 11 bps, respectively. 

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 18

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 3

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 8.3 bps last week, ending the week at 5.44% versus 5.53% the prior week.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1,872.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 6

 

7. TED Spread Monitor – The TED spread fell 0.2 basis points last week, ending the week at 19.4 bps this week versus last week’s print of 19.64 bps.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 7

 

8. CRB Commodity Price Index – The CRB index fell -0.8%, ending the week at 305 versus 308 the prior week. As compared with the prior month, commodity prices have decreased -0.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 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 20 bps.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 2 basis points last week, ending the week at 2.51% versus last week’s print of 2.53%. 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: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 10

 

11. Chinese Steel – Steel prices in China rose 0.4% last week, or 12 yuan/ton, to 3,233 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 210 bps, -9 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 1.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Fund Flows, Refreshed

Takeaway: It was another week of decent fixed income subscriptions at the expense of equities with stock fund flow lackluster.

Editor's Note: This research note was originally sent to subscribers on May 29, 2014 by Hedgeye’s Financials analyst Jonathan Casteleyn. Follow Jonathan on Twitter @HedgeyeJC.  

 

Fund Flows, Refreshed - wall street  

 

ICI Mutual Fund Data and ETF Money Flow

In the most recent 5 day period, the combination of taxable and tax-free bond funds had a decent week of production with $2.3 billion in inflow, slightly above the running year-to-date average of $2.1 billion. Conversely, equity funds mustered just a $678 million inflow, well below the year-to-date average of a $3.0 billion inflow. In our charts of weekly fund production herein, the 12 week linear charts depict the intermediate term trends of these fund flows displaying the more positive backdrop for fixed income versus the ongoing decline in interest in equities.

 

Total equity mutual fund flows put up only a slight inflow in the most recent 5 day period ending on May 21st with just $678 million coming into the all stock category as reported by the Investment Company Institute. The composition of the slight inflow was again made up of a moderate outflow of $1.8 billion within domestic stock funds which was offset by the $2.4 billion inflow into international products. Both equity categories ran below their respective 2014 weekly averages with the combined weekly mean for all equity products settling in at $3.0 billion inflow, now in-line with the $3.0 billion weekly average inflow from 2013. 

 

Conversely, fixed income mutual fund flows continued on much strong footing for the week ending May 21st, with a solid $2.3 billion flowing into all fixed income funds. While this production was a deceleration from the $3.9 billion that came into bond products the week prior, the inflow into taxable products was the 15th consecutive week of positive flow and the inflow into municipal or tax-free products was the 19th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.1 billion weekly inflow, a vast 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). 

 

ETFs followed in suite with mutual fund flows during the week with weak production in the equity ETF category offset by a substantial inflow into bond exchange traded funds. Equity ETFs experienced a sizeable $7.0 billion outflow, while fixed income ETFs put up a $5.4 billion subscription. The 2014 weekly averages are now a $476 million weekly inflow for equity ETFs and a $1.2 billion 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 negative $14.1 billion spread for the week ($6.3 billion of total equity outflow 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 $7.0 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). 

 

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 - ICI chart 1

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product

 

Fund Flows, Refreshed - ICI chart 2

 

Fund Flows, Refreshed - ICI chart 3

 

Fund Flows, Refreshed - ICI chart 4

 

Fund Flows, Refreshed - ICI chart 5

 

Fund Flows, Refreshed - ICI chart 6

 

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

 

Fund Flows, Refreshed - ICI chart 7

 

Fund Flows, Refreshed - ICI chart 8

 

Net Results

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $14.1 billion spread for the week ($6.3 billion of total equity outflow 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 $7.0 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). 

 

Fund Flows, Refreshed - ICI chart 9  

SUBSCRIBE TO HEDGEYE.


LEISURE LETTER (06/02/2014)

Tickers:  BYI, CZR, BEE, RCL, NCLH

EVENTS TO WATCH

  • Mon June 2: Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference, New York
  • Mon June 2 - Tues June 3: NYU Int'l Hospitality Industry Conference, New York
  • Mon June 2 - Tues June 3: Midwest Gaming Summit, Rosemount, IL
  • Tues June 3 - Thurs June 5: REITWeek, New York, NY
  • Wed June 4 - Thurs June 5: Russian Gaming Week 2014
  • Thurs June 5 - Todd in Vegas for slot suppliers mgmt meetings
  • Tues June 10 - Thurs June 12: Bally Systems User Conference
    Mohegan Sun

COMPANY NEWS

BYI – amended and restated its Corporate Credit Facility whereby the Company increased the facility by an additional $370 million to a maximum of $1.07 billion, extend the maturity date of the Company’s Term Loan A and revolving credit facility to May 27, 2019, and revise interest rate equal to either the applicable base rate or LIBOR, plus in each case a margin determined by the Company’s consolidated total leverage ratio, with a range of base rate margins from 0% to 1.00% and a range of LIBOR margins from 1.00% to 2.00%.

Takeaway: More buybacks or should we expect a small acquisition? 

 

BEL:PM - Belle Corp (SINO:PM) – announced its intention to undertake a reorganization of its gaming assets under a separate listed entity.  The Board of Directors of Belle Corporation approved a re-organization under which Belle will inject its 100% ownership of Premium Leisure Amusements Inc (PLAI) and its shares representing 34.5% of Pacific Online Systems Corporation into Sinophil (SINO:PM) Corporation, a subsidiary of Belle that is listed on the Philippine Stock Exchange.  PLAI is part of the consortium that holds the PAGCOR license for "City of Dreams Manilla" to be operated by Melco Crown Philippines and located in PAGCOR Entertainment City. Belle will retain direct ownership of the land and building of City of Dreams Manilla, from which Belle will receive rental income. The reorganization is expected to be completed on or about August 2014.

Takeaway: Belle is a conglomerate and given the highly regulated nature of the gaming business, this separation makes sense.


CZR – Harrah's Tunica will close its doors today.

Takeaway:  Tough market

 

FB promoted Tarquin Henderson, head of gaming sales for Europe and MEA, to head up the company's real-money gambling project following the departure of former head Will Collins, who departed to start his own gaming consultancy firm. 

Takeaway: Online gaming revenues may not be living up to expectations and early forecasts for FB? 

  

BEE –  closed on a $120 million limited recourse loan secured by the Loews Santa Monica Beach Hotel.  The financing replaces the $108 million loan previously placed on the property.  The loan carries a floating interest rates of LIBOR plus 225 bps and has an initial three-year term with four, one-year extension options pending certain financial and other conditions. Wells Fargo Bank originated the loan.

Takeaway: As expected but a modestly larger loan amount. 

 

Equity Inns – American Realty Capital Hospitality Trust (a $2 billion non-traded REIT) announced it entered into an agreement to acquire the Equity Inns lodging portfolio of 126 hotels totaling 14,934 rooms across 35 states for $1.925 billion from subsidiaries of W2007 Grace I, LLC and WNT Holdings LLC - both of which are indirectly owned by one or more Goldman Sachs Whitehall Real Estate Funds. 

Takeaway: Whitehall made a sizable return for its shareholders. Industry veterans will recall Whitehall announced its intention to acquire ENN in June 2007 for $1.27 billion – $23 a share in cash, 19% premium to the previous day's share price and closed on the acquisition on October 26, 2007.  At the time, Equity Inns owned 132 limited-service hotels covering 15,700 rooms.

 

HLT – announced the launch of Curio - A Collection by Hilton. Curio - A Collection by Hilton (curiocollection.com) is a global collection of distinctive hotels. Letters of intent have been signed for the following properties: SLS Las Vegas Hotel & Casino; The Sam Houston Hotel in Houston, Texas; Hotel Alex Johnson in Rapid City, S.D.; The Franklin Hotel in Chapel Hill, N.C.; and a soon to be named hotel development in downtown Portland, Ore.

Takeaway: Everyone is in the boutique business.

 

RCL - (Travel Weekly)  Celebrity Cruises will pay commission on what is typically invoiced as noncommissionable cruise fare (NCF) on some cruises sold in June by travel agents in North America.  The extra commission applies to 2015 sailings, if agents book veranda cabins and above.  NCFs can account to 10-15% of the total cruise price. Dondra Ritzenthaler, Celebrity's senior VP of Sales said that 2015 bookings were not notably behind or in need of a boost.  “It’s a 30 day way to say thank you to all of our travel partners who have really supported us through all of our promotions,” she said.

Takeaway:  This short-term promotion could give an early boost for Celebrity 2015 bookings, particularly on the heels of the success of its 123Go! program.

 

NCLH - Hawaii's Visitor Spending and Arrivals Continue to Dip (Travel Agent Central)

Fewer visitors came by cruise ships (-22.2% YoY) and that led to a slight drop in total arrivals to Hawaii (-0.7%) at 662,553 visitors.  The dip in cruise passengers can be attributed to poor access to Hawaii’s harbors, says Mike McCartney, president and CEO of the Hawaii Tourism Authority.  “We recently issued a request for proposals for maritime vessel scheduling software, which will help to establish an integrated system that will ease vessel scheduling to optimize the use of dock space to accommodate more cruise ships throughout the Hawaiian Islands...Visitor arrivals and expenditures will continue to plateau in 2014, in comparison to the past two record-breaking years," added McCartney.

Takeaway: Could the slowdown in this expensive tourist destination continue?  Hawaii cruise pricing has been dipping as well.  NCLH itineraries have 7% exposure in 2014.

 

Insider Transactions:

RCL – EVP Harri U. Kulovaara sold 41,985 shares of the stock on Thursday, May 29th at an average price of $54.60, and he now directly owns 32,905 shares. 

SHO – CFO Bryan Giglia sold 15,763 shares of stock on Thursday, May 29th at an average price of $14.61, and he now directly owns 115,449 shares.

Takeaway: More insider selling in the Cruise and Lodging sectors. Buying seems to be on Gaming side.

INDUSTRY NEWS

Japan Gaming Expansion – late on Friday, Japanese Prime Minister Shinzo Abe who had remained silent on the issue of casinos, gave a strong endorsement to legislation that would legalize casino gambling in Japan.  Abe visited both RWS and MBS during his recent trip to Singapore.  The initial gaming legislation is expected to pass the Diet this fall,  at which time, legislation and debate will move on to a second bill concerning concrete regulations, which proponents hope can be passed in 2016.  Allowing for three years of construction prior to the 2020 Tokyo Summer Olympics which open on July 24, 2020 and close on August 9, 2020.

Takeaway: We're hearing as long as Abe remains in power, casino legislation will happen.  There is more than sufficient time to approve the required two-step legislation as well as complete construction prior to the opening of the 2020 Tokyo Summer Olympics.

 

Zhuhai-Macau-Hong Kong Bridge – The Infrastructure Development Office conceded that it had encountered a serious delay in the reclamation work of urban Zone A just across the waters from Areia Preta, which is a major public infrastructure project linking Macau to the Hong Kong-Zhuhai-Macau Bridge. Zone A, the biggest of the five reclaimed zones, is located across the waters from Areia Preta – the northeastern district of the Macau Peninsula. The 138-hectare zone is to be linked to the Zhuhai-Macau artificial island to its east, where the Hong Kong-Zhuhai-Macau Bridge will land.  The bridge is expected to be in use by 2016

Takeaway:  More infrastructure project delays

 

Pennsylvania Online Poker Legislation – Pennsylvania State Senator Edwin Erickson announced his intention to formally introduce State Bill 1386 (legislation that would authorize Interactive Gaming in the form of online poker). Gross gaming revenue would be taxed at 14% – less than New Jersey but higher than Nevada.

Takeaway: More support for our contention that legal online gaming will ultimately take the place of interstate online poker.

MACRO

China Economic Growth - China Manufacturing PMI rises in May to 50.8 versus expectations of 50.7, up from 50.4 in April and February's low of 50.2

 

LEISURE LETTER (06/02/2014) - ChinaPMI

 

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.


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next