Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
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
Russia remains a major area of global risk exposure. Russia's largest bank, Sberbank, which holds roughly half of all retail deposits for the country, is now trading at over 400 bps on its credit default swaps. The "danger zone" is generally regarded as anything north of 300 bps. With oil continuing to plunge following OPEC's move to drive marginal shale producers out of business, the embedded risk in Russia's banking system is growing quickly. Consider this simple example. Energy still accounts for 20-25% of Russia's GDP, and energy prices have fallen ~30% in the last two months. Multiplying those two weightings would imply that Russia's economy is at risk of suffering a decline of 6-7.5%. Compare that with the 8.2% decline experienced by the US Economy in 4Q08 during the height of the US Great Recession.
European Financial CDS - Swaps also were mostly tighter in Europe last week. At the median, European swaps tightened by -8.5%. Only Greek and Russian bank CDS widened modestly: Greece by about 3.1% and Russia by 2.5%. We would call out Russia's Sberbank, which is now north of 400 bps, reflecting the rising risk in the Russian economy.
Sovereign CDS – Sovereign swaps mostly tightened over last week. Spanish sovereign swaps tightened by -12.5% (-13 bps to 91 ) and American sovereign swaps widened by 8.9% (1 bps to 18).
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 tightened by 2 bps to 8 bps.
Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market 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 “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 CFTC did not report its weekly positioning data with the shortened week. The table below represents the data released Friday, November 19th.
2. Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.
3. Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.
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.
Tickers: FLL, IKGH, CCL
FLL – Announced the appointment of Daniel R. Lee as Chief Executive Officer and the favorable resolution of issues with its stockholder group -- the Board has been increased from five to nine members and the Company accepted the resignations of Andre M. Hilliou and Mark J. Miller as directors and entered into Separation Agreements with respect to their employment. To fill the resulting six vacancies, W.H. Baird Garrett, Raymond Hemmig, Ellis Landau, Daniel R. Lee, Bradley M. Tirpak and Craig W. Thomas have been appointed to serve as directors, each subject to normal and customary regulatory approvals. Mr. Lee will replace Mr. Hilliou as the Company’s Chief Executive Officer.
Takeaway: Mr. Lee makes his return to public company gaming, this time in a turnaround role at FLL.
IKGH – reported Q3 2014 results including EPS of ($0.02), revenues of $51.9 million and rolling chip turnover of $4.3 billion. The company noted full year 2014 rolling chip turnover guidance of $16.8 billion to $17.5 billion, down from $17 billion to $19 billion.
Takeaway: Disappointing VIP rolling chip trends prevail
CCL – Seabourn ordered a second ultra-luxury ship from Fincantieri, through the exercise of the option which was included in the order for the first vessel in early 2014. The ship, due to join the Seabourn fleet in spring 2018 and will be a sister ship to the newbuild announced earlier this year, scheduled for delivery in late 2016. These ships will continue the fleet modernization that began in 2009. The all-suite ship will be approximately 40,350 gross tons, 210 meters long and 28 meters wide and will be able to reach a cruising speed of 18.6 knots. It will carry up just 604 guests, accommodated in 302 spacious suites, all with a private balcony.
Takeaway: After transferring 3 Seabourn ships to Xanterra in 2013, Seabourn is back on the growth track. Ultra-luxury is one cruising segment where demand growth is outpacing supply growth.
Virgin Cruises Government Investment Corporation of Singapore (GIC) will join the buyout firm Bain Capital as a founding shareholder in Virgin Cruises and will invest a 'substantial amount'. At least one Middle East sovereign wealth fund and a number of family offices and high net worth individuals are also believed to be investing, according to private equity sources. A statement about Bain Capital's involvement, revealed by Sky News last month , is expected to be made this week.
Sources said that Virgin Group would itself invest more than $100m (£63m) in shares in Virgin Cruises, using funds recycled from the proceeds of the two recent flotations. Details of the launch plans for Virgin Cruises remain sketchy, although it is thought likely to be targeting a maiden voyage in 2019 and be based in Miami. Bankers said it would raise approximately £500m in equity and a debt package worth substantially more - possibly as much as £1bn.
Takeaway: Virgin Cruises gets another important investor.
Macau VIP Gaming Segment in Ruin – Junkets are on the hook for a surge in bad debts as China's economic slowdown and a crackdown on corruption chase some VIP gamblers away. With little access to credit and slow repayments, the capital to fund the business isn't flowing. Heng Sheng, one of the largest junket operators, told investors in October that 30% of the outstanding debt owed to its agents was over a year old. Many gamblers were making monthly installments rather than the normal practice of paying in full. Wealthy coal baron Lu Zhong Lou, ranked among China's wealthiest tycoons by Forbes, the 49-year-old from Shanxi province frequented luxurious casinos including Wynn Macau Ltd's caramel-hued VIP parlors and Galaxy Entertainment Group's diamond-encrusted saloons, owes junkets and Chinese businessmen as much as $HK3.5 billion ($451 million), according to his creditors and local media.
Takeaway: Junket bad debt and lack of funding capital could lead to a more severe and protracted downturn in VIP gaming revenue.
November Macau GGR – Nov GGR totaled HKD 23.562bn, down 19.6% YoY and down 13.4% versus October. Market shares as follows:
Takeaway: Nov was in-line with recently revised (lower) Street expectations.
New Macau Secretary for Economy & Finance – Lionel Leong Vai Tac was confirmed on Monday as Macau’s next Secretary for Economy and Finance, the official that oversees the city’s gaming industry. Mr Leong replaces Francis Tam Pak Yuen, who has been in the post since Macau’s handover from Portuguese administration in 1999.
Takeaway: Widely expected as we noted in our November 11 Leisure Letter. We look forward to Mr. Leong Vai Tac's policy platform and stance given his prior relationships with the Macau casinos and hotels.
Macau Property Values Forecasted to Drop – Midland Realty (Macau) Ltd forecasts that real estate prices will fall by 5% next year Midland Realty's CEO Ronald Cheung, said the rise in prices is slowing as the gaming business slumps and investors seek property over the border on Hengqin Island. “Visa restrictions have been tightened for mainlanders, gaming revenue is dropping and interest rates have been raised. All these factors have contributed to the instability of the real estate market,” Mr Cheung said.
Hong Kong Protests Escalate – Last night and early this morning in Hong Kong, protesters fought police armed with pepper spray, batons and water hoses on Lung Wo Road in Admiralty. Earlier today, an injunction was granted to clear an area just west of the main Admiralty protest site. That sparked fears of more violence after what was already some of the worst unrest in two months of protests.
Communist Party of China Crackdown – The Chinese Government has commissioned an 'adultery map' of cheating members of the Communist Party, to name and shame officials and civil servants embroiled in scandals. The map was created by the People's Daily, the Communist Party's flagship newspaper, based on information obtained from the Central Commission for Discipline Inspection (CCDI), China's anti-corruption unit. The CCDI has been tasked by Chinese President Xi Jinping to weed out corruption, extravagance and breaches of Communist Party discipline – of which adultery is one.
Takeaway: The crackdown widens beyond corruption and extravagance.
China H7N9 Bird Flu – China confirmed a new human infection of the deadly H7N9 avian influenza virus, state news agency Xinhua said, the first case this winter in the southern province of Guangdong. A 31-year-old woman from the provincial city of Dongguan, was confirmed on Friday to have been infected with the virus, Guangdong's health and family commission said in a statement on its website. The patient, in critical condition, is being treated in the provincial capital of Guangzhou, it added. The H7N9 bird flu first infected three people in China in March 2013. Since then, it has since infected more than 450 people, killing 175 of them.
Takeaway: Bird flu headlines have taken a backseat lately
Cyprus Casino Expansion – Various gaming operators have indicated Interest in building and opening a integrated resort and casino on the Greek-controlled southern half of Cyprus, including Caesars Entertainment, Genting and Las Vegas Sands. The proposed casino legislation and regulations will be submitted to the Cypriot House of Representatives in early 2015 with the aim of selecting a casino operator by August 2015. The bill calls for a casino with at least 100 gaming tables, 1,000 electronic gaming machines and an accompanying 500-room hotel. The casino will pay 15% tax on gross gaming revenue, with annual license fees of €2.5m per year for the first four years, rising to €5m per year in years four to eight. Fees for subsequent years, as well as the initial license fee, have yet to be determined.
Takeaway: What was once a 5k EGM opportunity has been shrunk to 1k.
Foxwoods Seeks Liquor Exemption – Foxwoods Resort Casino CEO Felix Rappaport says Connecticut’s casinos are at a disadvantage in the region because they have to stop service at 1 a.m. on weekdays and 2 a.m. on weekends even though they offer gambling at all hours. He wants the state to grant an exemption to casinos. Atlantic City casinos serve alcohol 24/7, and liquor is served until 4 a.m. at New York’s gambling facilities. Rappaport says he expects Massachusetts casino developers will lobby for changes to the law cutting off service there at 2 a.m.
Illinois Video Gaming – Since video gambling began in Illinois two years ago, the slot-like terminals have shown up in places lawmakers never imagined - floral shops, laundromats, liquor stores and gas stations. They’re also now the main attraction at dozens of storefront bistros and cafes geared toward women. Video gambling has become big business for the state, but it’s also raised some second thoughts in the process.
Takeaway: IL VGT market will be peaking soon anyway, probably around 22.5-23k units.
China Official November manufacturing PMI 50.3 vs 50.6 consensus and 50.8 in October
Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.
Takeaway: European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 earnings release, we recently turned negative on those stocks based on the negative European thesis.
Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up. Following a great call on rising housing prices, the Hedgeye Macro/Financials team is 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.
We are pleased to present this complimentary peek behind-the-macro-scenes of Hedgeye's daily Morning Macro Call for institutional subscribers.
Reminder: We are hosting a call tomorrow, December 2nd, at 10am EST to run through our long thesis on YUM. We will send out materials and dial-in information tomorrow morning.
11/24/14 Monday Mashup: YUM, RUTH and More
11/25/14 Best Idea Call Invite: Long YUM
Tuesday, December 2nd
Wednesday, December 3rd
Thursday, December 4th
The Restaurant Value Spread, which turned positive in May for the first time in the prior 25 months, continues to widen sequentially.
Monday, October 24th
Tuesday, October 25th
Wednesday, October 26th
Friday, October 28th
The XLY (+2.7%) outperformed the SPX (+0.7%) last week, as both casual dining and quick service stocks, in aggregate, outperformed the SPX Index.
From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.
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