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Keith's Macro Notebook 12/1: Oil | Russia | Italy

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


European Banking Monitor: Oil Move Priced Into Russian Financials Swaps

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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Key Takeaway:

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.

 

European Banking Monitor: Oil Move Priced Into Russian Financials Swaps - chart1 euro financials CDS

 

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).

 

European Banking Monitor: Oil Move Priced Into Russian Financials Swaps - chart2 sovereign CDS

 

European Banking Monitor: Oil Move Priced Into Russian Financials Swaps - chart3 sovereign CDS

 

European Banking Monitor: Oil Move Priced Into Russian Financials Swaps - chart4 sovereign CDS

 

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.

 

European Banking Monitor: Oil Move Priced Into Russian Financials Swaps - chart5 euribor OIS spread

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 

 



Commodities Weekly Sentiment Tracker

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.    

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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.

 

Commodities Weekly Sentiment Tracker - chart1 sentiment

 

2.       Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.

  • The CORN, SUGAR, AND SOYBEANS markets are positioned for HIGHER PRICES near-term
  • The LEAN HOGS, COTTON, AND COPPER markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart2 spot 2nd month basis

 

3.       Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.

 

  • The CORN, SUGAR, AND ORANGE JUICE markets are positioned for HIGHER PRICES in 1-year  
  • The LEAN HOGS, LIVE CATTLE, AND SOYBEANS markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot 1 Yr basis

 

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.

 

Commodities Weekly Sentiment Tracker - chart4 aggregate open interest         

 

Ben Ryan

Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

LEISURE LETTER (12/01/2014)

Tickers:  FLL, IKGH, CCL

EVENTS

  • Dec 2: 11 am ISLE Q2 2015 earnings
  • Dec 8: 10:30 MTN Q1 2015 earnings
  • Dec 8: Golden Nugget Lake Charles grand opening?
  • Dec 12: Trump Taj Mahal Closing
  • Dec 15: CoD Manila opening?
  • Dec 17:  Upstate NY casino decision

COMPANY NEWS

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.

Article HERE

Takeaway:  Virgin Cruises gets another important investor.  

 

INDUSTRY NEWS

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. 

Article HERE

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:

  • SJM:  22.6%
  • Sands China:  22.6% 
  • Galaxy:  21.5%
  • MPEL:  13.5%
  • MGM China:  11.0%
  • Wynn Macau:  8.9% 

Article HERE

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.

Article HERE

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.

Article HERE

 

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.

Article HERE

 

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.

Article HERE

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.

Article HERE

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.

Article HERE

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.

Article HERE

 

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.
Article HERE

Takeaway:  IL VGT market will be peaking soon anyway, probably around 22.5-23k units.

 

MACRO

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.


Hedgeye's Morning Macro Call with CEO Keith McCullough

We are pleased to present this complimentary peek behind-the-macro-scenes of Hedgeye's daily Morning Macro Call for institutional subscribers.


Monday Mashup: YUM, BLMN and More

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.

 

Monday Mashup: YUM, BLMN and More - 1

 

Recent Notes

11/24/14 Monday Mashup: YUM, RUTH and More

11/25/14 Best Idea Call Invite: Long YUM

 

Events This Week

Tuesday, December 2nd

  • YUM Hedgeye Best Idea Call at 10am EST

Wednesday, December 3rd

  • BOBE earnings call 10am EST

Thursday, December 4th

  • SBUX Investor Day at 11am EST

 

Chart of the Day

The Restaurant Value Spread, which turned positive in May for the first time in the prior 25 months, continues to widen sequentially.

 

Monday Mashup: YUM, BLMN and More - 2

 

Recent News Flow

Monday, October 24th

  • RRGB announced the opening of its newest restaurant in South Florida. 
  • PNRA announced the resignation of EVP and CMO, Michael Simon.  Mr. Simon accepted a new senior leadership position with Bai Brands.  Chris Hollander, VP of Marketing at Panera, will fill Mr. Simon's vacancy while the company conducts an internal and external search for a replacement.
  • PZZA announced the acquisition of Pizza Corner stores in South India.  Papa John's will convert these stores to Papa John's branded restaurants through 1Q15.

Tuesday, October 25th

  • TXRH COO, Steve Ortiz, announced his retirement, effective January 12, 2015.  Mr. Ortiz has been with the company for 18 years and served as COO since 2004.  The company is currently working on an agreement with Mr. Ortiz to become a franchisee in the San Diego area.  In order to fill this vacancy, Doug Thompson has been promoted to VP of Operations and will report directly to CEO Kent Taylor.

Wednesday, October 26th

  • BWLD elected Cindy L. Davis to its expanded Board of Directors.  This addition expands the board to eight members.  Ms. Davis most recently served as VP of Nike and President of Nike Golf from 2008 to 2014.

Friday, October 28th

  • BLMN signed a purchase agreement to sell Roy's Restaurants to United Ohana, LLC.  The transaction is expected to close in the next 30-60 days.

 

Sector Performance

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.

 

Monday Mashup: YUM, BLMN and More - 3

 

Monday Mashup: YUM, BLMN and More - 4

 

XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.

 

Monday Mashup: YUM, BLMN and More - 5

 

Casual Dining Restaurants

Monday Mashup: YUM, BLMN and More - 6

Monday Mashup: YUM, BLMN and More - 7

 

Quick Service Restaurants
Monday Mashup: YUM, BLMN and More - 8

Monday Mashup: YUM, BLMN and More - 9

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%
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