Hedgeye Risk Management CEO Keith McCullough discusses activist investor Cannell Capital's highly publicized rebuke of CNBC host Jim Cramer's role at TheStreet.com on Fox Business "Opening Bell."
Expectations were high, but our call was right that Mario Draghi and the ECB’s governing council would remain in “assessment” mode today (no rate cut or QE announcement); our “counter-TREND” call proved correct with the EUR/USD bouncing higher and equities falling on Draghi’s decision.
Below are key take-aways from today’s press conference:
- Draghi pushes out prospect of sovereign QE until Q1 2015 after an assessment of concurrent programs (ABS, covered Bond, TLTRO) and economic outlook
- Draghi gave much importance to the impact of oil on the deflationary trend in Eurozone CPI. He all but explicitly said should oil prices remain subdued, it will be necessary for the ECB to act in a big way #Sovereign QE
- No Surprise: Eurozone economic and inflation outlook revised downward by ECB #EuropeSlowing
- ECB cuts GDP forecasts to 0.8% in 2014 (vs 0.9% projection in September), 1.0% in 2015 (vs 1.6%) and 1.5% in 2016 (vs 1.9%)
- ECB cuts inflation forecasts to 0.5% this year (vs 0.6%), 0.7% next year (vs 1.1%), and 1.3% in 2016 (vs 1.4%)
- Draghi says "We don't need unanimity to proceed with QE"
- Draghi says QE has been shown to be effective in the US and in the UK; in Japan it's more complicated #TheEurozoneIsComplicated
- On push back from Germany on QE... Draghi says the ECB will comply with its mandate for price stability #NoAnswer
Our read through remains that Draghi is effectively telling us that everything he's tried so far hasn't worked, including his explicit Policy To Inflate that is only resulting in more #deflation. We’ll continue to stick to our playbook #EuropeSlowing, and manage risk (and price levels) created by the heavy hand of central bank intervention.
Takeaway: Slow and steady wins the race. That's the characterization of the labor market right now. We continue to watch for any negatives.
The main takeaways from this week's labor report are that the trend of sub-300k claims persists, further reducing the slack in the labor market. While the y/y rate of change is slowing, this is to be expected as that series will naturally converge toward zero since 300k is the frictional bottom for claims. In other words, the data is strong and consistent even thought the rate of positive change is slowing. What we're more interested in, at this point, is any signs of an unfavorable inflection. If the rate of change begins to turn positive (i.e. rising claims) or materially diverges from the trendline then all (long) bets are off.
Prior to revision, initial jobless claims fell 16k to 297k from 313k WoW, as the prior week's number was revised up by 1k to 314k.
The headline (unrevised) number shows claims were lower by 17k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.75k WoW to 299k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.8%
The 2-10 spread fell 0 basis points WoW to 172 bps. 4Q14TD, the 2-10 spread is averaging 183 bps, which is lower by -16 bps relative to 3Q14.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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Takeaway: PVH - 15x earnings with limited top-line growth potential doesn't get us excited. DG lose/lose. WMT stat supports need for physical stores.
PVH - 3Q14 Earnings
Takeaway: PVH turned a 1% top line miss into a 3% EPS beat, but guidance for the balance of the fiscal year leaves a lot to be desired. The $0.08 beat with the $0.10 guide down for the year translates to a $0.18 guide down on the top end of guidance for the fourth quarter. A few quick takeaways. 1) This is the 5th straight quarter where PVH has underperformed on the top line. Excluding the Bass divestiture, the top line slowed 200bps sequentially on the 1 yr and 570bps on the 2yr. Comparisons get easier (again) into the 4th quarter and guidance looks doable even with the currency headwind. But, over a slightly longer duration we have a hard time getting to the Street's numbers which call for 6% growth per annum. 2) Manny made his traditional post-earnings CNBC shop and touted how healthy the company's inventory position was. By our math, the sales/inventory spread was -8%. That's in stark contrast to the company's rhetoric. 3) Reduced interest expense and tax rate drove the 11% earnings growth in the quarter. We're cognizant of the fact that debt reduction alone will drive 3% to 4% of earnings growth. But that's not a reason for us to get excited about owning a name at 15x earnings with limited top line growth prospects when we're at the tail end of a margin cycle for its wholesale distribution channel.
DG - 3Q14 Earnings
Takeaway: We'll take the FDO commentary to mean that the current 11.6x EBITDA bid isn't enough and the final offer will be closer to $80 or about 13x. When a company is looking to pay that much for such a poor quality asset, we need to really ask ourselves about the prospects management sees in its core. On the other side of that - the stock is up 14% since the bid for FDO was announced in mid-August and Dreiling committed to push off his retirement. Clearly, the Street thinks that there's some merit to DG buying FDO -- even at a higher price. We'll take the other side of that. We still think that with DG, if it wins the FDO bid, then shareholders lose. If it loses, then the stock retraces closer to where it was before the bidding war began.
GIL - 4Q14 Earnings
Takeaway: We don't have an opinion on GIL's stock right now, but are not particularly surprised by today's disappointment. Interesting as well to see the company change up its reporting structure. Companies usually don't do that when they want to improve transparency over the near-term. It will take a lot more than a 12% sell-off for us to get interested in this name on the long side.
WMT - Report: Wal-Mart CEO says 10% of mobile orders are in-store
Takeaway: This is simply a fascinating statistic. It shows how e-commerce and brick & mortar is inextricably linked. We maintain our view that this will cause many retailers to hang on to stores that they would otherwise close due to weak productivity. Not a good margin event.
TGT - Debit, credit issues temporarily affect Target stores Canada-wide
"Customers at Target stores in Canada could only pay with cash for about 90 minutes Tuesday afternoon due to a problem with the retailers main card processor."
COH - Coach May Spend Big to Acquire Stuart Weitzman
WMT - Walmart Canada Extends Store Hours for the Holiday Season
U.K. Targets Tech Firms With ‘Google Tax’
Vineyard Vines Docks on Upper East Side
"The store had a soft opening before Thanksgiving and so far, sales are exceeding expectations. They declined to provide a volume projection for the unit, which had its grand opening on Wednesday night."
SPLS - Staples Announces Staples Exchange, Bringing More Products and Services to Customers
"Staples announced the roll-out of Staples Exchange, a world-class platform that makes it easy for suppliers to offer products to Staples customers."
"Staples Exchange is a unified platform that allows vendors to sell through all of Staples’ e-commerce channels, with multiple integration options. Unlike other retailers, Staples does not require vendors to use a third party that charges integration fees, instead giving them a single portal to enroll with all of Staples’ sites, like Staples.com, and coming in 2015, Staples Advantage, Staples Canada and Quill.com."
Tickers: IGT, MGM, HLT, HST, CCL
- Dec 4: Normua Investment Forum - MPEL, WYNN & Genting Singapore
- Dec 8: 10:30 MTN Q1 2015 earnings
- Dec 8: Golden Nugget Lake Charles Opening?
- Dec 12: Trump Taj Mahal Closing
- Dec 14: City of Dreams Manila soft opening
- Dec 17: Upstate NY Casino Decision
Today's Headline Story
Mainland China Official: Macau Too Reliant on Gambling– Li Fei, deputy secretary general of the National People’s Congress Standing Committee, on Wednesday said the Macau SAR government should address its over reliance on the gaming industry and to put more effort into economic diversification and take into account the interests of mainland China. Mr Li, who is also chairman of the Basic Law Committee, was in Macau on Wednesday to take part in a seminar on Macau’s Basic Law, which came into effect following the city’s handover from Portuguese administration in 1999.
Takeaway: We have heard similar comments from the Chinese government in the past but we expect more discussion on this particularly in the face of declining GGR.
GENS.SP – Genting Singapore today repurchased 12 million shares (35.3% of today's trading volume) for S$13.338 million. Cumulative shares repurchased year-to-date = 109,665,000. Following today's share repurchase, the total shares outstanding = 12,123,371,480.
Takeaway: Thus far, Genting has completed 8.9% of the total authorized shares. They are authorized to purchase up to 10% of ordinary shares.
IGT & GTK.IM – The merger of the two companies could increase NewCo's EBITDA by as much as $280 million. In an IGT filing on behalf of GTech to Nasdaq in New York, management said “industrial efficiencies” could have a positive EBITDA impact of US$85 million; with “overlapping corporate activities” accounting for a US$125 million positive impact; and a further US$20 million improvement from “optimized” research and development spending. GTech added that what it called “natural revenue enhancements” from sales in Italy – GTech’s home base – plus benefits from cross selling and “mobile exploitation” could produce a further US$50 million positive impact on EBITDA.
Takeaway: It's good to be optimistic on revenue and cost synergies.
MGM – MGM Resorts International asks Obama Administration to proceed with caution before granting federal recognition to Pamunkey Native American tribe of Virginia.
Takeaway: MGM seeking to prevent potential competition from a Native American casino at its MGM National Harbor project under development.
HLT – welcomed The Franklin Hotel Chapel Hill to its growing global brand, Curio – A Collection by Hilton. Selected for its strong connection to the community and tradition of excellence among guests, The Franklin Hotel Chapel Hill offers travelers the local discovery and authentic travel experiences at the core of the Curio brand.
HST - authorized a regular quarterly cash dividend of $0.20 per share and a special dividend of $0.06 per share on the Company's common stock. The total dividend of $0.26 per common share is payable on January 15, 2015 to stockholders of record on December 31, 2014.
Takeaway: HST had mentioned on its 3Q call that a special dividend was possible in 4Q.
CCL – Princess Cruises is celebrating 50 years of cruising and kicking off its Wave season with the cruise line's biggest sale ever featuring savings on vacation destinations around the globe. Guests can save up to $500 per person on all cruise vacations seven days and longer, sailing between May and December 2015. In addition to these special savings, guests will enjoy free dining for two at one of the line's specialty restaurants and receive up to $200 per stateroom of free onboard credit to be spent as they wish, including on commemorative 50th anniversary keepsakes, a rejuvenating massage at the Lotus Spa, or an in-depth cultural experience on a Princess shore excursion.
Guests can also bring along friends and family and save up to 50% on third and fourth guests in a stateroom. They can additionally reserve their cruise with a reduced, refundable deposit of only $100 per person.
Takeaway: Wave Season promotions are generally early this year.
Virgin Cruises – the Branson family- owned branded investment group, today announced the formation of Virgin Cruises, its new cruise line business, as well as the appointment of a CEO and its lead investment partner, Bain Capital.
Proven industry leader Tom McAlpin will join Virgin Cruises as CEO and will head the management team. Most recently, Tom has been President and CEO of The World, Residences at Sea. Tom also served as President of Disney Cruise Line having joined as part of the founding management team.
Virgin Cruises will be headquartered in the Miami/Fort Lauderdale area and plans to design and construct two new world class cruise ships.
Jeju - Jeju's casinos have opened offices in China to tout for gamblers there. One agent has organized 53 gambling trips to Jeju for Chinese gamblers over the last 2 years. In some instances, Chinese tourists have turned to loan sharks on the resort island, have their passports confiscated and commit suicide when their luck refuses to turn.
Takeaway: The gaming world is becoming more sensitive to negative media articles. This time, it's South Korea.
Macau International Airport Traffic +9.5% in November – During November, passenger volume was recorded at over 450,000, +9.5% YoY. Aircraft movements posted over 4,600, an increase of 11.5% YoY from 4,400.
Takeaway: Strong airport traffic not translating into casino revenues. Some of the increased airport traffic could be MICE attendance.
Macau Residential Real Estate Prices Drop 10% – A slump in gaming revenue, the mainland crackdown on corruption and competition from nearby Hengqin Island in Zhuhai have combined to drive home prices in Macau down 10%, and the fall is expected to extend into the new year, according to property agents.
Hong Kong-Macau Organized Crime Crackdown – A joint crackdown organized by police in Guangdong Province, Hong Kong and Macau has busted 38 cross-border criminal gangs, Guangdong police said. The crackdown focused on guns, drugs, prostitution, money laundering and illegal border crossings, said Lin Weixiong, director of the criminal investigation bureau of Guangdong Pubic Security Department. Over 470 suspects have been arrested in the joint operation, Guangdong police said. More than 180 guns and one ton of drugs were found.
Takeaway: Mainland China cleaning up both Hong Kong and Macau.
Blackstone Group Closer to Closing The Cosmopolitan Acquisition – Yesterday the Nevada Gaming Control Board recommended that Blackstone Group be licensed to acquire the 4-year-old Strip hotel-casino. The Nevada Gaming Commission will take up the matter on Dec. 18. Blackstone representatives told the Control Board it planned to make changes at The Cosmopolitan, including adding another restaurant and renovating areas of the casino to improve revenue. The Cosmopolitan’s Strip frontage may get a new look.
Clark County Nevada Class A Slot Machine License Amended – Clark County commissioners on Wednesday approved regulations affecting slot machine operations in taverns. The new ordinance requires taverns to operate a full-service kitchen and embed more than half of the location’s slot machines into a bar top. If that requirement isn’t accomplished, the taverns must show that slot machine revenue is 50% or less than other revenue. If a tavern is unable to accomplish at least one of those requirements, it must reduce the number of slot machines from 15 to seven. The ordinance is effective immediately for future tavern applicants.
European Low Cost Airline Results Strong But Outlook Uncertain – Ryanair raised its profit forecast for the second time in a month on Thursday after passenger numbers jumped 22% in November. Ryanair said that despite increasing its seat capacity by 13% during November, as a result of opening new routes designed to appeal to business customers, it also increased its load factor by 7% to 88%. However, the company also indicate its final full-year profit would still be heavily reliant on bookings and fare yields in the January-March quarter over which it said it "presently has very little visibility".
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.
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