MCD reported dismal same-store sales for the month of November this morning, mostly missing estimates across the board:
- Global comps -2.2% vs -1.9% estimate
- U.S. comps -4.6% vs -2.1% estimate
- Europe comps -2.0% vs -2.0% estimate
- APMEA comps -4.0% vs -3.8% estimate
Last month, we warned that we’ve yet to see a light at the end of the tunnel signalling a true recovery. Today, we echo that sentiment.
Global and U.S. comps were particularly woeful, with severe underperformance in the U.S. leading the way due in part to “strong competitive activity.” This is the worst monthly comp McDonald’s has reported for the U.S. in over a decade. Importantly, management lowered 4Q14 EPS guidance by $0.07-0.09 due a strengthening U.S. dollar.
While Europe performed in-line with expectations, weakness in Russia, France, and Germany resulted in a -130 bps sequential decline from October. APMEA, despite being down -4.0% for the month, was the only region to record a sequential improvement in comps on both an absolute and two-year basis as Japan and China attempt to recover from the supplier issue. As a reminder, management previously announced this issue will negatively impact EPS by $0.07-0.10 per share in 4Q14.
Rhetoric was quite similar to that of a month ago, as management noted they are working to restore momentum in the U.S. by enhancing marketing, simplifying the menu, and shifting toward a more locally-driven structure to increase its relevance. We’ve wondered in the past to what extent these changes will be made and whether or not they will be able to change the direction of the U.S. business. Though we recognize these changes will take time, November was nothing short of discouraging. In fact, the decline in the business appears to be accelerating.
It will be a long road to recovery for MCD, which makes us cautious on the stock. The bull case for McDonald’s is that an activist will step in to unlock value. But, as we opined in a note last month, the activist case for McDonald’s appears quite bleak as well. We're staying on the sidelines, until we clearly identify a catalyst to get involved on either side of the trade.
While appreciating the difficulty and complexity of the situation at hand, major changes must be made – and fast.
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
From a risk management standpoint, we remain very focused on the rising risk of a Russian banking crisis. In a nutshell, Western sanctions are driving capital out of the country causing the Ruble to weaken. Falling oil prices are compounding the problem. The CEO of Sberbank, Russia's largest bank with 46% deposit share, said back on November 14th that if the Russian economy were to decline by more than 1.2% in 2015 Sberbank would need the State to bail it out. Sberbank's CDS tacked on another 97 bps over the week, rising to 503 bps this week.
Russia's GDP was most recently growing at 0.7% Q/Q annualized. Energy contributes between 20-25% of GDP and oil prices are down by ~30%. This implies a drag on GDP of -6-8% as we roll into 2015. In other words, if sanctions aren't removed and oil prices don't bounce, the Ruble should continue to lose value and Russia will need to bail out its banking system at a time when it's already hemorrhaging cash ($100bn/year) from falling oil prices. That makes for a nasty mix with US equities at/near all time highs.
European Financial CDS - Swaps mostly tightened in Europe last week with an average -4.7% move. There were a few extreme movers in the region. Russia continued to show extreme widening WoW: +97 bps, +23.9%. Sberbank's CDS at 503 bps flag reflects the rising risk in the Russian economy. Portugal's Banco Espirito Santo tightened to most last week (-88 bps, -17.8%) as Portuguese authorities near a sale of a few of the collapsed bank's parts.
Sovereign CDS – European Sovereign Swaps mostly tightened over last week. Italian sovereign swaps tightened by -10.7% (-14 bps to 115 ) and American sovereign swaps widened by 10.3% (2 bps to 18). American CDS displayed a divergence from the stock market's (S&P 500) flat performance for the week.
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 0 bps to 8 bps.
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Tickers: CZR, CCL, SHO
- Dec 8: 10:30 MTN Q1 2015 earnings
- Dec 9: Hedgeye Client Holiday Cocktails Cellar Bar @ Bryant Park Hotel
- Dec 14: City of Dreams Manila Soft Opening
- Dec 17: Upstate NY Casino Decision
- Dec 20: Trump Taj Mahal Closing
Today's Headline Story
Macau Transit Visas – In 2013, the Zhuhai checkpoints recorded a total of 2 million people entering Macau with a Chinese passport who didn’t actually depart for another country. During 2014, CCTV reports that around a million people are estimated to have entered Macau last year using a travel loophole. Travel agencies in Shenzhen and Zhuhai “helped” clients enter Macau and Hong Kong via non-legitimate visas and flight tickets.
Takeaway: Official Macau immigration figures show 2.64 million Mainlanders entered Macau in transit in 2013 but only 20.8% actually traveled to an overseas destination. This is a huge number. Stricter enforcement of the transit visas could result in a 7% reduction in annual total visitation to Macau.
CZR – Three months after Horseshoe Casino Baltimore opened to big crowds, its revenues are substantially lower than state consultants projected. The $442 million casino has averaged monthly revenue of $22.8 million, about a third less than forecast in November 2013 by a pair of state-funded consulting firms, which projected it would average about $32 million to $35 million a month in its first 10 months of operation.
Takeaway: Horseshoe Casino competing in an already saturated greater Baltimore, Philadelphia market. Maryland Live! is also holding tough despite the competition.
CZR– plans to convert Caesars's largest unit into a real-estate investment trust is facing resistance from creditors, complicating the casino giant’s efforts to slash the unit’s $18.4 billion debt. The disagreement over the conversion plan for Caesars Entertainment Operating Co. and other terms of the restructuring have so far prevented Caesars from winning support from senior creditors for filing a prearranged bankruptcy plan for the unit.
Takeaway: As we've repeatedly pointed out, the likely outcome is a large equity issuance to pay down debt or a debt for equity restructuring.
LVS & 1928.HK– Sands China Ltd appointed Melina Leong as chief operating officer of subsidiary Cotai Ferry Co Ltd. Ms Leong, currently serving as Sands China’s senior vice president of public relations and community affairs, will take on the new role from January 1, 2015. Ms Leong has been with the company for almost 10 years.
Takeaway: Interestingly, the announcement follows the appointment of Lionel Leong Vai Tac, Ms Leong’s brother, as Macau’s next Secretary for Economy and Finance.
Novomatic – Privately owned, giant Austrian gaming supplier Novomatic has made its second acquisition in two months. It has purchased Spanish gaming equipment supplier GiGames from Conei Group. Last month Novomatic bought Elam Group, the Dutch distributor for Interblock and Aristocrat.
Takeaway: Novomatic quietly getting bigger.
CCL – The Dawn Princess, currently on a 13-day cruise to New Zealand, is plagued by a recurrent Norovirus outbreak which has sickened many of her 1500 passengers. Yesterday, more than 200 passengers remain restricted to their cabins with severe symptoms.
Takeaway: The Princess brand has been on a streak of bad luck recently
CCL – Carnival Cruise Lines will offer a series of unforgettable 10- to 14-day voyages on six different ships between October 2015 and February 2016 that feature extended calls at magnificent destinations throughout the Caribbean, Bermuda, Mexican Riviera and The Bahamas. Several of the 10- and 11-day voyages can be combined into three-week-long Caribbean adventures providing an unmatched combination of breathtaking ports of call, amazing experiences ashore, and fun-filled sea days, all at an incredible value. These new voyages are in addition to a previously announced series of nine 10- to 14-day departures to the Caribbean and Bermuda offered on Carnival Triumph from Galveston and Carnival Pride from Baltimore in 2015-16.
Takeaway: More longer-dated voyages for the Carnival brand
CCL – officially shut down its Spanish cruise line Iberocruceros this week, after the sale of its last remaining ship to an undisclosed buyer. Plans for the ship, Grand Celebration, to go to sister company Costa Cruises were scrapped last month. However, Costa, which absorbed the Iberocruceros' market, still remains committed to serving Carnival Corp.'s Spanish demographic.
CCL – Holland America Line's new ReadySetSail promotion has upgrades, reduced deposits and, for suite passengers, on-board credit and other perks. The promotion applies to select 2015 summer sailings. Travelers who book cruises or an Alaska Land+Sea Journey (offers on cruise portion only) will get a free stateroom upgrade from an inside to ocean-view or ocean-view to veranda stateroom, up to 10% savings on select shore excursions when booked before March 15, free or reduced third and fourth fares, and 50% off the normal deposit rate. Eligible destinations include Alaska cruises and Land+Sea Journeys, Bermuda, Canada/New England and Europe.
Takeaway: HAL's Wave promotion is for most sailing regions
RCL - Michael Bayley named CEO of Royal Caribbean International. Bayley was previously the President and CEO of Celebrity Cruises. Lisa Lutoff-Perlo has been appointed the new CEO of Celebrity Cruises.
Takeaway: These changes were made to fill the vacant position by Adam Goldstein, who was recently promoted to President and COO of RCL.
RCL – Royal Caribbean President and COO Adam Goldstein discloses sale of 90K shares on Friday, December 5th.
- 60K shares were sold for $77.3128
- 30K shares were sold for $77.2947 were for trusts for certain members of the Goldstein family
- Goldstein beneficially owns 310.7K shares (all direct) following the transaction.
SHO – CEO Kenneth Edward Cruse sold 31,296 shares of SHO stock on Friday, December 5th, at an average price of $16.10, and now directly owns 605,985 shares in the company. The sale was not options related nor part of a 10b5-1 plan.
Macau Government Expected Gaming Slowdown – Chief Executive Chui Sai On has said he expects gross gaming revenue in Macau’s casinos to fall to MOP27.5 billion (US$3.45 billion) per month during 2015, and that his government is prepared for this. Mr Chui told reporters that the government had foreseen the slump and taken contingent measures and made appropriate financial arrangements beforehand.
Takeaway: 2015 forecasted to be down -7% versus 2014 by the Chief Executive - better than the Hedgeye forecast of down 5-10%.
Mainland China Closely Watching Macau – China's top legislator Zhang Dejiang urged Macao's new government to continue fully implementing the "one country, two systems" principle. Zhang, chairman of the Standing Committee of the National People's Congress (NPC), made the remarks at a meeting with Chui Sai On, chief executive of Macao Special Administrative Region (SAR).
Takeaway: China keeping Macau close to the motherland.
Macau International Airport Expansion Planned – Macau International Airport is focused on increasing its capacity to 7.5 million passengers per year with the extension of the Passenger Terminal Building north side.
China's Banks Pressure PBoC to Lower RRR – China’s big banks are pressing the central bank to let them lend out more of their deposits. Currently big banks have to pledge 20% of deposits to the central bank. Reducing it by half a percentage point would boost banks’ liquidity by around 500 billion yuan, or about $81 billion.
Taj Mahal Closing Postponed – The owners of Atlantic City's Trump Taj Mahal casino have pushed back its scheduled closing date until Dec. 20. Trump Entertainment Resorts tells The Associated Press it decided to move the closing date back eight days while talks remain ongoing to try to save the casino and its 3,000 jobs.
Virginia Gaming Legislation – Virginia Senate BIll 19 was introduced. The bill proposes a casino only in cities where more than 40% of the land is tax exempt - a condition under which only Portsmouth Virginia would qualify and includes a proposed 10% tax on GGR. Portsmouth is located to the west of Norfolk in eastern Virginia near the Atlantic coast.
Takeaway: A potential competitor to MGM's National Harbor casino located near Washington DC but the road is a long one to passage.
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 CEO Keith McCullough shares the top three things in his macro notebook this morning.
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 ORANGE JUICE, COTTON, AND WHEAT markets experienced the most BULLISH relative positioning changes week-over-week
- The SUGAR, SOYBEANS, AND HEATING OIL markets experienced the most BEARISH relative positioning changes week-over-week
2. Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.
- The CORN, SUGAR, ORANGE JUICE markets are positioned for HIGHER PRICES near-term
- The WHEAT, LEAN HOGS, COCOA markets are positioned for LOWER PRICES 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.
- The BRENT, CORN, AND SUGAR markets are positioned for HIGHER PRICES in 1-year
- The LEAN HOGS LIVE CATTLE, AND COCOA markets are positioned for LOWER PRICES in 1-year
*NOTE* Despite the sell-off in crude oil since the middle of the summer, the futures curve has become much steeper. Jan. 2016 BRENT contracts have widened relative to spot prices. The spot price-1yr differential has widened from around $1.00 at the beginning of October to over $5.00 currently ($5.23 currently). BRENT spot-1Yr. basis differential is the widest of any commodities in the CRB Commodities Index (Jan 2016 contracts are trading nearly +12% higher than Jan 2015 contracts (current spot). Despite the downward pressure on spot prices, the contango in the current curve will provide support to the upside on the expiry roll if the general shape remains the same.
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.
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