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European Banking Monitor: Widening in Financials

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 




European Financial CDS - Swaps mostly widened among European banks last week.  Greece began discussions with the Troika regarding the technical details of its bailout extension last week and the Syriza party raised some inflammatory issues such as opening up Greece's borders to Middle Eastern refugees and alleged reparations owed to the country by Germany for Nazi war crimes. Investors reacted negatively to the signal from Greece that it will not make the process easy; swaps on Greek banks rose between 152 and 158 bps.


European Banking Monitor: Widening in Financials - chart1 financials CDS


Sovereign CDS – Sovereign swaps were little changed last week. Italian sovereign swaps widened by 6 bps to 105. Meanwhile, Japanese swaps tightened by 3 bps to 40.  


European Banking Monitor: Widening in Financials - chart2 sovereign CDS


European Banking Monitor: Widening in Financials - chart3 sovereign CDS


European Banking Monitor: Widening in Financials - 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 widened by 1 bps to 11 bps.


European Banking Monitor: Widening in Financials - chart5 euribor.OIS spread



Matthew Hedrick 



Ben Ryan



LEISURE LETTER (03/16/2015)



  • March 16-19: Cruise Shipping Miami Conference
  • March 19: Galaxy FY 2014 results
    • (), Passcode: 712943


LVS - The St. Regis Macao, expected to open during the third quarter of this year at Sands Cotai Central, is looking to recruit 700 employees. The luxury hotel brand held its first job fair in Macau on Friday. The St. Regis will offer 400 guest rooms and suites, as well as dining venues. 


Takeaway: St. Regis is expected to open Aug 1, 2015.


IGT - High 5 Games is suing IGT alleging breach of contract, trademark infringement and unfair competition stemming from their 2012 licensing agreement. The suit alleges that IGT failed to pay royalties on 81 games that use High 5 content, including features like super stacks, tumbling reels and split symbols.


RCL - Could Ovation of the Class be sailing to China?


LEISURE LETTER (03/16/2015) - rcl  ovation


Takeaway: Two Quantum class ships in China would prove RCL's short-term and long-term commitment to that risky but potentially lucrative market opportunity. 


CCL - Agents have given a resounding thumbs-up to P&O’s newest ship Britannia, with some suggesting it could help the line attract a new clientele.  

  • Phil Evans, managing director of Cruise Nation: “I think it’s also going to appeal to a slightly younger audience that P&O tends to attract. They usually tend to get people in their late 50s, but I think this will appeal to people in their 40s."
    • “I do think Anthem will be perhaps be more family orientated, but the staff at my agency have all said that they feel this signals a new era for cruising for P&O.”
  • Ann Anglesea, managing director of Delmar World in Wrexham: “The size of the ship was noticeable – [at 3,647 passengers] it’s a much bigger ship than we’ve been used to.
    • “It is beautiful, but the ambience of a ship depends on the clients that you have onboard, and I wonder if P&O will be reaching out to a different market share than they have previously had.
    • “I think P&O have got it right. The Retreat area looked exceedingly nice, and the specialty dining will appeal to higher end customers, but the prices are competitive in the market place. Whether there’s enough in the market to fill it though will remain to be seen.”


Takeaway: More praise for Britannia. Attracting a new clientele is a stretch. We are concerned about pricing power for the older ships as the Southampton cruise supply revs up.





Super anti-graft bureau - China is preparing to establish a ‘super’ anti-graft bureau that will investigate high-ranking officials suspected of corruption, Procurator-General Cao Jianming said. The plan for the bureau has already been approved by the central government, said Cao, who heads the country’s Supreme People’s Procuratorate. The new bureau will be staffed by several dozen experienced senior prosecutors and will strengthen the Supreme People’s Procuratorate’s anti-corruption capacities.


Proxy-betting - proxy betting in Manila could "represent as much as 50%of VIP revenue in Manila, versus 5%-10% to in Macau.” (Morgan Stanley).


Takeaway: We have also confirmed Suncity adding junket rooms in Solaire and CoD Manila later this year. This is good news for CoD Manila. We will be getting additional color on the Philippines market later in the month.


Jeju Air-  the leading South Korean budget airline is targeting Chinese gamblers deserting Macau due to the crackdown on corruption initiated by the People’s Republic of China Government, the company’s Chief Financial Officer, Kim Tae Yoon, said. In order to attract Chinese tourists the company is offering popular liquor and cosmetics onboard to lure Mainlanders to Jeju Island, where the company is based. The South Korean island has seven casinos where only foreigners are permitted to gamble.



Cyclone Pam - Several cruise ships have been forced to alter South Pacific

itineraries to avoid category 5 Cyclone Pam which has devastated the island nation of Vanuatu. Cunard’s Queen Elizabeth and Queen Victoria and P&O Cruises’ Aurora, all on world cruises, have had itineraries altered in the region. Holland America Line’s Oosterdam was forced to miss a call into Port Vila in Vanuatu on Friday and instead spent a day at sea to avoid the weather front. 

Other companies forced into making itinerary changes include Carnival Cruise Lines, Celebrity Cruises, P&O Cruises Australia and Royal Caribbean International.





Singaporre private home sales - was nearly halved in February from a year earlier. Developers sold 382 units last month, compared with 739 units in February 2014, according to data compiled by the Urban Redevelopment Authority.


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.

Keith's Macro Notebook 3/16: China | Europe | Oil


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

Early Look

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Takeaway: Easiest comps drives a better week.


There was some improvement this week from last due to a much easier comparison.  DTR of HK$691 fell “only” 22% YoY but the comp was the weakest of the month (-7%).  We still believe the trend is lower and while consensus GGR forecasts have dropped dramatically, EBITDA estimates remain much too high in our opinion. We fear the Street is missing the recent downturn in the grind mass which carries the highest margins of any segment.


Please see our detailed note: 



Link to Report: SHAK: NYC Is Not The Center Of The Universe

  • We are adding SHAK to the Hedgeye Best Ideas list as a SHORT.
  • The market is valuing SHAK at $27 million per system-wide store versus the average store generating approximately $3.5 million in revenues.  This compares to CMG, which trades at $11.2 million per store.  If SHAK can execute at a CMG level and grow into that valuation, it would trade at around $20 per share.
  • Clink the link below to read more about our SHORT thesis.

YELP: Salesforce Productivity?

Takeaway: "Rookies" aren't problem, as YELP suggested at a sell-side event last week. Declining salesforce productivity is likely a secular issue.


  1. SALES REP CHURN MAY HAVE ACCELERATED: Management attributed its declining salesforce productivity to a higher percentage of sales rep “rookies” , which YELP defines as reps hired 6-9 months ago.  A higher percentage of rookies on decelerating sales rep growth suggests elevated churn (at least in 4Q14).
  2. IT REALLY WASN’T THE ROOKIES: If it takes 6-9 month for a sales rep to ramp as management suggests, then we should have seen a 2H14 acceleration in new account growth from its 1H14 acceleration in sales rep hiring.  Unless salesforce attrition was elevated throughout 2014 (which would be a much bigger issue), then rookies can't explain the decline salesforce productivity that occurred throughout all of 2014.  We suspect the bigger issue is Point 3 below.
  3. PRODUCTIVITY LIKELY IN SECULAR DECLINE: YELP’s salesforce (telesales) is already large enough to canvas its entire addressable market in call volume.  Hiring more and more reps to call on the same number of clients is essentially the definition of declining salesforce productivity; only leads to higher call volume for existing prospects.  It also means that YELP's "rookie" problem could become a growing issue from escalating salesforce churn (too many mouths to feed).



Management attributed its declining salesforce productivity to a higher percentage of sales rep “rookies”, which YELP defines as reps hired 6-9 months ago.  We’re not sure what period management’s comments are pointing to (4Q14, or all of 2014), but we estimate productivity has been on the decline throughout 2014.


YELP: Salesforce Productivity? - YELP   New Acct vs. Sales 4Q14 2 


We suspect the more important takeaway is what that means for sales rep retention.  The only way YELP would have a higher percentage of rookies is if its salesforce was growing at an accelerating rate, which wasn’t the case in 2H14 (reps hired in 1H aren’t considered rookies anymore).  That said, it’s likely that YELP's sales rep attrition picked up in 4Q14, potentially 3Q14 as well.



Management suggests that it takes 6-9 month for a sales rep to fully ramp.  If that is the case, then we should have seen a 2H14 acceleration in new account growth following its 1H14 acceleration in sales rep hiring.  In the chart below, we’re comparing YELP’s new account growth against its growth in sales headcount on both a direct and leading basis (e.g. 2Q lead is showing headcount growth from 1Q14 in 3Q14, 2Q14 in 4Q14). 


YELP: Salesforce Productivity? - YELP   New Acct vs. Sales 4Q14 lead


Another explanation could be that YELP did experience a heightened level of sales rep attrition at some point in 2014.  But unless that occurred throughout all of 2014 (which would be a much bigger issue), it couldn't explain the decline in salesforce productivity that occurred throughout all of 2014.  Either way, it doesn't change the fact that YELP hasn’t been able to generate new account growth in excess of the rate that it’s hearing sales reps at any point in 2014. 


If there was ever an admission that YELP’s TAM isn’t large enough to support its model, it would be this persistent decline in salesforce productivity (see note below for our TAM analysis).


YELP: Debating TAM

06/30/14 01:10 PM EDT

[click here]



Hiring more and more reps to call on the same number of clients is essentially the definition of declining salesforce productivity.  YELP’s salesforce (telesales) is already large enough to canvas its entire addressable market in call volume. 


We illustrate this point in the two tables below, which we are flexing by total sales reps and required daily call volume (note: the recurring theme from employer reviews at glassdoor.com suggests the salesforce is required to make at least 80 calls a day).


In the first table below, we’re calculating how long it would take YELP's salesforce to call all 14.4M B2C business in the US (see TAM note above).  Based on YELP’s ~1,500 reps making 80 calls daily, YELP’s salesforce could call every B2C business in the US within 120 days.  YELP guided to growing its salesforce by 40% (to 2,100), which will only shrink that window to 86 days.


YELP: Salesforce Productivity? - YELP   B2C call volume


However, we suspect the primary focus of YELP's salesforce is the 2.0M businesses that have claimed a page on their site (since 2008).  YELP probably doesn’t have the current contact info for all 14.4M B2C businesses in the US (YELP licenses business lists from third-parties).  Repeating our analysis above for claimed businesses, the call window shrinks to 12 from 17 days.


YELP: Salesforce Productivity? - YELP   Claimed call volume


In short, adding more and more reps just means increasing call frequency, which naturally has a waning benefit.  We suspect this is the reason why salesforce productivity is on the decline, and why we believe the issue is secular.  We also suspect this will exacerbate YELP's "rookie" problem in the form of escalating salesforce churn (i.e. too many mouths to feed).   



Let us know if you have any questions, or would like to discuss in more detail.


Hesham Shaaban, CFA



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