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China Economic Update: Will the "Beijing Put" Be Enough to Offset the Slowdown?

This morning we shot a brief video offering our updated, detailed thoughts on the Chinese economy and its financial markets, which are best summarized in the following picture:

 

China Economic Update: Will the "Beijing Put" Be Enough to Offset the Slowdown? - 1

 

Watch the video replay of this presentation below.

 

CLICK HERE to download the accompanying slides.

 

As always, please feel free to ping us with any follow-up questions.

 

Kind regards,

 

DD

 

Darius Dale

Associate


European Banking Monitor: No Verdict in Greek Bailout Discussions

Takeaway: Risk is net neutral to slightly negative on the heels of the Fed and delayed progress in Greek-Eurozone bailout discussions.

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:

Risk perception in the U.S. and Europe improved but is neutral to negative as (1) the Fed dropped its "patient" verbiage but Chair Yellen moderated the market reaction in her press conference, and (2) as Greek-Eurozone bailout discussions made little progress. 

 

European Financial CDS - Swaps mostly widened in Europe last week with Greek bank swaps rocketing more than 700 bps wider.  Although Greek prime minister Tsipras agreed to send a new list of economic overhauls to Eurozone finance ministers, Greek-Eurozone bailout discussions are not making significant progress.  As German Finance Minister Wolfgang Schäuble said, time is running out for Greece. Meanwhile, Russia's Sberbank saw its swaps tighten by a notable -121 bps to 514. 

 

European Banking Monitor: No Verdict in Greek Bailout Discussions - chart1 financials CDs

 

Sovereign CDS – Sovereign swaps mostly widened over last week. Portuguese sovereign swaps widened the most, by 9 bps to 131.  Japanese swaps were the only ones to tighten, by -1 bps to 39.

 

European Banking Monitor: No Verdict in Greek Bailout Discussions - chart2 sovereign CDS

 

European Banking Monitor: No Verdict in Greek Bailout Discussions - chart3 sovereign CDS

 

European Banking Monitor: No Verdict in Greek Bailout Discussions - 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 was unchanged at 11 bps.

 

European Banking Monitor: No Verdict in Greek Bailout Discussions - chart5 eruibor ois spread

 

 

Matthew Hedrick 

Associate

 

Ben Ryan

Analyst

 

 

 

 


Correlation Risks

Client Talking Points

USD

The USD is flat vs. both the Euro and the Yen this morning as the U.S. Dollar Index has held @Hedgeye TRADE and TREND levels of support – at -2.4% on the week, last week was its biggest down week of 2015, but still looks very bullish.


OIL

Oil agrees with that conclusion on USD being oversold into Friday’s close, down -2.5% this morning to $45.40 WTI and no immediate-term TRADE support to $42.04 – the 15-day inverse correlation between the USD and Oil is -0.84.

UST 10YR

After an expedited 18 basis point drop last week, the UST 10YR Yield hasn’t budged this morning at 1.93%; you’ll get U.S. CPI and Q4 GDP this week; if the Fed is “data dependent”, those 2 data points will be slow.

Asset Allocation

CASH 34% US EQUITIES 15%
INTL EQUITIES 14% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 13%

Top Long Ideas

Company Ticker Sector Duration
ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.

PENN

Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.

TLT

Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

Three for the Road

TWEET OF THE DAY

GERMANY: in a rare down day, DAX -1% to +21% YTD

@KeithMcCullough

QUOTE OF THE DAY

Courage is the most important of all the virtues because without courage, you can't practice any other virtue consistently.

Maya Angelou

STAT OF THE DAY

Brazillian soccer legend, Pele (Edson Arantes do Nascimento) scored the most league goals in football history, 1281 goals in 1363 games.


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Keith's Macro Notebook 3/23: USD | Oil | UST 10YR

Hedgeye Macro Analyst Darius Dale shares the top three things in CEO Keith McCullough's macro notebook this morning.


LEISURE LETTER (03/23/2015)

Tickers:  

EVENTS

  • March 26: Macau Legend 4Q conf call 8:30-9:30pm (EST)
  • March 27: CCL F1Q, 10am -

headline news

GGR forecast lowered - Macau CEO Chui lowered his monthly GGR forecast for 2015 from MOP 27.5 billion to only MOP 20 billion, representing a 32% YoY decline for the year.  Chui said in the first policy of his second-term. Macau has entered an “adjustment” period of slower growth and needed to develop a broader range of attractions to draw tourists from around the world, he said.

 

Chui’s tourism panel would draft a five-year plan for stable casino growth while expanding the city’s tourist offerings, the chief executive said.  

 

According to the median estimate of nine analysts surveyed by Bloomberg News in January, gaming revenues would probably drop another 8% drop this year. The most pessimistic expected a 21% decline.

 

Greater oversight and adjustments - Chui stated that the Macau government plans to “enhance gaming-related laws and regulations, strengthen supervision of the gaming industry, regulate gaming businesses’ operation and continue to push for responsible gaming”.

 

The policy address added that the review of the gaming industry would analyse how each of the six gaming concessionaires have conducted their business since the liberalisation of the industry in 2002. The analysis would include the development of non-gaming elements, the creation of jobs and the promotion of Macau residents within each company.

 

But the Chief Executive warned of the possibility of job losses arising from the “adjustments” to the casino industry, saying the government would keep a close eye and take the necessary meaures to prevent the problem from affecting other industries.

 

New smoking rules - The policy address, as announced on Monday, confirmed the government would propose a full ban on smoking inside public areas, including casinos. It is expected that the ban would impact VIP rooms and mean that smoking lounges on mass floors would no longer be allowed.

 

New smoking rules are likely to be proposed in the second half of 2015.

ARTICLE HERE

ARTICLE HERE

Takeaway: Chui's even more bearish than even us. The casino 'adjustments and further regulation' will be costly to the operators.

COMPANY NEWS  

PENN - Plainridge Park will open on June 24th with over 1,200 slots/ETGs. 

 

MGM - will break ground on its Springfield casino this Tuesday. 

 

MGM - MGM Grand, which hosts the big fight, said 98% of rooms are already sold out for the weekend of May 1-2. MGM Grand President Scott Sibella said room prices immediately shot up to $900-$1,000 a night once the bout was announced and now the going rate is more than $1,600 with still six weeks to go. This contrasts with a regular weekend price of $338 at this time of year.

 

Other Strip hotels such as the Venetian and Palazzo are sold out but vacancies still exist at some hotels with four-star properties going for an average $716 and five-stars for $1,033 according to a quick search online at Expedia.com.

Coveted ringside seats are rumored to be changing hands for a mind boggling $100,000. 

ARTICLE HERE

Takeaway: May 1-2 will set records in Vegas

 

BYD/MGM - Borgata sued Friday to block Atlantic City from borrowing $43 million in the bond market to repay a state loan due March 31. The lawsuit, filed in Superior Court of New Jersey in Atlantic County, claims that the borrowing plan, endorsed by Atlantic City Council on March 4, violates a September ordinance allowing the city to borrow up to $140 million to pay property-tax refunds, such as $88.25 million owed to Borgata.

 

The Borgata lawsuit came just days before the emergency manager appointed Jan. 22. by Gov. Christie is expected to issue recommendations on stabilizing Atlantic City's finances, and it sets up a three-way fight between the state, the city and Borgata.

 

Borgata said it had to file its complaint Friday to beat a legal deadline to appeal Atlantic City's plan to repay the state, but not casinos owed tax refunds, which is what City Council authorized last year.
ARTICLE HERE

Takeaway: It will be an intense legal battle to get the $88 million

 

 

INDUSTRY NEWS

IVS capacity report (Nomura) - the key points in the report include: “1) balance between tourism capacity and local resident life quality, 2) potential free arrival and departure in Macau and Hengqin within the seven days granted by the Individual Visit Scheme (IVS), and 3) potential tightening of the IVS via four measures.”  

 

Possible IVS restrictions include: spreading to other provinces a practice of Macau’s neighbouring province Guangdong – whereby visitors can only apply for the IVS to Macau every two months; extending the interval on Guangdong residents’ applications to once every three months; blocking approval of any new cities for the IVS, or reducing the number of existing cities covered; limiting IVS approval numbers during peak seasons.

Takeaway: IVS changes are coming and they are likely negative for mass gaming. We continue to believe the sell side is overestimating mass gaming revenues for 2015 and overestimating margins

 

Mississippi FEB GGR - Gulf Coast: +7%, River Counties -13%; statewide: -4%

 

 

MACRO

Guangzhou housing

  • The Guangzhou Daily cited authoritative sources who said that more government relief for the property market was coming, including measures to relax tax burdens and purchasing limits.
  • The bulk of the article discussed the government lowering the threshold to access the public housing fund, including increasing its lending quota. The paper said that the fund will play a larger role to support housing.  

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.


P: Worst-Case Scenario? (Web IV)

Takeaway: The worst case scenario isn’t effectively managing content costs to 55% of revenue; it’s the fallout if P can’t do so (insolvency)

KEY POINTS

  1. WORST CASE SCENARIO? We recently learned of a research report suggesting that P could weather SoundExchange (SX) proposed rates by managing content costs to the 55% revenue floor through a listener cap.  The analysis appears encouraging, but it's extremely sensitive to its rather optimistic underlying assumptions (e.g. revenues that are above street estimates).  Small variances in either revenue growth or listener hours would be the difference between treading water and insolvency.
  2. THERE’S NO SILVER BULLET: If SX proposed rates prevail, P would be in a precarious situation.  There wouldn't be much room to cut costs since the majority of its costs are tied to content & S&M, and any material cuts to the latter would put its revenues at risk.  The only real option is cutting hours, and while a listener cap seems like the natural option, it may not be enough, especially if revenues fall short.  We suspect management would take more drastic measures to proactively preserve its cash, potentially exiting unprofitable US markets altogether (both users and its local sales reps). 
  3. WEBCASTER IV = POWDER KEG: If Web IV settles somewhere in the middle, P remains in a precarious setup.  P’s prospects would still be tied to its ability to maximize revenue while limiting listener hours, which essentially means taking price and/or increasing per-user ad load (sell-through).  The latter may prove more challenging given a growing wave of competitive threats for listener hours.  We’re not sure how Web IV unfolds, but ultimately a compromise may not be good enough.  

 

WORST CASE SCENARIO?

We recently learned of a research report suggesting that P could weather SoundExchange (SX) proposed rates by managing content costs to the 55% revenue floor through a listener cap.  While the analysis appears encouraging, it’s extremely sensitive to its underlying assumptions, which are rather optimistic (particularly revenues, which are above street estimates). 

 

The key thing to consider is the trigger.  Under SX’s proposal, P will pay the greater of 55% of revenue or the per-track royalty rate. So if revenues are too light, or listener hours are too high, the higher per-track rate would apply.  Assuming P could seemingly manage those two dynamics to trigger the 55% floor is not the worst-case scenario under SX’s proposal, it’s the best case.

 

For example, if revenue growth is off by only 2-3 percentage points and/or the listener cap doesn’t curb usage to the magnitude expected, then the 55% floor wouldn't apply.  

 

Below are a two charts illustrating P’s cash burn under small changes in revenue and listener hour assumptions; the takeaway is that very small changes in either metric paint drastically different pictures, and the underlying assumptions in each are still fairly optimistic.  

 

P: Worst-Case Scenario? (Web IV) - P   Sx Scen 1

P: Worst-Case Scenario? (Web IV) - P   SX Scen 2

 

THERE’S NO SILVER BULLET

If SX rates prevail, P’s cash flows would become very sensitive to small variances in revenue growth or listener hours.  There won’t be much room to cut costs since the majority of which are tied to content, and any material cuts to its next largest line item (sales & marketing) would put its revenues at risk. 

 

The only real option is cutting hours.  While a listener cap would be the most likely option, it may not be enough if revenue growth falls short.  Below is an scenario analysis for total EBITDA through 2017.  We’re flexing revenue and listener hours (both on a 3-yr CAGR) under SX proposed rates.  Note consensus is calling for 23.5% revenue CAGR through 2017.

 

P: Worst-Case Scenario? (Web IV) - P   Web Scen SX

 

The takeaway from above analysis is that P could face an escalated level of cash burn over, which could ultimately lead to insolvency within 2-3 years.  Note that P still isn't generating positive FCF, has only $355 million in cash, with a $60M revolver.  

 

That said, we suspect management would take more drastic measures to proactively preserve its cash if SX rates prevail, regardless of its internal expectations for revenue growth or listener hours.  The risk of getting it wrong would be too severe.  We suspect that means exiting unprofitable US markets altogether (both users and its local sales reps). 

 

WEBCASTER IV = POWDER KEG

If SX gets there way, P will need to drastically alter its model (see point 2).  If P’s proposed rates prevail, P would see a massive reprieve in content costs over the next two years that would drive considerable ramp in cash flow growth.  

 

P: Worst-Case Scenario? (Web IV) - P   Web IV Scen P

 

If Web IV settles somewhere in the middle, P still remains in a precarious setup. Below are two additional scenario analyses.  The first is the midpoint between the two proposals, the next the midpoint between P's current rates and SX proposed rates.  We believe the variance between the two seemingly-similar situations illustrates how sensitive the situation is. 

 

P: Worst-Case Scenario? (Web IV) - P   Web IV Scen P SX

P: Worst-Case Scenario? (Web IV) - P   Web IV Scen P SX 4

 

Ultimately, P’s prospects would still be tied to its ability to maximize revenue while limiting listener hours, which essentially means taking price and/or increasing per-user ad load (sell-through). The latter may prove more challenging given a growing wave of competitive threats for listener hours. 

 

We’re not sure how Web IV will unfold, but ultimately a compromise may not be good enough.

 

 

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

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


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 80.65%
  • SHORT SIGNALS 78.64%
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