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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.


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.


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 (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

 


[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds

Takeaway: The first 10 weeks of 2015 have seen a drastic decline in U.S. stock fund flows which impacts several managers disproportionately

This note was originally published March 19, 2015 at 08:11 in Financials. Click here for more information on how you can become a subscriber to Hedgeye.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Domestic equity flows continue to be soft, coming in at a relatively low +$326 million this week and most importantly comping down a drastic 90% from trends in 2014. The first 10 weeks of 2015 have put up a marginal +$114 million weekly average inflow, this compares to the same two and a half month period in '14 which experienced a +$1.8 billion weekly subscription. This 93% decline year-over-year continues to relay the share losses for active funds to ETFs and also a rotation out of the U.S. stock market.

 

International equity fund flows are picking up some of the slack but are also comping down. In the most recent weekly survey, International stock funds put up a solid +$3.9 billion subscription, however even this week's decent number is only blending to a +$1.7 billion weekly average inflow year-to-date. The first 10 weeks in 2014 averaged a +$2.9 billion inflow, so while not as drastic a negative year-over-year comp, a -58% year-over-year decline for international equity funds is hard to get excited about. We continue to flag that shares of T. Rowe Price will bear the brunt of these weak equity trends and the stock continues on our Best Ideas list as a Short (or avoid - see our latest TROW research).

 

[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds - ICI 1

 

In the most recent 5 day period ending March 11th, total equity mutual funds put up net inflows of +$4.2 billion according to the Investment Company Institute, exceeding the year-to-date weekly average inflow of +$1.9 billion and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$3.9 billion and domestic stock fund contributions of +$326 million.  International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 15 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up inflows of +$1.3 billion, trailing their year-to-date weekly average inflow of +$3.0 billion but outpacing their 2014 average inflow of +$929 million. The inflow was composed of +$1.0 billion of contributions to taxable funds and +$278 million of contributions to tax-free or municipal bond funds.  Munis have had a solid run with subscriptions in 51 of the last 52 weeks.

 

Equity ETFs lost -$190 million, trailing the year-to-date weekly average inflow of +$83 million and the 2014 weekly average inflow of +$3.2 billion. Fixed income ETFs gave up -$3.5 billion, trailing the year-to-date weekly average inflow of +$1.3 billion and the 2014 weekly average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly quarter-to-date average for 1Q 2015:

 

[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds - ICI 2

 

[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds - ICI 3

 

[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds - ICI 4

 

[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds - ICI 5

 

[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds - ICI 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly quarter-to-date average for 1Q 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds - ICI 7

 

[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds - ICI 8

 

Sector and Asset Class Weekly ETF and Year-to-Date Results: Sector SPDR call-outs are similar to last week.  The consumer discretionary XLY ETF experienced a +$579 million inflow (6% of its market cap) while the utilities XLU and long Treasury TLT saw outflows of -$438 (-6%) and -$664 (-9%) respectively.

 

[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds - ICI 9 2

 

 

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$6.3 billion spread for the week (+$4.1 billion of total equity inflow net of the -$2.2 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.1 billion (more positive money flow to equities), with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$15.5 billion (negative numbers imply more positive money flow to bonds for the week).

  

[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds - ICI 10 2

 

Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] ICI Fund Flow Survey | Drastic Year-over-Year Decline in Domestic Stock Funds - ICI 11 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


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