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European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps

Key Takeaway:

Risk measures are currently neutral (intermediate term) to positive (short-term). The obvious flash point is Greece, which continues to play chicken with the EU. That said, while the probability of Greece's exit from the Eurozone continues to rise, the expected fallout from Grexit appears to continue to fall.

 

European Financial CDS - Swaps mostly tightened in Europe last week. However, with the continued absence of a deal for Greece's bailout, bank swaps in that country widened between 298 bps and 639 bps.

 

European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps - chart1 financials cds

 

Sovereign CDS – Sovereign swaps mostly tightened over last week. Spanish and French sovereign swaps tightened the most, by -5 bps to 100 and -3 bps to 38, respectively.

 

European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps - chart2 sovereign CDS

 

European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps - chart3 sovereign CDS

 

European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps - 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 tightened by 2 bps to 10 bps.

 

European Banking Monitor: Grexit Fears Continue to Push Greek FInancials Swaps - chart5 euribor OIS spread

 

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 


Keith's Macro Notebook 4/27: China | Euro | S&P 500

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


Retail Callouts (4/27): NKE, KSS, TGT, JWN, M, JCP, FL

Takeaway: NKE product flow issues. Free shipping across the board in 18-24mo. M growth strategy not a ringing endorsement of dept. store environment.

EVENTS TO WATCH

Retail Callouts (4/27): NKE, KSS, TGT, JWN, M, JCP, FL - 4 27 chart2

 

 

COMPANY HIGHLIGHTS

 

NKE - Nike Delays Online Releases for Several Upcoming Models 

(http://tinyurl.com/ld3y233)

 

Takeaway: This struck us as a little strange. And maybe it's just the cost of having a greater presence online. The fact is that Nike deals with product flow issues all the time. But, with consumers becoming more dependent on the Nike site, mobile app, and retail stores -- these types of issues become a lot more visible to the consumer. Nike was pretty cagey in how it dealt with the delay, but it seems to be a short term hiccup in sourcing rather than a statement about the company's e-comm direct capabilities.

Retail Callouts (4/27): NKE, KSS, TGT, JWN, M, JCP, FL - 4 27 chart3

 

Free Shipping: Retail’s New Battleground

(http://wwd.com/retail-news/retail-features/free-shipping-retails-new-battleground-10116806/)

 

Takeaway: Free shipping = an offensive weapon for retailers to gain market share. We've seen it used sporadically from players in the department store/mass channel. Most notably Target who over the Holiday eliminated the free shipping threshold all together, and then in February cut its free shipping  threshold from $50 to $25. Over the next 18-24 months it's likely we see free shipping across the board. That will manifest itself during this Holiday season when retailers make a free shipping offensive play.

We've seen retailers, most notably KSS, talk about how a $25 shipping threshold isn't sustainable from a profitability perspective. We agree with the company on that. For Nordstrom, it makes sense to offer free shipping and returns given the basket size, but for the mid-tier space...it's bps dilutive. The problem is that a) consumers want it (in chart below its nearly 2x as important as any other online shopping feature), and b) if one domino falls, all others will have to move accordingly.

Retail Callouts (4/27): NKE, KSS, TGT, JWN, M, JCP, FL - 4 27 chart1

 

M - Macy’s Bag of Tricks for Growth

(http://wwd.com/retail-news/department-stores/macys-retail-growth-10116935/)

 

Takeaway: Add an 8,000 sq. ft. specialty concept in mid-tier markets to the list of new initiatives at M. Along with an off-price concept and the acquisition of Blue Mercury, we have to wonder what M sees in the department store space that would make these new initiatives attractive. Not a ringing endorsement from a company who has long been considered the best in breed. We bumped Macy's down from the core short list to the bench a few weeks back. This one is all about timing. We still think that the group (including M) will see a 1000bps sequential deceleration in growth. But for the next few months the catalysts are likely positive. And with M, unlike KSS or JCP, there's real estate value support.

 

 

OTHER NEWS

 

KSS - Kohl’s keeps up with Apple Watch app

(http://www.chainstoreage.com/article/kohl%E2%80%99s-keeps-apple-watch-app)

 

FL -  New TV Spot Featuring Manny Pacquiao

https://www.youtube.com/watch?v=TMi-lTnUmBg&feature=youtu.be

 

AMZN - Amazon comes to your wrist

(http://www.chainstoreage.com/article/amazon-comes-your-wrist)

 

TGT - Target, Sports Authority to carry folding bikes

(http://www.retailingtoday.com/article/target-sports-authority-carry-folding-bikes)

 

ANF - A&F Drops ‘Sexualized’ Marketing

(http://wwd.com/retail-news/retail-business/abercrombie-fitch-hollister-updates-new-corporate-guidelines-10116708/)

 

The Great One joins Sears Canada brand team

(http://www.retailingtoday.com/article/great-one-joins-sears-canada-brand-team)

 

Retail sales surging at O’Hare Airport after redevelopment

(http://illinois.realestaterama.com/2015/04/24/retail-sales-surging-at-o%E2%80%99hare-airport-after-redevelopment-ID0899.html)

 


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LEISURE LETTER (04/27/2015)

TICKERS: RCL

 

EVENTS  

  • April 28 (4:30pm) - WYNN 1Q CC: ; pw: 20173922

  • April 29 (1:00pm)  -  HOT 1Q CC: ; pw: 17589434

  • April 29: New Hampshire House vote on 2 casino bill (SB 113)

  • April 30 (9:00am) - HST 1Q CC:

  • April 30 (10:00am) - MAR 1Q CC: ; pw:  99597993

  • April 30 (5:00pm) - BYD 1Q CC: ; pw: 3858748

  • May 4 (11:00am) - MGM 1Q CC: ; pw: 1535291

  • May 5 (11:00am) - HYATT 1Q CC ; pw: 17020089

  • May 7 (8:30am) - MPEL 1Q CC ; pw: MPEL

HEADLINE NEWS

Macau March visitation - March 2015 visitation fell 14% YoY, the worst comp since July 2009. The decline was steeper for Mainland China visitation which dropped 18%. The decline was most pronounced in Beijing, Zhejiang and Tianjin. Guangdong visitors also fell 10% YoY in March.

DATA HERE

 

LEISURE LETTER (04/27/2015) - 1

 

LEISURE LETTER (04/27/2015) - 2

 

Takeaway: LVS confirmed that base mass is now in sharp decline - down 21% YoY in Q1 for the company.  Now we know that visitation was at least partly to blame.  This is a damaging statistic for long term bulls.

COMPANY NEWS  

Summit Ascent - Summit Ascent, a company controlled by Lawrence Ho, registered losses of HK$78.9 million in 2014, a reduction of HK$600,000 compared to the previous year when the company’s losses amounted to HK$79.5 million. According to the filing of the Group with the Hong Kong Stock Exchange this figure was primarily “attributable to non-cash share-based compensation benefits of HK$84.2 million”.  The opening of the integrated resort in Primorye, Russia is nearing completion and slated to open this year.  The casino is expected to have 25 VIP gaming tables, 15 mass-market baccarat tables and 800 slots.

ARTICLE HERE


Equinox- Equinox Holdings, the New York company that runs Equinox fitness clubs is launching a hospitality brand intended for health-conscious travelers willing to pay for high-end fitness facilities and amenities while on the road. 

Equinox expects to open its first hotel in 2018 at Related Cos.’ Hudson Yards development under way on Manhattan’s west side. The hotel’s Yabu Pushelberg-designed property will include indoor and outdoor swimming pools and at 60,000 square feet, the largest ever Equinox gym, the company says. A Los Angeles hotel is slated to open in 2019.

 

Equinox eventually expects to open as many as 75 hotels world-wide. Related, which is the company’s majority owner, expects to invest or raise “several billion” dollars for Equinox hotels over the next few years, a Related spokeswoman said.

ARTICLE HERE

Takeaway: The idea isn't new but with the recession behind us in the US, why not? The luxury customer is alive and well.

 

RCLRoyal Caribbean's Majesty of the Seas is in an unexpected dry dock, prompting the cancellation of the ship's next cruise, which was slated to depart Monday. RCL spokeswoman Cynthia Martinez says repairs will "resolve an issue that is causing a small amount of bio-friendly oil to leak."  

 

Passengers booked on the subsequent sailing -- a four-night Bahamas cruise from Miami, scheduled to depart April 27 -- will receive full refunds, as well as future cruise certificates equal to 100 percent of the cruise fares paid for the canceled voyage.

ARTICLE HERE

Takeaway: Another ship incident for RCL. No wonder legacy (pre-2006) ship pricing stinks.

INDUSTRY NEWS

Control tourist measure - A new measure intended to alleviate crowd congestion in popular tourist spots will be tested during this week’s Labour Day holiday, Secretary for Social Affairs and Culture Alexis Tam Chon Weng said.  

 

Tam said one of the suggestions he proposed was that the China National Tourism Administration (CNTA) and the Macau Government Tourist Office (MGTO) co-operate in managing the number of IVS arrivals during peak travel times. He added that while the central government agreed with his suggestions, it would have to talk to relevant entities in the mainland before any of the proposals could be implemented.

 
Tam said that in the meantime MGTO officials will test tourist flow control measures during the three-day Labour Day holiday which begins on Friday.

 

According to Tam, visitors entering from the mainland will receive SMS messages alerting them of overcrowded tourist spots, in the expectation of diverting them to other areas. He said he was confident that the measure will see positive results. 

ARTICLE HERE

Takeaway: You don't really need control if visitation is falling.

 

Junket watch - US-based International Union of Operating Engineers (IUOE) has sponsored the launch of a website called Macau Gaming Watch. The organization, which claims to represent over 2,000 stationary engineers in Nevada and previously launched the now-defunct website CasinoLeaks-Macau, calls the new site “independent” and “critical,” and aims for it to be “the first-stop source for people investigating gaming in Macau." 

 

The new site has released information on Macau junkets and VIP gaming operators, including the “Neptune Guangdong Group” and “Hoi Fong” Entertainment. Drawing on the “recent tumult” in Macau’s gaming industry, the IUOE said that it is now expanding its research to explore more elements of the industry. “The site will initially look into Wynn Macau’s junkets. However, we will later explore the junket/VIP operators at other casinos as well,” it says.

 

The IUOE, declaring itself a shareholder of Wynn Resorts Ltd, has also launched a website called Cotai Land Deal. The site has presented its ongoing research as a real estate transaction of the Wynn Macau’s Cotai land, with key documents and findings.

ARTICLE HERE

 

New Hampshire - Gov. Maggie Hassan on Friday afternoon changed her position and announced her support for legislation that would allow for two casinos in New Hampshire. The casino bill is up for a vote Wednesday by the New Hampshire House. Activists on both sides of the issue said Friday they are expecting a close vote, with neither side predicting victory.

 

The legislation on Tuesday was amended by the House Ways and Means Committee to delay the licensing of a second casino until at least one year after the completion of a performance audit of the first casino. The bill initially allowed for a simultaneous licensing process.

 

SB 113 would permit two casinos – a large casino of 2,000 to 3,000 slot machines and 80 to 160 table games that would require a minimum investment. And a casino of 750 to 1,000 slots and 25 to 80 tables requiring a $125 million investment. 

ARTICLE HERE

Takeaway: This is the closest NH has been on legalizing casinos and could provide a little spark to very weak slot demand.

 

Oregon - The Oregon House on Thursday waved along legislation targeting state-sponsored video gambling, approving a bill that would map out Oregon Lottery terminals in relation to each location's "socioeconomic status." HB 3317 now heads to the Senate About 2,500 retailers, according to state data, offer video gambling.

ARTICLE HERE

Takeaway: This study, if approved, may result in some VLT reduction in Oregon.

MACRO

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.

 


TWTR: Thoughts into the Print (1Q15)

Takeaway: We’re staying short, but this is a very tricky setup since this comes down to when mgmt rebases expectations (2Q15 guidance or release?)

KEY POINTS

  1. 1Q15 = MUTED UPSIDE: We’re expecting limited top-line upside on consensus estimates that are above the top end of 1Q15 guidance.  Further, any upside to estimates likely comes from the Data segment, with a limited upside to consensus advertising estimates that we believe are failing to adequately consider the non-recurring tailwinds from last year.  However, the big unknown here is ad pricing (see Point 3).
  2. A VERY TRICK SETUP: We believe TWTR is facing a precipitous slowdown in ad revenue growth with the company struggling to find an answer to comp past the 2Q13 Supply Shock, which had driven much of its recent success.  Mgmt will either have to own up to it, or try to acquire its way through it (or both).  However, we’re not sure if management concedes that point on the 1Q or 2Q print (2Q guidance or earnings).  The setup seems similar to 2Q14/3Q14 when TWTR guided high for 3Q14 revenues, then disappointed with inorganic upside and light advertising revenues. It's a tough setup, but we suspect Noto is more likely to manage expectations (he already tried last quarter).
  3. WHAT WE’RE KEYING IN ON: Ad Pricing (CPE), which is the biggest risk to our Short thesis.  TWTR has historically driven its model off of surging ad load; yielding CPE along the way.  However, CPE just turned positive on a y/y basis in 4Q14 for the first time in TWTR’s reported history (after cumulatively declining by 82% since 1Q12).  There is a lot of moving parts to CPE (ad load, product mix, customer base, geography), so tough to get any edge here.  However, we estimate that CPE needs to not only grow, but accelerate on a y/y basis to hit consensus 1H15 Ad Revenue estimates. 

 

1Q15 = MUTED UPSIDE

We’re expecting limited top-line upside on consensus estimates that are above the top end of 1Q15 guidance.  Further, any upside to estimates likely comes from the Data segment, with a limited upside to consensus advertising estimates that we believe are failing to adequately consider the non-recurring tailwinds from last year. 

 

During the 4Q14 call, TWTR tried to warn the street about the 1H14 benefit from the Olympics and the World Cup, which contributed an incremental 10% and 20%, respectively, to 1Q14 and 2Q14 results.  Excluding these events, consensus is calling for a mild slowdown in advertising revenue growth into 1Q14, with a reacceleration in 2Q14; a tall order for a company already experiencing a sharp decelerating in ad engagements (more detail below).

 

TWTR: Thoughts into the Print (1Q15) - TWTR   Adj Consensus Est 1H15

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad eng vs. Price y y 

 

A VERY TRICK SETUP

We believe TWTR is facing a precipitous slowdown in ad revenue growth with the company struggling to find an answer to comping past the 2Q13 Supply Shock, which was a sudden and sustained surge in ad load that drove much of its revenue growth through 2014.   For supporting detail, see the note below.

 

However, TWTR is now at the point where ad engagements are precipitously decelerating, and we don’t believe the company can risk another surge in ad load since it needs to beat on both revenue and MAU expectations to appease the street, yet those two factors have historically worked against each other. 

 

The question is when mgmt will own up that slowdown, or if it will try to acquire its way through it (or both).  The more important questions may be timing; we’re not sure if management concedes that point on the 1Q or 2Q print (2Q guidance or earnings).  The setup seems similar to 2Q14/3Q14 when TWTR guided high for 3Q14 revenues, then disappointed with inorganic upside and light advertising revenues.  It's a tough setup, but we suspect Noto is more likely to manage expectations; he already tried last quarter by quantifying the non-recurring tailwinds mentioned above.

 

TWTR: Are Acquisitions Enough?

03/17/15 08:50 AM EDT

[click here]

 

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad Engagement vs. Pricing 4Q14

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad engagement vs. MAU

 

WHAT WE’RE KEYING IN ON

Ad Pricing (CPE), which is the biggest risk to our Short thesis.  TWTR has historically driven its model off of surging ad load; yielding CPE along the way.  However, CPE just turned positive on a y/y basis in 4Q14 for the first time in TWTR’s reported history (after cumulatively declining by 82% since 1Q12). 

 

There is a lot of moving parts to CPE (ad load, product mix, customer base, geography), so tough to get any edge here.  However, we estimate that CPE needs to not only grow, but accelerate on a y/y basis to hit consensus 1H15 Ad Revenue estimates.  For context, we have included a scenario analysis flexing ad pricing (CPE) against ad engagements (per MAU), along with a chart showing the recent trajectory between the two factors.

 

TWTR: Thoughts into the Print (1Q15) - TWTR   1H15 Scenario Analysis

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad eng mau vs. Price y y

 

 

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

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


MACAU WEEKLY ANALYSIS (APRIL 20-26)

Takeaway: CAN APRIL IMPROVE ON MARCH’S AWFUL VISITATION #S?

CALL TO ACTION

Dwarfing the importance of the weekly numbers, March visitation figures were released by the Macau government and they were awful. The sharp decline in visitation to Macau partly explains the disaster that was LVS’s earnings report – base mass revenues declined 21% in Q1.  While not widely analyzed by the Street, base mass revenues and visitation trends are critical to the performance of the Macau stocks, particularly LVS.  Long-term investors own Macau stocks, LVS included, because of the perceived positive growth profile of this high margin segment.  From a sentiment and earnings perspective, these trends are disconcerting.

 

Please see our detailed note: http://docs.hedgeye.com/HE_MACAU_4.27.15.pdf


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