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Stay Short the Euro

Stay Short the Euro - Euro cartoon 05.18.2015

We remain the EUR/USD bears.

 

On Tuesday, Hedgeye CEO Keith McCullough issued another short signal in the EUR/USD (via the etf FXE) in our Real Time Alerts product. Here’s a portion of what he wrote:

 

If the Chinese think Draghi is going to sit idle and not devalue-back, they have another thing coming. As growth and inflation continue to slow, globally, I fully expect this central-planning FX War to continue.

 

Notably, the next days will bring parliamentary votes on Greece’s third bailout.  Make no mistake, the top Eurocrats (ECB’s Mario Draghi & Germany’s Angela Merkel) are incentivized to plug Greece’s credit hole. So, expect ‘debt relief’ in some form, but no great solution to Greece’s larger, leviathan structural issues. (Never mind the flawed nature of a currency union regulating uneven economies with one monetary policy.)

 

We continue to expect slower growth in the region from here. This should put increased pressure on Draghi to issue more QE.  As Hedgeye Europe analyst Matthew Hedrick wrote in this morning’s Early Look: 

 

Look to Jackson Hole at the end of the month (Aug. 27-29) as an opportunity for Draghi to talk down the Euro. An increase in his QE target would send the Euro falling.


INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS

Takeaway: After rolling SA claims hit 266.3k in April 2000, it took exactly one year for the economy to enter recession. This week's reading: 266.3k.

With spot SA claims having hit a 42-year low four weeks ago, the rolling 4-week number has hit its own low of 266.3k this week. The last time rolling SA claims were at this level was the week ending April 15, 2000. Aside from that one week in 2000, this is the lowest level of rolling SA claims since December 1973.

 

For perspective, back in the late '90s, early '00s cycle, 266.3k was the lowest rolling SA claims would go. The following chart shows that from April 15, 2000 claims began to rise; the economy entered recession exactly one year later.

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims9 2

 

In energy states, the spread versus the U.S. as a whole rose to 9 in the week ending August 1, coinciding with the July Challenger report that showed Energy sector cuts rising to 9k from 0k in June.

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims18

 

The Data

Prior to revision, initial jobless claims rose 4k to 274k from 270k WoW, as the prior week's number was revised down by -1k to 269k.

 

The headline (unrevised) number shows claims were higher by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.75k WoW to 266.25k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.9% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.7%

 

<chart2>

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims3

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims5

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims6

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims7

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims8

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims10

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims11

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims19

 

Yield Spreads

The 2-10 spread fell -5 basis points WoW to 148 bps. 3Q15TD, the 2-10 spread is averaging 161 bps, which is higher by 3 bps relative to 2Q15.

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims15

 

INITIAL JOBLESS CLAIMS | LATE CYCLE MARKERS - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


LEISURE LETTER (08/13/2015) - WYNN, MPEL, Airbnb

TICKERS: WYNN, MPEL, Airbnb

 

EVENTS   

 

August 28: 10:00am: PENN - Meeting with Management at Plainridge Park  

COMPANY NEWS     

WYNN - Global casino giant Wynn Resorts may be contemplating a push into New South Wales, Australia (NSW) after its representatives met with Deputy Premier and gaming minister Troy Grant to discuss investment opportunities.  According to the latest NSW government ministerial diary summaries, representatives from Wynn Resorts met Mr Grant on May 13. The purpose is recorded as an "introductory meeting" to discuss "investment in NSW".
ARTICLE HERE
Takeaway: Worth pursuing...
  

MPEL - Billionaire James Packerstepped to step down as chairman of Australia’s Crown Resorts Ltd. Mr Packer will remain co-chairman both of Asian casino developer Melco Crown Entertainment Ltd and the “Alon Resort” casino-hotel project in Las Vegas, the company said in a filing.

ARTICLE HERE

 

Bloombery - Reported a net loss for the second quarter of 2015. The group’s unaudited results for the three months to June 30 show a net loss of approximately PHP773.54 million ($16.75 million) compared to a net gain of about PHP846.60 million in 2014.

  • Revenues for the three-month period increased by 9.4% YoY to PHP5.99 billion. 
  • Operating costs however jumped 47.2% from a year earlier to PHP5.61 billion in the second quarter of 2015. Including other items, total costs topped PHP6.27 billion, up 58.7% from a year ago.
  • Jump in costs tied to the opening of Solaire’s, Sky Tower and the acquisition of Jeju Sun Hotel and Casino in South Korea. 
  • GGR was PHP7.49 billion for the three months to June 30, up from PHP6.90 billion in the prior-year period
  • Rebates for junket operators and VIP guests however increased by 15.5% YoY to PHP2.01 billion

ARTICLE HERE

 

Airbnb - Reported yesterday that Airbnb acquired apartment rental startup, RentMethod.  This is not a formal acquisition. RentMethod is shutting down and two of its founders have joined Airbnb.  Customers who used RentMethod are being encouraged to port over their data to other solutions, to which the company will provide a list in the future.  

ARTICLE HERE

INDUSTRY NEWS 

Macau Gaming License Study - The study the government is making in preparation for its forthcoming review of gaming licences is in the pipeline, and officials mean to have the first draft of the study report completed by the end of next month, Chief Executive Fernando Chui Sai On has said. 

  • Mr Chui told the Legislative Assembly that his government expected to begin soliciting public opinion on the findings of the study this year.

  • “The review will focus on eight aspects, including the impact of gaming on the Macau economy, small and medium enterprises, society and the relationship between gaming and the development of non-gaming activities. The review will also study if the current contracts with operators have been fulfilled and if they are assuming their social responsibilities,” he said.

ARTICLE HERE

  

Regional Gaming Revenues

 

AC - July GGR (SSS): +7.1 YoY 


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GENTING SINGAPORE Q2 2015 CONFERENCE CALL

Highlighted financials 

  • Q2 Gaming Revenue -28% YoY
  • Q2 Non Gaming Revenue -3% YoY 
  • Q2 Adjusted EBITDA - S$296.46 million, -6% YoY
  • Q2 Unadjusted EBITDA - S$107.865 million, -60% YoY
    • (Includes the effects of losses on financial derivatives)
  • Resorts World Sentosa contributed revenue of S$577.8 million, a drop of 23% YoY. Poor VIP business to blame. 
  • No dividend declared for Q2. Dividend of 1 cent was declared for Q1 2015. 
  • Q2 2015 eps - S$(0.14)

Q & A 

Rolling VIP volumes? VIP win rate?

  • Rolling VIP volumes -11% QoQ
  • VIP win rate - 2.1% 

VIP share of total volume? Mass share, Mass GGR?

  • 37% VIP, Mass volume 43% this Q, Mass GGR was 41% 

Overall GGR performance YoY

  • GGR -28% YoY
  • VIP GGR -36% YoY
  • Mass GGR +2% YoY

Accounts Receivable down substantially? Why?

  • They are being a lot more cautious in the VIP space. They are quite concerned with their ability to give credit. They have tightened their collection procedure quite significantly as a result of their lack of confidence in the Chinese economy. 

FX reserves are high because they must pay their customers back in the same currency they came there with. 

 

What drove the drop in value of your financial derivatives? 

  • The prices derive directly from the price of the public listed equities. The value of those equities has fallen off and therefore the derives have fallen off. 
  • Very limited color on how the values are derived. Would not disclose additional information on these derivatives. 

They do not hedge any of their currency exposure. 

 

Why is the mass market growing for you guys? 

  • They include mass and premium mass together. Very concerned with the volatility of the currencies in the surrounding countries. They get a lot of business from Malaysia and the Malaysian ringgit has continued to depreciate. This could hurt their mass and premium mass business. 

Cost cutting measures? What have you implemented?

  • Mostly reductions in the VIP business headcount through natural labor attrition. Could see further reductions in headcount. 

Ability to pay dividends and increase dividends?

  • Probably able to consider an increase in 2016 depending on how results rebound. 

Buy back to continue?

  • Yes, they have a lot of shares they can buyback, will move forward with the buyback as originally planned. 

Korea, whats the status of getting a gaming license? 

  • Property is well underway and construction is on track. The government is putting together the regulations and they should have the regulations finished by Q12016. Bottom line: They have to wait for the regulations to come out before they can submit their license application. Could be a 6 month wait until the application is processed and approved. 

ADR this Q?

  •  S$275

Market stabilizing?

  • Sentiment is still very negative from their perspective. They still see overall volume and GGR trending downward over the next 12 months. 
  • Currency issues in the surrounding countries remains a major problem and could further hurt visitation and GGR. 

Does the low win rate has to do with the breadth of players, or is it the table mix?

  • Not the table mix. From a statistical standpoint they do not know why their win rate remains so low. They are "praying" for it to get better. 

Slot mkt. share in Q2?

  • 43% for the Q. (for the entire slot business)

What are the derivatives linked to? Which equities? US, AUS, UK?

  • No comment. 

 

 

 

 

 

 

 

 


USD, EUR and Commodity Divergences

Client Talking Points

USD

Investors pushed out the dots yesterday as global growth slowing and China’s quasi-acknowledgement of economic reality pushed bets on the probability of a September lift-off back below 50% and pushed the dollar -1.1% lower on the day. With dollar correlations still strong, across durations, ↓ Dollar still  = ↑  (commodity/energy) re-flation and XLE followed the currency correlation playbook gaining +1.86% and leading sector performance  … but the slow-growth rotation remained equally strong with XLU up 1.8% on the session (+2.8% MTD vs SPX -0.85%).  The USD is up modestly this morning and Jackson Hole – the next major currency catalyst – is, on the margin, Euro bearish.  Jackson Hole = Aug 27-29th, September FOMC = Sept 17th.  

EUR

We remain the EUR/USD bears. The next days will bring parliamentary votes on Greece’s 3rd bailout.  Make no mistake, the top Eurocrats (Draghi & Merkel) are incentivized to plug Greece’s credit hole. Expect ‘debt relief’ in some form, but no great solution to Greece’s larger structural issues nor the flawed nature of a currency union regulating uneven economies with one monetary policy. We expect slower growth in the region from here, which should put increased pressure on Draghi to issue more QE.  

COMMODITY DIVERGENCES

3-factor price signaling in the commodities complex is sending mixed signals. Relative USD correlations (near-term vs. historical norms) are tracking more positively (less negatively correlated) and price volume signals vs. USD movements are diverging across the space. Nat. Gas and RBOB Gas finished +~3-4% vs. Corn and Soybeans -5-6%, all on heavy volumes. We continue to like base metals, materials, and crude on the short side, but time and price is key. Most look oversold on a near-term duration on our screens. We would look to short on strength.  

Asset Allocation

CASH 60% US EQUITIES 4%
INTL EQUITIES 5% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 7%

Top Long Ideas

Company Ticker Sector Duration
HOLX

In an analysis of the demographics of the newly insured, Pap testing, HPV, and mammography were at the top of the list of products that would be positively impacted by the ACA.  As we reach the #ACATaper stage, will HOLX take a hit to their Diagnostic segment? It is possible, in our view, but so far a minor risk. As we learned last week from a lab operator, Qiagen is likely to continue to cede their 14% HPV testing share to HOLX. So while the #ACATaper appears to be finally here, there are offsets. On a disappointing note, our 3D Tomo Tracker update for July came in at 24 facilities. Down sequentially from June, and down from a peak of 54 in May. Our forecast algorithm, which is based on these updates, remains unchanged. While 20 is low, it is probably a blip in the longer term adoption cycle.

PENN

PENN has emerged as the first domestic gaming growth story in 10 years with a new casino in Massachusetts this year and one in San Diego next year. Meanwhile, regional gaming trends have stabilized, providing near term earnings visibility and upside. Upcoming catalysts include the monthly release of State gaming revenues for July, including Massachusetts, and positive earnings revisions.

TLT

Sometimes the macro rotation and allocation playbook is relatively straightforward. As growth slows and "reflation" deflates, you want to be buying A) Long-term Bonds and B) stocks that look like bonds. Bond proxies and defensive yield consistently outperform alongside the dual deceleration in demand and prices and Utilities and REITS remain the go-to sectors for growth slowing, defensive yield exposure.

Three for the Road

TWEET OF THE DAY

$SHAK announces 4M share offering priced at $60 - someone thinks its a good buy here

@HedgeyeHWP

QUOTE OF THE DAY

One person with passion is better than forty people merely interested.

E. M. Forster

STAT OF THE DAY

Only 1.9% of Facebook users continue to use the popular 1990s-era acronym LOL to signify their laughter in a post.


CHART OF THE DAY: Draghi's "Whatever It Takes" Willingness

Editor's Note: The excerpt and chart below are from this morning's Early Look which was written by Hedgeye analyst Matthew Hedrick. For more info on how you can become a subscriber click here.

 

...Draghi’s “whatever it takes” continues to spell a willingness to increase his QE purchasing program (currently structured at ~ €60 billion/month – see Chart of the Day below). Look to Jackson Hole at the end of the month (Aug. 27-29) as an opportunity for Draghi to talk down the Euro. An increase in his QE target would send the Euro falling. 

 

CHART OF THE DAY: Draghi's "Whatever It Takes" Willingness - z. chart2


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