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European Risk Abates on Strauss-Kahn’s Back?

Conclusion: European CDS spreads come in alongside insurance from the international community to backstop sovereign debt in Europe and the IMF potentially plays the role of global currency arbiter. In the Hedgeye Portfolio we’re long Germany (EWG) and short Italy (EWI).

 

October-to-date we’ve seen sovereign CDS spreads in Europe come in, an indication of declining risk, which on the margin is positive for the region (see chart below). Here’s a quick look at the improvement in CDS spreads for a select group of countries October-to-date:

 

Greece  -97bps

Ireland  -47bps

Portugal  -37bps

Spain  -34bps

Italy  -26bps

Iceland  -12bps

UK  -9bps

 

European Risk Abates on Strauss-Kahn’s Back? - neuste

 

Importantly, both Ireland and Portugal are trading around or below the 400bps line, a line we’ve found to be a critical breakout line. One read-through on this marginal improvement is the increased insurance from international players, in particular the IMF and ECB, that they’ll backstop any potential sovereign debt risk in the region by such means as adjusting repayment schedules, forgiving debt, and extending bargain-basement borrowing rates.  Consequently, investors appear more willing to take on European debt, despite the continued poor state of many countries balance sheets, especially those of the peripheral PIIGS.

 

Take a look at the rhetoric from international players regarding Europe’s sovereign debt in recent days:

  1. Greek officials are doing “exactly what they need to do” to rein in spending and meet the benchmarks set out as a condition of aid…and there’s “no reason for default.”  -Dominique Strauss-Kahn, chief IMF.
  2. The IMF has mechanisms to “prolong packages” for countries receiving assistance and is “thinking” about it for Greece, though nothing has been decided.  -Lorenzo Bini Smaghi, ECB executive board member.
  3. “The fund’s options include lengthening repayment periods, replacing shorter-term with longer-term loans, and agreeing to a new program when the current one comes to an end.”  -Simonetta Nardin, a spokeswoman for the IMF.

Concurrently the IMF is restructuring the fund’s governing structure to give emerging-market nations a bigger voice in decision making. Also, with currency tensions the focus of this year’s IMF and World Bank annual meetings, we could see the IMF take on a greater role as the arbiter of global currencies, a move that could appease and take the tension off increased strain between the US and China over the valuation of the Yuan.  This policy shift towards giving the IMF a far heavier hand in international governance could be a slow moving train, or maybe just wishful thinking, nevertheless a development to keep your eye on. 

 

Another positive sign from Europe today came via Italy’s successful debt auction of 5.5 Billion EUR ($7.7 Bill.) in which yields across maturities fell versus the prior auction of similar maturity, which is positive on the margin, especially given Italy’s high public debt as a % of GDP at 115.2%. Here’s what Italy’s auction yielded:

 

€3.5 Billion due June 2015 with a yield of 2.53% versus 2.69% on Sept. 13.

€1.15 Billion due 2037 with a yield of 4.53% versus 4.91% on June 11. 

€846 MM due 2023 with a of yield 3.98% versus 4.43% on July 14.

 

From a fundamental standpoint we’re forecasting slower growth in Europe into year-end and in 2011 as austerity measures cool growth. We’re currently long Germany via the etf EWG and short Italy (EWI) in the Hedgeye Portfolio. The German economy continues to power forward and stands out among its European peers from a fiscal perspective.  

 

Matthew Hedrick
Analyst


MPEL Q32010 PREVIEW

Market share gains drove the recent strong appreciation in the stock but delivering on the bottom line could drive the next leg.

 

 

As we wrote about on September 29th in “MPEL: COULD THEY FINALLY BEAT A QUARTER?”, we think that MPEL, indeed, should beat the quarter - finally.  Despite the recent move up – more due to market share gains – negative sentiment persists on “the guys that can’t shoot straight”.  We think that changes this quarter.  Now that we have our hands on the property level detail of September in Macau, here’s how MPEL can produce a $117MM EBITDA quarter versus the Street at $100MM.

 

3Q2010 Detail:

 

Our EBITDA estimate for City of Dreams (CoD) of $105MM is 21% ahead of the consensus

  • CoD’s table revenue share increased to 10.6% this quarter compared to 7.1% in 2Q2010 and 10.0% in 3Q09.
  • Opened 3 additional junket rooms in July; reallocated tables from Mass
  • We estimate net casino revenues of $485MM and total net revenues of $496MM
    • Assuming 18% of VIP play is direct, we estimate that Rolling Chip (RC) volume increased to $15BN, and at a 3.2% hold, we estimate that gross VIP table win was $480MM
    • We assume a 90bp rebate rate and a 1.33% commission rate (due to a greater percentage of CoD’s business coming from revenue share deals – roughly 40%)
    • Mass table win of $110MM and slot win of $30MM
  • Total variable expenses (taxes, gaming premium, junket commission in excess of rebate, and bad debt) of $313MM
  • Total fixed costs of $60MM compared to $55MM last quarter
  • The opening of the Dragone show added a few million dollars of expenses to the quarter. 
    • The incremental cost of the show is $125/day which will hit expenses in the 4th quarter.  
    • The theatre has 2,000 seats, 8 shows a week and tickets are going for $75-80 (before comps and discounts)

We estimate that Altira will report $21MM of EBITDA compared to consensus of $25MM

  • Altira should report net revenues of $197MM – basically all from the casino
    • RC volume of $9.4BN at a 2.8% hold should produce gross VIP table win of $263MM
    • We assume a rebate rate of 87.5bps and a 1.3% total commission rate
    • Mass table win of $17MM
    • Variable expenses totaling $152MM and fixed costs of $21MM compared to $26.6MM last quarter

We estimate that Mocha slots will report $25MM of revenue and $6MM of EBITDA, in-line with consensus.

 

Other stuff:

  • $15MM of corporate expense
  • $62MM of D&A or $81MM when you include amortization of the gaming subconcession and land use rights
  • $20MM of net interest expense
  • EPS of $0.03

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK

Initial Claims Rise 13k (17k After Revision)

Initial claims rose 13k last week to 462k (rising 17k before the upward revision of last week’s data).  Rolling claims came in at 459k, an increase of 2.25k over the previous week and the first increase in the series in seven weeks. All told, claims remain in the same band they’ve occupied since the start of the year. It bears worth repeating that claims need to be in the 375-400k range before unemployment can start to fall. For reference, we pointed out last week the curious fact that of the claims revisions over the past 24 weeks, 23 were revised higher (more claims) the week after. We calculated that the odds of that happening randomly were one in 699,000. This week, claims from last were ("surprisingly") revised higher by 4k bringing the running count to 24 upward revisions out of 25 instances. For those curious, the odds of 24 in 25 going higher are one in 1.34 million.

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - 1

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - 2

 

Our firm continues to expect a further economic slowdown relative to the first half of the year and into 2011 that will keep a lid on new hiring activity as management teams focus on cost control. We're seeing anecdotal signs of this in the Financials recently.

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

<chart3>

 

Joshua Steiner, CFA

 

Allison Kaptur


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - October 14, 2010

As we look at today’s set up for the S&P 500, the range is 29 points or -2% downside to 1155 and 0.5% upside to 1184. Equity futures are trading above fair value but below earlier peaks as the market attempts to build upon a four day long rally. The dollar remains under pressure on QE2 speculation and after Singapore widened its currency trading band to combat inflation. September PPI and weekly jobless claims are the main macro focus, while quarterly earnings from Google after the close.

  • Apollo (APOL) withdrew its financial forecast for 2011, citing fewer new students and regulatory scrutiny.
  • Cash America (CSH) 3Q EPS beat est.
  • Constellation Energy (CEG). EDF may develop new U.S. nuclear plant on its own following a dispute with Constellation.
  • Everest Re (RE) sees 3Q adj. EPS below ests. Due to losses from catastrophe.
  • Lennar (LEN) had its credit rating cut to B+ from BB- by S&P.
  • Universal Forest Products Inc. (UFPI) 3Q EPS ex. items missed ests.
  • Yahoo! (YHOO).  Yahoo! working with Goldman Sachs to help defend against possible takeover approaches, said three people familiar with the matter. AOL has talked with private-equity funds including Silver Lake about a possible bid, two people familiar with the matter said.
  • ZAG (ZAGG) lifted 2010 rev. growth forecast to 70% from 30%.

 PERFORMANCE

  • One day: Dow +0.69%, S&P +0.71%, Nasdaq 0.96%, Russell 2000 +1.50%
  • Month/Quarter-to-date: Dow +2.86%, S&P +3.23%, Nasdaq +3.07%, Russell +4.49%
  • Year-to-date: Dow +6.41%, S&P +5.65%, Nasdaq +7.58%, Russell +12.96%
  • SECTOR PERFORMANCE: Industrials +1.65%, Materials +1.60%, Energy +1.22%, Tech +0.81%, Consumer Staples +0.85%, Healthcare +0.71%, Utilities +0.38%,Consumer Disc +0.15%, Financials 0.09%.

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +1532 (+1175) - breadth expanded for the past three days
  • VOLUME: NYSE - 1270.40 (+37.62%)  - accelerating for the past  two days  
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Williams Cos +9.79%, Yahoo +5.54% and Monsanto +4.67%/Marshall & Isley -4.20%, Intuitive Surgical -3.86% and Analog Devices -3.50%.
  • VIX: - 19.07 +0.74%% - YTD PERFORMANCE - (-12.04%)
  • SPX PUT/CALL RATIO: - 1.27 from 1.79 -29.19%%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD - 16.43 -0.304 (-1.818%)
  • 3-MONTH T-BILL YIELD 0.13%
  • YIELD CURVE - 2.09 from 2.07

COMMODITY/GROWTH EXPECTATION:

  • CRB: 299.74 +0.64% - up 6 of the last 8 days
  • Oil: 83.01 +1.64% - BULLISH
  • COPPER: 382.05 +0.82% - OVERBOUGHT - a 27 month high
  • GOLD: 1,369.85 +1.67% - BULLISH

CURRENCIES:

  • EURO: 1.3949 +0.59% - BULLISH
  • DOLLAR: 77.071 -0.38%  - BEARISH

OVERSEAS MARKETS:

 

Europe

  • European Markets: FTSE 100: +0.02%; DAX: +0.51%; CAC 40: (0.01%)
  • European markets extended yesterday's gains following Asian markets higher with major indices attaining 3-week highs.
  • Mining shares started on a strong note as metal prices traded higher helped by a weaker US dollar with gold touching a record high, however market gains were tempered by mixed corporate results as heavy-weights Roche and LVMH disappointed.
  • Sovereign bonds eased as equities moved higher and ahead of supply from Italy.

Asia

  • Asian Markets: Nikkei +1.9%; Hang Seng +1.7%; Shanghai Composite +0.6%
  • Asian markets followed Wall Street up today.
  • Resource shares led Japan up; all 33 sectors rose, but major banking stocks lagged the market in light of JPMorgan Chase’s (JPM) doing the same yesterday.
  • Yahoo Japan and Alibaba.com rose 6% and 1%, respectively, on talk of a buyout of Yahoo (YHOO).
  • Chinese banks and resource stocks led Hong Kong higher.
  • South Korea went up after the central bank kept interest rates unchanged; roughly half of economists had expected a 25-bp increase.
  • Tech stocks rose after Intel (INTC) beat expectations.
  • Early gains were pared, but banks and property stocks were strong in China as the central bank injected money into the country’s money market.
  • Singapore lagged the region on news that the city-state’s Q3 GDP fell (20%) q/q vs consensus (18%). The Monetary Authority of Singapore also surprised the market by tightening policy, saying it will slightly increase the slope of and widen the trading band of the Singapore dollar.
Howard Penney
Managing Director

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK

Initial Claims Rise 13k (17k After Revision)

Initial claims rose 13k last week to 462k (rising 17k before the upward revision of last week’s data).  Rolling claims came in at 459k, an increase of 2.25k over the previous week and the first increase in the series in seven weeks. All told, claims remain in the same band they’ve occupied since the start of the year. It bears worth repeating that claims need to be in the 375-400k range before unemployment can start to fall. For reference, we pointed out last week the curious fact that of the claims revisions over the past 24 weeks, 23 were revised higher (more claims) the week after. We calculated that the odds of that happening randomly were one in 699,000. This week, claims from last were, surprisingly, revised higher by 4k bringing the running count to 24 upward revisions out of 25 instances. For those curious, the odds of 24 in 25 going higher are one in 1.34 million.

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - rolling

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - raw

 

Our firm continues to expect a further economic slowdown relative to the first half of the year and into 2011 that will keep a lid on new hiring activity as management teams focus on cost control. We're seeing anecdotal signs of this in the Financials recently.

 

Yield Curve

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. The 2-10 spread (a proxy for industry NIM) has been collapsing in the past two quarters.  Yesterday’s closing value of 206 bps is up from 201 bps last week.

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - spreads

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - spreads qoq

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS REMAIN STUCK IN THE MUD - UP 13K THIS WEEK - subsector perf

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: S'PORE GDP SLOWS; MAS WIDENS S'PORE $ BAND; NEW CHINA LOANS SOAR; AERL; PACKAGE STATS

The Macau Metro Monitor, October 14th 2010


SINGAPORE'S GDP EXPANDS BY 10.3% ON-YEAR, CONTRACTS BY 19.8% ON-QUARTER IN Q3 Channel News Asia

S'pore's GDP contracted by 19.8% QoQ, missing estimates of -17.5%.  However, the Ministry of Trade and Industry (MTI) stated the S'pore economy remains on track to grow 13-15% YoY.  The decline was largely attributed to a 57% drop in the manufacturing sector.

 

SINGAPORE TIGHTENS MONETARY POLICY; CURRENCY SOARS WSJ.com

In a surprise move, the Monetary Authority of Singapore said it will "increase slightly" the slope of its policy band for the Singapore dollar and also widen the band in which it allows the currency to trade against an undisclosed, trade-weighted basket of currencies.  It maintained the level at which the band is centered.  This move is an effort to combat the predicted 4% inflation by the end of the year.  MAS did not change its stance of "modest and gradual appreciation of the S'pore dollar".  The US Dollar dropped to a record-low of 1.2886 S$ shortly after the central bank move.

 

NEW LENDING LOANS IN MAINLAND CHINA ON SURGING GROWTH Macau Daily News

September new RMB loans increased RMB 50.3BN to RMB 595.5BN (US$89BN).  The strong lending market has forced China's four major banks to increase the deposit reserve ratio by 50 basis points.


LOCAL VIP PROMOTER ACQUIRES COMPETITOR Macau Daily TImes

VIP promoter Asia Entertainment & Resources (AERL) has acquired a 100% profit interest in King's Gaming Promotion, a VIP promoter that currently operates one room with five tables at The Venetian Macau.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR AUGUST 2010 DSEC

Visitor arrivals in package tours increased by 23.1% YoY to 477,072 in August 2010.  Tour visitors from Mainland China, HK, Japan, and Korea increased by 28.4%, 8.3%, 3.9%, and 152.6% YoY respectively.  Taiwanese tour visitors decreased 16.5% YoY.

 

 


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